MESSAGE FROM THE SECRETARY OF THE TREASURY

1999

Hacienda is at your service1

COMMONWEALTH OF PUERTO RICODEPARTMENT OF THE TREASURY

PO BOX 9022501 SAN JUAN PR 00902-2501

INCOME TAX RETURN FOR EXEMPTBUSINESSES UNDER THE PUERTO RICO

INCENTIVES PROGRAMSMESSAGE FROM THE SECRETARY OF THE TREASURY

1999


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TABLE OF CONTENT

Relevant Facts ............................................................................................................................

Taxpayer’s Bill of Rights .............................................................................................................

Instructions to Complete the Return ............................................................................................

Instructions to Complete the Schedules:

Schedule E - Depreciation .............................................................................................

Schedule K Incentives - Computation of Tax ...............................................................

General Instructions for Schedules L, M, N, P and V Incentives ...........................................

Schedule L Incentives - Partially Exempt Income under Act 52 of 1983 or Act 78 of 1993 .....

Schedule M Incentives - Fully or Partially Exempt Income under Act 57 of 1963 orAct 26 of 1978 .................................................................................................................

Schedule N Incentives - Partially Exempt Income under Act 8 of 1987 .....................

Schedule O Incentives - Optional Income Tax for Exempt Businesses pursuant toSection 3A of Act 8 of 1987 ...........................................................................................

Schedule P Incentives - Income from Fully Taxable Operations or Partially ExemptIncome under Act 148 of 1988, Act 75 of 1995, Act 225 of 1995 and Act 14 of 1996 ..

Schedule V Incentives - Income Tax for Exempt Businesses under Act 135 of 1997..

Schedule V1 Incentives - Computation ot the Special Deductions under Act 135 of 1997 ....

Form 480-E - Estimated Tax Declaration ..............................................................................

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1999


FINANCIAL STATEMENTS REQUIREMENT

If the entity had a business volume related to itsfully taxable operations of more than $1 million, thefinancial statements must be included with thereturn. Such financial statements should include abalance sheet, an income statement and astatement of cash flows. These statements shouldbe submitted with an audit report issued by acertified public accountant (CPA) licensed in PuertoRico.

A report that includes consolidated financialstatements, in which the operations in PuertoRico are presented as supplementaryinformation, is not acceptable. Also, compiledor reviewed statements are not acceptable.They must be audited.

SIGNATURE OF THE RETURN BY THESPECIALISTS

If you pay for the preparation of the return,make sure that it is signed by the Specialistand the registration number is included in alegible form. The Puerto Rico Internal RevenueCode of 1994, as amended (Code), imposes civiland criminal sanctions to those Specialists whofail to submit this information.

The Specialist must declare under penalty of perjurythat he/she examined the return, and to the best ofhis/her knowledge and belief, is correct andcomplete.

If the return is prepared by an accounting firm dulyregistered as a Tax Return Specialist, it must includethe employer's identification number and be signedby the employee who prepared the return.

CONTRACTS WITH GOVERNMENTAL ENTITIES

Every person, natural or juridical, contractedby a governmental entity, must comply with theExecutive Order 91-24, as amended, and theprovisions of the Circular Letters in force at thetime of processing the contracts. According tosaid provisions, every contract subscribed bya governmental entity must include a clause tocertify that the contracted party filed the incometax returns for the last five years, and that theincome, property, unemployment, temporarydisability and drivers social security taxes havebeen paid.

RELEVANT FACTS

In addition, in order to approve a contract orpurchase order, the governmental entity mustrequire the Tax Return Filing and Debt Certificationsfrom the Internal Revenue Area of this Department,the Property Tax Certification from the CRIM andthe corresponding certification from the Departmentof Labor and Human Resources. These documentsmust be requested annually.

In order to expedite the process of issuing thecertifications from this Department, theComputerized Debt Certification issued by theInternal Revenue Collections Offices will be acceptedin lieu of the Debt Certification (Modelo SC 6096).In the case of the Tax Return Filing Certification(Modelo SC 2888), the Computerized Tax ReturnFiling Certification issued by the Tax AssistanceDivision and the District Offices of the Fiscal AuditBureau will be accepted. The ComputerizedCertifications must have the Department’s stamp.Also, the Computerized Debt Certification must besigned by the Collector or his/her duly authorizedagent, and the Computerized Tax Return FilingCertification must be signed by the Tax AssistanceDivision Chief or the District Office Chief or any oftheir duly authorized agents.

Every person who has filed income tax returns forthe last 5 years and who does not have tax debts,or if having debts, has formalized a payment plan,will receive the Tax Return Filing and DebtCertification automatically by mail (Modelo SC2628). For this purpose, it is necessary that ifthe corporation is contracted by agovernmental entity, indicate so in theheading of the return, page 1.

Sometimes, a certification cannot be issued inconnection with the return corresponding to the lasttaxable year since such return may have not beenalready processed. Because of this possibility, itis recomended to personally hand in the originalreturn along with a copy, in order to receive backsaid copy sealed with the Department’s receiptstamp. This service will be offered at the Departmentof the Treasury, Intendente Ramírez Building in OldSan Juan, at the District Offices, at the InternalRevenue Collections Offices and at the TaxOrientation Centers.

1999


NEW TAXPAYER'S SERVICES FACILITIES

The Department of the Treasury, in its effort to improvethe services offered, opened new facilities of theTaxpayer's Services Office in Bayamón and Caguas.

In these offices, among others, the following serviceswill be offered: Tax Return Filing Certifications,Return's Copies, Inheritance and Donations Cases,Corporations, Partnerships, Individuals, ProfessionalServices Waivers and COLA Certificates. Followingis the address and telephone number:

Taxpayer's Service Office BayamónRoad #22nd Floor Gutiérrez BuildingTelephone: 778-4949 or 778-4950

Taxpayer's Service Office CaguasGoyco Street1st Floor Governmental BuildingTelephone: 258-5272 or 258-5255

TAXPAYER'S ASSISTANCE

Technical assistance:

For additional information on the technical contentsof this pamphlet or to clarify any doubts, pleasecall 721-2020 extension 3611 or toll free at 1-800-981-9236.

Claims and refunds:

For claims or to verify the status of your tax refund,please call the Taxpayer's Service Offices:

San Juan: 721-2020 ext. 3610 or1-800-981-7666

Ponce: 844-8800

Mayagüez: 265-5200

Bayamón: 778-4949 or 778-4950

Caguas: 258-5272 or 258-5255

HACIENDA MAKING CONNECTION

The Department of the Treasury has a site on theINTERNET. Here you can access information about theTotal Quality Management Policy, our Vision, Missionand Organizational Values. Also, we include informationabout our Taxpayer's Bill of Rights and the Department'sOrganizational Structure. Also, it has the followingservices:

Program for the preparation of the IndividualIncome Tax Return 1999

TeleHacienda (Only available in Spanish)

Income Tax Return of Taxable Corporationsand Partnerships

Puerto Rico Internal Revenue Code of 1994,as amended (Only available in Spanish)

Form SC 2898 - Change of Address

Form AS 4809 - Information of IdentificationNumber - Organizations (Employers)

Modelo SC 2800 - Planilla de ContribuciónSobre Caudal Relicto (Only available inSpanish)

Modelo SC 2800A - Planilla Corta deContribución Sobre Caudal Relicto(Only available in Spanish)

Modelo SC 2788 - Planilla de ContribuciónSobre Donaciones (Only available in Spanish)

Informative Booklet to Provide Orientationabout your Income Tax Return

Informative Booklet to Provide Orientation onthe Income Tax Responsibilities of Federal,Military and Other Employees

Informative Booklet Regarding the 7% TaxWithholding in Case of Professional Services

You can access our site at: http://www.hacienda.prstar.net. Also, you can let us knowyour opinion through our E-MAIL at:[email protected].

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The Taxpayer’s Bill of Rights grants the followingrights under the Code:

To receive a proper, considerate and impartialtreatment.

Confidentiality of the information submitted.

All interviews must be at a reasonable time andplace for the taxpayer, in coordination with theemployees of the Department of the Treasury(Department).

The interview or audit must not be used to harassor intimidate in any manner the person interviewed.

To receive an explanation of the process to whichthe taxpayer will be exposed and subject, and therights that assist him.

Be assisted by an attorney, accountant, certifiedpublic accountant or any other authorized personat any moment during the interview.

Be informed prior to the interview, of the intentionto tape the interview and to be able to obtain anexact copy of such recording prior to the paymentof the cost thereof.

Be informed of the nature of your tax liability.

Be advised of your right against self-incrimination,to remain silent and that your silence should notbe taken or commented against you, in case of apossible exposure to a criminal action.

Consult, and be advised by an attorney, accountant,certified public accountant, or authorized agent torepresent you within the Department, or to be ableto finish the interview even when it had commenced.

