Kevane Grant Thornton Webcast on Puerto Rico proposed tax reform

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Act to Transform the Tax System of the Commonwealth of Puerto Rico

P de la C 2329

February 20, 2015


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Agenda

• Summary of P de la C 2329 “Act to Transform the Tax System of the Commonwealth of Puerto Rico”

– Income Tax– Sales and Use Tax – Value Added Tax

• Questions


Summary of P de la C 2329

“Act to Transform the Tax System of the Commonwealth of Puerto Rico”


Individual Income Tax

• Tax computation for individuals, married filing separate and married filing joint with optional method

Net Taxable Income Tax

Not more than $40,000 0%

More than $40,000 but less than $125,000

15% of the del excess over $40,000


$12,750 plus 20% of the excess over $125,000

More than $200,000 $27,750 plus 30% of the excess over $200,000



• Tax computation for married filing joint not electing optional method

Net Taxable Income Tax

Not more than $80,000 0%


15% of the del excess over $80,000


$6,750 plus 20% of the excess over $125,000

More than $200,000 $21,750 plus 30% of the excess over $200,000



• The Bill proposes the elimination of:

• Alternate Basic Tax ("CBA")• Personal Exemptions• Dependents Exemptions• 2% additional tax on self-employed• Option 94 elections are revoked• Exclusion of gain on sale of principal residence

• One time exclusion for individual 60 years and older

• Deferral of gain




• Deductions:• Mortgage Interest – new credit• Educational IRA's• Casualty losses• Health Savings Accounts• Special deduction to individuals – new

exemption level




• Filing of income tax returns for those with only salary income (W-2) which does not exceeds $40,000 ($80,000)• new informative return


Corporate Income Tax

• The Bill proposes the following:

• Fixed tax rate of 30%• Elimination of additional tax on gross income

("patente nacional")• Keep the Alternative Minimum Tax ("AMT")

• 25% rate or % of purchases from related person• No waivers after 12/31/14• Actual waivers will expire 12/31/14


Corporate Income Tax


• AMT preferences back to 2011 Code, including expenses paid to related person and home office


Flow Through Entities


• Statutory conversion of all partnerships, special partnerships and corporations of individuals created as of 12/31/14 to a new flow through entity ("entidad conducto")

• partnerships and certain LLC's created after 12/31/14 will be taxed as this "entidad conducto"




• Tax will be computed pursuant to Chapter 7 for their first taxable year after 12/31/14. All sections related to special partnerships and corporations of individuals eliminated




• Statutory conversion of special partnerships and corporations of individuals will not make their owners to be deemed engaged in trade or business in Puerto Rico.




• Tax effect of statutory conversion depends on each particular case• In general, no gain or loss• Keep same taxable year, basis and holding

periods• Computation of owners basis as of 12/31/14

must be done• "Simple" change of identity




• Election available for corporations and LLC's taxed as corporations to be taxed as "entidad conducto"• even with only one owner• within 90 days of the beginning of the taxable

for which the election will be effective


Preferential Tax Rates


• Capital gains

• Individuals – rate of 30% with election to tax at normal rates

• Corporations – taxed at 30% or as ordinary income

• Transactions after 12/31/14




• Interest• Individuals – eliminates the 10% and 17% on

interest from financial institutions• Individuals – eliminates the optional 10% on

interest on certain loans to eligible corporations/partnerships




• Eligible dividends

• Individuals – rate is 30%• subject to withholding

• until 3/31/15 – 15%• from 4/1/15 – 20%


Changes that may affect all taxpayers


• Exclusions/Exemptions from gross income:• Income from sports teams taxed as ordinary

income rather than at 20%• In the case of non resident citizens subject

to 20% withholding (29% if non resident aliens)




• Exclusions/Exemptions from gross income:• Eliminates:

• literary, journalist, scientific, artistic awards• amounts received from crop insurance• IVU Loto awards – IVU Loto system is

eliminated





• interest – except from PR and US Government (including subdivisions and instrumentalities)

• $2,000 ($4,000) from financial institutions• $5,000 from Coops• interest from certain commercial banks





• income from royalties to news agencies• income from military o naval

"licenciamiento"• COLA• income from sports game; Serie del

Caribe excluded until 1/1/16





• rent income from Historic Zones• only remains for contracts in placed as

of 2/15/15• renewal of such a contract will not be

deemed in place as of 2/15/15





• reference to Act 135 (young workers) since new tables cover the same exemption of $40,000 of income.




• Deductions:

• Only straight line depreciation for purchases after 12/31/14:• If accelerate depreciation used:

compute tax basis as of 1/1/15 and depreciate S/L for remaining life




• Deductions:

• automobile expenses – use and maintenance• actual expenses• Secretary may allow the use of standard

mileage rate by Regulations




• Deductions:

• charitable contributions –• only for non for profits operating in Puerto

Rico and registered with Treasury Department




• Deductions:

• payments to related person or Home Office remain 51% non deductible

• no waivers to be issued




• Credits Moratorium:• for years after 12/31/14 and before 1/1/2017

limited to 25% of tax

• Eliminates:• Credit for work• Credit to individuals older than 65 years



• The Bill proposes the following:• New credit for mortgage interest:

Gross Income Credit

No more than $125,000 the lesser of 15% of the interest or $5,250

More than $125,000 but not more than $140,000

the lesser of 12% of the interest or $4,200





More than $170,000 the lesser of 3% of the interest or $1,050




• credit for mortgage interest will not be reimbursable

• any amount not used will not be carried over




• Act 163 supplementary information to audited financial statements requirement remains.

