INFORMA. Tax Alert: New income tax and IVU rules effective in Puerto Rico

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1 El Comité de Asuntos Contributivos de la Cámara de Comercio de Puerto Rico... INFORMA El pasado 30 de junio de 2013 el Gobernador de Puerto Rico, Hon. Alejandro García Padilla, firmó la Ley para la redistribución y Ajuste de la Responsabilidad Contributiva Núm A continuación incluimos (3) Alertas emitidos por nuestro socio y miembro del Comité de Asuntos Contributivos, Kevane Grant Thornton, sobre el tema para su conocimiento. An instict for growth TM Tax Alert: New income tax and IVU rules effective in Puerto Rico An instict for growth TM The Governor of Puerto Rico signed Act 40 on June 30, The Law, commonly known as the Law for the Redistribution and Adjustment of the Tax Responsibility, amends several sections of the Puerto Rico Internal Revenue Code of 2011 and other Laws. The attached table summarizes the main provisions of Act 40 and provides you with general information as to the effective dates and changes. Some of these changes may require immediate action: 1. If you hold tax credits as of June 30, 2013 (even those not covered by the tax credit moratorium), you will need to file an informative return disclosing the same, not later than July 31, If you render services now considered taxable and that do not qualify for the business to business exemption, you must start complying with the collection and reporting of the Sales and Use Tax ( IVU ) upon those services as of July 1, Businesses with gross volume of $100,000 ($200,000 as of June 30, 2013) and more are required to deposit the IVU via electronic transfers. 4. Taxpayers (including pass through entities) with taxable years commenced or commencing after January 1, 2013 must revise their estimated tax computation for tax year The same must now consider the new alternative minimum tax and alternative basic tax rules that include the new additional tax on gross income ( Patente Nacional ). Act 40 states that no penalty for underpayment of estimated tax will be imposed, if the remaining installments of estimated tax for the first taxable year of effectiveness of the Patente Nacional, include this additional tax. The Department of Treasury is in the process of issuing Informative Bulletins (BI), Circular Letters (CC) and Administrative Determinations (AD) to administer these new provisions. An area that needs special attention is the revocation of the exemption certificate for resellers. New provisions will apply to transactions commencing from August 1, During the month of July, the current exemption certificate will be valid for the purchase of tangible personal property for resale. From August 1, 2013 on, all merchants that sell tangible personal property to other merchants for resale, must collect and deposit the IVU on those sales. Act 40 provides a credit mechanism for the affected resellers. More guidance is expected to be issued by the Treasury Department. Contact us For assistance in this matter you may contact maria.rivera@pr.gt.com or lina.morales@pr.gt.com We will continue to keep you up-to-date on how these new income tax and IVU provisions can affect you, and if immediate actions are required from your part. DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant should be obtained prior to taking action on any issue dealt with this update. De necesitar alguna información adicional, llame al , Ext. 2208

2 Tax Alert: Complementary laws in relation to Act 40 the Governor of Puerto Rico signed Acts 41, 42, 46 and 48, all of which complement the dispositions provided by Act 40 of June 30, 2013, better known as the Law for the Redistribution and Adjustment of the Tax Responsibility. The dispositions set forth by these acts amend several of the sections of the Puerto Rico Internal Revenue Code of 2011, as well as other Laws. The attached tables summarize the main provisions of these Acts and provide you with general information as to their effective dates and changes. Please note that some of these changes may require immediate action. Act 41 proposes an increase to the excise tax on cigarettes and smokeless tobacco. In an attempt to provide additional resources to the general fund in addition to discourage cigarette smoking, which is associated with the increased incidence of respiratory diseases and various types of cancer, the Puerto Rico Legislature has imposed a gradual increase on the excise tax on cigarettes and smokeless tobacco over the next two years. Act 42 seeks to broaden the instances in which a merchant dedicated to the sale of taxable items in Puerto Rico is to be considered to have substantial nexus for sales and use tax purposes. The new legislation introduces a new definition to the term merchant or retailer which, among other, includes internet sales, and transactions performed by members of affiliate programs and/or related parties. Act 46 completes the picture on the changes to sales and use tax already enacted by Act 40 and Act 42 by incorporating to the excise tax declaration and return filing the use tax applicable to articles imported to Puerto Rico to be used in the operations of the business in Puerto Rico. In addition to this, Act 46 seeks to assign ten (10) percent of the Sales and Use Tax General Fund to the modernization and digitalization of the PR Treasury Department systems and equipment. Finally, Act 48 in addition to establishing an additional special contribution on government service contracts amends the Puerto Rico Gambling Law to increase the amount of slot machines allowed in a casino. The changes incorporated by these laws complete the scenario for the Treasury fund raising strategy promoted by the Puerto Rico Legislature. In the following weeks it is expected for the Department of Treasury to issue additional Informative Bulletins (BI), Circular Letters (CC) and Administrative Determinations (AD) to further administer the provisions therein. Contact us For assistance in this matter you may contact maria.rivera@pr.gt.com or lina.morales@pr.gt.com We will continue to keep you up-todate on how these new income tax and IVU provisions can affect you, and if immediate actions are required from your part. DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant should be obtained prior to taking action on any issue dealt with this update Kevane Grant Thornton LLP All rights reserved. Kevane Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently. July 9, 2013