Be notified in writing of any adjustment made bythe Department as a result of a tax audit when itinvolves the addition of interest, penalties andsurcharges, as provided by the Code, as well asthe exact amount of the adjustment and the reasonsfor such changes.

TAXPAYER’S BILL OF RIGHTS

Waive the rights described in the precedingparagraphs, if such waiver is made knowingly andvoluntarily.

Grant a written power to authorize any person torepresent you during a tax interview or process.Such person shall receive, for purposes of theinterview, equal treatment as you, unless you arenotified that such person is responsible for anunreasonable delay or interference with the audit.

Not to be discriminated because of race, color, sex,birth, origin or social condition, or political, religiousideas or association of any taxpayer or hisrepresentative. No records will be kept containingtax information for these purposes.

The Department’s employees will explain andprotect your rights during all phases of the process.If you believe that your rights have been violated,you should discuss this matter with the supervisorof the employee. If you do not agree with the actiontaken by the supervisor, you may file a complaintwith the Office for the Protection of Taxpayer'sRights.

OFFICE FOR THE PROTECTION OF TAXPAYER'SRIGHTS

The Office for the Protection of Taxpayer's Rights(Ombudsman of the Taxpayer) was created toassure the compliance of the provisions of theTaxpayer’s Bill of Rights. Said office is located at theDepartment of the Treasury in Old San Juan, Office800. For assistance, please call 723-1080 or 721-1532.

The Ombudsman of the Taxpayer is responsiblefor attending to the problems and claims of thetaxpayers and to facilitate the process betweenthe taxpayers and the Department of the Treasury.Also, the Ombudsman of the Taxpayer has authorityto prevent or correct any infringement, by anyemployee of the Department, of the rights of thetaxpayer.

For additional information, you can request thebooklet: “Carta de Derechos del Contribuyente”.

1999


WHO MUST FILE THIS RETURN?

Every corporation or partnership engaged in a tradeor business in Puerto Rico which derives fully orpartially exempt income under any of the followingacts:

Puerto Rico’s Industrial Incentives Act of 1963,as amended (Act 57 of 1963)

Puerto Rico’s Industrial Incentives Act of 1978,as amended (Act 26 of 1978)

Puerto Rico’s Tax Incentives Act of 1987, asamended (Act 8 of 1987)

Tourism Incentives Act of 1983, as amended(Act 52 of 1983)

Puerto Rico’s Tourism Development Act of1993, as amended (Act 78 of 1993)

Agricultural Tax Incentives Act of Puerto Rico,as amended (Act 225 of 1995)

Tax Incentives Act of 1998 (Act 135 of December 2, 1997)

Furthermore, this return must be filed by acorporation or partnership which derives incomefrom the sale of entrance tickets for artistic andcultural spectacles that are performed accordingto the provisions of one of the following acts:

Special Act for the Rehabilitation andDevelopment of Santurce, as amended (Act148 of 1988)

Special Act for the Rehabilitation andDevelopment of Río Piedras (Act 75 of 1995)

Special Act for the Rehabilitation andDevelopment of Castañer (Act 14 of 1996)

WHEN AND WHERE TO FILE?

This return must be filed not later than the 15th dayof the fourth month following the end of the taxableyear. In case of a foreign corporation or partnershipnot having any office or place of business in PuertoRico, the return must be filed not later than the15th day of the sixth month following the close ofthe taxable year.

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INSTRUCTIONS TO COMPLETE THE RETURN

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The return can be mailed to the followingaddress:

Returns with Refund:DEPARTMENT OF THE TREASURYPO BOX 50072SAN JUAN PR 00902-6272

Returns with Payment and Others:DEPARTMENT OF THE TREASURYPO BOX 9022501SAN JUAN PR 00902-2501

The return can also be delivered at the Departmentof the Treasury, Intendente Alejandro RamírezBuilding, in Old San Juan, the Internal RevenueCollections Office of your municipality, the DistrictOffices of the Department, or the Tax OrientationCenters.

AUTOMATIC EXTENSION OF TIME TO FILETHE RETURN

A 90 days automatic extension of time will begranted for filing the return if it is requested notlater than the due date to file the return. This willbe done using Form AS 2644.

In case of corporations under the provisions of Section936 of the Federal Internal Revenue Code, theextension of time will be up to the fifteenth day of theninth month following the end of the taxable year (fivemonths after the prescribed date to file the return).

Every corporation or partnership must pay with therequest for an automatic extension of time, the entireamount of tax determined, the special surtax andthe tollgate tax under Act 8 of 1987, if applicable.

An extension of time to file the return does not extendthe time for the payment of tax or any installment of thesame.

SPECIFIC INSTRUCTIONS FORM 480.30(II)

Every corporation or partnership that during thetaxable year derives partially exempt income underone or more tax or industrial incentives acts, tourismor tourism development acts, or any special act, mustfile Form 480.30(II), in addition to a separate schedulefor each one of the acts under which it earned saidpartially exempt income.

1999


is sugar cane growing, enter sugar cane; if coffeegrowing, enter coffee. If the source of income is atrading business and the main business activity ishardware, enter hardware. If the source of incomeis sale of furniture, write furniture. If the source ofincome is manufacturing and the main activity isthe manufacturing of shoes, enter shoes.

PART I - TAX LIABILITY

Line 1 - Tax liability

Enter your total tax liability, as determined onSchedules K, O and V Incentives of the return.

Line 2 - Payments

Enter on lines 2(a) through 2(f) the tax paid for thespecified concepts to be credited against the taxliability for the year.

Line 3 - Balance of tax due

If the amount on line 2(g) is larger than the amount online 1(d), there is a tax overpayment. The overpaymentmay be credited against next year's estimated tax orrefunded, as indicated on line 5 or 6. If you filed thereturn after its due date or requested an extensionof time, but you did not pay the total amount due,you must compute the interest and surcharges thatapply since the due date to file the return throughthe date on which the return is filed. Refer to sectionInterest, Surcharges and Penalties.

Line 4 - Amount paid with this return

Enter the amount paid for each concept, asapplicable.

Make the check or money order payable to theSecretary of the Treasury. Indicate theemployer's identification number and Form480.30(II).

If you decide to pay in cash, you can do it at any ofour Collections Offices. Make sure to keep theofficial receipt of the amount paid.

Line 9 - Balance of tax due

If you file the return after its due date or yourequested an extension of time, but you did notpay the total amount due, you must compute theinterest and surcharges that apply since the duedate to file the return through the date on which thereturn is fi led. Refer to section Interest,Surcharges and Penalties.

In those cases where the corporation or partnershipis tax exempt under two or more tax exemptiondecrees issued under the same industrial, tax,tourism incentives or tourism development act, onlyone schedule under the applicable act must be filed.Such schedule should include all the operationscovered by the applicable act.

If the corporation or partnership also derives incomefrom fully taxable operations, it must file ScheduleP Incentives along with Schedules L, M, N, O andV Incentives, as applicable.

The following instructions are applicable to everycorporation or partnership required to file anySchedule from L Incentives through V Incentives.

The schedules with the instructions are availablein the Department of the Treasury in Old San Juan,Forms and Publications Division, Office 603. Tocontact said office, please call 721-2020 extension2645 or 2646.

HEADING OF THE RETURN

If the taxable year of the corporation or partnershipis a calendar year, there is no need to enter thedates on which the taxable year begins and ends.Only the corresponding year should be indicated.If it is a fiscal year, you must enter the dates in thespaces provided in the return.

NAME, EMPLOYER'S IDENTIFICATIONNUMBER AND ADDRESS

Enter the name of the corporation and the registrationnumber assigned by the Department of State. In caseof a partnership, enter its legal name.

In addition, enter the employer's identificationnumber in the space indicated. The employer'sidentification number is necessary to processthe return.

Corporations or partnerships that do not have anemployer's identification number, shall request itfrom the Federal Internal Revenue Service and notifyit to the Department of the Treasury on Form AS4809.

Enter the complete physical address where theprincipal office of the business is located, and itstelephone number.

Inform the type of industry or business (principalbusiness activity). For example, if the source ofincome is agriculture and the main business activity

1999


INTEREST, SURCHARGES AND PENALTIES

Interest

The Code provides for the assessment of interest ata 10% annual rate over any tax not paid by its duedate.

Surcharges

In case that imposition of interest is applicable, asurcharge of 5% of the amount due will beassessed, if the delay in paying exceeds 30 days,but not over 60 days; or 10% of the amount due, ifthe delay exceeds 60 days.

Penalties

The Code imposes a progressive penalty from 5%to 25% of the total tax for late filing unless youcan show reasonable cause for the delay.

Any person required under the Code to file a returnor declaration, who voluntarily fails to file such returnor declaration within the term or terms required bythe Code or regulations, in addition to otherpenalties, shall be guilty of a misdemeanor andpunished by a fine of not more than $500 orimprisonment for a term of not more than 6 months,or both penalties, plus the costs of prosecution.

