23 January 2014 Global Tax Alert News from Americas Tax Center EY Americas Tax Center The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: http://www.ey.com/us/en/ Services/Tax/Americas-Tax- Center---borderless-clientservice Puerto Rico s Governor signs act affecting audited financial statements requirement On 25 December 2013, the Governor of Puerto Rico signed Act Number 163 (Act 163-2013), which makes significant changes to the audited financial statements (AFS) requirements for supplementary schedules. Act 163-2013 also amends or introduces provisions in other areas, such as new rules for the relationship of the certified public accountant (CPA) and the Puerto Rico Treasury Department (PRTD) and the deferral of the deduction for certain expenses paid to related parties. Effective date Act 163-2013 is effective on 25 December 2013. The new provisions, requiring supplementary information related to the AFS as a whole to be included with the tax filings, generally apply to tax years that commence after 31 December 2012. The requirement regarding certain supplementary information, however, was postponed through Administrative Determination 13-22 (AD 13-22) by the Secretary of the PRTD. Under AD 13-22, the supplementary information requirement applies to tax years that commence after 31 March 2013. The deferral of these provisions only applies to the requirement for income tax filing purposes. Changes to AFS requirements for supplementary information Under Act 163-2013, the income tax return must continue to be accompanied by AFS, including a balance sheet, a statement of income, a statement of cash flows and the related notes to the financial statements, when the volume of business equals or exceeds $3 million. However, Act 163-2013 now also requires the submission of supplementary information subject to audit procedures performed by a CPA licensed in Puerto Rico, in relation to the AFS as a whole. Following are highlights of the supplementary information to be included in relation to the AFS accompanying the income tax return:
Withholdings on salary payments and services rendered and their related deposits were made as required by the 2011 Puerto Rico Internal Revenue Code (2011 PRIRC) The business has deposited the entire tax that it withheld on payments to nonresidents, as required by the 2011 PRIRC The reported use tax and related deposits were made, as required by the 2011 PRIRC The reported sales tax and related deposits were made, less any sales tax credit paid on the purchase of tangible personal property acquired for resale to which the taxpayer is entitled, as required by the 2011 PRIRC All credits generated in the sale of tangible personal property for resale, the amount of such credits used in the monthly returns and the balance of unused credits at the beginning and end of the tax year as required by the 2011 PRIRC Expense accounts arising from accounting books do not include personal expenses by partners, shareholders, members, owners, employees or their families (effective for tax years that commence after 31 March 2013) Use tax was paid on the disposal of tangible personal property for less than its cost in exchange for executing a contract for services or maintenance The salary amount reported on Form 499R2/W2PR, as well as all payments, reimbursements or compensation to owners, shareholders, partners or members, including payments made on their account (if any) Total salaries paid during the year match the amount reported on Form W-3PR; if year-end does not match the calendar year, salaries will be validated with information contained in quarterly returns A reconciliation of services rendered, recognized as expenses with Forms 480.6, submitted to PRTD, plus payments for services rendered below $500 A reconciliation of lease expenses, with Forms 480.6 submitted to the PRTD The balance at the end of the tax year of loans granted to partners, members or shareholders or, if applicable, to controlled group members, as defined in Section 1010.04 of the 2011 PRIRC or a group of related entities, as defined in Section 1010.05 of the 2011 PRIRC If a business operates under a decree of tax exemption, that the business meets the requirements of the tax exemption decree (effective for tax years that commence after 31 March 2013) For construction businesses with contracts exceeding $1 million: (1) that the sale and use tax has been paid on the purchase of construction materials; (2) the accounting method that was used and whether its use for this tax year is permitted by the 2011 PRIRC; (3) if the percentage-ofcompletion method is used, that the percentages of completion for each project have been certified by an engineer; and (4) when applicable, that the amount reflected in books as retainer withheld represents the total amounts withheld in the works or projects that have not been accepted as completed by their owner or developer (effective for tax years that commence after 31 March 2013) For hospitals operating under Act No. 168 (30 June 1968), as amended, that: (1) the number reported as eligible payroll complies with the definition of that term under Act No. 168; and (2) the credit claimed in the tax return meets the requirements set forth in Section 1(a) of Act No. 168 (effective for tax years that commence after 31 March 2013) For financial institutions: (1) that the amount reported as interest expense in the income tax return does not include interest expense attributable to exempt interest income from exempt obligations acquired after 31 December 1987; (2) that the amount reported as expenses that is not interest expense does not include expenses attributable to exempt income; and (3) a detailed description of the method used for determining nondeductible expenses (effective for tax years that commence after 31 March 2013, except for the information related to expenses other than interest) The new requirements to include supplementary information in relation to the AFS as a whole 2 Global Tax Alert Americas Tax Center
