Tax Reform Process Act 72 - 2015 (P. de la C. 2482)

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Tax Reform Process Act 72 - 2015 (P. de la C. 2482)

WebcastJune 2, 2015


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Agenda

• Summary of the tax reform process as of today:– P de la C 2329 “Act to Transform the Tax System

of the Commonwealth of Puerto Rico”– Substitute P de la C 2329– Act 72 - 2015 (P de la C 2482)

• Changes to Income Tax• Changes to Sales and Use Tax• Adoption of Value Added Tax (VAT

• Questions


P. de la C. 2329

"Act to Transform the Tax System of the Commonwealth of Puerto Rico"

Substitute P. de la C. 2329 P. de la C. 2482

Changes Proposed to Puerto Rico's Tax System

Filed 2/11/2015 Filed 4/29/2015 Filed 5/18/2015

Public Hearings

Killed 4/30/2015Signed 5/29/2015

Act 72 - 2015


Income Tax


Individual Income Tax:Regular Tax

Gross Income Tax

Not over $9,000 0%

Over $9,000 but not over $25,000 7% of the excess over $9,000

Over $25,000 but not over $41,500 $1,120 plus 14% of the excess over $25,000

Over $41,500 but not over $61,500 $3,430 plus 25% of the excess over $41,500

Over $61,500 $8,430 plus 33% of the excess over $61,500

Tax tables effective for tax years beginning after 12/31/12, but before 1/1/14 will apply for tax years starting after 12/31/12:


Individual Income Tax:Gradual Adjustment

– Gradual Adjustment• for taxable years beginning after 12/31/13:

the gradual adjustment will be applicable once again for all individuals with income subject to tax in excess of $500,000.–such excess will be subject to an additional

5% tax.


Individual Income Tax:Gradual Adjustment

– Limitations for taxable years beginning:• after 12/31/12, but before 1/1/14

– $8,895, plus 33% of the allowable personal and dependents exemptions.

• after 12/31/13, but before 1/1/15 – $8,423, plus 33% of the allowable personal and

dependents exemptions. • after 12/31/14 and thereafter

– $8,895, plus 33% of the allowable personal and dependents exemptions.


Individual Income Tax:Self-employed Individuals

– Self-employed Individuals• additional tax of 2% on self-employed

individuals will only apply to tax years commenced after December 31, 2012 but before January 1, 2015.


Individual Income Tax:Net Operating Losses

– Net Operating Losses• individuals reporting net losses from a trade

or business for three consecutive tax years can only carry forward the net operating loss attributable to the third taxable year and thereafter, beginning after December 31, 2014, limited to a 50% of such loss. The other 50% will not be allowed to be carried forward to future periods.


Individual Income Tax:Net Operating Losses

– Corporation of Individuals, Special Partnership & Partnerships• partners of a Corporation of Individuals,

Special Partnerships and Partnerships will now have a limit on the deductibility of prior years net operating losses. For years commencing after December 31, 2014, the loss deduction will be 80% of the current year's aggregate distributable share of net income.


Individual Income Tax:Deductions

– Charitable Contributions• for taxable years commencing after

December 31, 2014, deductions will only be allowed for charitable contributions made to non profit entities certified by the PR Department of Treasury.–applicable to entities under the provisions

of Section 1101.01(a)(2) of the PR Tax Code.


Corporate Income Tax:Alternative Minimum Tax (AMT)

– AMT will now be the higher of:• AMT income at the rate of 30%, or• The sum of:

–Purchases of personal property to related parties at rates that fluctuate from 2.5% to 6.5%, plus

–Expenses or charges from related parties not subject to withholding at the rate of 20%

» A waiver may be obtained to reduce 60% of the expenses subject to the charge.



– Expenses incurred or paid to a related person• states limitations on the determination of

expenses that may be excluded/waived from the application of the 20% tax for AMT purposes.–expenses that may be excluded from the

20% tax rate cannot exceed the 60% of the total amount of such expenses.



– Value of purchases of personal property from a related person • changes in the applicable tax rate

–2% for taxable years commenced before January 1, 2015.

– for taxable years commencing after December 31, 2014, tax rate will vary according to purchaser's gross revenues derived from the trade or business in PR.


