Puerto Rico Legislature Bill No. 2329, better known as the Transformation of the Commonwealth of Puerto Rico Tax System Act, introduces a Value Added Tax system (hereinafter referred to as “VAT”) in Puerto Rico.

Here we discuss the exclusions and exemptions that will be in effect if the Bill is approved as is.


The term “goods” excludes the following:

  • Money, stocks, bonds, notes, mortgages, and other securities and obligations;
  • Intangibles (except computer programs);
  • Electricity;
  • Water supplied by the Puerto Rico Aqueducts and Sewer Authority;
  • Any property of the Puerto Rico and U.S. Government.

The term “imports” excludes the following:

  • Goods introduced into foreign trade zones;
  • Goods that are part of a move;
  • Temporary introduction of goods;
  • Alcoholic beverages deposited in a bonded warehouse under certain conditions;
  • Certain promotional materials;
  • Certain vessels acquired by non-residents of Puerto Rico.

The term “services” excludes the following:

  • Services rendered between affiliated entities;
  • Services rendered by the Puerto Rico and U.S. Government;
  • Services rendered as an employee.

The term “sales” excludes the following:

  • Exempt transfers under Subtitle A of the Code;
  • The delivery of donated goods to non-for-profit entities.

Other items excluded form VAT:

  • Certain entertainment machines;
  • Sales by non-merchants.


The current exemptions for the following transactions expire as of March 31, 2015:

  • Funeral services;
  • Solar electric equipment;
  • Uniforms, materials and text books.


The following taxable transactions will be exempt from VAT:

  • Financial services, except those that generate bank charges;
  • Sale and imports of prescription medicines and articles for the treatment of health conditions;
  • Sale of articles and equipments for physical or physiological deficiencies;
  • Sale of any good or services that qualify for full or partial reimbursement for Medicare, Medicaid and the Puerto Rico Government’s Health Insurance Plan;
  • Sale of goods and services to the United States Government, the States, District of Columbia and Puerto Rico Government;
  • Sale and import of gasoline, aviation fuel, gas oil or diesel oil, cure oil, and any mixture of hydrocarbons other than propane and derivatives;
  • Hotel room charges fixed by the Puerto Rico Tourism Company;
  • Sale and import of food and food ingredients;
  • Sale of goods acquired with PAN or WIC funds;
  • Sale of real property;
  • Real property lease that constitute the principal residence of the lessee, including student and elderly housing;
  • Gratuitous transfers of goods and services by non-for-profit entities.
  • Sale of machinery, medical-surgical material, articles, equipment and technology to hospitals and imports of such goods by hospitals;
  • Sale and import of agricultural products to bona fide farmers;
  • Sale of goods to and the import of goods by a merchant dedicated to a tourism business;
  • Sale and import of vehicles.


In anticipation of the proposal to transform the Puerto Rico Tax Regime, the administration of the Governor of Puerto Rico, Hon. Alejandro Garcia Padilla, filed House and Senate Bills No. 2319 and 1299, respectively (hereinafter referred to as “the Bills”) early this month, at the House of Representatives and the Senate of Puerto Rico. The Bills are identical and include changes to the Puerto Rico Internal Revenue Code of 2011, as amended (hereinafter referred to as “the Code”).

The main purpose of the Bills is to collect tax revenues by proposing an additional extension of the tax prepayment windows originally approved under Act 77 of 2014 later extended by Act 238 of 2014. Also, proposes a new window with special tax rates for the tax prepayment of dividend and deemed dividend distributions. Finally proposes a Tax Amnesty that provides the opportunity to pay tax debts with a total abatement of interest, surcharges and penalties related to income tax, estate and gift taxes, excise taxes, sales and use tax, tax withholding debts and other taxes imposed by any tax incentives acts.

Should the Bills become law, the following tax prepayment windows approved by Act 77 of 2014, which were extended through January 31, 2015 by Act 238 of 2014, would be extended through March 31, 2015 including:

I. Individuals, Estates and Trusts

  • The special tax of 8% on capital gains.
  • The special tax of 15% on assets, the sale of which would generate ordinary income.

II. Individuals

  • The special tax of 8% on undistributed accumulated amounts of an Individual Retirement Account or an Educational Contribution Account. The tax prepayment applies to contributions made and accumulated value for year 2014 to the extent the contributions were made prior to the enactment of the Bills.

III. Corporations

  • The special tax of 12% on capital gains.


A new tax prepayment window is proposed by the Bills by adding a new Section 1023.25 to the Code to provide for the payment of a special tax of 5% on the distribution of dividends or deemed dividends between January 1st and March 31, 2015, and 8% on the distribution of dividends or deemed dividends between April 1st and June 30, 2015. the election to pay the special tax must be submitted and the tax paid to the Puerto Rico Treasury Department within the period prescribed. The special tax is in lieu of any other taxes imposed by the Code, including alternative minimum tax and the basic alternate tax. Please note that, an actual distribution of the dividends is not required to benefit from this special tax prepayment rates. Also, public companies are not allowed to apply for the benefits of the special dividend tax prepayment.


