The Puerto Rican government is considering implementing a comprehensive tax reform package between January and March 2015, which would replace the current sales and use tax system enacted in 2006.

 

Tax reforms being considered:

• sales and use tax
• corporate gross profits tax
• individual income tax
• excise tax
• property tax

Sales and use tax reform

With respect to consumption taxes, the Puerto Rican government has outlined the following tax system alternatives:

• convert to a ‘pure sales and use tax’
• return to a general excise tax
• significantly reform the current sales and use tax system in order to simplify compliance, educate taxpayers, and reduce evasion
• adopt a value added tax (VAT).

The Puerto Rican government noted that reforming the current sales and use tax system – and effectively creating a VAT – would require broadening the tax base through the taxation of services, eliminating many exemptions, and reforming business to business (B2B) taxation. The government is therefore leaning towards adopting a formal VAT system based on global best practices.

Corporate and individual tax reform

The Puerto Rican government is also considering reducing the individual income tax by lowering income tax rates, increasing exemptions for individuals and broadening the tax base by eliminating and adjusting certain tax expenditures.
In order to rationalise inefficient tax regimes, the government is also considering repealing the current gross profits tax (Patente Nacional) and reducing overall tax rates. The repeal and/or reduction would be equal “…to the maximum rate paid by individuals…”

Excise and property taxes

The government is also analysing tax reform alternatives for excise tax and property tax purposes.

The takeaway

Should the tax reform bill be approved, taxpayers with Puerto Rico transactions may be subject to new tax collection and remittance rules. Taxpayers, such as manufacturers and service providers, that are currently entitled to exemptions may be subject to a VAT. With this proposed tax reform taxpayers may also receive tax relief related to corporate gross profit taxes and individual income taxes.

Furthermore, multinational corporations with Puerto Rican subsidiaries or branches should monitor the tax reform developments and consider how the new VAT regime may affect compliance processes, contract terms, systems, cash flow, and general business operations.

Puerto Rico Tax NewsAlert on House Bill 2329

For more information regarding the planned tax reform, please contact:

Victor Rodriguez
Partner, Puerto Rico
+1 (787) 772-7958
victor.rodriguez@us.pwc.com

Hector Bernier
Managing Director, Puerto Rico
+1 (787) 772-8035
hector.bernier@us.pwc.com

Darycel Collazo-Ruiz
Director, Puerto Rico
+1 (787) 772-7593
darycel.collazo@us.pwc.com

Jose Erba
Director, Puerto Rico
+1 (787) 772-7597
jose.erba@us.pwc.com