If any person voluntarily fails to file the abovementioned return or declaration (within theterms required by the Code or regulations) withthe intention to avoid or defeat any tax imposedby the Code, in addition to other penalties, shallbe guilty of a felony and punished by a fine ofnot more than $20,000 or imprisonment for afixed term of 3 years, or both penalties, plusthe costs of prosecution. If there wereaggravating circumstances, the establishedfixed jail penalty may be increased to amaximum of 5 years; if there were extenuatingcircumstances, it may be reduced to amaximum of 2 years, or both penalties, at thediscretion of the Court, plus the costs ofprosecution.

PART II - APPLICABLE TAX EXEMPTION ACTS

Check the box corresponding to the act underwhich the operations are fully or partiallyexempt. If you checked the box of Act 26 of 1978or Act 8 of 1987, you must complete Part III.


The payments made by check or money order mustbe made payable to the Secretary of the Treasury.Indicate the employer's identification number andForm 480.30(II).

If you decide to pay in cash, you can do it at any ofour Collections Offices. Make sure to keep theofficial payment receipt provided by the Collector.

The Special Surtax must be paid to theSecretary in a separate check attached to theIncome Tax Return.

Line 12 - Prepayment of tollgate tax

This tax shall be paid to the Secretary of theTreasury in a separate check attached to theIncome Tax Return.

Every corporation or partnership that requestsan extension of time to file the income taxreturn, must include the payment of thePrepayment of Tollgate Tax with said request,in a separate check.

Any payment made after the due date, is subjectto interest and surcharges. If you filed the returnafter its due date or you requested an extension oftime, but you did not pay the total amount due,you must compute the interest and surcharges thatapply since the due date to file the return throughthe date on which the return is filed. Refer to sectionInterest, Surcharges and Penalties.

Line 13 - Tollgate tax applied against taxwithheld attributable to current yeardistribution

Enter the prepaid amount during the year on whichyou elected to apply the total tax paid in advance,if the tax determined over the distributed industrialdevelopment income (IDI) is equal to or larger thanthe prepaid amount.


Enter the amount paid for each concept, asapplicable (See instructions for line 12).

Line 18 - Amount overpaid to be credited toestimated prepayment of tollgate tax for next year

Any overpayment of this tax will be credited onlyagainst the estimated prepayment of tollgate taxfor the following year.

1999


credit, such as a copy of the federal incometax return.

Line 6 - Determination of prepayment oftollgate tax

Enter in the corresponding box the 5% tax rate,unless the entity's decree provides for specialdistribution rules and it has been convened througha Closing Agreement with the Secretary to pay 50%of the applicable rate. Multiply line 5 by theapplicable tax rate and enter the amount on thisline.

Line 7 - Dividends declared from current earnings

Enter the amount of dividends declared and paidrelated to earnings accrued during the current year.

Line 8 - Prepayment of tollgate tax attributableto current earnings

Enter 5% of line 7. If the entity is subject to a tollgatetax rate lower than 10% because its decree providesspecial distribution rules, and it has been convenedthrough a Closing Agreement with the Secretary toprepay 50% of the aforementioned tollgate tax, youmust enter 50% of your tax rate in the spaceindicated and determine the applicable tollgate taxprepayment.

Line 10(b) - Other credits

Any business exempt under Act 8 of 1987, includingthose covered under previous laws, that invests inPuerto Rico part of its IDI for a particular taxableyear in plant expansion, purchases of productsmanufactured in Puerto Rico, research anddevelopment of new products or industrialprocesses and in eligible activities under Section2(j), is entitled to a credit against the tax, but subjectto certain terms and conditions. For additionaldetails, refer to Section 4(b) and (d) of said act.

Also, if the parent company of an exempt businessis under Federal Bankruptcy proceedings, theexempt business is entitled to claim a credit againstthe income tax payment and the prepayment oftollgate tax, subject to compliance with certainconditions. For additional information, refer toSection 3(a)(3) of Act 8 of 1987.

For the credits under Act 26 of 1978, refer to Section4(h) of said act.

Any exempt business that has a converted decreeunder Section 3(i)(2a) of Act 26 of 1978, is entitledto carryfoward as a credit for future taxable years,an amount equal to two thirds of the net income

PART III - CONDITIONS THAT EXONERATEFROM THE PREPAYMENT OF TOLLGATE TAX

Complete this questionnaire if the entity derivesincome from partially exempt activities under Act 8of 1987 or Act 26 of 1978. Every entity operatingunder these acts, must make a tollgate taxprepayment of 5% on the industrial developmentincome (IDI).

If the entity is not subject to the tollgate taxprepayment, please check the applicable box. Incase that the tax exemption decree provides andestablishes special rules for the distribution andtaxation of the IDI, you must attach to the return aschedule indicating such rules.

PART IV - COMPUTATION OF PREPAYMENTOF TOLLGATE TAX

Line 1 - Net operating income for the year

Enter the amount shown in Schedule MIncentives or N Incentives, Part I, line 1, whicheverapplies.

Line 2 - Adjustments

Enter on line 2(a) the interest income from eligibleinvestments (Section 2(j)) derived from obligationsissued by the Government of Puerto Rico, itsinstrumentalities or political subdivisions.

Enter on line 2(b) any adjustments required todetermine the amount of IDI that constitutes incomeand profits available for dividend distribution. Youmust submit a detailed schedule. For example:

Expenses incurred but not deductible (i.e. mealand entertainment, charitable contributions, etc.)

Income earned but not taxed on the return (i.e.proceeds from life insurance when thebeneficiary of the policy is the corporation, etc.)

Special deductions granted by the Act which donot represent a cash disbursement (i.e.deduction of $400 for each severely handicappedemployee, etc.)

Line 4 - Tax paid on industrial developmentincome

Enter on line 4(c) any tax paid to the United States,its possessions and foreign countries attributableto IDI. You must submit with the the returnevidence of the tax paid and claimed as a

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tax paid as a result of the conversion, against anytaxes paid or withheld at source on current dividenddistributions and in liquidation.

PART V AND VI - COMPARATIVE BALANCESHEET AND RECONCILIATION OF NETINCOME (OR LOSS) PER BOOKS WITH NETTAXABLE INCOME (OR LOSS) PER RETURN

The financial statements and reconciliation mustbe totally completed in order to consider the returnas filed. Do not submit this information in loosesheets to substitute the statements or thereconciliation. Returns that do not comply withthese requirements, will be returned to thetaxpayer.

SIGNATURE AND OATH OF THE RETURN

The return must be signed and sworn before anotary by the president, vice president or otherprincipal officer and by the treasurer or assistanttreasurer or agent of the exempt business.

INCOMPLETE RETURN

The return must be completed in all of its parts. Allthe information of the Income Statement, BalanceSheet and Reconciliation of Retained Earnings mustbe detailed. Returns that do not comply with thisrequirement will be considered as not filed.

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SCHEDULE E - DEPRECIATION

This schedule will be used to inform each of theproperties for which depreciation expense isclaimed. Spaces are provided for current, flexibleand accelerated depreciation, and for improvementsamortization.

The following information must be provided on theschedule:

property classification;date acquired;allowable cost or basis;depreciation claimed on previous years;estimated useful life to determine thedepreciation;depreciation claimed this year.

Part (b) - Flexible Depreciation

To be entitled to claim flexible depreciation insteadof current depreciation, the Code requires to makethe election through a sworn statement to be filednot later than 30 days after the close of the taxableyear. Said option may be exercised only overproperty acquired by the taxpayer prior to June30, 1995.

Part (c) - Accelerated Depreciation

The election may be exercised only over propertyacquired by the taxpayer during taxable yearsbeginning after June 30, 1995. The election, oncemade, is irrevocable.

Refer to the Code and its regulations todetermine who will qualify for the flexible andaccelerated depreciation deduction, and therequirements that must be met in order to beentitled to said deduction.

Submit Schedule E with your return.

SCHEDULE K INCENTIVES - COMPUTATION OFTAX

PART I - NORMAL TAX AND SURTAX

Line 1 - Enter the net income subject to tax in thecorresponding line as determined on Schedules L,M, N and P Incentives.

Line 3 - Enter $25,000 in the corresponding column.If you have more than one operation covered underan exemption decree or partially exempt under aspecial law, or totally taxable income, you mayclaim only up to $25,000 in the aggregate.

Also, if the entity is a member of a controlledgroup, as defined in Section 1028 of the Code,the credit will apply only to the controlled group. Ifan entity is a member of a controlled group as ofDecember 31, the credit allowed to said entity forthe taxable year which includes such December31, will be equal to $25,000 divided among thenumber of entities that are component membersof the controlled group. Nevertheless, thecontrolled group may elect, through an agreement,for a different apportionment plan, as long as thesum of the amounts prorated among the membersof the group does not exceed $25,000.

If the entity is a member of a controlled group,it is necessary to include with the return ofeach member of the controlled group aschedule detailing the apportionment plan, thename and employer's identification numberof each entity that is a member of the group.