• Period for the Secretary to issue estate tax waiver increased from 30 to 60 days.


Value Added Tax ("VAT")

• A VAT or also goods and services tax (GST) is a form of consumption tax.

• For the buyer, it is a tax on the purchase price.

• For the seller, it is a tax only on the value added to a product, material, or service.

.

• The sellers remit to the government the difference between these two amounts, and retain the rest for themselves to offset the taxes they had previously paid on the inputs.

http://en.wikipedia.org/wiki/Consumption_tax

http://en.wikipedia.org/wiki/Value_added


VAT

• The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs.

• A VAT is like a sales tax in that ultimately only the end consumer is taxed.

• It differs from the sales tax because collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.

http://en.wikipedia.org/wiki/Sales_tax


VAT

• Effectiveness:– For transactions after

12/31/15• General rate is 16% on

taxable transactions, except for the following which have a 0% rate:

– goods and services for export

– certain imports by manufacturers (Manufacturing Plant Certificate)

• Effectiveness:– For transactions before

1/1/16, taxable items pursuant to 2011 Code will be subject to 16% (instead of 7%).

• Municipalities may not collect• Treasury will make the

payment to the eligible consumer


VAT

New terms

1. Value Added Tax (VAT or IVA)

2. Taxable transactions:1. import of goods into PR

2. sale of goods and services;

3. rendering of services by a nonresident person to a person in PR

4. combined transactions

Old terms

1. Sales and Use Tax (SUT or IVU)

2. Taxable item:1. tangible personal property

2. services

3. admission rights

4. combined transactions


VAT

New terms

3. Merchant

4. Place

5. Eligible consumer

6. Eligible merchant

7. Small merchant

Old terms

3. Nexus

4. Source


VAT


VAT

• Exclusions from IVA:

• money, stock, bonds, notes, life insurance, and other securities and obligations;

• intangibles (except computer programs)• electricity• water supplied by the PR Aqueduct and Sewer Authority• any property of the Commonwealth of PR or of the U.S. Government• certain entertainment machines• sales by non-merchants• exempt transfers under Subtitle A of the Code• the delivery of donated goods• goods introduced into foreign trade zones•


VAT

• Exclusions from IVA:

• alcoholic beverages deposited in a bonded warehouse under certain conditions;

• certain promotional materials introduced into PR• certain vessels acquired by non-residents of PR• services rendered between affiliated entities• services rendered by the PR Government and by the U.S.

Government• services rendered as an employee.


VAT

• Taxable transactions exempt from IVA:

• certain financial services (other than bank charges)• prescription medicines and articles for the treatment of health

conditions• articles to correct physical deficiencies• sales and services that qualify for Medicare, Medicaid and the PR

Government’s Health Insurance Plan• sales to the U.S. Government and PR Government• import and sale of petroleum derivatives, except propane gas• certain hotel room charges


VAT

• Taxable transactions exempt from IVA:

• import and sale of unprepared food and food ingredients• sales of goods acquired with PAN or WIC funds• sale of real property• real property leases by individuals for principal residence, students• gratuitous transfers of goods and services by non-profit entities• certain imports by and sales to hospitals• certain imports by and sales of agriculture products to bona fide

farmers;• imports by and sales to hotels to be used in the exempt operation• import and sale of vehicles


VAT – Person responsible for the tax

• the person that imports the goods to PR;

• non retail sales - the seller as withholding agent for the buyer is primarily responsible, but the person that buys the goods or services is also responsible;

• retail sales – the seller as withholding agent for the buyer.

• services rendered by a non-resident to a PR resident – the person in PR that receives the service.


VAT – Collection of the tax

• The merchant that sells the goods or services, except for small merchants:– sales to merchants

• Fiscal statement• Debit and Credit notes

– retail sales• IVA not show as separate item

• Waiver for collection:– Certificate Exempt Purchases– Certificate of Exemption

Manufacturing Plant


VAT – Collection of the tax

• Special rules for sales delivered by mail to Puerto Rico residents:– internet sales– mail order sales– any other telecommunications means


VAT

• time and form of payment• returns• adjustments, credits and reimbursements• regressivity relief• registry

– merchants– small business


VAT

• certificates:– exempt purchases– manufacturing plant– eligible merchant

• transitory provisions– current certificates valid until 12/31/15– bonds will be effective until expiration date– current credits – will carry forward but not reimbursable

• Municipalities – cannot impose/collect after effective date


Questions


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Kevane Grant Thornton Webcast on Puerto Rico proposed tax reform