By: CPA y attorney Juan A. Alvarado, Member CPA Rosirma García, Senior Manager ALVARADO TAX & BUSINESS ADVISORS LLC

Transcription

1 Act By: CPA y attorney Juan A. Alvarado, Member CPA Rosirma García, Senior Manager ALVARADO TAX & BUSINESS ADVISORS LLC

2 Act

3 I. Principal purposes a. Add a new Subtitle DD to introduce a Value-Added Tax ( VAT ), effectively April 1, 2016 b. Amend the sales and use tax ( SUT ) provisions from July 1, 2015 to March 31, 2016 c. Other amendments to collect additional income taxes 3

4 II. Transition period a. Increase the SUT tax from 7% to 11.5% b. Three-phase transition process towards a VAT which will begin on April 1,

5 III. First phase a. Begins on July 1, 2015 b. Includes 1% of sales tax which is currently remitted to the Municipality(ies) c. 10.5% to be remitted to the PR Treasury Department ( PRTD ) 5

6 III. First phase Amended Section (nn)- Taxable Services Current law provides for 9 services to be taxable when rendered between merchants Bank charges Security and armored services Laundry services Telecommunication services Operating Lease of motor vehicles that constitute a daily lease (known in the industry as Daily Rental ) Collection Services Cleaning services Repair and maintenance services (those of expenditure nature) Waste collection services 6

7 III. First phase Amended Section (nn)- Taxable Services On July 1, Tax rate for the 9 taxable services mentioned earlier will increase from 7% to 11.5% (both include a 1% SUT at the Municipality level). Commercial rent will continue to be exempt 7

8 IV. Second phase Will begin on October 1, 2015 All services between merchants will be taxable at a rate of 4%, except for the 9 taxable services (which will continue at a 11.5% SUT rate). Municipal SUT will not apply to these services that were not previously taxable. 8

9 IV. Second phase Exempt services Services rendered to other merchants (taxable at 4%), excluding the 9 services (taxable at 11.5%) Designated professional services (taxable at 4%) Services provided by the Government of Puerto Rico Education services, including tuition costs Interest and other fees for money use and related transactions Insurance commissions and services Health or hospital medical services Services rendered by persons whose annual volume of business does not exceed $50,000 Services rendered to a related entity that operates within Puerto Rico 9

10 IV. Second phase 4% tax rate Professional designated services Lawyers, CPAs, Tax Preparers, Architects, Geologists, Engineers & Surveyors, Real Estate Brokers, Appraisers, Professional Draftsmen Will apply to services received from outside of Puerto Rico, the buyer of the services doing business in Puerto Rico will be responsible to include in the SUT tax return and pay the applicable SUT. Will apply to services provided by employment placement agencies. 10

11 IV. Second phase This phase requires specific regulations and guidance from Treasury Subcontracted services are exempt when rendered between registered merchants, even though the services corresponds to one of the 9 taxable services Act does not provide an exception for subcontracted services that are not within the 9 taxable services, therefore will become taxable in this phase. Commercial rent remains exempt 11

12 V. Third phase Value Added Tax Effective April 1, 2016 substituting the SUT Tax rate 11.5% (10.5% VAT plus 1% municipal SUT) Tax is imposed on the value that a merchant adds to his/her raw materials or purchases before selling the new or improved product or service. 12

13 V. Third phase Value Added Tax 9 taxable services will continue to be taxed at 11.5% (but that rate includes a 1% Municipal SUT) Designated professional services and other taxable services will be taxed at 10.5% Commercial rent remains exempt Services rendered by a non-resident person are taxable 13

14 V. Third phase Value Added Tax Exempt Transactions Financial services, except for bank charges Import and Sale of Prescription Drugs Sale of medical equipment for disabled persons Goods acquired under PAN & WIC Programs Goods acquired or imported by bona fide farmers Sale and introduction of gas, diesel and other petroleum products, except propane gas and related products Rental of properties subject to a room tax Sale and introduction of food and food ingredients Equipment acquired or imported by Hospital Units Sale and Import of Motor Vehicles 14

15 V. Third phase Value Added Tax Exempt Transactions Rental of Principal Residence Rental of Commercial Property Transfer of donated goods and services rendered by non-profit entities Books (printed) Occasional sale of goods by churches or other religious institutions Educational and child care services Goods acquired or imported by tourism businesses Goods and services acquired by Government (PR and US) Health and Medical Services Certain legal services rendered under a contingency agreement Sale of goods or services reimbursed by Medicare/Medicaid and the PR government health plan Sale of real estate 15