Line 5 - If the entity is covered under theIndustrial, Tax or Tourism Incentives Act, orTourism Development Act, you must multiply line2 by 22%.

If the entity has partially exempt income under Act225 of 1995, Act 148 of 1988, Act 75 of 1995, Act14 of 1996 or has fully taxable income, you mustmultiply line 2 by 20%.

Line 6 - Multiply line 4 by the applicable tax rateand enter the result on the corresponding column.

If the income is derived from operations coveredunder Act 52 of 1983, Act 57 of 1963, Act 26 of1978 or Act 8 of 1987, the surtax is:

If the net income subjectto surtax is:

$0 $75,000

$75,001 $125,000

$125,001 $175,000

INSTRUCTIONS TO COMPLETE THE SCHEDULES

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The tax shall be:

9%

$6,750 plus 19%of the excess over$75,000


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$175,001 $225,000

$225,001 $275,000

$275,001 or more

If the income is derived from operations coveredunder Act 78 of 1993, the surtax rate will becomputed as follows:


$0 $75,000

$75,001 $125,000

$125,001 $175,000

$175,001 $225,000

$225,001 $275,000

$275,001 or more

If the income is derived from partially exemptactivities under Act 148 of 1988, as amended, Act75 of 1995, Act 225 of 1995 or Act 14 of 1996, orfrom fully taxable income, the surtax will be:


$0 $75,000

$75,001 $125,000

$125,001 $175,000

The tax shall be:

6%

$4,500 plus 16%of the excessover $75,000





$175,001 $225,000

$225,001 $275,000

$275,001 or more

Line 7 - This tax shall apply to activities coveredunder Act 78 of 1993, Act 148 of 1988, Act 75 of1995, Act 225 of 1995 or Act 14 of 1996, or to fullytaxable income. If the net taxable income of theentity exceeds $500,000, a 5% tax will be imposedon said excess. Nevertheless, the total taxdetermined shall not exceed 42% for operationscovered under Act 78 of 1993; and 39% foroperations covered under Act 148 of 1988, Act 75of 1995, Act 14 of 1996 or Act 225 of 1995 or tofully taxable income.

Line 9 - Enter the amount determined on line 26 ofSchedule D Corporation and Partnership - Gainsor Losses from Sale or Exchange of Property.

If during the taxable year the corporation’s net longterm capital gains exceeded the net short termcapital losses, the corporation may elect to paythe alternative tax.

The alternative tax is determined on the net incomeat the normal tax rates, without including the longterm capital gain, plus 25% of such gain.

Line 11(a) - Enter the amount determined onSchedule C Corporation and Partnership - Creditfor Taxes Paid to the United States, its Possessionsand Foreign Countries.

If the tax was paid in a foreign currency, you mustdetermine the equivalent value in dollars at the dateof payment. You must submit with the return aschedule indicating the conversion in dollars, andcopy of the United States or foreign countries taxreturn and cancelled checks to show the tax paidor accrued in said country.

Line 11(b) - Enter the credit granted under Article41 A-6 of the Regulations under the Puerto RicoIncome Tax Act of 1954, as amended, as a resultof an adjustment made by the Federal InternalRevenue Service under Sections 936, 61, 162 and351, or any succeeding provision. Only foreignentities actively conducting a trade or business inPuerto Rico under Section 936 of the FederalInternal Revenue Code of 1986, as amended, are

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$36,750 plus22% of theexcess over$225,000

$47,750 plus23% of theexcess over$275,000

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The tax shall be:

5%

$3,750 plus 15%of the excessover $75,000





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eligible for this credit. This credit is limited to 50%of the tax determined for each year.

Line 11(c) - If the subsidiary of a parent companyof an entity doing business in Puerto Rico andoperating under Act 8 of 1987, is under bankruptcyproceedings, a credit against the Puerto Ricoincome tax payment can be claimed, subject tocompliance with certain requirements. To qualifyfor this credit, the parent company must:

be incorporated under the laws of any state ofthe United States,

be under bankruptcy proceedings, and

reflect a loss in the consolidated federal incometax return after including the income of theexempt entity.

This benefit will be granted as a credit, which isdetermined as follows:

Tax for the particularyear of the loss

Nevertheless, said credit is limited to the total taxfor the particular year in which the loss was incurred.

This credit shall be requested from the Secretarythrough a sworn statement and it will be subject torecapture at the time the parent company recoverssaid loss.

Line 11(d) - Enter the amount determined onSchedule Q.

To claim this credit you must submit the following:

Schedule Q and Q1 duly completed.

A document indicating or evidencing the creditgenerated by the investment on the differentcapital investment funds or direct investments,such as Solid Waste Disposal Facilities,Agricultural Incentives, Feature Films, as wellas Tourism Development.

Copy of the certification issued by the pertinentagencies.

Copy of the notification made through a swornstatement issued by said agency, in which thedistribution of the credit is informed.

Line 11(e) - Enter the tax credit acquired, if any,during the year through purchase, exchange ortransfer made by a primary investor.

To claim this credit, the assignor and the cessionarymust submit with the income tax return, a swornstatement notifying the Secretary the cession, inthe year on which the same took place.

Line 11(f) - Enter the amount determined onSchedule Q.

Line 11(g) - In those cases in which the entity haspaid an alternative minimum tax on the incomederived from fully taxable operations from previousyears, it may claim a credit against the regular taxfrom the taxable operations, as long as it complieswith certain requirements. To be eligible to thiscredit, the regular tax of the year must exceed thealternative minimum tax for said year and have paidthe alternative minimum tax for previous years. Thecredit will be determined as follows:

Normal Tax (Schedule K Incentives,Part I, Column C, line 5)

Minus: Alternative MinimumTax (Schedule A Corporationand Partnership, Part V, line 30)

Regular Tax Subject toCredit (Subtract line 2 fromline 1)

Credit for AlternativeMinimum Tax Paid onPrevious Years (Schedule KIncentives, Part I, Column C, line13 of the return from previousyears which has not beenused. Submit schedule)

Allowable Credit (The smallerof line 3 or 4.

If line 4 exceeds line 3, the balance will becarried forward to future years.

Line 11(h) - Enter the credit attributable to dividendsreceived from industrial development incomecorresponding to the 3% of the investment madeby the branch in the acquisition, construction andenlargement of buildings and other structures usedin manufacture, in excess of the investment in suchproperties possessed by the subsidiary as of March31, 1997.

Average employmentduring the taxable yearEmployment required inthe tax exemption decree

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In those cases of corporations which have notenjoyed tax exemption under Act 57 of 1963, Act26 of 1978 or Act 8 of 1987 for two taxable years,this credit will be granted to the parent companyfor the increase in investments made by thesubsidiary after the end of its second year of taxexemption.

To be entitled to the credit, the investment shouldhave been made prior to January 1, 1993.

This credit can be carried forward to the followingtaxable years. Nevertheless, investments made inreal property to obtain the exemption indicated onparagraph 6, Subsection (a) of Section 4 of Act 8of 1987, cannot be used for the purpose of thiscredit.

Line 11(i) - Enter the contribution made up to $500to the Educational Foundation for the Free Selectionof Schools.

The contributions made in excess of the allowedcredit can be claimed as a deduction undercharitable contributions, up to the limit provided bythe Code.

To claim this credit, you must submit a certificationfrom the Educational Foundation for the FreeSelection of Schools or copy of the cancelled checkas evidence of the contribution made.

Line 13 - This tax will apply only to income derivedfrom taxable operations. Said tax will be equal tothe excess, if any, of:

the Tentative Minimun Tax for the taxable yearover,

the Regular Tax of the year.

The Tentative Minimum Tax for the taxable year willbe 22% of the total for which the AlternativeMinimum Net Income for the taxable year exceedsthe exempt amount.

Enter the amount determined on Schedule ACorporation and Partnership, Part V, line 32.

Line 14 - In addition to any other tax imposed bythe Code, those foreign corporations andpartnerships engaged in trade or business in PuertoRico that operates as branches, are subject to a10% tax of the amount equivalent to the dividendor profit distribution for the taxable year.

This provision shall not be applicable to any taxable

year on which the foreign corporations andpartnerships engaged in trade or business in PuertoRico derive at least 80% of its gross income duringthe 3 taxable years period ended at the closing ofsaid taxable year, from sources within Puerto Ricoor from income effectively connected or treated aseffectively connected with the conduct of a trade orbusiness in Puerto Rico.

The corporations subject to this additional taxmust file Form AS 2879 Branch Profits Tax andinclude it with your return.

Line 15 - Enter the sum of line 15 of Column A, Band C.

PART II - COMPENSATION TO OFFICERS

Enter the total compensation paid or accrued toofficers of the entity for salaries or other allowances.Also, you must include the name, social securitynumber and the percentage of stocks or sharespossessed, if any. The total amount reflected inthis part as compensation, will be equal to theamount claimed on Schedules L, M, N, P and VIncentives. If the entity files more than one of theseschedules, the amount entered in this part mustbe equal to the sum of the amounts reflected oneach schedule for this concept.

