Act to Transform the Tax System of the Commonwealth of Puerto Rico [P de la C 2329]

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Act to Transform the Tax System of the
Commonwealth of Puerto Rico
P de la C 2329
February 20, 2015

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Agenda
• Summary of P de la C 2329 “Act to Transform the
Tax System of the Commonwealth of Puerto Rico”
– Income Tax
– Sales and Use Tax – Value Added Tax
• Questions

Summary of P de la C 2329
“Act to Transform the Tax System of the
Commonwealth of Puerto Rico”

Individual Income Tax
• Tax computation for individuals, married filing
separate and married filing joint with optional
method
Net Taxable Income Tax
Not more than $40,000 0%
More than $40,000 but less
than $125,000
15% of the del excess over
$40,000
More than $125,000 but
less than $200,000
$12,750 plus 20% of the
excess over $125,000
More than $200,000 $27,750 plus 30% of the

• Tax computation for married filing joint not electing
optional method
Net Taxable Income Tax
Not more than $80,000 0%
More than $80,000 but less
than $125,000
15% of the del excess over
$80,000
More than $125,000 but
less than $200,000
$6,750 plus 20% of the
More than $200,000 $21,750 plus 30% of the

• The Bill proposes the elimination of:
• Alternate Basic Tax ("CBA")
• Personal Exemptions
• Dependents Exemptions
• 2% additional tax on self-employed
• Option 94 elections are revoked
• Exclusion of gain on sale of principal residence
• One time exclusion for individual 60 years
and older
• Deferral of gain

• Deductions:
• Mortgage Interest – new credit
• Educational IRA's
• Casualty losses
• Health Savings Accounts
• Special deduction to individuals – new
exemption level

• Filing of income tax returns for those with only
salary income (W-2) which does not exceeds
$40,000 ($80,000)
• new informative return

Corporate Income Tax
• The Bill proposes the following:
• Fixed tax rate of 30%
• Elimination of additional tax on gross income
("patente nacional")
• Keep the Alternative Minimum Tax ("AMT")
• 25% rate or % of purchases from related
person
• No waivers after 12/31/14
• Actual waivers will expire 12/31/14

Corporate Income Tax
• AMT preferences back to 2011 Code, including
expenses paid to related person and home office

Flow Through Entities
• Statutory conversion of all partnerships, special
partnerships and corporations of individuals
created as of 12/31/14 to a new flow through
entity ("entidad conducto")
• partnerships and certain LLC's created after
12/31/14 will be taxed as this "entidad conducto"

• Tax will be computed pursuant to Chapter 7 for
their first taxable year after 12/31/14. All
sections related to special partnerships and
corporations of individuals eliminated

• Statutory conversion of special partnerships and
corporations of individuals will not make their
owners to be deemed engaged in trade or
business in Puerto Rico.

• Tax effect of statutory conversion depends on
each particular case
• In general, no gain or loss
• Keep same taxable year, basis and holding
periods
• Computation of owners basis as of 12/31/14
must be done
• "Simple" change of identity

• Election available for corporations and LLC's
taxed as corporations to be taxed as "entidad
conducto"
• even with only one owner
• within 90 days of the beginning of the taxable
for which the election will be effective

Preferential Tax Rates
• Capital gains
• Individuals – rate of 30% with election to tax at
normal rates
• Corporations – taxed at 30% or as ordinary
income
• Transactions after 12/31/14

• Interest
• Individuals – eliminates the 10% and 17% on
interest from financial institutions
• Individuals – eliminates the optional 10% on
interest on certain loans to eligible
corporations/partnerships

• Eligible dividends
• Individuals – rate is 30%
• subject to withholding
• until 3/31/15 – 15%
• from 4/1/15 – 20%

Changes that may affect all taxpayers
• Exclusions/Exemptions from gross income:
• Income from sports teams taxed as ordinary
income rather than at 20%
• In the case of non resident citizens subject
to 20% withholding (29% if non resident
aliens)

• Eliminates:
• literary, journalist, scientific, artistic awards
• amounts received from crop insurance
• IVU Loto awards – IVU Loto system is
eliminated

• Eliminates:
• interest – except from PR and US
Government (including subdivisions and
instrumentalities)
• $2,000 ($4,000) from financial institutions
• $5,000 from Coops
• interest from certain commercial banks

• Eliminates:
• income from royalties to news agencies
• income from military o naval
"licenciamiento"
• COLA
• income from sports game; Serie del
Caribe excluded until 1/1/16

• Eliminates:
• rent income from Historic Zones
• only remains for contracts in placed as
of 2/15/15
• renewal of such a contract will not be
deemed in place as of 2/15/15

• Eliminates:
• reference to Act 135 (young workers)
since new tables cover the same
exemption of $40,000 of income.

