United States

Puerto Rico: Treasury Department Publishes Draft Regulations for VAT

Feb 29, 2016
From KPMG TaxWatch

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On February 19, 2016, the Treasury Department of the Commonwealth of Puerto Rico (“The Treasury”) published on their website the Draft Regulations for VAT (“the Draft Regulations”). Effective April 1, 2016, Puerto Rico will replace its Commonwealth sales and use tax (“SUT”) of 10.5 percent and 4 percent with a new Commonwealth value added tax (“VAT”) of 10.5 percent. The Draft Regulations, which are largely based on the existing regulations for sales and use tax, provide further explanations and examples for the definitions for VAT purposes set forth in Subtitle DD of the 2011 Internal Revenue Code of Puerto Rico (“The 2011 Code”). While the Draft Regulations do not clarify the general sourcing rules for sales of goods and services, they provide detailed rules for the sourcing of telecommunication services. The Draft Regulations further detail and explain different scenarios in which a transaction is taxable or exempt for purposes of VAT or SUT, jointly, or separately. Moreover, the Draft Regulations define and discuss on an item by item basis the transactions that will be VAT exempt and provide details on the person responsible for VAT payment and VAT collection. The Draft Regulations clarify the application of the accounting methods by type of business and the consequences on the remittance of VAT.

As an important component on any VAT system, the Draft Regulations discuss extensively adjustments, credits and refunds related to the payment of VAT and discuss processes, computations, timing, and amounts to be taken either as an adjustment credit or refund, depending on each situation. These explanations are illustrated by detailed examples on how the credit system works based on the provisions of the 2011 Code.

However, the Treasury did not provide details on the future invoicing process, which will be crucial to obtain adjustments, credits, and refunds. Additionally, the Draft Regulations are silent with respect to the registration and various certificates described in Subtitle DD of the 2011 Code. The Treasury will also have to issue guidance with respect to the transition from SUT to VAT as well as publish draft VAT returns and guidance relating to their submission.

Interested parties and public in general can provide any comments and suggestions or address questions regarding the Draft Regulations by sending an email to: ComentariosReglamentoIVA@hacienda.pr.gov. For more information on the new VAT in Puerto Rico and the Draft Regulations, please contact Leah Durner at 202-533-5542 or Carlos A. Molina at 787-622-5311.

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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.