16 V. Third phase Value Added Tax Excluded goods and services Money Intangibles (except computer programs) Electricity Aqueduct and Sewer Authority Service Property owned by Government (PR and US) In transit goods (less tan 60 days) Home owner association s dues and fees Goods sold by graduating classes Traditional lottery tickets Blood, tissues and human organs Goods imported into a Foreign Trade Zone Alcoholic beverages imported into a bonded warehouse 16

17 V. Third phase Value Added Tax Excluded goods and services Certified promotional materials Various telecommunication services or charges Services rendered by a related entity that operates within Puerto Rico Goods imported to Puerto Rico as part of a move of a nonresident individual Services rendered as an employee 17

18 V. Third phase Value Added Tax Zero tax rate taxable transactions Sale of goods for export Services rendered for export Sale of raw materials and equipment used in manufacturing operations to merchants hold a valid Exemption and Zero Rate Certificate for Eligible Manufacturing Plant 18

19 V. Third phase Value Added Tax Transactions subject to 11.5%, 10.5% or 0% will be considered taxable transactions (although on the latter no tax is collected) Merchants are entitled to claim a credit for the amount of VAT paid on their purchases Recover the VAT paid on their inputs by claiming it against the VAT determined on their monthly VAT return 19

20 V. Third phase Value Added Tax Formula to determine the VAT credit available: 20

21 V. Third phase Value Added Tax The total amount of the credit will depend on the taxability of the goods and services each merchant sells 21

22 VI. Transitional provisions Preexisting contracts and bids SUT provisions Contracts for goods or services for which contracts and bids took place prior to July 1, 2015 : will be exempt from the increase in SUT rates for a period of 12 months or the term of the contract, whichever is less Special rules will apply to goods and services used for the construction of residential, commercial or industrial projects (possible rules may include that certain documents, or the bid, should have been submitted or approved by May 31, 2015) the PRTD is in the process of issuing a Circular Letter to that regard 22

23 VI. Transitional provisions Preexisting contracts and bids VAT provisions Contract related to goods and services granted prior to April 1, 2016 will not be subject to VAT for a period of 12 months or the term of the contract, whichever is less (if they were excluded for SUT under those rules). Taxable services rendered after March 31, 2016 will be exempted from the VAT only if paid before April 1, 2016 Special rules will apply to goods and services used for the construction of residential, commercial or industrial projects (possible rules may include that certain documents, or the bid, should have been submitted or approved by May 31, 2015) the PRTD is in the process of issuing a Circular Letter to that regard 23

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25 Income Tax Implications of Act

26 INCOME TAX IMPLICATIONS VII. Alternative Minimum Tax Limitation on the exclusion of expenses incurred or paid to related party or Home Office The waiver that maybe requested to the PRTD is limited to a 60% of the total expenses subject to the AMT calculation for taxable years commenced after December 31, 2014 Limitation of the net operating loss deduction Reduction from 80% to 70% for taxable years ended after December 31,

27 INCOME TAX IMPLICATIONS VIII. Limitation in the determination of Net Operating Loss deduction Expenses incurred by a taxpayer and paid or to be paid to a related person or to a Home Office are not allowed as deductions (only for purposes of the determination of the Net Operating Loss) 27

28 INCOME TAX IMPLICATIONS VIII. Net Operating Loss Carry-Over Regular taxes: Limitation from 90% to 80% for taxable years commenced after December 31,

29 INCOME TAX IMPLICATIONS VIII. New Non Deductible Items if the taxpayer has not paid the corresponding SUT or VAT, as applicable: Expenses incurred or paid for services rendered by a non-resident and cost (or related depreciation) of any taxable item. 29

30 Any questions? Contact one of our tax consultants: Juan A. Alvarado, Esq., CPA Rosirma García, CPA or visit our web page at As provided in Treasury Department Circular 230, this presentation is not intended or written by Alvarado Tax & Business Advisors LLC, to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer. Readers are reminded that they should not consider this presentation to be a recommendation to undertake any tax position, nor consider the information contained therein to be complete. Before any item or treatment is reported, or excluded from reporting on tax returns, financial statements, or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this presentation may not continue to apply to a reader's situation due to changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

31 This presentation should not be used, reproduced, totally or partially copied without our authorization Alvarado Tax & Business Advisors, all rights reserved.