• Deductions:
• Only straight line depreciation for purchases
after 12/31/14:
• If accelerate depreciation used:
compute tax basis as of 1/1/15 and
depreciate S/L for remaining life

• Deductions:
• automobile expenses – use and maintenance
• actual expenses
• Secretary may allow the use of standard
mileage rate by Regulations

• Deductions:
• charitable contributions –
• only for non for profits operating in Puerto
Rico and registered with Treasury
Department

• Deductions:
• payments to related person or Home Office
remain 51% non deductible
• no waivers to be issued

• Credits Moratorium:
• for years after 12/31/14 and before 1/1/2017
limited to 25% of tax
• Eliminates:
• Credit for work
• Credit to individuals older than 65 years

• New credit for mortgage interest:
Gross Income Credit
No more than $125,000 the lesser of 15% of the
interest or $5,250
More than $125,000 but not
more than $140,000
the lesser of 12% of the
interest or $4,200
more than $155,000
interest or $3,150
more than $170,000
interest or $2,100
More than $170,000 the lesser of 3% of the
interest or $1,050

• credit for mortgage interest will not be
reimbursable
• any amount not used will not be carried over

• Act 163 supplementary information to audited
financial statements requirement remains.
• Period for the Secretary to issue estate tax
waiver increased from 30 to 60 days.

Value Added Tax ("VAT")
• A VAT or also goods and
services tax (GST) is a
form of consumption tax.
• For the buyer, it is a tax on
the purchase price.
• For the seller, it is a tax
only on the value added to
a product, material, or
service.
.
• The sellers remit to the
government the difference
between these two
amounts, and retain the
rest for themselves to offset
the taxes they had
previously paid on the
inputs.

VAT
• The value added to a
product by or with a
business is the sale price
charged to its customer,
minus the cost of materials
and other taxable inputs.
• A VAT is like a sales tax in
that ultimately only the end
consumer is taxed.
• It differs from the sales tax
because collections,
remittances to the
government, and credits for
taxes already paid occur
each time a business in the
supply chain purchases
products.

VAT
• Effectiveness:
– For transactions after
12/31/15
• General rate is 16% on
taxable transactions, except
for the following which have
a 0% rate:
– goods and services for
export
– certain imports by
manufacturers
(Manufacturing Plant
Certificate)
• Effectiveness:
– For transactions before
1/1/16, taxable items
pursuant to 2011 Code will be
subject to 16% (instead of
7%).
• Municipalities may not collect
• Treasury will make the
payment to the eligible
consumer

VAT
New terms
1. Value Added Tax (VAT or
IVA)
2. Taxable transactions:
1. import of goods into PR
2. sale of goods and services;
3. rendering of services by a
nonresident person to a
person in PR
4. combined transactions
Old terms
1. Sales and Use Tax (SUT
or IVU)
2. Taxable item:
1. tangible personal property
2. services
3. admission rights
4. combined transactions

VAT
New terms
3. Merchant
4. Place
5. Eligible consumer
6. Eligible merchant
7. Small merchant
Old terms
3. Nexus
4. Source

VAT

VAT
• Exclusions from IVA:
• money, stock, bonds, notes, life insurance, and other securities and
obligations;
• intangibles (except computer programs)
• electricity
• water supplied by the PR Aqueduct and Sewer Authority
• any property of the Commonwealth of PR or of the U.S. Government
• certain entertainment machines
• sales by non-merchants
• exempt transfers under Subtitle A of the Code
• the delivery of donated goods
• goods introduced into foreign trade zones
•

VAT
• Exclusions from IVA:
• alcoholic beverages deposited in a bonded warehouse under certain
conditions;
• certain promotional materials introduced into PR
• certain vessels acquired by non-residents of PR
• services rendered between affiliated entities
• services rendered by the PR Government and by the U.S.
Government
• services rendered as an employee.

VAT
• Taxable transactions exempt from IVA:
• certain financial services (other than bank charges)
• prescription medicines and articles for the treatment of health
conditions
• articles to correct physical deficiencies
• sales and services that qualify for Medicare, Medicaid and the PR
Government’s Health Insurance Plan
• sales to the U.S. Government and PR Government
• import and sale of petroleum derivatives, except propane gas
• certain hotel room charges

VAT
• Taxable transactions exempt from IVA:
• import and sale of unprepared food and food ingredients
• sales of goods acquired with PAN or WIC funds
• sale of real property
• real property leases by individuals for principal residence, students
• gratuitous transfers of goods and services by non-profit entities
• certain imports by and sales to hospitals
• certain imports by and sales of agriculture products to bona fide
farmers;
• imports by and sales to hotels to be used in the exempt operation
• import and sale of vehicles

VAT – Person responsible for the tax
• the person that imports the
goods to PR;
• non retail sales - the seller as
withholding agent for the buyer is
primarily responsible, but the
person that buys the goods or
services is also responsible;
• retail sales – the seller as
withholding agent for the buyer.
• services rendered by a non-
resident to a PR resident – the
person in PR that receives the
service.

VAT – Collection of the tax
• The merchant that sells the
goods or services, except for
small merchants:
– sales to merchants
• Fiscal statement
• Debit and Credit notes
– retail sales
• IVA not show as separate item
• Waiver for collection:
– Certificate Exempt Purchases
– Certificate of Exemption
Manufacturing Plant

VAT – Collection of the tax
• Special rules for sales delivered
by mail to Puerto Rico residents:
– internet sales
– mail order sales
– any other telecommunications means

VAT
• time and form of payment
• returns
• adjustments, credits and reimbursements
• regressivity relief
• registry
– merchants
– small business

VAT
• certificates:
– exempt purchases
– manufacturing plant
– eligible merchant
• transitory provisions
– current certificates valid until 12/31/15
– bonds will be effective until expiration date
– current credits – will carry forward but not reimbursable
• Municipalities – cannot impose/collect after effective date

Questions

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Act to Transform the Tax System of the Commonwealth of Puerto Rico [P de la C 2329]

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