3 Kevane Grant Thornton LLP 33 Calle Bolivia Ste 400 San Juan, Puerto Rico T F Act. No. 41 of June 30, 2013 Increase in excise taxes on cigarettes and smokeless tobacco Section Cigarettes excise tax Establishes a gradual increase to the excise tax imposed on cigarettes. Section Article 5 (Act No ) Imposes a new excise tax on smokeless tobacco manufactured in or imported to Puerto Rico Amends the Law better known as " Ley del Depositario de Archivos y Reliquias de Ex-gobernadores y Ex-primeras Damas de Puerto Rico" Establishes the definition for smokeless tobacco, and sets forth the excise tax imposed. Assigns one percent (1%) of the collections of the excise tax imposed on cigarettes to the special fund provided by this Law. Increases to $16.15 the cigarette excise tax imposed on every one hundred or fraction of one hundred (100) cigarettes for periods commencing on or after July 1, After July 1, 2015 the cigarettes excise tax will be increased to $17.00 for every one hundred or fraction of one hundred (100) cigarettes. Imposes a one dollar ($1.00) per pound or fraction of a pound excise tax on chewable snuff ("tabaco de mascar"). Imposes three dollars and two cents ($3.02) per pound or fraction of a pound excise tax on snuff ("tabaco en polvo") or any of its derivatives." Establishes that the special fund kept under the Act will be assigned one percent (1%) per year from the collections of the excise tax imposed on cigarettes under Section of the Code, as amended, up to a maximum of $1,000,000 per year until the fund has accumulated and maintained $6,000,000. At Kevane Grant Thornton we are committed to keep you updated of all developments that may affect the way you do business in Puerto Rico. Please contact us should you need more information. On July 1, 2013 On July 1, 2013 On July 1, 2013 DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from a qualified consultant should be obtained prior to taking action on any issue dealt with in this update Kevane Grant Thornton LLP All rights reserved. Kevane Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently. July 9, 2013

4 Act. No. 42 of June 30, 2013 Sales and Use Tax extensive to certain internet sales Section Section Section Amends the definition provided by paragraph (h) of the Section for merchant or retailer Amends the provision for regulations on Sales and Use Tax Adds a paragraphs (d) and (e) to the Section, collection of sales tax on mail order sales. Expands the definition of merchant or retailer to include merchants that although not physically present in Puerto Rico enter into agreements with Puerto Rico residents under which those residents, in exchange for a commission or other consideration, refer directly or indirectly, potential buyers to the person, either by a link ("link") on a website, oral presentation in person, telemarketing or in any other way. These new provisions will apply when the total amount of gross sales referred in a 12 month period exceeds $10,000. Establishes that the Secretary shall issue the necessary regulations to promote the amendments to Section (h) paragraphs (2), (4), (5), (6), (9) and (10). Establishes a new definition to mail order sales for the collection of sales tax The new definition for merchant or retailer broadens the scope of transactions and activities held by a merchant that might constitute substantial nexus for sales and use tax purposes. Among the activities now covered we can find: internet sales, and sales or services performed by members of an affiliate program, related parties, etc. As per new definition provided mail order sales refers to a sale of tangible personal property, order by mail, internet or other means of communication, to a merchant who receives the order outside of Puerto Rico and transports it, whether or not by mail, from any place inside or outside of Puerto Rico, to a person in Puerto Rico. Section Amends the dispositions of paragraph (a) of the Section, monthly return of sales and use tax. To establish that the provisions of paragraph (a) of Section shall not apply to merchants subject to Section (d), which shall be subject to the dispositions set forth by the Secretary by means of regulation, circular letter, informative bulleting or administrative determination of general disposition The new definition also incorporates any person who makes mail order sales and it is considered to be engaged in the sale of taxable items in Puerto Rico as per Section (h), as amended. Section (a) requires the filing of a monthly sales and use tax return to every merchant no later than the 10th day of the following month in which the taxes are collected. As per this amendment said disposition shall not apply to the collection of sales tax on mail orders, as defined above by Section (d). Page 2

