TAX ALERT
On February 11, 2015 the Puerto Rico House of Representatives filed House Bill No. 2329 (hereinafter referred to as “the Bill”) proposing the adoption of the “Puerto Rico Internal Revenue Code of 2015” and the transitory repeal of the Puerto Rico Internal Revenue Code of 2011, as amended (hereinafter referred to as “2011 Code”). This Bill is an administration bill and it is expected to be seriously considered for approval. Among its provisions, the Bill proposes various changes to the income tax system, including changes in the income tax rates and the creation of a new Conduit Entity that would encompass all current entities with a pass-through income tax treatment.
Here we include a summary with the highlights of the Bill as filed. Please note that, the Bill might be subject to changes as part of the Legislative process which includes public hearings.
INDIVIDUALS
- Tax rates for single and married taxpayers under the actual system that were applied to tax year 2014.
| For taxable net income of: | Tax will be: |
| Less than $9,000 | 0 percent |
| In excess of $9,000 but equal to or less than $25,000 | 7% of the excess over $9,000 |
| In excess of $25,000 but equal to or less than $41,500 | $1,120 plus 14% of the excess over $25,000 |
| In excess of $41,500 but equal to or less than $61,500 | $3,430 plus 25% of the excess over $41,500 |
| In excess of $61,500 | $8,430 plus 33% of the excess over $61,500 |
- Tax years 2015 and beyond: Tax rates for single taxpayers and married filing jointly taxpayers that elect alternate computation.
| For taxable net income of: | Tax will be: |
| Less than $40,000 | 0 percent |
| In excess of $40,000 but equal to or less than $125,000 | 15% of the excess over $40,000 |
| In excess of $125,000 but equal to or less than $200,000 | $12,750 plus 20% of the excess over $125,000 |
| In excess of $200,000 | $27,750 plus 30% of the excess over $200,000 |
• Tax years 2015 and beyond: Tax rates for married taxpayers.
| For taxable net income of: | Tax will be: |
| Less than $80,000 | 0 percent |
| In excess of $80,000 but equal to or less than $125,000 | 15% of the excess over $80,000 |
| In excess of $125,000 but equal to or less than $200,000 | $6,750 plus 20% of the excess over $125,000 |
| In excess of $200,000 | $21,750 plus 30% of the excess over $200,000 |
- The following deductions applicable to individual or married taxpayers remain:
– medical expenses
– donations limited to entities that provide services in Puerto Rico
– fortuitous property loss
– contributions to governmental pension plans
– contributions to individual retirement plans (cannot exceed $5,000 or $10,000, if married)
– interest paid on student loans by college students - The home mortgage interest deduction is eliminated, although a tax credit will now be available.
– If gross income is $125,000 or less, the credit will be the lower of 15% of the interest paid, or $5,250
– If gross income exceeds $125,000, the credit available is gradually reduced. - Apparently, the $3,500 personal exemption and the $2,500 dependent deduction have been eliminated.
- Married filing jointly taxpayers maintain the benefit of the alternate computation.
- Alternate Basic Contribution and the 2% Special Tax on Self-Employment are eliminated.
- Certain preferential tax treatments over passive income are eliminated. The Code Section that reduced the preferential tax treatment for interest income is eliminated.
– The following will now tax at ordinary rates:
– Net capital long term gains
– Dividends
CORPORATIONS
- Corporate tax rate is fixed to 30%.
- The only depreciation method allowed will be straight line depreciation and with the allowable recover periods.
- The taxable base of the depreciable asset to be used will be the base at the close of 2014 and the useful life will be proportionate to the remaining period under the previous method.
- The following entities will consolidated as pass-through entities. All the foregoing entities will be referred to as pass-through. The main objective is to provide uniformity in their regulation.
– Partnerships
– Limited Liability Companies
– Corporations
– Special Partnerships
– Corporation of Individuals
- Donations deductions: The non-profit organization that benefits has to operate its business in Puerto Rico and spend the donations in Puerto Rico.
VALUE ADDED TAX (VAT)
- VAT is imposed at a rate of 16% for taxable items. Apparently, this imposition does not include the municipal tax of 1%.
- Taxable items now will include business to business services (“B2B”) and designated professional services,
among others. - Self-monitoring mechanism: every wholesale, merchant or seller that pays VAT in the purchase of a product to be sold or in the acquisition of an input required to render a service, shall inform to the government the person from which it charged the VAT, in order to be able to claim the credit or obtain a reimbursement.
- The credit limitation of the Sales and Use Tax (SUT) paid eliminated. Now, a credit and reimbursement can be claimed for the VAT paid.
- In order to lessen the burden caused by the VAT, the government will make three payments (November, March and July) to certain eligible low income consumers or taxpayers whenever they meet certain criteria (ex. income level, age, marital status, consumer price index, among others). The Bill delegates the quantity and eligibility determination of the payments to the Secretary of the Treasury.
- Businesses with less than $75,000 in sales do not charge the VAT. It seems that the ability for them to take a credit for the VAT paid is limited.
- Reimbursements will be limited (for example, reimbursements will be eligible once overpayment reaches to $10,000 in total) and there will be a limit for B2B payment allocable to the sale of non taxable transactions. This might include automobiles, real property and transactions with government.
VAT EXEMPTIONS:
- Financial services (except services that result in the imposition of bank charges)
- Sales and imports of prescription drugs and articles for the treatment of health conditions.
- Sales of materials and equipment used by handicapped persons to diminish problems related to physical or physiological deficiencies (purchaser must certify the seller its qualification to purchase at 0% tax).
- Sales or rendering of goods or services that are reimbursed by Medicare, Medicaid and the health insurance of the Government of Puerto Rico.
VAT EXEMPTIONS:
- Sales of goods and services to agencies and related entities of the United States and Puerto Rico Governments.
- Sales and imports of gas, aviation fuel, gas oil, diesel, raw oil among other oil derivatives.
- Leasing of property subject to the room occupancy tax imposed by the Puerto Rico Tourism Company.
- Sales of non-processed food and food ingredients.
- Sales of good acquired with funds of the Special Supplemental Nutrition Program for Women, Infants and
Children (WIC). - Real Estates Sales.
- Real estate property leasing that constitutes the lessee’s primary residence (including student housing and establishments with rooms for advance age persons under Act 94 of June 22, 1977).
- Goods transfers and services without consideration (compensation) executed by non-profit organizations who are exempt under Section 1101.01 of the Puerto Rico Internal Revenue Code.
- Sale of machinery, medical surgical supplies, articles, equipment and technology, and import of the aforementioned goods by hospital units (these units must have the Certificate for Exempt Purchases under Section
4070.05 of the Puerto Rico Internal Revenue Code). - Sales and imports of articles for agriculture under bona-fide farmers.
- Occasional sales by churches and religious organizations.
- Sales and import goods for a merchant running a touristic business (must have the Certificate of Exempt Sales).
ADDITIONAL COMMENTS
- There will be a credit moratorium for 2 years (i.e. 2015 and 2016)
- The Bill is silent on municipal VAT. Municipal funds that receive .5% will be charged from the 16%.
- No comments are made in the Bill regarding the restructuring of the Puerto Rico Treasury Department.
- No comments are made regarding the inventory exemption from the personal property tax that has been discussed as an alternative in the media.
- It seems that the exemption on the principal property sale ends on March 31, 2015. As the principal property is a capital asset, it should be eligible for the new rate.
- Effective dates are not clear, it seems that the VAT is effective on January 1, 2016 and also on the first day following the month in which the Bill is approved.