Corporate Income Tax:Alternative Minimum Tax (AMT)Value of purchases of personal property from a related person

If purchaser's gross revenues from the trade or business in PR is:

Tentative Minimum Tax Rate

Equal or more than $10 Million, but less than $500 Million

2.5%

Equal or more than $500 Million, but less than $1,500 Million

3.0%

Equal or more than $1,500 Million, but less than $2,000 Million

3.5%

Equal or more than $2,000 Million, but less than $2,750 Million

4.5%

Equal or more than $2,750 Million 6.5%

For taxable years commencing after December 31, 2014:



– Value of purchases of personal property from a related person • changes in the applicable tax rate

– amends section to address exceptions applicable to purchases subject to the provisions of Section 3020.08 (Vehicles) of Subtitle C of the PR Tax Code.

» for taxable periods ended before January 1, 2015, such purchases will be subject to a 1.50%.

» for taxable periods beginning after December 31, 2014, such purchases will be subject to a 0.50%.



– Value of purchases of personal property from a related person • tax waiver provided under section 1022.03(d)

(4) will not be applicable to tax years beginning after December 31, 2014.–Notwithstanding, waivers already approved

by the Secretary of the Treasury will remain in effect for the periods originally granted.


Corporate Income TaxNet Operating Losses

– Net Operating Losses• for taxable periods beginning after

December 31, 2014: – limited to 80% of the net income for regular

taxes.• for taxable periods ending after

December 31, 2014: – limited to 70% of the alternative minimum

net income for AMT purposes.


Corporate Income TaxNet Operating Losses

– Net Operating Losses• no deductions will be allowed for expenses incurred

or paid to a related person that does not perform any trade or business in PR or a home office located outside of PR by a foreign entity engaged in trade or business in PR through a branch. – except for expenses excluded by the Secretary

of the Treasury on Section 1033.17(a)(17)(D).– certain exceptions apply to exempt businesses

under Act 73-2008, Act 74-2010, Act 83-2010 & Act 20-2012.


Income TaxNet Operating LossesCapital Gains and Losses

– Net Operating Losses• corporations

– for tax years beginning after December 31, 2014:» limited to 80% of capital gains from such sale.

• for taxpayers other than corporations, 90% limitation is eliminated.

– Such losses will be allowed up to the amount of gains generated during the taxable year. Deduction for excess of loss over gains during the year will still be limited to $1,000 or the taxpayer's net income, whichever is less.


Corporate Income TaxNet Operating LossesCapital Gains and Losses

– Net Operating Losses• for tax years beginning after December 31, 2014,

capital losses carried forward to subsequent years will be limited to 80% of the current year's net capital gain.

– Amount of loss to be carried forward to a subsequent year will be considered as a short term loss in such year.


Corporate Income Tax:Non Deductible Expenses

– Non deductible expenses • 51% disallowance on expenses incurred or paid

to a related person for tax year beginning after December 31, 2014.–states limitations on the determination of

expenses that may be excluded/waived from this disallowance for regular tax purposes.»expenses that may be excluded/waived

cannot exceed the 60% of the total amount of such expenses.


Corporate Income Tax:Non Deductible Expenses

– Non deductible expenses • expenses paid or incurred for services rendered by

a non resident, if such taxpayer has not paid the sales and use tax and value added tax stated on Subtitles D and DD respectively, will not be allowed as a deduction.

• the cost or depreciation of any goods or taxable item, as per Subtitles D and DD, will not be deductible if the taxpayer has not paid the corresponding sales and use tax and value added tax for such item.


Income Tax:Other Dispositions

– Includes definition for "Large Taxpayers"• new rules applicable to the filing of tax returns for these

taxpayers will be established by regulation or any other kind of publication to be issued by the Secretary of the Treasury.

• must meet at least one of the following requirements:

– Telecommunications companies

– Entity whose volume of business was $50,000,000 or more during the prior tax year.

– Commercial bank or trust

– Private bank– Brokerage firms– Insurance companies



– Tax Credits• extends the moratorium on certain tax credits

up to tax years commenced until January 1, 2018.–applicable to tax credits that were issued

or purchased before June 30, 2013.



