Puerto Rico Tax Compliance Guide By: Torres CPA Group (TCG) & CifrasPR

Transcription

1

2 Puerto Rico Tax Compliance Guide By: Torres CPA Group (TCG) & CifrasPR Understanding the Puerto Rico tax system and its interrelation with United States is crucial for individuals and entities doing business in Puerto Rico. Puerto Rico is not a state; it s a territory, with its own Business and Payroll laws and regulations. The following White Paper is designed to give an insight Tax Issues in Puerto Rico. It provides relevant background information, which will be of assistance to organizations considering establishing business in the Island. Nonetheless, it is highly recommended to seek advice and counsel from qualified professional sources before undertaking any business. Certain exclusions and exemptions may apply and when specific problems occur in practice, it will often be necessary to refer to the laws and regulations of Puerto Rico, and to obtain appropriate accounting and legal advice. It is understood that the following overview does not constitute any formal rendering of either legal, accounting, tax or professional services. If legal advice or other assistance is required, an attorney, CPA or tax adviser should be consulted. Torres CPA Group is an Advice Certified Public Accounting Firm offering Audit, Tax, Consulting and Financial Outsourcing services for over 33 years. If you require any further information or help, please do not hesitate to contact us. CPA William Torres Torres CPA Saudhi Soto Pagán

3 U.S. International Tax Reform The 2017 Tax Reform has made substantial changes to tax obligations for USA based companies with subsidiaries outside the mainland. Tax Reform is of particular interest to organizations doing business in Puerto Rico. This newsletter presents an outline of the most important items included in the Act. As always, we encourage you to contact TCG for in-depth information and counsel on your case. Mayor Subjects included in the 2017 Tax Reform Participation Exemption Dividends paid by a Puerto Rico corporation to a US Corporation will benefit from the Participation Exemption, these will be 100% Exempt from US Tax. The Tax Act adopts a participation exemption system under which the foreign source portion of dividends received after 2017 by a 10% U.S. corporate shareholder from a foreign subsidiary is exempt from U.S. federal income tax via a 100% dividends received deduction mechanic. No foreign tax credit or deduction is allowed for any foreign tax paid or accrued (including withholding taxes) concerning any exempted dividend. Amongst other conditions, a minimum one-year holding period must be satisfied for the participation exemption to apply. While the participation exemption represents a move toward a territorial approach, many aspects of worldwide taxation remain, including the fact that this exception only applies to 10% corporate shareholders and therefore does not change taxation of foreign dividends received by shareholders that are U.S. partnerships or individuals. The Repatriation Tax Dividends paid by a Puerto Rico corporation to a Puerto Rico resident are not subject to Repatriation Tax To avoid any windfall from the new participation exemption, the Tax Act introduces a one-time mandatory repatriation tax on a 10% U.S. shareholder s allocable share of a foreign corporation s

4 untaxed and undistributed accumulated earnings and profits. The repatriation tax is meant to prevent previously untaxed deferred foreign earnings from escaping U.S. taxation altogether under the new participation exemption regime. The participation exemption only benefits 10% corporate U.S. shareholders. The repatriation tax applies to all 10% U.S. shareholders, including individuals and partnerships. GILTI Subpart F Expansion There is no minimum US tax on foreign earnings received by a Puerto Rico Resident from an Act 20 entity. GILTI does not include any income that is effectively connected to a U.S. trade or business, Act 20 trade or business is effectively connected to the U.S. as to these section of the law, therefore not subject to this minimum tax. Under the new law, a U.S. shareholder of a CFC has to include in gross income its global intangible low-taxed income Global Intangible Low Taxed Income (GILTI) like a Subpart F inclusion. GILTI means the excess (if any) of the shareholder s net CFC tested income over such shareholder s net deemed tangible income return for such taxable year. GILTI is a very complicated and nuanced definition that will need to be examined on a case-by-case basis. However, we can simplify this explanation for purposes of identifying potential inclusions by stating that we may have an inclusion where the CFC s foreign source, low-taxed, trade or business income exceeds 10 percent of such CFC s adjusted basis in the tangible property used in the associated trade or business. U.S. C corporations will be allowed a deduction equal to 50 percent of the GILTI inclusions. Base Erosion and Anti-Abuse (BEAT) Minimum Tax for Corporations Applicable to corporate taxpayers with average annual gross receipts of at least $500 million. The Tax Act BEAT provision specifically targets U.S. corporations that substantially reduce U.S. taxable income through significant deductible payments, like royalties or interest, to foreign affiliates. BEAT effectively applies a minimum tax on a modified taxable income amount.

5 Foreign IP - Outbound Transfer Limitations and Income Deductions Intellectual Property (IP) is typically created through proprietary knowledge and or process, by an Individual or Entity, involves development activities, when created should be new and unique invention, stand alone in nature as to its functionality attributes, have an economic value and market, should provide a competitive advantage or product differentiation, and have a extended life cycle. Under an existing rule often referred to as the super royalty rule, U.S. persons making outbound transfers of intangible property are sometimes required to recognize deemed income akin to royalty over a future period meant to reflect amounts commensurate to income derived from that intangible. This super royalty rule is a punitive measure designed to prevent U.S. taxpayers from transferring valuable intellectual property outside U.S. taxing jurisdiction. The Tax Act expands the reach of the super royalty rule by increasing the scope of intangible property to include goodwill, going concern value, the workforce in place, and other elements of value not directly identified with tangible property or services. Change in Sale of Inventory Sourcing Rule The new law requires that income from the sale or exchange of inventory produced partly in and partly outside the U.S. must be allocated and apportioned by the location of production of the property for purposes of determining the amount for foreign source income for foreign tax purposes. The previous rule is that 50 percent of the revenue would be treated as foreign-source income.