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.


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.

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