– Tax Credits• extends the moratorium on certain tax credits up to

tax years commenced until January 1, 2018.– tax credits issued during tax years 2016-2017 &

2017-2018, can only be claimed up to 50% of such credit during tax years beginning after December 31, 2016 or December 31, 2017 respectively, and before January 1, 2018 or 2019 respectively. Any remainder can be claimed in subsequent years.


Income Tax:Exemption from tax on corporations and non profit entities

– Establishes the requirement for entities exempt under Section 1101.01(a) (except cooperatives) to provide evidence that they provide services in Puerto Rico.

– Organizations subject to this requirement will be:• churches• organizations that provide service to the community • organizations for the exclusive benefit of its members• organizations providing benefits to employees• association of property owners• organizations providing homes for rent• organizations of labor, agricultural or horticultural• cemetery companies• organizations exempt under Act 120 of 1994


Excise Taxes


Add Exemption for Excise Taxes

• Provides the exemption to business under Act 73 of 2008 (Tax Incentives Act for the Development of Puerto Rico) that uses crude oil, unfinished oils and end products derived from oil and other hydrocarbons mixture for the generation of power used by the exempt business.


Excise Taxes - Vehicles

• Increases the excise tax on ATV introduced from abroad or manufactured in Puerto Rico from a 10% to 11.5% of the taxable price in Puerto Rico.


Sales and Use Tax


Sales and Use Tax

• Sales and Use tax– as a transition method/period, the SUT

provisions of 2011 Code, as amended, will still apply until March 31, 2016, but the applicable tax rate will increase from a 7% to a 10.5% (resulting in a combined state and municipal SUT of 11.5%) effective on July 1, 2015, or the effective date of this Bill.


Sales and Use Tax

• Sales and Use tax– commencing on October 1, 2015, a new special

SUT rate of 4% will be imposed on (i) certain services rendered to a merchant and (ii) designated professional services.

– provides that the 1% municipal SUT will not apply to services rendered to other merchants or to designated professional services.


Sales and Use Tax

• Sales and Use tax– the following services previously taxed by Act 40

of 2013 at 7% will now be subject to 10.50%:• certain bank charges,• collection services, • security services, including armored services

and private investigations, except security services provided to associations of residents or condo-owners,


Sales and Use Tax

• Sales and Use tax– the following services previously taxed by Act 40 of 2013

at 7% will now be subject to 10.50%:• cleaning services, except cleaning services provided to

association of residents or condominiums• laundry services• non capitalize repair and maintenance services of real and

personal property, except those services provided to association of residents or condominiums

• telecommunication services


Sales and Use Tax

• Sales and Use tax– the following services previously taxed by Act 40 of 2013

at 7% will now be subject to 10.50%:• waste collection services, except waste collection services

provided to association of residents or condominiums• operating leases of motor vehicles that constitute a daily lease,

except those leases of motor vehicles that are essentially equivalent to a purchase


Excluded Services for Sales and Use Tax 10/1/15 – 3/31/16

• services rendered to other merchants (special tax)• designated professional services (special tax)• services provided by the Government of Puerto Rico• educational services, including tuition costs;• interest and other charges for the use of money


Excluded Services for Sales and Use Tax 10/1/15 – 3/31/16 cont.

• insurance services and commissions • health or hospital services• services rendered by persons whom annual volume of

business is $50,000 or less, • services rendered between members of a controlled group.


Business to Business Services subject to 4% after October 1, 2015

Are services rendered to a person engaged in a trade or business or in the production of income except for:– taxable services (Act 40 taxable B2B)– services provided by the Government of Puerto Rico– educational services, including tuition costs;– interest and other charges for the use of money– insurance services and commissions – health or hospital services– services rendered by persons whom annual volume of business is

$50,000 or less, – services rendered between members of a controlled group.


Designated Professional Services subject to 4% after October 1, 2015

• Agronomists• Architects and landscape architects• Certified Public Accountants• Brokers, sellers and real estate companies• Professional draftspersons• Professional real estate appraisers• Geologists• Engineers and surveyors • Legal Services• Specialist of tax returns (from 9/30/15)


Accounting method for Merchants dedicated to provide designated professional services

– allows merchants dedicated to provide designated professional services to use the cash method of accounting for purposes of the SUT provisions for tax events occurred after 9/30/15.