also apply to the filing obligations related to the volume of business declaration (municipal license tax) and the personal property tax return. The supplementary information required with these other tax filings varies, and applies when the taxpayer is also required to submit AFS. For example, for the volume of business declaration, Act 163-2013 requires generally more detailed information about the items that comprise the total revenues of the entities, including aspects related to businesses with tax incentives grants. On the other hand, the supplementary information in relation to the AFS as a whole that needs to accompany the personal property tax return focuses on the items of inventory (monthly balances, reserves and adjustments), cash balances and assets not used in activities covered under tax incentives grant. Deferral of deduction for amounts paid to related parties Act 163-2013 does not allow a taxpayer to deduct any amount owed to a related party who is a foreign or nonresident person not engaged in a trade or business in Puerto Rico until the amount is actually paid to the related party. This provision applies with respect to amounts that are otherwise deductible by the taxpayer, and includes items such as: interest, rent, royalties, wages, compensation, income from distributable share in partnerships, and fixed, determinable, annual or periodic income. Right to hire tax experts Act 163-2013 also allows the PRTD s Secretary to hire personnel trained in tax matters to examine any books, papers, certificates or memoranda related to the subjects that should be included in the tax return or statement. The tax experts could also provide technical support to PRTD officers or employees. All hired tax experts would be subject to the provisions of Sections 6030.13, 6030.17 and 6030.18 on unlawful or prohibited acts by PRTD officers or employees, even if the person hired is not a PRTD employee. Under this new provision, the hired tax experts are required to be: (1) duly qualified and hold credentials allowing them to perform a tax technical analysis, (2) authorized CPAs licensed in Puerto Rico, and (3) part of the public contractors registry established by the PRTD s Secretary to control hired personnel and their compensation. New rules for CPAs to practice in front of PRTD Act 163-2013 requires anyone working as a CPA authorized before the PRTD for purposes of issuing an opinion on the new requirement about submitting supplementary information to fulfill the following duties and requirements: Keep the certificates and documents supporting the preparation and evaluation of supplementary information for four years after issuing the opinion Respond to information requirements by the PRTD Secretary with regard to the supplementary information required under the 2011 PRIRC and submitted by the taxpayer with its income tax return Electronically submit to the PRTD the supplementary information Additionally, any notification or request for information required by the PRTD Secretary in connection with the supplementary information will be issued simultaneously to the taxpayer and the CPA. Act 163-2013 introduced new penalty provisions to the 2011 PRIRC related to CPAs for infractions or noncompliance with the supplementary information requirements, including the authority of the Secretary of the PRTD to revoke or suspend the privilege of a CPA to act on the supplementary information requirements for purposes of the CPA being considered in compliance with the new rules under the 2011 PRIRC. Publication of tax debtors The PRTD Secretary is authorized through Act 163-2013 to publish a list of taxpayers with tax debts if they are considered to be late payers. Before publishing the list, the PRTD Secretary is required to document each step in the process through a regulation and to certify that adequate procedures were used to ensure the truthfulness of the information. The PRTD Secretary also has to notify taxpayers in a timely and adequate manner and grant a term for taxpayers to challenge or settle their alleged tax debts. Global Tax Alert Americas Tax Center 3
Implications The PRTD informs in AD 13-22 that it will be evaluating further amendments to Act 163-2013, as necessary, as well as issuing regulations and administrative guidance to administer the new rules about accompanying the tax filings with supplementary information to the AFS as whole. The postponement of certain supplementary information responds to the PRTD s need to evaluate further how to implement these requirements. These new rules have significant implications for entities that are required to submit the supplementary information with their 2013 Puerto Rico tax filings due in 2014, since calendar-year taxpayers must comply with the new supplementary information obligation for the statutory audit of their 2013 financial statements. The deferral of the effective date of certain supplementary information requirements provided under AD 13-22 only applies to the income tax return filing obligation with the PRTD. Supplementary information applicable to the filings for municipal license and personal property taxes are effective, as provided under Act 163-2013. Official publication or administrative guidance from governmental agencies administering these tax obligations should be monitored in case similar deferral provisions are issued. The information included in this Alert is intended only to highlight the new requirements on the supplementary information in relation to the AFS as a whole. We recommend that taxpayers consult with their CPA to discuss further the extent of the requirements in connection with the issuance of the AFS. Act 163-2013 also amended certain other provisions of the 2011 PRIRC on debt forgiveness (income exclusion and new informative reporting requirements) and the execution of closing agreements with the PRTD. 4 Global Tax Alert Americas Tax Center
For additional information with respect to this Alert, please contact the following: Ernst & Young Puerto Rico LLC, San Juan Teresita Fuentes +1 787 772 7066 teresita.fuentes@ey.com German Ojeda +1 787 772 7080 german.ojeda@ey.com María T. Riollano +1 787 772 7077 maria.riollano@ey.com Rosa M. Rodríguez +1 787 772 7062 rosa.rodriguez@ey.com Co-Directors of EY Americas Tax Center Global Tax, Eric Solomon, Washington, DC Global Tax, Michael Mundaca, Washington, DC EY Americas Tax Center America s Tax Center Chief Operating Officer Declan Gavin, Washington, DC ATC - Customs William Methenitis, Dallas ATC - Global Compliance and Reporting (GCR) Ken Brown, Dallas ATC - Global Tax Desks Gerrit Groen, New York ATC - Tax Controversy Rob Hanson (interim), Washington, DC ATC - Tax Effective Supply Chain Management (TESCM) Lisa Lim, New York ATC - Tax Performance Advisory (TPA) Gary Paice, Chicago ATC - Tax Policy Michael Mundaca (interim), Washington, DC ATC - Value Added Tax (VAT) Jean-Hugues Chabot, Montreal, Canada ATC - Insurance Terry Jacobs, Washington, DC Global Tax Alert Americas Tax Center 5
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