United States: Puerto Rico Enacts Major Tax Laws, Releases Administrative Guidance Clarifying Legislation

On June 30, the Governor of Puerto Rico signed several Acts making major changes to a variety of tax laws. Act 40, also known as the Law for the Redistribution and Adjustment of the Tax Responsibility, made numerous changes including the imposition of an additional tax on gross income ("Patente Nacional"), a moratorium on certain tax credits, imposition of sales tax on services and the elimination of the reseller exemption certificate. Other legislation included the adoption of remote seller nexus rules. The laws also made changes to excise taxes on cigarettes and government service contracts, the required declaration and return filing for imported articles, and the number of slot machines allowed in a casino.

The Puerto Rico Department of Treasury approved an extension of time until August 31, 2013 for tax credit holders to file required informative tax returns and released a series of Internal Revenue Circular Letters to provide guidelines on the waiver and/or exclusions request procedure available for several of the new tax provisions provided by Act 40. Also, the Department has released administrative guidance concerning the computation of the new additional tax on gross income as it applies to financial institutions, the postponement of the increase of the fuel excise tax and sales tax waivers for wholesalers.

Act 40 Imposes New Gross Income Tax, Moratorium on Credits

The enactment of Act 40 will result in numerous changes to income tax laws, including: (i) the imposition of an additional tax on the gross income ("Patente Nacional") of corporations and pass-through entities on income of at least $1 million at graduated rates ranging from 0.2 percent to 0.85 percent for taxable years beginning after December 31, 2012 (which is part of the computation of the alternative minimum tax of corporations and individuals); (ii) a moratorium on certain tax credits; (iii) changes to the computation of the alternative minimum tax; (iv) limitations on the deduction for net operating losses (NOLs);1 and (v) changes to the computation of estimated tax payments. Act 40 also imposes sales tax on certain services.2 In addition, Act 40 eliminates the exemption certificate for resellers for purchases of tangible personal property for resale. Beginning August 1, 2013 (deferred until August 16, 2013 by the Department), purchases by resellers are subject to sales tax that must be collected by the merchant selling to the reseller. The resellers may claim a credit against the sales and use tax owed on taxable sales.

Other New Tax Legislation

The Governor of Puerto Rico signed Acts 41, 42, 46, and 48 on June 30, which amend several sections of the Puerto Rico Internal Revenue Code of 2011, as well as other laws.

Act 42 includes the adoption of a click-through nexus rule for remote sellers. The law expands the definition of a merchant or retailer to include merchants, though not physically present in Puerto Rico, who enter into agreements with Puerto Rico residents under which those residents, in exchange for a commission or other consideration, refer directly or indirectly, potential buyers to the person, either by a link on a Web site, oral presentation in person, telemarketing or in any other way. The remote seller nexus rules apply when the total amount of gross sales referred in a 12-month period exceeds $10,000.

Act 41 gradually increases the excise tax on cigarettes and smokeless tobacco over the next two years, imposes an excise tax on smokeless tobacco and defines that term and assigns a percentage of these excise taxes collected to a special fund.

Act 46 incorporates use tax into the declaration and monthly returns filed for excise tax purposes. Specifically, use tax is imposed on articles imported to Puerto Rico to be used in the operations of a business in Puerto Rico. The requirements set forth in Act 46 have been deferred until the Department issues the related regulations. In the meantime, the use tax upon these imports will be reported and paid with the monthly sales and use tax return.

Act 48 establishes an additional special tax on government service contracts and increases the number of slot machines allowed in a casino. The law imposes a 1.5 percent special tax on the total amount of a contract for professional and consulting services provided to the Commonwealth of Puerto Rico or any government agency. The maximum number of slot machines allowed in a casino is increased to eight per authorized player.

Informative Return for Tax Credit Holders Due August 31

Administrative Determination (AD) 13-05, which was released by the Department on July 19, provides an extension of time to file the informative return for tax credit holders until August 31, 2013 and specifies that in order to comply with this requirement, the taxpayer must file Form 480.71, the Informative Return for Tax Credit Holders.

Act 40 added various sections to the 2011 Internal Revenue Code that establish a moratorium on tax credits for taxable years beginning after December 31, 2012 and before January 1, 2016. Among the various dispositions for claiming the tax credits established by Act 40, new Section 1051.10(d) states that in order for a taxpayer to be entitled to claim any of the tax credits set forth by new Sections 1051.10, 1051.11 and 1051.12 of the Code or any other tax credit, it will be required to submit to the Secretary on or before July 31, 2013 (deferred until August 31 as explained above) an informative tax return stating the outstanding amount of the tax credit granted and approved at June 30, 2013.

Partial Waiver Request Procedures Amended

The Department released a series of Internal Revenue Circular Letters on July 12 to provide additional guidelines on the waiver and/or exclusions request procedures available for several of the new tax provisions provided by Act 40.

Internal Revenue Circular Letter 13-05 provides the procedure for requesting a partial waiver on the gross income special tax ("Patente Nacional") imposed by new Section 1023.10. Under this section, the Secretary may grant a waiver to reduce the tax rate (limited to 0.2 percent), provided the taxpayer can prove that the increase in tax will cause him or her improper or detrimental economic consequences.