PART III - RECONCILIATION OF TAXABLEINCOME FROM PUERTO RICO (FORM 480.30(II))AND UNITED STATES (FORM 1120)

Enter in Column A the income and deductions aspresented on Form 480.30(II). Enter in Column Bthe income and deductions reflected on Form 1120.Any difference among both income must bereflected in Column C, explaining the reason forsuch difference (i.e. Section 263A of the FederalInternal Revenue Code, depreciation adjustment,etc.).

PART IV - RECONCILIATION OF PASSIVEINCOME

In the Reconciliation column of Form 1120, enterthe passive income reflected in the financialstatements and on line 2 enter any adjustment toreconcile the income reflected on Form 1120.

In the Reconciliation column of Form 480.30(II),enter the passive income reflected on the financialstatements. Enter on line 2 any adjustment madeto obtain the income reflected on Form 480.30(II)such as, income from sources of the United States.

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GENERAL INSTRUCTIONS FOR SCHEDULESL, M, N, P AND V INCENTIVES

If an entity made an election under Section 3(f) ofAct 8 of 1987 or Section 6(f) of Act 135 of 1997, itmust submit with the return a copy of the swornstatement through which such election was made.

PART II - SCHEDULES L, M AND P INCENTIVES(SCHEDULE N INCENTIVES, PART III ANDSCHEDULE V INCENTIVES, PART V) - GROSSPROFIT ON SALES AND OTHER INCOME

In this part you will determine your gross profit onsales, production or other income. Check theapplicable box to indicate the appraisal method forthe inventory at the beginning and end of the year.

Detail in Part IV of Schedules L, M and PIncentives the Other Direct Costs claimed on line5 of Part II. If you are completing Schedule NIncentives, detail the Other Direct Costs in Part Vand claim the same in Part III, line 5. If you arecompleting Schedule V Incentives, detail in PartVII and claim the same in Part V, line 5.

The flexible depreciation of assets used inmanufacture will be claimed only on the OtherDirect Costs item in Part IV, line 11 of Schedule PIncentives. The flexible depreciation of other assetswill be entered in Part III, line 37 of said schedule.

The assets used in any activity that generatespartially exempt income under Act 52 of 1983, orAct 57 of 1963, Act 26 of 1978, Act 8 of 1987 orAct 135 of 1997, or Act 78 of 1993 or Act 225 of1995 cannot be depreciated under the flexibleor accelerated depreciation method.

PART III - SCHEDULES L, M AND P INCENTIVES(SCHEDULE N INCENTIVES, PART IV ANDSCHEDULE V INCENTIVES, PART VI)-DEDUCTIONS AND NET OPERATING INCOME

In this part of Schedules L, M, N, P and V Incentivesenter the deductions related to your operations.Following we present information related to someof these items:

a. Meal and entertainment expenses

You may deduct the 50% of the total expenses actuallypaid or incurred, up to 25% of the gross income for thetaxable year for meal and entertainment expensesdirectly related with the conduct of a trade or businessor with the production of income. Do not considerthose that do not constitute ordinary and necessaryexpenses from the trade or business.

No deductions shall be allowed for meal andentertainment expenses considered sumptuous orextravagant.

b. Contributions to pension and otherqualified plans

Enter the amount contributed to pension plans, profitsharing or other qualified plans approved by theSecretary of the Treasury. This deduction is subjectto certain limitations.

To claim this deduction, you must include with yourreturn a schedule showing the information requiredby the regulations under the Code.

c. Current depreciation and amortization

Submit detail of the current depreciation inPart (a) and improvements amortization in Part(d) of Schedule E - Depreciation.

The maximum basis to depreciate an automobileacquired and used in the trade or business, or forthe production of income, is $25,000. This rule alsoapplies to those automobiles acquired throughfinancial leases that are equivalent to a purchase.

In the case of an ordinary lease, the total amount ofrent paid during the taxable year, excluding financialcharges, shall be considered as current depreciation.

An automobile may be depreciated over a 3 yearsperiod if it is used exclusively in selling activities,and over a 5 years period if it is used for otherpurposes.

The basis limitation ($25,000) and the useful lifeterm do not apply to those automobiles acquiredby corporations or partnerships engaged in theleasing, or transportation of passengers or freightbusinesses.

Also, a deduction for goodwill amortization isgranted, as long as the goodwill is purchased fromthird parties during taxable years beginning afterJune 30, 1995. This deduction will be determinedusing the straight line method and an useful life of15 years.

d. Flexible depreciation

Enter the amount of flexible depreciation you areentitled, and submit a copy of the authorization forthe flexible depreciation option.

The detail of the flexible depreciation will beincluded in Part (b) of Schedule E - Depreciation.

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SCHEDULE L - PARTIALLY EXEMPT INCOMEUNDER ACT 52 OF 1983 OR ACT 78 OF 1993

This schedule must be used by those entities thatoperate under Act 52 of 1983 or under Act 78 of1993. Check the applicable box for the act underwhich the entity operates and indicate the periodin force for income, and the actual and requirednumber of jobs directly related with tourismdevelopment.

In the case of a corporation or partnership thatoperates under Act 52 of 1983 or Act 78 of 1993,and has made the election under Section 5(b) or3(a)(1)(D) respectively, must submit with the returna copy of the notification addressed to the Secretaryof the Treasury making such election.

Any exempt business under Act 78 of 1993, mustinclude with the return a copy of the order issuedby the Director of the Tourism Company indicatingthe date the exemption began.

PART I - NET INCOME SUBJECT TO TAX

Line 2 - Enter the carryover balance of net operatingloss reflected at the end of the preceding year. Thenet operating losses under tourism incentives ortourism development acts can be deducted onlyagainst income derived from touristic activities. Thenet operating losses not covered under any of thepreviously mentioned acts, may be deducted onlyagainst the totally taxable income. You mustsubmit with the return a schedule supportingthe deduction claimed.

The excess of income loss from touristic activitiesfrom preceding years can only be carried over andclaimed against income from touristic activities.Said loss will be deductible up to an amount equalto the percentage of income from touristic activitiesthat would have been taxable. The losses will becarried over in the order in which they were incurred.

Any net loss incurred during the year on which theentity made the election under Section 3(a)(1)(D)of Act 78 of 1993, can be carried over and taken asa deduction only against the tourism developmentincome derived by the exempt business in whichthe election was made under said Section.

In case of an entity that has renegotiated its decreeunder Act 78 of 1993, may take as a deduction thenet operating losses incurred from operations underprevious decrees (Industrial or Tourism IncentivesAct).

This deduction is applicable only against the fullytaxable income (Schedule P Incentives) and islimited to property used in the activities indicatedin the Code.

Said option may be exercised only over propertyacquired prior to June 30, 1995.

e. Accelerated depreciation

In order to be entitled to this deduction, an electionto use the Accelerated Depreciation Method mustbe exercised with the return. Said election can beexercised only for property acquired by purchaseduring taxable years beginning after June 30, 1995.Once the option is exercised, the same isirrevocable.

This depreciation method does not apply toautomobiles, property used outside Puerto Rico,property used by exempt entities and property usedtotally or partially in activities under the Industrial,Tax and Tourism Incentives Acts or TourismDevelopment Act, Agricultural Tax Incentives Actor any other special act or to intangible property.

The detail of the accelerated depreciation will beincluded in Part (c) of Schedule E - Depreciation.

f. Bad debts

Enter the accounts receivable that are considereduncollectible. For taxable years beginning after June30, 1995, the corporations and partnerships cannotuse the reserve method to compute the deductionfor bad debts. Instead, they may claim a deductionfor debts that become uncollectible within thetaxable year (direct write-off method).

If the corporation or partnership has used the reservemethod, it shall include in its gross income 25% ofthe bad debts reserve balance determined at theclose of the last taxable year beginning prior toJuly 1, 1995. In the following 3 years, you willrecognize 25%, as determined in the first year.

g. Other deductions

Those expense items for which a specific space isnot provided in Part III (Schedules L, M and PIncentives), Part IV (Schedule N Incentives) andPart VI (Schedule V Incentives) will be added andthe total will be entered as Other Deductions.Submit with the return a schedule detailingthese deductions.

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Losses incurred on a year on which the electionwas made under Section 5(b) of Act 52 of 1983 orunder Section 3(a)(1)(D) of Act 78 of 1993, may beclaimed as a deduction against income fromtouristic or touristic development activities for whichthe election was made.

Line 4 - Enter in the space provided the exemptionpercentage to which you are entitled in accordanceto the Resolution under the Tourism Incentives orTourism Development Act.

Multiply the net operating income from eligibletourism activities subject to the computation(Schedule L Incentives), by the applicableexemption percentage. Enter the amount on thisline.