Person responsible for tax payment

– Effective July 1, 2015 in the case of services provided by a non-resident person to a person in PR, the person responsible for the payment of the SUT is the person that receives the service in PR.


Credit for taxes paid by a reseller merchant

– until June 30, 2015 the credit is 75% except for taxpayers engaged in the sale of unprepared food and provisions which is 100%.

– for periods after June 30, 2015 the credit is increased to 100% of the tax liability shown on tax return.


SUT rate applicable to preexisting contracts and auctions

– retail sales covered by executed contracts or approved bids at auction before July 1, 2015 will be subject to the SUT applicable to such taxable item at June 30, 2015 (7%).

– the person may acquire the taxable items subject to such contract or auction during a period of: • 12 months • contract term


SUT rate applicable to preexisting contracts and auctions

– in the case of services, the above will apply for those services paid before 7/1/15

– special rules for contracts for construction of commercial, industrial or residential projects• as of 5/30/15• must register within 90 days• rate and exclusions applicable are those in effect as

of 6/30/15


Merchants with gross sales of less than $1million for the preceding taxable year

Sales and Use tax corresponding to the month of July 2015 will be paid:• 55% of the sales tax will be paid not later than August 20,

2015

• 45% will be paid not later than the 20th day of the months of September, October and November.


Value Added Tax

("VAT")


Value Added Tax ("VAT")

• A VAT or also goods and services tax (GST) is a form of consumption tax.

• For the buyer, it is a tax on the purchase price.

• For the seller, it is a tax only on the value added to a product, material, or service.

.

• The sellers remit to the government the difference between these two amounts, and retain the rest for themselves to offset the taxes they had previously paid on the inputs.

http://en.wikipedia.org/wiki/Consumption_tax

http://en.wikipedia.org/wiki/Value_added


VAT

• The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs.

• A VAT is like a sales tax in that ultimately only the end consumer is taxed.

• It differs from the sales tax because collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.

http://en.wikipedia.org/wiki/Sales_tax


VAT

• Effectiveness - for transactions after 03/31/2016• general rate is 10.5% on taxable articles and

transactions, except for the following which have a 0% rate:–sale of goods for export–provision of services for export–certain sales to manufacturers (Exemption

Certificate and Zero Rate for Manufacturing Plants).


VAT

New terms

1. Value Added Tax (VAT or IVA)

2. Taxable transactions:

1. sale of goods and services

2. rendering of services by a nonresident person to a person in PR

3. combined transactions

Old terms

1. Sales and Use Tax (SUT or IVU)

2. Taxable item:

1. tangible personal property

2. services

3. admission rights

4. combined transactions


VAT

New terms

3. Merchant

4. Place

5. Eligible merchant

6. Small merchant

Old terms

3. Nexus

4. Source


VAT


VAT

• Exclusions from VAT:• the term "goods" excludes the following:

o money, stocks, bonds, notes, life insurance, and other securities and obligations

o intangibles (except computer programs)o blood, products derived from blood, and human tissue

and organso electricityo water supplied by the PR Aqueduct and Sewer

Authorityo any property of the Commonwealth of PR or of the

U.S. Government


VAT

• Exclusions from VAT:• the term "introduction" excludes the following:

• articles introduced into foreign trade zones• articles that are part of a move• temporary introduction of articles• alcoholic beverages deposited in a bonded

warehouse under certain conditions • certain promotional materials introduced into

PR


VAT

• Exclusions from VAT:• the term "services" excludes the following:

o services rendered between affiliated entitieso services rendered by the PR Government and by the

U.S. Governmento services rendered as an employeeo certain shipping services of goods by air or sea

• the term "sales" excludes the following:o exempt transfers under Subtitle A of the Codeo the delivery of donated goods


VAT

• Exclusions from VAT:• other items excluded from VAT:

o certain entertainment machineso sales by non-merchantso certain admission rights


