Value Added Tax ("VAT")

HB 2329 proposes the implementation of a VAT to substitute the current sales and use tax regime. The VAT is a consumption oriented tax that is placed on a product whenever value is added through the distribution chain and at the final sale. Merchants are allowed to claim a credit for the VAT paid on purchased merchandise and services. HB 2329 proposed certain transitional rules that will apply from the time of its approval, if approved, through December 31, 2015, and the rules that will apply from January 1, 2016 onwards, as follows:

1. Transitional rules for transactions occurring from April 1, 2015 to December 31, 2015 are as follows:
   1. The sales and use tax (“SUT”) provisions of the Puerto Rico Internal Revenue Code of 2011 (“2011 Code”), regarding to reporting, collection, payment, etc., will remain in place until December 31, 2015, but references to the SUT will be substituted for VAT.
   2. Transactions currently taxable for SUT will be subject to a 16% tax during the transitional period.
   3. Effective 30 days after the approval of HB 2329, if approved, retail merchants will have to bundle and not separately state the VAT on receipts or invoices, reflecting the applicable tax. The VAT will have to be shown together with the sales price of the good or service sold.
   4. Effective the first day of the second month after the approval of HB 2329, if approved, merchants with a valid reseller certificate will be allowed to claim a credit for taxes paid on inventory for resale of up to 100% of the tax liability reflected in the monthly SUT return. The 2011 Code provides for up to a 75% credit of the tax liability.
   5. Effective the first day of the second month after the approval of HB 2329, the following exemptions are eliminated
      1. funeral services
      2. solar electric equipment
      3. uniforms
      4. materials and text books
   6. Existing certificates, including the Manufacturer’s Exemption Certificates, Eligible Reseller Certificates, Reseller Certificates and Merchant’s Registration Certificates issued under the 2011 Code will be effective until December 31, 2015, regardless of the their expiration date.
2. After December 31, 2015 the VAT main dispositions will be as follows:
   1. Sales or transfers of taxable goods and services will be subject to a 16% VAT.
   2. The following transactions will be subject to a 0% VAT:
      1. Exportations of tangible personal property
      2. The rendering of export services
      3. Importation of manufacturing articles by a manufacturer with an Eligible Manufacturer Imports Exemption Certificate.
   3. Exemptions to the VAT:
      1. Financial services, except for bank charges;
      2. The sale and import of prescription medicines and items for the treatment of health conditions;
      3. The sale of items and equipment for physical or physiological deficiencies when the purchaser can acquire them at 0% VAT;
      4. The sale of any good or the rendering of any service paid or reimbursed by Medicare, Medicaid or the Puerto Rico Government’s health insurance;
      5. Sale of goods and services to agencies or instrumentalities of the United States Government, District of Columbia or the Puerto Rico Government;
      6. Sale and import of gas, aviation fuel, gas oil, diesel oil, crude oil, partially elaborated and finished products derived from oil and other hydrocarbon mixtures, excluding natural gas and derived products;
      7. Lease of property subject to the room tax;
      8. Sale and import of food and food ingredients;
      9. Sale of goods purchased with funds received by the Federal Nutritional Assistance Program (PAN) or the Special Supplemental Nutrition Program for Women, Infants and Children (WIC);
      10. Sale of real property;
      11. Lease of real property that constitutes the principal residence of the lessor;
      12. The cost free transfer of goods and the services rendered by not for profit entities that have received tax exemption from the Puerto Rico Treasury Department;
      13. Sale of machinery, medical or surgical materials, items, equipment and technology to, and the import of such goods by, any hospital unit with an Exempt Purchases Certificate;
      14. Sale and import of agriculture items to bona-fide farmers;
      15. Occasional sales by churches and religious organizations;
      16. Sale and import of goods by a merchant dedicated to a tourist business with an Exempt Purchases Certificate;
      17. The sale and import of vehicles subject to excise taxes.
   4. Payment of the VAT on:
      1. Goods and services:
         1. Except for retail sales, the person that purchases a taxable good or service is responsible for the payment.
         2. Merchants with gross annual sales of less than $75,000 will not be required to withhold the VAT.
      2. Imports:
         1. In order to take possession of the imported merchandise, the merchant will pay the VAT upfront.
         2. Bonded importers, as provided by the 2011 Code, will be able to remit the payment of the VAT along with the tax on imports monthly return.
         3. Goods imported by air carriers will also be subject to the VAT and the payment should be remitted with the tax on imports monthly return.
   5. Compliance and reporting:
      1. Imports Declaration: to be filed on or before the 10th day of the month following the introduction of the goods. Similar to the import declaration return for the SUT.
      2. Tax on Imports Monthly Return: to be filed by all importers of tangible personal property on or before the 10th day of the month following the introduction to Puerto Rico. Similar to the tax on imports declaration return for the SUT.
      3. VAT Monthly Return: to be filed on or before the 20th day of the month following the collection of the VAT. The return shall include the amount of VAT to be remitted and the amount of credits claimed.
      4. Annual Declaration for Small Merchants: to be filed within 60 days of the Small Merchant’s income tax return due date.
   6. Refunds and credits for overpaymen ts of the VTA:
      1. Overpayments of $10,000 or less: a credit may be applied in the VAT Monthly Return of the month following the month in which the overpayment arises.
      2. Overpayments of more than $10,000: a refund may be requested if certain conditions are met.
   7. A merchant registration certificate, similar to the one for the SUT, will be required for any person conducting a business in Puerto Rico.
   8. Exemption Certificates:
      1. Exempt Purchases Certificate: this certificate will allow an entity to purchase or import tangible personal property and services exempt from the VAT. The certificate will be available for the United States Government, the states and the District of Columbia, the Puerto Rico Government, hospitals, merchants dedicated to tourism activities and bona fide farmers.
      2. Eligible Manufacturer Imports Exemption Certificate: this certificate will allow manufacturers to import at 0% VAT manufacturing items and purchase at 0% VAT tangible personal property and services.
      3. Eligible Merchant Certificate: this certificate will allow merchants to claim a refund for VAT overpayments. To be eligible for this certificate the merchant annual sales volume for the past 3 years had to exceed $500,000 and 80% of its total sales to merchants with 0% VAT withholding, for example, exportations.
   9. Small Merchants: merchants with annual gross sales of less than $75,000 will not be required to withhold the VAT and neither to file the VAT monthly return. Those merchant will be required to request a Small Merchant Registration Certificate. An annual declaration, including the goods and services sold during the year, should be filed within 60 days of the merchants income tax return due date.
   10. Municipal tax: HB 2329 proposes the elimination of the 1% SUT for the municipalities. The Department of Treasury should allocate 1% of the 16% VAT to municipalities.