SCHEDULE M INCENTIVES - FULLY ORPARTIALLY EXEMPT INCOME UNDER ACT 57OF 1963 OR ACT 26 OF 1978

This schedule must be used by those entities thatderive fully or partially exempt income under Act 57of 1963 or Act 26 of 1978. Check the applicablebox for the act under which the entity operates andindicate the period in force for income, and the actualand required number of jobs directly related withmanufacture or designated service. If the entity haspartially exempt operations under both acts, aschedule for each activity must be used. If thereare no specific instructions for a particular line underthis section, refer to the General InstructionsSection.


Line 2 - Enter the income derived from qualifiedinvestments under Section 2(j) of Act 57 of 1963and Act 26 of 1978, whichever applies.

Line 4 - Enter the larger of the following amounts:

Line 4(a) - 5% of your total production payrollup to an amount that does not exceed 50% ofthe net industrial development income, or

Line 4(b) - $100,000 if the net industrialdevelopment income is smaller than $500,000.

For purposes of line 4(a), the production payroll shallbe for wages paid by the exempt business topersonnel directly related with the manufacture of theexempt product, excluding the salaries of executives,supervisors and administrative personnel, and anypayment for professional services rendered undercontract by independent firms not related to theexempt business, as long as the above is not in

conflict with the definition of production employee adoptedby the Labor Statistics Bureau of the Department ofLabor and Human Resources of Puerto Rico.

For purposes of line 4(b), if the exempt businessengaged in manufacturing is a member of acontrolled group of corporations and partnershipsthat are exempt businesses, or is controlled in morethan 50% by one or more persons who directly orindirectly own an exempt business, the businessmay elect, with the consent of the Secretary, themanner in which the total amount or part of the$100,000 deduction will be apportioned among oneor more of the controlled exempt businesses.

These deductions do not apply to corporationsunder Section 3(n) of Act 26 of 1978.

Line 6 - Enter the carryover balance of net operatingloss reflected at the end of the preceding year. Thenet operating losses under the industrial incentivesacts may only be deducted against the IDI. The netoperating losses derived from operations that are notcovered under any of the previously mentionedincentives acts, may only be deducted against fullytaxable income.

The loss excess of IDI from the preceding years,may only be carried over and claimed as a deductionagainst the IDI. Said loss will be deducted up to anamount equal to the IDI percentage that would havebeen taxable. Losses will be carried over in theorder in which they were incurred.

Line 9(a) - Enter in the space provided theexemption percentage to which you are entitled,according to your decree under Act 57 of 1963 orAct 26 of 1978.

Multiply the net operating industrial developmentincome after the adjustments by the applicableexemption percentage. Enter the amount on thisline.

SCHEDULE N INCENTIVES - PARTIALLY EXEMPT INCOME UNDER ACT 8 OF 1987

This schedule must be used by those entities thatderive partially exempt income under Act 8 of 1987.Indicate in the corresponding box the period in forcefor income, and the actual and required number ofjobs directly related with manufacture or designatedservice.


Line 2 - Enter the income derived from qualifiedinvestments under Section 2(j) of Act 8 of 1987.

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Line 4 - Enter the larger of the following amounts,as applicable:

Line 4(a) - 5% of its total production payroll up to50% of the net industrial development income(line1), if the eligible business:

enjoyed industrial tax exemption under any ofthe previously mentioned industrial incentivesacts and said tax exemption was authorizedprior to January 1, 1985, and then convertedits decree to the dispositions of Act 8 of 1987for the remaining part of its exemption period;or

was operating in Puerto Rico under a decreeas of January 1, 1985 and subsequentlyobtained a new decree covering previouslyexempt operations based on negotiations inview to special conditions, and then requeststo convert its new decree under Act 8 of 1987.

Line 4(b) - 15% of the production payroll up to 50%of your net industrial development income, if in anytaxable year you generate a net income from theexempt operations of less than $30,000 perproduction job and said eligible business:

enjoys tax exemption under a new decreeissued under Act 8 of 1987; or

has a tax exemption decree issued afterDecember 31, 1984, but has not enjoyed taxexemption prior to that date, and converted saiddecree under Act 8 of 1987 for the remainingpart of the exemption period originally granted.For these purposes, the production payroll shallinclude the salaries of personnel directly relatedto the manufacture of the exempt product,excluding executive salaries and any paymentfor professional services rendered throughcontract to the exempt business byindependent firms.

The net income per production job will be obtaineddividing the net industrial development incomederived from the exempt operation, by the numberof production jobs reflected on the production payroll.

Line 4(c) - Enter the first $100,000 if the netindustrial development income is smaller than$500,000 and the business has kept anemployment average of 15 persons or more duringsaid taxable year.

The exempt business that claims this deduction,will not be able to enjoy the deductions previouslyindicated in items 1 and 2.

If the exempt business is controlled in more than50% by stockholders or corporations in common,with the consent of the Secretary, it may decidethe manner in which all or part of the $100,000deduction shall be assigned among one or more ofthe controlled exempt businesses.

Line 6 - Enter the carried over balance of the netoperating loss reflected at the end of the precedingyear. The net operating losses covered under the TaxIncentives Act may only be deducted against the IDI.The loss excess of IDI from previous years can onlybe carried over and claimed as a deduction againstthe IDI. Said loss will be deductible up to an amountequal to the IDI percentage that would have beentaxable.

Any loss incurred in the year in which the entitymade the election under Section 3(f) of Act 8 of1987, can be carried over and taken as totaldeduction against the IDI derived by the exemptbusiness under the decree in which the electionwas made under Section 3(f) or against the IDIpercentage that would have been taxable in casethat the entity has not made the election.

PART II - SPECIAL SURTAX SECTION 3(a) OFACT 8 OF 1987

This special surtax applies to every entity that hasderived a total gross income from industrialdevelopment larger than $1,000,000 during thetaxable year.

For purposes of this computation, the term grossincome from industrial development includesthe following:

Income derived from certain investmentactivities eligible under Section 2(j).

Net income derived from patent sales, royaltiesor any other entitlement to receive income,related to activities or intangible propertyresulting from exempt operations under Act 8of 1987.

Income derived from insurance policies forbusiness interruption, as long as there is noreduction on the job employment level of theexempt business as a result of the action thatmotivated the collection of such income.

The tax will be .00075 of the sales volume of theexempt business, but never more than half of onepercent (.005) of the net industrial developmentincome.

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SCHEDULE O INCENTIVES - OPTIONALINCOME TAX FOR EXEMPT BUSINESSESPURSUANT TO SECTION 3A OF ACT 8 OF 1987

If the corporation elected the computation of theOptional Income Tax under Section 3A of Act 8 of1987, please complete this schedule.

PART II - COMPUTATION OF OPTIONAL TAX

Line 2 - Include the income from interest of eligibleinvestments (Section 2(j)), except exempt interestfrom obligations issued by the Government ofPuerto Rico, its instrumentalities or politicalsubdivisions.

Line 4 - Check the box corresponding to theapplicable tax rate. If the entity has a decreethat has another tax rate, enter the same on line4(d).

Line 8(b) - Any exempt business with a converteddecree under Section 3(i)(2a) of Act 26 of 1978, isentitled to carry forward as a credit for future taxableyears an amount equal to two thirds of the netincome tax paid as a result of the conversion,against any income tax payment or withholding atsource on current dividend and liquidationdistributions.

If the entity is exempt under Act 8 and the parentcompany is under Federal Bankruptcy proceedings,the exempt business is entitled to claim a creditagainst the income tax and tollgate tax payment,subject to compliance with certain conditions. Foradditional information, refer to Section 3(a)(3) ofAct 8 of 1987.

SCHEDULE P INCENTIVES - INCOME FROMFULLY TAXABLE OPERATIONS OR PARTIALLYEXEMPT INCOME UNDER ACT 148 OF 1988, ACT75 OF 1995, ACT 225 OF 1995 AND ACT 14 OF1996

This schedule must be used by those entities thatin addition to enjoy exemption under a decree, deriveincome from fully taxable activities. Those entitiesthat derived partially exempt income under Act 148of 1988, Act 75 of 1995, Act 225 of 1995 or Act 14of 1996 must also use this schedule. Check thecorresponding box if your activities are fully taxableor if they are partially exempt under one of theseacts.

If you have fully taxable operations, and at the sameyou have partially exempt operations under one ofthese special acts, a schedule for each activitymust be used and check the corresponding box. If

there are no specific instructions for a particularline on this section, refer to General Instructions -Schedules L through V Incentives.

Those industries or businesses established ina special planning zone that do not deriveexempt income under Act 148 of 1988, Act 75of 1995 or Act 14 of 1996, must use Form 480.20or 480.10.


Line 2 - Enter the carried over balance from thenet operating loss reflected on the return of previousyears.

