Publications Issued by the PR Treasury Department Regarding the Sales and Use Tax on Services

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1 O N E I L L & B O R G E S LLC Publications Issued by the PR Treasury Department Regarding the Sales and Use Tax on Services TAX ALERT The PR Treasury Department ( Treasury ) recently issued the Circular Letter of Tax Policy No (the CL ) and the Administrative Determination No (the AD ) to address certain matters related to the special sales and use tax rate of 4% (the Special SUT ) to be imposed commencing on October 1 st, 2015 on the rendering of designated professional services and services rendered to other merchants, which are currently exempt from SUT. Designated Professional Service Providers Obligation to Update the Sales and Use Tax Merchant s Registry Designated professional service providers have until September 30, 2015 to update their Merchant Registration Certificate. Commencing on October 1st, 2015, a 4% sales and use tax ( SUT ) will apply to designated professional services and therefore, merchants who are providers of this type of service will become collection agents of this 4% SUT; in which case their Merchant s Registration Certificate will change from a Non-Withholding Agent (the red color certificate) to a Withholding Agent Certificate (the green color certificate). According to CL 15-12, merchants which are providers of designated professional services have the obligation to update their information in the Sales and Use Tax Merchants Registry no later than September 30, Designated professional services include the following services: legal services; agronomists; architects and landscape architects; CPAs; brokers, sellers and real estate companies; professional draftspersons; professional real estate appraisers; geologists; engineers and surveyors; and from September 30, 2015, tax return specialists (these last ones do not have the obligation to update their Merchant s Registration Certificate). The procedure to update the Sales and Use Tax Merchant s Registration Certificate is as follows: 1. Go to: and select the option Actualización del Registro de Comerciantes. 2. The system will request certain information from the merchant, including the EIN and the first 7 digits of the Merchant s Registration Certificate. 3. Select the merchant number to be updated.

2 Page 2 4. Complete a questionnaire regarding the billing mechanism, accounting system, aggregate (annual) volume of business, cease of operations date (if applicable), among other information. 5. Once the procedure to update the Sales and Use Tax Merchant s Registry is completed, the system will provide a confirmation number and indicate if a new Merchant s Registration Certificate will be issued. Note that service providers with an annual volume of business of less than $50,000 will remain with the Non-Withholding Agent Certificate. Once you receive the new certificate you must mutilate the old certificate and the new certificate must be exhibited in a place visible to the public at the commercial location. Services Rendered by a Non-Resident Person to a Person in Puerto Rico The corresponding SUT will apply to services provided by non-resident persons received on or after October 1, 2015; and the 1% Municipal SUT will not apply to these services. Act 72 of 2015 amended Section (c) of the PR Internal Revenue Code (the Code ) to establish that in the case of services rendered by a non-resident person to a person located in Puerto Rico, the person responsible for remitting the applicable sales and use tax on such services to Treasury will be the person who receives the service in Puerto Rico. Regarding this matter, the AD issued by Treasury establishes the following: o This provision will be effective for services received on or after October 1, o The applicable SUT rate will depend on the type of service received; that is, taxable services subject to the 10.5% Commonwealth SUT, or designated professional services and services rendered to other merchants subject to the 4% Special-SUT. o The municipal SUT rate will not apply since the service is rendered outside of Puerto Rico. o The corresponding SUT will apply to services provided by non-resident persons that are received by persons located in Puerto Rico, only in connection, either directly or indirectly, with operations or activities carried out in Puerto Rico. If the service provided by the non-resident is partially connected or related to the operations or activities carried out in Puerto Rico, then the service received by the person located in Puerto Rico will be subject to the corresponding SUT in the same proportion in which such service is connected with the operations or activities carried out in Puerto Rico by such person. o The SUT exemption when the service provider has a volume of business of $50,000 or less will not apply to services rendered by a non-resident person.