Internal Revenue Circular Letter 13-06 provides the procedure for requesting an exclusion of certain service expenses incurred or paid to a related person with respect to the 20 percent consideration under the alternative minimum tax calculation, as well as for the deduction of these expenses with respect to the 49 percent limitation imposed for income tax purposes, provided by Sections 1023.03 and 1033.17, respectively. Under these sections, the Secretary may grant exclusion upon assessment of the nature of the expenses or costs paid to a related person or office.

Internal Revenue Circular Letter 13-07 provides the procedure for requesting a partial or total waiver from inclusion in the alternative minimum tax calculation of the purchase value of property acquired from a related person or transferred from a home office provided by Section 1022.03. Under this section, the Secretary may grant a partial or total waiver to reduce the tax rate by up to 0.2 percent when it is determined that the value of the purchased property or transferred property by the home office to a branch engaged in trade or business in Puerto Rico is the same or substantially similar to the value under which said related person sells the property to an unrelated party.

The request procedures set forth above require a series of documents to be submitted to the Secretary along with an explanatory memorandum. Upon consideration of the grant request, the Secretary may also evaluate any outstanding debts of the taxpayer or its members, partners or stockholders. Each of the exclusions and waivers provided is available for up to two taxable years. Additional grants for subsequent tax periods must be requested separately.

Computation of New Gross Income Tax by Financial Businesses

On August 8, the Department released AD 13-09 to explain the computation of the gross income special tax ("Patente Nacional") for financial businesses.3 This document focuses on clarifying the definitions of "financial business" and "gross income," in addition to establishing that the tax does not apply to certain financial businesses4 and excludes certain items from the gross income computation.

New Section 1023.10 defines a "financial business" as any trade or business consisting of the services and transactions of commercial banks, savings and loan associations, savings or mutual banks, finance companies, investment companies, brokerage houses, collection agencies and any other activity of a similar nature conducted by any trade or business. However, the definition does not include activities related to a taxpayer's investment of its own funds.

"Gross income" is defined as the amount specified by Section 1031.01 less the exemptions from gross income provided by Section 1031.02 and excluding: (i) the cost of the real and personal property sold, including securities, stocks and bonds; (ii) repayments of advances, loans and credits; (ii) deposits; and (iv) losses incurred in any securities transaction, as long as the deduction does not exceed the total of the proceeds generated by these securities.

Increase of Fuel Excise Tax Postponed

AD 13-10 postpones the increase of the excise tax of $3.00 to $9.25 per barrel or fraction of a barrel of gas oil or diesel oil until August 30, 2013. This tax increase results from the unexpected increase in the cost of gas oil and diesel oil, petroleum derivatives essential for the hauling and transportation of goods and products throughout the island.

Sales Tax Waiver for Wholesalers

On August 14, the Department released AD 13-11 to standardize the tax treatment of purchases of taxable items for resale made after August 16, 2013 and to establish the procedure for requesting a "waiver for eligible wholesaler."5 The Department has determined that an "eligible wholesaler" is any wholesaler registered with the Department and (i) at least 90 percent of the merchandise available for resale has been acquired from a local manufacturer or has been imported; and (i) at least 80 percent of its sales are made to resellers that have a provisional reseller certificate, reseller certificate or eligible reseller certificate ("qualified resellers").

A wholesaler that meets these requirements and wants to apply for a waiver must make a written request to the Director of the Sales and Use Tax Bureau. Within three days of receiving the application, the Department will issue a provisional waiver valid for a period not to exceed 45 days. During this period, the Department will determine whether to grant the waiver. A "waiver of eligible wholesaler" is valid for 12 months or any period of time established by a circular letter or administrative determination. Before the period expires, a wholesaler may submit a renewal request that must be accompanied by an "agreed upon procedures" document prepared by a CPA licensed in Puerto Rico and who belongs to a peer review program among colleagues.

Footnotes

1 The deduction for NOLs in tax years beginning after December 31, 2012 is limited to 90 percent of net income for the year. Also, the law changes the carryover period for NOLs. For tax years beginning after December 31, 2004 and before January 1, 2013, the carryover period is 12 years. For tax years beginning after December 31, 2012, the carryover period is 10 years.

2 Taxable services include the following: storage of tangible personal property (excluding motor vehicles and all food), leases (ordinary leases of motor vehicles), computer programming (includes modifications to pre-designed programs), installation of tangible personal property and the repair of tangible personal property. In addition, the following will not qualify for the business-to-business exemption: bank charges (limited to charges and fees that financial institutions impose on customers), collection services, security services (including armored services), cleaning services, dry cleaners (laundry), repair and maintenance services to real and personal property (non-capitalized), telecommunications services and waste services. These changes are effective after June 30, 2013.

3 This tax is effective for tax years beginning after December 31, 2012. For financial institutions, the additional tax is imposed on gross income at a rate of 1 percent. The Secretary may reduce the tax, but not below 0.2 percent, in certain cases.

4 The tax does not apply to international banking institutions or international financial entities operating under a tax grant.

5 Wholesalers that receive this waiver are exempt from sales tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.