Line 4 - This line must be completed only by thoseentities that derived exempt income under one ormore of the following acts:

Act 148 of 1988, as amendedAct 75 of 1995, as amendedAct 225 of 1995, as amendedAct 14 of 1996, as amended

If the operations are partially covered by Act 148 of1988, and/or Act 75 of 1995, enter the 50%exemption of net income derived from the sale ofadmission tickets for artistic and cultural showsperformed in new structures, substantiallyrehabilitated or subject to improvements for a 5years period, beginning on the date the construction,substantial rehabilitation or improvement iscompleted. In order to be entitled to those benefits,said construction, rehabilitation or improvementmust be performed within 5 years beginning on thedate of the designation of the zone in which thebusiness will be located.

If the operations are covered under Act 14 of1996, enter 90% of the exemption from the netincome derived from the sale of admissiontickets to artisanal, agricultural, artistic andcultural fairs, and sport events, if you meet thefollowing requirements:

The activity or event must be celebrated withinone of the special designated zones establishedby the Puerto Rico Planning Board inaccordance to said Act;

At least 50% of the persons employed in theactivity or event by the person claiming theexemption, must be bona fide residents ofCastañer.

The Department of the Treasury established byregulations the procedures to be entitled to thisexemption.

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If the operations are partially exempt underAct 225 of 1995, enter the 90% exemption, ifyou meet the following requirements:

You have a certification issued by the Secretaryof Agriculture of Puerto Rico, certifying thatyou are a bona fide farmer dedicated to anagricultural business;

You have derived at least 50% of your incomefrom agricultural activities; and

You have not elected the provisions of Section1023(s) of the Code.

This exemption of income tax payment applies totaxable years beginning on January 1, 1996. Thisexemption is not extensive to income from interest,dividends, royalties or gains derived from the saleof assets, including those assets used in theagricultural business, or any other income derivedby bona fide agricultural businesses and that doesnot come directly from the agricultural activity.

To claim such exemption, you must include withthe return a copy of the certification issued by theSecretary of Agriculture of Puerto Rico and aschedule showing the income percentage derivedfrom agricultural activities over the total income ofthe entity.

For purposes of calculating 50% or more of thegross income, income from all sources will beconsidered, realized and recognized, adjusted orreduced by the following items:

The cost of raw material used, if any;

In case of sale of real property, the capitalrestoration which is considered the adjustedbasis of such real properties, and excluding:

the total amount of exclusions from grossincome under Section 1022(b) of the Code;

the total amounts received for which creditsare allowed under Section 1026(a) of theCode; and

those amounts that by law do notconstitute income.

Line 6 - Enter 85% of the amount received asdividends or profits from a domestic corporation orpartnership subject to taxation under the Code, butlimited to 85% of the net income of the corporationor partnership.

If the dividend received is from industrialdevelopment income derived from operationscovered by the provisions of Act 57 of 1963, thecredit will be 82.70% of the amount received, butlimited to 82.70% of the net taxable income.

This credit does not apply to dividends or profitdistributions derived from operations covered underAct 78 of 1993 or Act 8 of 1987.

However, the Code provides the followingexceptions:

In the case of a small business investmentcompany operating in Puerto Rico under the“Small Business Investment Act of 1958”, thereshall be allowed as a credit an amount equalto 100% of the total amount received asdividends or profits from a domestic corporationor partnership taxable under the Code.

In accordance to certain requirements imposedby the Code, a credit of 100% is allowedagainst the net income from the total amountreceived as dividends from corporationsorganized under the laws of any state of theUnited States or of the Commonwealth of PuertoRico, whose principal income is derived fromIDI accrued during taxable years beginning priorto January 1, 1993 and invested in obligationsof the Commonwealth of Puerto Rico, itsinstrumentalities or political subdivisions, orinvested in mortgages secured by the PuertoRico Housing Bank and Finance Agency or inloans or other securities guaranteed bymortgages granted under any pension orretirement system of a general characterestablished by the Legislative Assembly ofPuerto Rico, the municipalities and theagencies, entities or public corporations of theCommonwealth of Puerto Rico.

A 100% credit will be granted against the netincome from the total amount received asdividends by corporations organized under thelaws of any state of the United States or of theCommonwealth of Puerto Rico, whose principalincome is derived from IDI accrued during taxableyears beginning prior to January 1, 1993invested in obligations of the GovernmentalDevelopment Bank for Puerto Rico or any of itssubsidiary corporations, for the financing throughthe purchase of mortgages, or the construction,purchase or housing improvements in PuertoRico started after December 31, 1984.

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exceeds $12,000 per unit or represents 30% of theproperty's market value prior to the rehabilitation,excluding the value of the land in which it is located,whichever is larger.

To claim this deduction, you must include with thereturn a certification issued by the Secretary ofConsumers Affairs indicating the basic rentestablished for the unit and the ajusted rent.Nevertheless, this deduction must not exceed$4,800 per year per unit, and can only be claimedwhile the unit is rented by the tenant who did soprior to the rehabilitation of the unit, and for a 10years period starting from the date the rehabilitationwas completed.

For more detailed information, refer to Act 148 of1988, Act 75 of 1995 and Act 14 of 1996.

SCHEDULE V INCENTIVES - INCOME TAX FOR EXEMPT BUSINESSES UNDER ACT 135 OF1997

This schedule must be used by those exemptbusinesses under Act 135 of 1997. Indicate in thecorresponding boxes the enforcement period forincome, and the actual and required number of jobsdirectly related with manufacture or designatedservice.

PART I - QUESTIONNAIRE

Line 1 - Indicate if the exempt business exercisedthe option provided in Section 3A of Act 8 of 1987or if it was subject to a fixed tax rate stipulated onthe decree during any of the years included in thecomputation of the basis period income.

Line 2 - If you answered "Yes", the 2(j) income,up to an amount not over the 2(j) income for thebasis period, will also be subject for the remainingexempt period of the renegotiated preceding decree,to the rate applicable to the basis period incomeunder the preceding act.

Line 3 - Indicate if for any of the years included inthe basis period you had 2(j) income tax exemptincome and 2(j) taxable income. The 2(j) basisperiod income will be taxable or exempt in the sameproportion that the 2(j) exempt income bears withthe 2(j) total income subject to income tax earnedduring the basis period.

PART II - COMPUTATION OF THE BASIS PERIODAVERAGE INCOME

Line 4 - Enter the amount of Column (a) in Part III,line 8. If the 2(j) income was subject to the Optional

A 100% credit will be granted against the netincome of the total amount received as dividendsor profits from a domestic controlledcorporation or partnership.

PART III - DEDUCTIONS AND NET OPERATINGINCOME

If there are no specific instructions for a particularline in this section, refer to section of GeneralInstructions for Schedules L, M, N, P and VIncentives.

Immediately afterwards we explain certain specialdeductions applicable to operations that qualify forbenefits granted under Act 148 of 1988, Act 75 of1995 and Act 14 of 1996.

Any industry or business established in a specialzone in Santurce, Río Piedras or Castañer in theperiod beginning on the designation date of saidzone, may claim a special deduction based on thefollowing:

10% of the lease paid for a period of 10 yearsin the zone of Santurce and Río Piedras, and15% for a period of 5 years in the zone ofCastañer.

5% of the minimum wage applicable for everynew job created. To be entitled to thisdeduction, it is necessary that the new jobdoes not eliminate or substitute a job existingprior to the approval of this Act, be a completeworking week of 40 hours (35 hours per weekin case of the Castañer zone), and beoccupied in a continuous basis by the sameperson for a period of not less than sixmonths. This deduction is for a 5 years periodbeginning on the date the business isdesignated to that zone by the PlanningBoard.

Also, every person that owns an eligible propertyin Santurce or Río Piedras subject to theReasonable Rents Act, that performs a substantialrehabilitation to such eligible property andafterwards it still be under the provisions of saidact, will be entitled to a special deduction equivalentto the difference between the ajusted rent, asdefined in each one of said special acts, and thebasic rent.

To be entitled to this deduction, it is necessarythat the rehabilitation of the eligible property beginsand concludes within the period between theenforcement date in each one of such special actsand the fifth year after the effective date of eachone of said special acts, and has a value that

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at the exempt business option, up to the totalamount allowed by law against the basis periodincome tax or against the fixed rate; or allocated,up to the amount allowed by law, between the basisperiod income tax and the fixed tax rate. The sumof the allocated amounts cannot exceed the totalamount of the credit.

Line 3(b) - The exempt business can claim a creditagainst the IDI fixed tax, for purchases of productsmanufactured in Puerto Rico including componentsand accesories, equal to a 10% of said productspurchases during the taxable year on which thecredit is claimed (subject to certain limitations).For additional information, refer to Sections 3(a)and 3(b) of Act 135 of 1997.

Line 3(c) - Any exempt business with a decreegranted under Act 135 of 1997, that is a subsidiaryof an U.S. parent company, that reflects a loss inthe consolidated federal return or is underbankruptcy proceedings under the federalregulations, will be allowed to claim a credit againstthe fixed tax applicable to the IDI earned during thetaxable year of the loss. For additional information,refer to Section 5(a) of Act 135 of 1997.