3 Page 3 Accounting Method Cash Basis Method Election for Designated Professional Service Providers Designated professional service providers may use the cash basis method to remit the SUT to Treasury. The cash basis method election must be made with the filing of the Special SUT Monthly Return for October o In general, all merchants must use for SUT purposes the same accounting methods used to report their income for income tax purposes. However, Act 72 of 2015 amended Section of the Code to establish, as an exception, that those merchants engaged in providing designated professional services (hereinafter, the Professionals ) may use the cash basis method for purposes of remitting the SUT to Treasury. That is, Professionals may opt to remit the 4% Special SUT on the services rendered with the return for the month during which they receive the payment for such services, regardless of when the same were billed and the accounting method used to report said income for income tax purposes. o AD establishes that the election to use the cash basis method for SUT purposes must be made with the filing of the Special SUT Monthly Return corresponding to the month of October 2015, which shall be filed no later than November 20, Professionals who commence operations after the month of October 2015 and wish to use said method for purposes of the Special SUT must select the same in the first Special SUT Monthly Return they file. Once an accounting method is elected, if the Professional wishes to change the method for purposes of the 4% Special SUT he must file a Ruling Request with the Secretary of Treasury (the Secretary ) requesting the approval of the change in method, and the change will not be applicable until the Secretary approves it. Transition Rule o Services rendered to other merchants and designated professional services rendered before October 1st, 2015 are not subject to the 4% Special SUT only if such services are billed to the client not later than October 20, If such services are rendered after September 30, 2015, or are billed after October 20, 2015, even if they have been rendered prior to October 1st, 2015, they will be subject to the 4% Special SUT.

4 Page 4 Commissions Generated by a Merchant on a Sale AD clarifies that commissions generated by a merchant on a sale, regardless of whether the items sold are taxable or exempt from SUT, are considered a payment for services rendered to other merchants and therefore, will be subject to the 4% Special SUT commencing on October 1 st, 2015; except for insurance commissions and commissions paid to an employee. Subcontracted Services AD establishes that subcontracted services are going to be subject to the 4% Special SUT commencing on October 1 st, 2015, including those subcontracted services consisting of taxable services that were treated as exempt under the B2B exemption by virtue of the Administrative Determination No issued by Treasury on May 4, Billing: Guidance on Breakdown of Items and Reimbursable Expenses Subcontracted services will be subject to the 4% Special SUT commencing on October 1, Every service provider must provide a breakdown of the different services rendered and the reimbursable expenses in the invoices, as agreed with their clients. The following reimbursable expenses will not be subject to the 4% Special SUT if itemized in an invoice: o expenses incurred, including the 4% Special SUT paid, in the purchase of tangible personal property used as part of the services rendered; and o expenses directly allocated to the service rendered, which are paid by the service provider and claimed to the client as reimbursable expenses, such as fees paid to a governmental agency, and mail stamps or private courier fees. The following items will not be considered reimbursable expenses and will be subject to the applicable SUT if itemized in an invoice: o "out of pocket expenses" or "administrative recovery fees", for which no detail is included in the invoice; o expenses indirectly related to the services rendered, even if such expenses are itemized in the invoice; o services rendered by employees; o subcontracted services and services rendered by other merchants; and o the SUT paid for the subcontracted services or services rendered by other merchants.

5 Page 5 Special SUT Monthly Return A new Special SUT Monthly Return must be filed no later than the 20 th day of the following month to remit the 4% Special SUT to Treasury. A new Special SUT Monthly Return must be filed electronically through the Integrated Merchant s Website (Portal Integrado del Comerciante or "PICO," by its Spanish acronym). The Special SUT Monthly Return must be filed no later than the 20th day of the month following the month in which the 4% Special SUT was collected. Therefore, the first Special SUT Monthly Return will be for the period of October 2015 and must be filed no later than November 20, The Special SUT Monthly Return only applies to merchants that are providers of designated professionals services or services rendered to other merchants who are required to collect the 4% Special SUT. Merchants who are required to file the Declaration of Imports (Form SC 2970), the Tax on Imports Monthly Return (Form SC 2915 D) or the Sales and Use Tax Monthly Return (Form SC 2915 A) ("SUT Monthly Return") must also file the Special SUT Monthly Return if they provide designated professionals services or services rendered to other merchants. In addition, those merchants or taxpayers who receive services from a non-resident person consisting of designated professionals services or services from other merchants must file this return. The payment of the 4% Special SUT must be remitted only through PICO. Taxable services subject to the 10.5% Commonwealth SUT will continue to be reported, and the 10.5% SUT to be remitted to Treasury, using the SUT Monthly Return. O Neill & Borges LLC 250 Muñoz Rivera Ave. Suite 800 San Juan, Puerto Rico Tel.: Fax:

6 Page 6 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. O Neill & Borges LLC CORPORATE TAX GROUP Members Walter F. Chow Ivelisse Collazo Giselle Flaqué Rosa M. González-Lugo Amaya Iraolagoitia Michelle Marichal Cristina Morazzani Samuel Rosado-Domenech Ismael Vincenty Associates Denisse Ortiz Roxanna Santiago Suhaily Sepúlveda Paola Medina