United States

Puerto Rico: Governor Announces Comprehensive Tax Reform

Feb 16, 2015
From KPMG TaxWatch

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On February 10, 2015, the Governor of Puerto Rico, Alejandro García Padilla, announced a comprehensive reform of the Commonwealth’s tax system. The Governor proposed a shift from taxes on income and capital to consumption taxes to improve Puerto Rico’s fiscal situation and promote growth. According to the announcement, Gov. Padilla intends to propose that residents earning up to $40,000 a year and married couples earning up to $80,000 per year would pay no income tax; this would exclude roughly 850,000 people from any income tax liability. In addition, businesses would see a reduction in the corporate tax rate. The major component of the proposal is to repeal the Commonwealth’s sales and use tax (known by the Spanish acronym IVU) and replace it with a broad-based value added tax (VAT), also known by its Spanish acronym IVA. The IVA is also expected to replace revenues from certain excise taxes and certain municipal gross receipts taxes.

According to the announcement, certain transactions would not be subject to IVA. These include sales of unprocessed foods and medicines, but if ultimately enacted, the final law may include additional exemptions. The Governor stated that the proposed rate would be 16 percent. To mitigate the additional impact of the IVA on low-income households, the proposal would include a relief mechanism for residents earning less than $35,000, retired persons, and recipients of food assistance, each of which would receive direct reimbursement in some form from the Treasury Department. To educate the citizenry, the Puerto Rican Treasury Department launched a campaign to educate Puerto Ricans about the IVA and the advantages of the proposed tax reform in early February. If adopted, the reform would be effective January 1, 2016. The tax reform bill was presented to the Puerto Rican legislature on February 11, 2015.

VAT is the most common general consumption tax in the world with over 150 countries and 33 of the 34 OECD countries employing some form of VAT. Key features of a VAT include: (1) it is a tax on final consumption; (2) it is not a tax on business. Properly structured, VAT does not generally result in a final cost to businesses as they receive a credit against the tax on their outputs for tax they paid on their inputs; (3) VAT is a multi-stage, transaction based tax that is levied at each stage of the supply chain, including imports; and (4) it is a broad based tax that applies to most goods and services. For more information on Puerto Rico’s tax reform, please contact Rolando Lopez at 787-756-6020 or Jeremy Gray at 267-256-3497.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.