Apr 25, 2016
From KPMG TaxWatch
On April 18, 2016, the Puerto Rico Treasury Department (PRTD) issued Administrative Determination 16-07 (AD 16-07), which provides transitional rules for the introduction of the value added tax (VAT) on June 1, 2016. The VAT will replace the Commonwealth’s sales and use tax (SUT). These changes, however, do not affect the municipal SUT of one percent, which will remain in effect after the VAT has been introduced.
Unified System of Internal Revenue (“SURI” in Spanish)
Effective June 1, 2016, a new electronic system, known as the Unified System of Internal Revenue (SURI), will start progressively replacing the various electronic systems currently used by the PRTD. User information included in PICO (the PRTD’s current SUT system) will be automatically transferred to SURI, including information related to authorized representatives. In its first phase SURI will be used for:
PICO will remain applicable for the following transactions:
o Periods prior to June 1, 2016 or any amendments to previously filed returns; and
o Periods between June and November 2016, as provided by the transitional rules.
Merchant Registration Certificates
AD 16-07 provides that all Merchants' Registration Certificates issued under the SUT will expire on July 20, 2016. Therefore, any merchant registered for SUT must request a new Merchant Registration Certificate for VAT purposes through SURI. Merchants holding SUT registration certificates and that have a PICO account will receive an electronic notification by the PRTD indicating the need to access SURI and validate the information in the system to complete a VAT registration once their information has been transferred from PICO to SURI. The process to validate and register will be available on SURI starting on June 1, 2016. Merchants holding SUT registration certificates that do not have a PICO account will also be able to access SURI effective June 1, 2016. In addition, all new merchants currently not holding a Merchant Registration Certificate, including those importing goods into Puerto Rico either for resale or use, will be required to apply for a Merchant Registration Certificate in SURI and register in PICO. The registration process must take place no later than July 20, 2016. Failure to comply with the registration validation process may result in a penalty of $500.
Once registration is completed, SURI will issue a new Merchant Registration Certificate. According to AD 16-07, the Merchant’s Registry Number for SUT will remain valid for VAT and SURI. Merchants must place the new certificate in a conspicuous place accessible to the general public. If the business has more than one location, the merchant must separately identify each location during the registration process.
The registration requirement also applies to small merchants whose annual sales volume is less than $125,000. However, these small merchants are not required to charge and collect VAT on their sales. Small merchants engaged in the sale of tangible personal property, regardless of their annual sales volume, and merchants selling services with annual sales volume above $50,000, remain liable for charging and collecting the municipal SUT.
Monthly VAT Return
The PRTD confirms that all merchants, except duly certified small merchants, must file a Monthly VAT Return by the 20th day of the month after the month in which VAT is collected. Therefore, the first VAT return for the month of June 2016 will be due July 20, 2016. In this VAT return, the PRTD will transfer any available credits or overpayments carried over from the SUT return filed for May 2016. According to AD 16-07, merchants must first claim SUT credits before using VAT credits resulting from VAT paid after June 1, 2016. The new VAT return, which is currently pending publication by the PRTD, will consist of a single form and provide for the electronic computation of VAT credit in SURI.
AD 16-07 provides clarification on the new VAT invoicing requirements. The law provides that VAT on domestic business-to-business transactions is recoverable only if the merchant buyer holds a valid Fiscal Voucher that must meet predefined invoicing requirements and which must be issued by the vendor within 30 days of the request by the buyer. In addition, in case of adjustment to VAT paid as identified on a Fiscal Voucher, the vendor must issue a formal credit or debit note. According to the PRTD, the issuance of Fiscal Vouchers and formal credit and debit notes will be done through SURI once the system is up and running.
Therefore, as a temporary measure, the commercial invoices/receipts issued by merchants will serve as the Fiscal Voucher and thus as proof to claim VAT credit, provided that they include at least a description of the sale, the sales price, and the VAT amount.
Merchants will generally not be required to include copies of invoices or Fiscal Vouchers with their Monthly VAT Return to claim VAT credits. However, merchants with annual gross receipts of $40,000,000 or more will be required to submit a list to be published by the PRTD detailing VAT incurred on purchases with their Monthly VAT Return. In addition, all merchants will be required to keep records, including invoices, Fiscal Vouchers, and credit and debit notes for a minimum of six years from the date of filing the relevant Monthly VAT Return.
Since March 1, 2016, the PRTD no longer accepts applications for renewal of any Certificates of Reseller and Municipal SUT Exemption, Exemption Certificates for Manufacturing Plants, or Eligible Reseller Certificates. The PRTD extends until further notice the validity period for those certificates that were in force as of December 31, 2015 and which must be kept for VAT purposes. However, AD 16-07 provides that all existing Eligible Reseller Certificates will expire on June 30, 2016, regardless of the expiration date. Moreover, merchants should continue to use for VAT purposes Form SC 2616 to document transactions exempt from VAT for which an exemption certificate is required.
Designated Professional Services
Per AD 16-07, designated professional services providers that opted for the cash accounting method prior to June 1, 2016 will remain subject to the cash accounting method for VAT purposes. Under the cash accounting method, VAT is due to the authorities when payment is received, not when the sale is accrued.
Merchants under the cash accounting method that have outstanding receivables for services rendered before June 1, 2016 must apply in the relevant SUT return for May 2016 for permission to report these sales during the following six months as sales subject to the special four percent SUT. However, AD 16-07 is silent as to what transpires if payment for services rendered prior to June 1, 2016 is received after November 30, 2016.
AD 16-07 further provides that designated professional services rendered prior to June 1, 2016 will be subject to the special SUT of four percent if an invoice relating to these services is issued no later than June 20, 2016. Otherwise, these services will be subject to VAT at 10.5 percent.
AD 16-07 further addresses rules applicable to Small Merchants (i.e., Merchants with gross sales of less than $125,000) and the indirect tax treatment applicable to pre-existing contracts.
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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.