5 cont. Act. No. 42 of June 30, 2013 Sales and Use Tax extensive to certain internet sales Section Section Adds a paragraph (g) to the Section, special disposition of funds. Adds a paragraph (d) to the Section, penalties for violation of other provisions. States that the Secretary will collect the municipal sales and use tax attributable to the purchases made by merchants under the provisions of paragraphs (2), (4), (5), (6), (9) and (10) of Section (h) and will distribute said collections among the municipalities according to a reasonable formula, that may be established by the Secretary or by agreement of the Secretary with the municipalities. Imposes a twenty thousand dollar ($20,000) penalty to every merchant or person that fails to comply with the provisions set forth by Section (h), as amended. Act. No. 46 of June 30, 2013 Payment of use tax upon introduction Section Amends paragraph (a) of the Section, excise tax declaration and monthly excise tax return Incorporates the use tax into the declaration and monthly return dispositions for the excise tax. As per amendment, every importer must file a detailed statement on excise tax and use tax for all articles imported from the outside Puerto Rico. The amendment also provides for an additional exception to paragraph (a)(1) which states that merchants that import taxable items subject to use tax, and which have provided a bond in the form and manner prescribed by the Secretary by regulation shall include said information in the monthly sales and use tax return provided by Section of the Code. Page 3

6 cont. Act. No. 46 of June 30, 2013 Payment of use tax upon introduction Section Section Amends the provision for articles introduced in vans. Amends the obligations of port owners, lessees and administrators provided by the Section. To incorporate the changes to Section regarding use tax and the extended definition for merchants or retailers provided by Section (h). Incorporates the changes to Section regarding use tax. Expands the applicability of the excise tax and use tax to articles introduced in vans, to include not only those transferred from the port to a warehouse, but also to stores or any other final destination for use. A port owner, lessee or administrator with articles or vans under its custody that are subject to either excise or use tax cannot deliver them to the consignee or any other person that claims them unless a Certificate from the Secretary authorizing its delivery is received. In the case that the merchandise is transferred to a warehouse (as per Act ) the obligation to request the necessary Certificate from the Secretary upon delivery relies on the warehouse owner. Section Section Section Amends the definition of "use" provided by paragraph (rr) of the Section. Adds a paragraph (c) to the provisions for the monthly return of sales and use tax provided by the Section. Adds a paragraph (c) to the provisions for the time to remit the use tax provided by the Section. Establishes that in the case of taxable items imported to Puerto Rico from abroad, it is understood that a person has exercised its right or power over said taxable property incident to the ownership thereof, or interest thereof, on the introduction to Puerto Rico. In order to incorporate the changes provided by the amendment to Section regarding the use tax, it provides that any person who introduces to Puerto Rico taxable items subject to use tax shall file a statement pursuant to the provisions of said section. In addition, it states that the Secretary shall provide the form and manner in which the merchant, with a certificate of registration, can deposit or pay the use tax on said items. States that the time to remit the use tax on taxable items imported to Puerto Rico will be the one provided by paragraph (c) of Section As per Section (c) disposition, the use tax shall be remitted to the Secretary no later than the 10th day of the following month in which the sale took place. Page 3

