Act No. 72 of May 29, 2015 (the “2015 Tax Reform Act”or the “Act”) amends
the Internal Revenue Code of 2011 (the “2011 Code”). Among other things, the
2015 Tax Reform Act increases the existing sales and use tax and provides for a
value added tax system to substitute the Commonwealth sales and use tax,
subject to certain conditions described below. The Act also amends certain
income tax and excise tax provisions of the 2011 Code.

Income Taxes

• Taxpayers with volume of business exceeding $50MM or belonging to
  certain industries (such as banking and insurance) will be classified as
  “large taxpayers”and will have to file their PR income tax returns with a
  special office of the PR Treasury Department and follow instructions to be
  provided.
• The Alternative Minimum Tax computation remains under the current
  2011 Code formula, which looks at the highest of 30% of alternative
  minimum taxable income or the sum of the following: (i) 20% of expenses
  incurred or paid to a related person or to the home office if the payment is
  not subject to PR income taxes; and (ii) a percentage of personal property
  purchased from related parties. For taxable years commencing after
  December 31, 2014, the percentage on personal property purchases from
  related persons will range from 2.5% to 6.5%, depending on the buying
  entity’s volume of business. For example, the applicable percentage for a
  business with volume ranging between $500MM and $1,500 MM is 3%.The Act
  limits the Secretary of the Treasury’s authority to waive the 20%
  charge on to related party expenses so that the waiver may not exceed 60%
  of such expenses. The Secretary’s authority to reduce the percentage
  tax on purchases of personal property from related parties is
  eliminated for taxable years commenced after December 31, 2014.
• The net operating loss allowed in the determination of alternative
  minimum tax income (“AMTI”) is reduced from 80% to 70% of such
  AMTI.
• Net operating loss carry-overs are limited to 80% of net income. In the
  determination of the net operating loss, the deduction for certain payments
  to related parties not resident of Puerto Rico is disallowed. This
  disallowance is not applicable with respect to operations covered by a tax
  exemption grant.
• The existing 51% deduction disallowance for regular tax purposes relating
  to payments to related parties for services rendered outside PR and not
  subject to PR income taxes is maintained. The Secretary may still provide
  waivers or relief against this disallowance but this authority will be limited
  to 60% of the expenses for such services. This disallowance does not apply
  to operations covered by a tax exemption grant.
• Deduction for expenses related to services is disallowed if the PR person
  has not paid the applicable sales and use tax or value added tax under the
  2011 Code. There is no exception for operations covered by a tax
  exemption grant.
• Deduction for the cost of property or depreciation deduction relating to
  property is disallowed if the applicable sales and use taxes or value added
  taxes have not been paid. There is no exception for operations covered by a
  tax exemption grant.
• In the case of corporate taxpayers, net capital losses may be carried over to
  future years, but the amount to be carried over is limited to 80% of capital
  gains for the year and the carried-over loss is to be treated as a short-term
  capital loss.
• The moratorium with respect to utilization of certain tax credits is
  extended, but this does not apply to certain tax credits including the credits
  under Act 73 of May 28, 2008 (“Act 73”) and Act 74 of July 10, 2010
  (“Act 74”).
• Other income tax changes:
  • Individuals will not see a reduction in their tax rates. The gradual adjustment that was supposed to be eliminated for taxable years commenced after December 31, 2014 will remain at 5% over net taxable income exceeding $500,000.
  • Deductions relating to losses from conduit entities will be limited to 80% of the aggregated income of other conduit entities.
  • To qualify as a non-profit entity and the charitable deduction to be allowed for individuals, a determination of the Secretary of the Treasury will be required.
  • For individuals with net operating losses (NOLs) for three
    consecutive years, the amount of the loss to be carried forward in the third taxable year, which commenced after December 31, 2014, and any subsequent taxable year will be limited to 50% of the NOLs of such years.

  Excise Taxes

  • The applicable excise tax rate for all terrain vehicles and four tracks is
    increased from 10% to 11.5%.
  • An exemption from the crude oil tax is added for fuel used by Act 73
    exempt businesses in the cogeneration of electric power for its own use or
    for the use of its affiliates, and for energy efficient equipment properly
    certified by the Energy Affairs Administration.

  Sales and Use Taxes (SUT)

  • Starting July 1st, 2015, transactions currently subject to the 7% SUT will be subject to a 11.5% Commonwealth (10.5%) and municipal (1%) SUT. However, note changes below relating to SUT on certain business to business and designated professional services, effective October 1st, 2015.
  • SUT will apply until March 31, 2016, unless the Secretary of Treasury extends the effectiveness of the SUT for an additional 60 days period.
  • Effective for periods commencing after June 30, 2015, merchants with a Reseller Certificate may claim 100% credits for SUT paid on their inventory against SUT collected on their sales without the 75% limitation currently in place.
  • Starting October 1st, 2015 and until March 31st, 2016:
    • Business to business services that are currently taxable will be subject to an 11.5% SUT.
    • Business to business services and designated professional services (e.g., accountants, lawyers, engineers) that were previously exempt from SUT will be subject to a Commonwealth SUT of 4%. No municipal SUT will apply to services subject to the 4% SUT.
    • The following services are exempt from SUT: services offered by the Government of PR, education, interest and other charges, insurance, health and hospital services, services offered by persons with a volume of business not exceeding $50,000.
    • Services rendered by members of the same group of controlled corporations will be exempt from SUT only if both the entity rendering the service and the one receiving the service are engaged in trade or business in Puerto Rico.
  • In the case of services rendered by a non-resident, the recipient in Puerto
    Rico of the service will be the party responsible for remitting the SUT to
    the Treasury Department.
  • Contracts and biddings entered into prior to July 1
    st may be protected against these increases under certain circumstances. The protection applies for 12 months or the expiration of the contract, whichever occurs first; and
    in the case of contracts consisting of services, if the payment for such services is made before July 1st, 2015.