The Bills provide the opportunity to pay tax debts with a total abatement of interest, surcharges and penalties for the following taxes:

  • Income tax for taxable years ended on or before December 31, 2013.
    Estate and gift taxes.
  • Excise taxes.
  • Sales and Use Taxes for all periods up to December 31, 2014.
  • Income tax withholding at source for all periods up to December 31, 2014.
  • Any other tax imposed by the Special Act Declaring a State of Fiscal Emergency and Establishing an Integrated Fiscal Stabilization Plan to Save Puerto Rico’s Credit (Act 7 of 2009), the Economic Incentives for the Develop ment of Puerto Rico Act (Act 73 of 2008), the 2010 Tourism Development of Puerto Rico Act (Act 74 of 2010), the Puerto Rico Green Energy Incentives Act (Act 83 of 2010), the Export Services Act (Act 20 of 2012), or any other act of similar nature, or which imposes a special tax rate on income.

To benefit from the Tax Amnesty, the taxpayer must comply with the following:

  • Complete and file the document to be provided by the Secretary of the Treasury and pay the principal amount of the tax debts on or before June 30, 2015.
  • Be in compliance with all tax and filing requirements of periods commenced after December 31, 2014.
  • The taxpayer must detail which tax debts will be covered by the Tax Amnesty, and no objections can be claimed in regard to those debts.
  • Taxpayers under audit may benefit from the Tax Amnesty by paying the corresponding tax on the proposed audit adjustments (without any interest and penalties), resulting in the discontinuance of the audit process.
  • Taxpayers under administrative proceedings on deficiency notices who have been sent final deficiency notices or that have contested a deficiency notice determined by the Treasury Department, may benefit from the Tax Amnesty by paying the total amount of the deficiency determined by the Secretary.
  • Taxpayers who have filed a judicial action objecting the payment of a deficiency notice determined by the Secre tary for any tax and period covered by the Tax Amnesty, may benefit from it by paying the total amount due (limited to principal), resulting in the discontinuance of the judicial process.
  • Taxpayers with an active payment plan for tax debts with the Treasury Department may also qualify for the Tax Amnesty, and will be able to renegotiate the balance due and pay under the terms of this incentive.
  • Taxpayers who received or accrued gross income subject to tax under the Code on or before December 31, 2013, and have not filed an income tax return nor have paid the related income tax for taxable years ended on or be fore December 31, 2013, or who did not report the totality of the gross income received or accrued for those peri ods, shall be allowed to file a special declaration reporting that gross income and will be subject to a tax of 20% with a total abatement of interest, surcharges and penalties.
  • Taxpayers with a tax debt balance consisting only of interest, surcharges, fines and penalties (no principal amount due) will be allowed to eliminate the tax debt subject to the payment of 25% of the total amount due.
  • Payments under the provisions of the Tax Amnesty will be voluntary and final for all purposes and will not be subject to subsequent claims of refund or credit.

Who May Not Benefit from the Tax Amnesty?

  • Taxpayers who have an ongoing proceeding for tax related crimes.
  • Taxpayers who were convicted for tax fraud or whose source of income is illegal, or where activities or businesses may be identified as criminal activities under “the Act against Organized Crime”.


Under the proposed Tax System Transformation (House Bill No. 2329), which we will discuss later in separate newsletters, no deduction would be allowed for the contributions to Educational Contribution Accounts going forward. You may want to consider whether it is a good alternative to prepay the 8% tax and withdraw the balance of these accounts to consider other investment alternatives. Also, depending on your circumstances, the prepayment of the 8% tax on the Individual Retirement Accounts’ undistributed balances may be a good opportunity to reduce your overall effective tax rate.

Also, under the proposed Tax System Transformation, corporations are given the opportunity to convert to a flow-through entity by prepaying the tax on the current and accumulated earnings and profits. Act 77 of 2014 increased the preferential tax rates, including the tax on dividends, and the proposed Tax System Transformation would eliminate those preferential tax rates, making the new window for the prepayment of the tax on dividends an attractive alternative to pay the tax on the earnings and profits.

Notwithstanding the issue of the tax debts with no principal balance, we believe tax amnesties present a great opportunity for taxpayers to clarify pending tax debts, and at the same time save some money in interest, surcharges and penalties. This is the perfect time to analyze and resolve any pending tax issues with the Puerto Rico Treasury Department.

At Gierbolini Consulting Group we are committed to keep you updated of all tax developments that may affect the way you do business in Puerto Rico. Please contact us if you need more information.