7 Act. No. 48 of June 30, 2013 Slow machines and special additional contribution upon Government service contracts Section 3 (Act No ) Section 5 (Act No ) Special Contribution to professional and consulting services Amends Section 3 of Act 221 of 1948, better known as "Ley de juegos de azar", to increase the amount of machines per authorized player. Amends Section 5 of Act 221 of 1948, better known as "Ley de juegos de azar", to establish a new distribution of the annual net income for the fiscal year and any of the subsequent fiscal years. Imposes a special contribution on professional and consulting services provided to the Commonwealth of Puerto Rico or any government agency. Increases to eight (8) the maximum amount of machines per authorized player, sitting or standing allowed in a casino. In addition it allows for the Puerto Rico Tourism Company to use its discretion in authorizing the operation of slot machines in gambling rooms located in airports and ports provided they are located after the security check point. Annual Net Income Distribution: (in millions): $315 or less 34% to Group A and 66% to Group B $315 to $495 55% to the General Fund and 45% to Group A $495 and above 80% to Group A and 20% to Group B Imposes a 1.5% special contribution from the total amount of the contract for professional services, advisory, advertising, training or guidance issued by an agency, department or instrumentality of the Commonwealth of Puerto Rico, public corporation, as well as Legislature and Judiciary, which will be allocated to the General Fund. As per amendment to the Section under no circumstances can the increase herein incorporated result in a reduction in the amount of gambling tables available at the casino. In which case, the casino will not qualify for the increase in machines. Under the threshold provided for $315 million or less, the amendment states that any annual net income in excess of the income for the base period will be distributed 60% to Group A and 40% to Group B. The definitions for each of the groups are set forth by paragraph (F). The special contribution established shall be withheld by the Treasury Department or government agency at the time of making the payment for the services rendered, said amount shall not be claimed as a credit or a deduction against the income tax determined. Page 4

8 Tax Alert: Guidelines and procedures to request waivers and exclusions provided by Act 40. On July 12, 2013 the Puerto Rico Department of Treasury released a series of Internal Revenue Circular Letters in order to provide additional guidelines on the waiver and/or exclusions request procedure available for several of the new tax provisions provided by Act 40, better known as the Law for the Redistribution and Adjustment of the Tax Responsibility. Herein you will find a brief summary of these guidelines: Internal Revenue Circular Letter provides the procedure for requesting a partial waiver on the gross income special tax ( Patente Nacional ) imposed by new Section incorporated to the 2011 Internal Revenue Code by Act 40. Under this section, the Secretary may grant a waiver to reduce the tax rate (limited to.2%), provided the taxpayer can prove that the contribution therein imposed can cause him improper or detrimental economic consequences. Internal Revenue Circular Letter provides the procedure for requesting an exclusion of certain services expenses incurred or paid to a related person with regards to the 20% consideration under the alternative minimum tax calculation, as well as for the deduction of said expenses with regards to the 49% limitation imposed for income tax purposes, provided by Sections and , respectively. Under these sections, the Secretary may grant an exclusion upon assessment of the nature of the expenses or costs paid to a related person or office. Internal Revenue Circular Letter provides the procedure for requesting a partial or total waiver from inclusion in the alternative minimum tax calculation of the purchase value of property acquired from a related person or transferred from home office provided by Section Under this section, the Secretary may grant a partial or total waiver to reduce the tax rate up to a.2% when it is determined that the value of the purchased property or transferred property by the home office to a branch engaged in trade or business in Puerto Rico is the same or substantially similar to the value under which said related person sells the property to an unrelated party. The request procedures set forth above require a series of documents to be submitted to the Secretary along with an explanatory memorandum. Upon consideration of the grant request the Secretary may also evaluate any outstanding debts of the taxpayer, or its members, partners or stockholders. As per circular letters disposition, all of the exclusions and waivers provided herein will have a maximum duration of two taxable years. Any additional grants for subsequent tax periods will have to be requested, following the parameters and requirements therein provided. Contact us For assistance on this matter, please contact us via maria.rivera@pr.gt.com or lina.morales@pr.gt.com Please contact us should you understand you may benefit from one or more of these waivers. DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant should be obtained prior to taking action on any issue dealt with this update Kevane Grant Thornton LLP All rights reserved. Kevane Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently. July 15, 2013