VAT

• Taxable transactions exempt from VAT:• certain financial services (other than bank charges)• prescription medicines and articles for the treatment of

health conditions• articles and equipment to correct physical deficiencies• sales and services that qualify for Medicare, Medicaid

and the PR Government’s Health Insurance Plan• sales and services to the U.S. Government and PR

Government• sale of petroleum derivatives• certain hotel room charges


VAT

• Taxable transactions exempt from VAT:

• sale of unprepared food and food ingredients• sales of goods acquired with PAN or WIC funds• sale of real property• real property leases by individuals for principal residence, students• commercial real property leases• sale of goods by non-profit entities, provided that such goods were

acquired by the entity through donation• certain sales to hospitals• certain sales of agriculture products to bona fide farmers• occasional sales of goods by churches or religious organizations• educational and child care services


VAT

• Taxable transactions exempt from VAT:• sales to hotels to be used in the exempt

operation• sale of printed books• sale of vehicles, boats and heavy equipment • certain health and hospital doctors services in

humans or animals• legal services in cases involving family, food,

medical "mal practice" and mental and physical damages claims


VAT

• Exempt articles introduced or imported into PR:• articles for manufacturing (raw material and

certain machinery and equipment)• prescription medicines• articles for the treatment of health conditions• articles and equipment to correct physical

deficiencies• articles that qualify for Medicare, Medicaid and

the PR Government's Health Insurance Plan


VAT

• Exempt articles introduced or imported into PR:• articles introduced by the U.S. Government and

PR Government• petroleum derivate• certain unprepared food and food ingredients• machinery and equipment by hospital units that

hold a Certificate of Exempt Purchases


VAT

• Exempt articles introduced or imported into PR:• agriculture articles by bona fide farmers• certain articles by hotels to be used in the

exempt operation• printed books• vehicles, boats and heavy equipment


VAT – Person responsible for the tax

• the person that introduces the article to PR;

• non retail sales - the seller as withholding agent for the buyer is primarily responsible, but the person that buys the goods or services is also responsible;

• retail sales – the seller as withholding agent for the buyer.

• services rendered by a non-resident to a PR resident – the person in PR that receives the service.


VAT – Collection of the tax

• The merchant that sells the goods or services, except for small merchants:– sales to merchants

• Fiscal statement• Debit and Credit notes

– retail sales• VAT shown separately

• Waiver for collection:– Certificate Exempt Purchases– Certificate of Exemption

Manufacturing Plant


VAT – Collection of the tax

• Special rules for sales delivered by mail to Puerto Rico residents:– internet sales– mail order sales– any other telecommunications means


VAT

• time and form of payment• returns• adjustments, credits and reimbursements• registry

– merchants– small business


VAT

• certificates:– exempt purchases– manufacturing plant– eligible merchant

• transitory provisions– current certificates

• effectiveness of such certificates was not discussed in P. de la C. 2482.

– bonds will be effective until expiration date– current credits – will carry forward but not reimbursable


Additional provisions included

• Commission for Alternatives to Transform the Consumption Tax ("Comisión de Alternativas para

Transformar el Impuesto al Consumo" (CATIC))– to provide a report 60 days after the

enactment of the Law.• Interagency portal for the fiscalization of tax

responsibility of Individuals and Corporations ("Portal Interagencial de Fiscalización de la Responsabilidad Contributiva del Individuo y las Corporaciones")


Up to 6/30/15General SUT = 6%*

Designated Serv. = exempt

B2B = exempt

07/01/15 - 9/30/15General SUT = 10.5%*


B2B = exempt

10/1/15 – 3/31/16General SUT = 10.5%*

Designated Serv. = 4%

B2B = 4%

4/1/16General VAT = 10.5% or 0% (credit)

Designated Serv. = 10.5% (credit)

B2B = 10.5% (credit)

State Level

Municipal Level

Up to 6/30/15General SUT = 1%


B2B = exempt

07/01/15 - 9/30/15General SUT = 1%


B2B = exempt

10/1/15 – 3/31/16General SUT = 1%


B2B = exempt

4/1/16General SUT = 1%

Designated Serv. = ?

B2B = ?

* resellers get a credit and applies to taxable B2B

Summary


Questions


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