Sales and Use Tax (“SUT”) and Value Added Tax (“VAT”)

Act 72-2015 provides the transition rules from a SUT to a VAT. The following are the main provisions for the SUT on the transition period and the VAT:

1. The SUT provisions will remain in place until March 31, 2016. The main amendments to the SUT regime during the transition period are the following:

1. Effective July 1, 2015, the current 7% SUT rate increase to 11.5% for a period of 9 months ending March 31, 2016.
2. Effective October 1, 2015, until March 31, 2016, a 4% SUT on business to business services and designated professional services will apply. Note that such tax would be imposed on services currently exempt from SUT. Designated professional services includes legal services and the following:

1. Agricultural;
2. Architects and landscape architects;
3. Certified Public Accountants;
4. Brokers, Sellers and Real Estate Companies;
5. Draftsmen Professionals;
6. Professional Real Estate Appraisers;
7. Geologists; and
8. Engineers and Surveyors

3. Business to business services currently subject to SUT, for example maintenance services, at a 7% rate would continue to be subject to SUT at the increased 11.5% rate effective July 1, 2015.
4. The 4% SUT on business to business services and designated professional services will not be creditable until the VAT is in place on April 1, 2016.
5. Contracts and bids related to taxable items which are executed or awarded prior to July 1, 2015, will be subject to the SUT rate applicable as of June 30, 2015. This provision will apply to contracts related to the rendering of taxable services if payment under such contracts is received prior to July 1, 2015.
6. Resellers will be able to take a credit for SUT paid on inventory items of up to 100% of the SUT liability in the corresponding SUT return. Currently, the credit is limited to 75% of the SUT liability.
7. Regarding taxable services rendered by a nonresident person to a person in Puerto Rico the person receiving these services in Puerto Rico will be responsible for withholding and paying 11.50% SUT.

2. The VAT provisions will begin on April 1, 2016. The main provisions of the VAT are the following:

1. Effective April 1, 2016, the introduction to Puerto Rico of taxable items and the sale or transfer of taxable goods and services will be subject to either a 10.5% or 0% VAT, and a 1% municipal SUT.
2. The 0% VAT rate will apply to the following transactions:

1. The sale of goods for export, and
2. The rendering of export services.
3. Sale to a manufacturing plant holding an exempt certificate of articles comprising raw materials, manufacturing articles, and manufacturing equipment.

0% VAT transactions are important to determine if a taxpayer qualifies for an Eligible Merchant Certificate, which we will discuss later.

3. The following items and transactions will be exempt from the VAT:

1. Financial services, except those in which bank charges apply;
2. The import and sale of prescription medicines including security caps, bottles, labels and bags inherent to the dispatch of prescription medicines;
3. Import and sale of items for the treatment of health conditions;
4. Import and sale of items and equipment for physical or physiological deficiencies when the purchaser can acquire them at 0% rate;
5. The import of any item, the sale of any good or any service rendered that is paid or reimbursed by Medicare, Medicaid or the Puerto Rico Government’s health insurance;
6. Items introduced to Puerto Rico by, and the sale of goods and services to, agencies or instrumentalities of the United States Government, any of its states, District of Columbia or the Puerto Rico Government;
7. Import and sale of gas, aviation fuel, gas oil, diesel oil, crude oil, partially elaborated and finished products derived from oil and other hydrocarbon mixtures to which excise taxes apply;
8. Lease of property subject to the room tax;
9. Import and sale of unprepared food and food ingredients;
10. Sale of goods purchased with funds received by the Federal Nutritional Assistance Program or the Special Supplemental Nutrition Program for Women, Infants and Children (WIC);
11. Sale of real property;
12. Lease of real property that constitutes the principal residence of the lessor, including student and elderly housing;
13. Commercial leases, including payments for office or sales spaces, storage and parking;
14. The cost free transfer of goods and the services rendered by non for profit entities that have received tax exemption from the PR Treasury Department;
15. Import of machinery, medical-surgical materials, items, equipment and technology by, and their sale to, any hospital with an exempt purchases certificate;
16. Agriculture items imported by or sold to bona fide farmers;
17. Occasional sales by churches and religious organizations;
18. Import and sale of goods by a merchant dedicated to a tourist business with an Exempt Purchases Certificate;

19. Educational services and child care services;
20. Manufacturing items introduced to Puerto Rico by or sold to a manufacturing plant with a duly issued manufacturing plant exemption certificate;
21. Import and sale of text books;
22. Import and sale of vehicles, boats and heavy equipment subject to excise taxes;
23. Health and hospital services.
24. Services rendered among persons engaged in a Puerto Rico trade or business forming part of a group of controlled corporations or a controlled group of related entities or a partnership falling within said group by applying the principles as if it was a corporation.
25. Services rendered as an employee.
26. Certain legal services under contingent fee arrangements related to tort and family proceedings.

4. Payment:

1. Imported items: merchants will pay the applicable VAT in order to take possession of imported items. Bonded importers may remit their VAT payment along with the tax on imports monthly return, on or before the 10th day of the month following the introduction of the items. VAT payments on items imported by air carriers or electronic means will be remitted with the tax on imports monthly return as well.
2. Sales and other taxable transactions: the VAT will be paid along with the VAT monthly return, on or the 20th day of the month following the taxable transaction.

5. Compliance:

1. Imports Declaration: to be filed by all importers of taxable and not taxable items;
2. Tax on Imports Monthly Return: to be filed by all importers of items on or before the 10th day of the month following the introduction of items to Puerto Rico.;
3. VAT Monthly Return: to be filed on or before the 20th day of the month following the collection of the VAT. Small Merchants will not be required to file this return.
4. Annual Declaration for Small Merchants: to be filed within 60 days of the Small Merchant’s income tax return due date. The declaration shall contain the total value of the goods and services sold during the preceding tax year. Small merchant is defined as any merchant who for the preceding year had less than $125, 000 in gross sales.

6. The following amounts may be credited:

1. VAT paid on the importation of items to Puerto Rico that are directly or indirectly related to the sale of taxable goods or services;
2. VAT paid on purchases of goods and services as reflected in the Fiscal Vouchers related to the sale of taxable goods or services. Fiscal vouchers will be provided to merchants who purchases merchandise to other merchant in Puerto Rico;
3. VAT paid by a merchant for receiving services from a non Puerto Rico resident.

7. Refunds and overpayments:

1. An overpayment of up to $10,000 generated due to the excess of adjustments or credits may be applied in the VAT monthly return of the month following the month in which the overpayment arises.
2. A refund may be requested by merchants that accumulate an overpayment in excess of $10,000 if the merchant is an eligible merchant, explained below, or the merchant has generated overpayments for three consecutive months.

8. Merchant registration and exempt certificates:

1. A merchant registration certificate will be required for any person conducting a business in Puerto Rico.
2. Exempt Purchases Certificate: this certificate will allow a person to import items or purchase goods and services exempt from the VAT. It will be available to the United States Government and any of its states, the District of Columbia, the Puerto Rico Government, hospital units, merchants dedicated to a tourism business and bona fide farmers.
3. Manufacturing Plant Exemption Certificate: this certificate will allow manufacturers to import manufacturing items and purchase goods and services exempt from the VAT.
4. Eligible Merchant Certificate: this certificate will be available to merchants whose annual sales volume during the 3 preceding years exceeds $500,000 and 80% of their total sales are 0% VAT. Such certificate will allow the eligible merchant to claim a refund for excess VAT payments.