  Value Added Tax (VAT)

• Transactions occurring after March 31, 2016 (or the extended sunset date
  of the SUT), will be subject to a new VAT of 10.5% plus a 1% municipal
  SUT.
• VAT will apply on the introduction into PR of taxable articles, and on
  taxable transactions, which are: the sale in PR of goods and services by a
  merchant, the rendering of a service by a non-resident to a person in PR,
  and combined transactions.
• Exempt articles (thus, no VAT on introduction of such articles) include:
  • Articles for manufacture (raw materials and machinery and
    equipment for manufacture) introduced into PR by a Manufacturing
    Plant with a Certificate of Exemption;
  • Prescription medicines;
  • Unprepared food and food ingredients;
  • Articles for the treatment of health conditions, including medical devices;
  • Articles to provide for physical deficiencies;
  • Articles paid by, or that qualify for reimbursement by, Medicare,
    Medicaid and PR government health plans;
  • Articles introduced by the Government of PR or the US;
  • Gasoline, aviation fuel, gas oil or diesel oil, crude oil, unfinished oils
    and end products derived from oil, and any other hydrocarbons
    mixture;
  • Equipment and other articles used by hospital units for the treatment
    of patients;
  • Articles for agriculture imported by a bona fide farmer;
  • Articles to be used in the tourism business, imported by a merchant
    that possess a Certificate of Exempt Purchases; except for inventory
    acquired principally for sale in the ordinary course of business, and
    certain other exceptions;
  • Printed books; and
  • Vehicles, boats and heavy equipment.
• Exempt transactions (thus, no VAT on such transactions occurring in PR),
  include:
  • Financial services, including insurance;
  • Sale of prescription medicines and articles for the treatment of health
    conditions;
  • Sale of articles to provide for physical deficiencies;
  • Sale of any good or service paid or reimbursed by Medicare,
    Medicaid or PR government health care;
  • Sale of goods and services to the PR or US governments;
  • Sale of gasoline, aviation fuel, gas oil or diesel oil, crude oil,
    unfinished oils and end products derived from oil, and any other
    hydrocarbons mixture;
  • The rent or lease of property subject to the room tax imposed by the
    PR Tourism Company;
  • Sale of unprepared food and food ingredients;
  • Sale of real property;
  • Leasing of real property for residential use or for commercial
    purposes;
  • Sale of articles for agriculture to a bona fide farmer;
  • Educational and child care services;
  • Sale of machinery and other materials to hospital units that possesses
    a Certificate of Exempt Purchases;
  • Sale of printed books;
  • Sale of vehicles, boats and heavy equipment;
  • The sale of goods to a merchant engaged in the tourism business that
    possesses a Certificate of Exempt Purchases; except for inventory
    purchased primarily for resale, and certain other exceptions; and
  • The rendering of health or hospital services.
• The sale of articles for manufacture to a Manufacturing Plant with a
  Certificate of Exemption and Zero Rate for Manufacturing Plants will be a
  taxable transaction subject to a zero rate.
• The sale of goods or services for export will be a taxable transaction
  subject to a zero rate.
• The following services are excluded from the definition of “services”, and
  therefore, not subject to VAT:
  • Services rendered to a person that is part of a controlled group of
    corporations or a controlled group of related entities if both related
    persons are engaged in trade or business in Puerto Rico;
  • Services provided by the Government of Puerto Rico;
  • Services provided as an employee;
  • Air and sea carrier services;
  • Electricity generated by PREPA or any other electricity generator
    plant; and
  • Water supplied by PRASA (AAA).
• In sales made to merchants, the merchant purchaser may request the
  merchant seller to provide within certain time-frame a Fiscal Statement
  which contains certain information. There is no obligation to provide a
  Fiscal Statement if the goods or services sold were: exempt, or sold at
  retail. We understand that the fiscal statement does not have to be
  provided to a “Small Merchant”(those with gross sales of less than
  $125,000 in the prior year) but the law appears to have a technical error.
• The time line for filing and payment of the VAT follows the same
  deadlines and procedures as the SUT. The monthly VAT on imports return must be filed by the 10th day of the month following importations. VAT on sales must be declared by the 20th day of the month following sales.
• A credit will be available for the VAT paid on the acquisition of goods and
  services that are attributable directly or indirectly to taxable transactions (including zero-rated transactions). However, merchants dedicated principally to the sale of unprepared food; prescription drugs, medicines, or articles for the treatment of health conditions; or motor vehicles may claim a credit in their monthly return for the VAT paid or accrued on the acquisition of goods and services up to the total amount of VAT paid or accrued during such month.
• A credit will be allowed for VAT paid to foreign countries by related
  parties that render services to the PR merchant. No deduction will be
  allowed for income tax purposes.
• Overpayments of VAT must be credited in the following month unless
  there are three consecutive months of overpayments in excess of $10,000 or Eligible Merchant (80% of its sales are zero rated), in which case a refund may be requested.
• No refunds for sales and use taxes will be allowed unless claimed before
  March 31st, 2016. After that date only credits will be allowed, if included
  in the SUT Monthly Return to be filed on or before April 20, 2016.
• The Act contemplates the possibility of the imposition of excise taxes
  instead of a VAT under statutes to be approved upon recommendations to be issued by a newly created Commission to Consider Alternatives to
  Transform Consumption Taxes. This imposition will require additional
  legislation.

 

Because of the general nature and informative purpose of this newsletter, nothing herein should be considered as legal advice or a legal opinion. For further information about the contents of this newsletter, or should you need further assistance in connection with these matters, please contact any of the attorneys of the firm’s Corporate Tax Group.