SCHEDULE V1 INCENTIVES- COMPUTATION OF THE SPECIAL DEDUCTIONS UNDER ACT 135 OF 1997

PART I - COMPUTATION OF THE SPECIALDEDUCTIONS

Use this schedule to determine the specialdeductions allowed among: payroll deduction,human resources training and improvementexpenses deduction, research and developmentexpenses deduction, and special deduction forinvestment on buildings, structures, machineries andequipment.

Payroll deduction - In addition to other deductionprovided by law, every exempt business with adecree under this act engaged in the manufactureand that generates a net income from its exemptoperations (computed without taking intoconsideration the benefit of the special deductionsprovided in Section 4 of the law) smaller than $30,000per production job, will be allowed to claim a specialpayroll deduction equivalent to a 15% of theproduction payroll of the exempt business, up to50% of the IDI, computed without the benefit of theproduction payroll special deduction.

The exempt business that has a decree under thisact engaged in manufacture, which IDI computedwithout the benefit of the special deductionsprovided in Section 4 on any taxable year is smaller

Tax or was taxable under special dispositions ofyour decree during all or part of the basis period,enter the amount of Column (b) on Schedule OIncentives, Part II, line 2.

PART III - NET INCOME SUBJECT TO TAX

Line 2 - Enter the income from qualified investmentsunder Section 2(j) of Act 135 of 1997.

Line 4 - Enter here the net operating losses fromthe preceding year, including the share on lossesfrom special partnerships which own or operatetourism businesses under Act 78. You must submita schedule with the case number, amount of theloss and carryover computation.

Line 8 - Applies only to exempt businesses whichrenegotiated their decrees under Act 135 of 1997.Enter this amount on Schedule M or N Incentives,Part I, line 8.

Line 9 - If line 9 is smaller than line 8, enter thenet operating income of the year (Part III, line 1 ofthis schedule) on Schedule M Incentives, Part I,line 1, if the preceding renegotiated decree wasissued under Act 57 of 1963 or Act 26 of 1978; oron Schedule N Incentives, Part I, line 1, if thepreceding renegotiated decree was issued underAct 8 of 1987, and complete the correspondingschedule.

If when the decree was renegotiated under Act 135of 1997, the exempt business had in force the optionunder Section 3A of Act 8 of 1987, Schedule M orN Incentives, whichever applies, and Schedule OIncentives must be completed.

If line 9 is larger than line 8, enter the basis periodincome on Schedule M Incentives, Part I, line 8, ifthe preceding renegotiated decree was issued underAct 57 of 1963 or Act 26 of 1978; or on Schedule NIncentives, Part I, line 8, if the preceding renegotiateddecree was issued under Act 8 of 1987, and completethe corresponding schedule starting from said line 8.

If when the decree was renegotiated under Act 135of 1997, the exempt business had in force the optionunder Section 3A of Act 8 of 1987, you must enterthe basis period income on Schedule O Incentives,Part II, line 1 and complete said schedule.

PART IV - TAX COMPUTATION

Line 3 - In case of exempt businesses whichrenegotiated their decrees under Act 135 of 1997and are entitled to claim the same credits againstthe basis period income tax and over the fixed rateunder Act 135 of 1997, said credits can be claimed,

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than $500,000, and that has kept an averageemployment of 15 or more persons during saidtaxable year, is allowed to deduct the first $100,000of said income in order to be totally exempt fromthe payment of the IDI fixed tax rate provided inSection 3(a) of this act. For additional information,refer to Section 4(a) of Act 135 of 1997.

Human resources training and developmentexpenses deduction - A special deduction willbe allowed for training expenses incurred to improvethe productivity and quality control, to promote totalquality management and to improve employeescommunication skills, incurred in excess of theannual average of said expenses during the 3taxable years ended prior to January 1, 1998.

Research and development expensededuction - A special deduction will be allowedequal to the expenses incurred in the research anddevelopment of new products or industrialprocesses, or the improvement of said productsand processes, that are deductible in the taxableyear under the Code (subject to certain limitations).

Special deduction for the investment onbuildings, structures, machinery andequipment - Every exempt business that has adecree under this act, is allowed to elect to deducton the taxable year incurred, instead of anyexpense capitalization required by the Code, thetotal expense incurred after the effective date ofthis act, in the purchase, acquisition or constructionof buildings, structures, machinery and equipment,as long as said buildings, structures, machineryand equipment have not been used or depreciatedpreviously by any other business or person inPuerto Rico, and are used in the manufacture ofproducts or to render the services for which saidbenefits were provided under this act.

Line 10 - In those cases in which the exemptbusiness is allowed to claim more than one of thespecial deductions mentioned before, and the sumof said deductions after determining the amountthat is allowed before taking into consideration thelimitation based on the IDI, results in an excess ofthe IDI for said year, or that the exempt businesscannot claim the total benefit of said deduction forsaid year, it will determine the limitation of thespecial deductions following the order indicated inPart II.

FORM 480-E - ESTIMATED TAX DECLARATION

The Estimated Tax Declaration (Form 480-E) mustbe filed not later than the 15th day of the fourthmonth of the taxable year, except when the

requirements to file are met for the first time:

After the last day of the third month and priorto the first day of the sixth month of the taxableyear, the filing date will be not later than the15th day of the sixth month of the taxable year;or

After the last day of the fifth month and prior tothe first day of the ninth month of the taxableyear, the filing date will be not later than the15th day of the ninth month of the taxable year;or

After the last day of the eighth month and priorto the first day of the twelfth month of thetaxable year, the filing date will be the 15thday of the twelfth month of the taxable year.

The Declaration must be filed with the InternalRevenue Collections Office of the Municipality wherethe taxpayer resides or sent to:

DEPARTMENT OF THE TREASURYRETURNS PROCESSING BUREAUPO BOX 9022501SAN JUAN PR 00902-2501

You must enter in the heading of the Declaration,the name, address and employer's identificationnumber, and check the applicable box to indicateif it is original or amended. In addition, you mustindicate the taxable year to which the estimatedtax payments will be applied, and the type oftaxpayer.

Determine the estimated tax to be paidfor the indicated taxable year. Thisamount cannot be less than the smallerof the following amounts:

90% of the tax to be paid at the endof the taxable year, or

100% of the tax paid in the previoustaxable year.

Enter as estimated credit the amountwithheld for services rendered by theentity or the amount withheld ondistributable profits from SpecialPartnerships. If you are filling out anAmended Estimated Tax Declaration,also enter on this line the total amountof the installments paid, if any, beforethis amendment.

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Enter as credit the tax paid in excessin the previous year applied asestimated tax payment in the incometax return. If you choose to claim thiscredit against one of the determinedinstallments, enter zero and go to line 5.

Divide the result on line 5 by the numberof remaining installments.

Enter the tax paid in excess in theprevious year applied as estimated taxpayment in the income tax return thatwill be claimed against the amount ofany installment. If such credit wasalready considered on line 4, it cannotbe considered again.

PAYMENT OF ESTIMATED TAX

If the Declaration is filed before the first day ofthe fourth month of the taxable year, the estimatedtax will be paid in four installments:

1st installment:

2nd installment:

3rd installment:

4th installment:

If the Declaration is filed after the last day of thethird month and before the first day of the sixthmonth of the taxable year, the installments will be:

1st installment:

2nd installment:

3rd installment:

If the Declaration is filed after the last day of thefifth month and before the first day of the ninth monthof the taxable year, the installments will be:

1st installment:

2nd installment:

If the Declaration is filed after the last day of theeighth month and before the first day of the twelfthmonth of the taxable year, the total estimated taxwill be paid on the 15th day of the twelfth month ofthe taxable year.

The estimated tax installments will be paid alongwith a payment coupon (Forms 480.E-1 or 480.E-2).Taxpayers who filed a Declaration on the previous

year, will receive a booklet of 4 coupons (Form480.E-2) preprinted with their name, address andemployer's identification number. Taxpayers whohave not received the coupon booklet, must visitthe Estimated and Employer Manual CouponsSection (Office 421-A) of the Department of theTreasury (Old San Juan), where a payment couponbooklet (Form 480.E-1) will be prepared. Foradditional information, call 722-1499 or 721-2020,extension 2446 or 2456.

Estimated tax payments must be made atparticipant banks (if you have the preprintedcoupon), at the Internal Revenue Collections Officesor at the Returns Processing Bureau at the addresspreviously indicated.

Payments with checks in the participating banksmust be made payable to the order of such banks.Payments made at the Internal Revenue CollectionsOffices shall be made with manager's checks,personal checks or money orders payable to theSecretary of the Treasury.

EXTENSION OF TIME

If for a reasonable cause, a taxpayer is unable tofile the Declaration or pay the tax as indicated, anextension of time to file the Declaration may berequested to the Secretary. No extension of timewill be granted for a period longer than 3 months.The extension shall be requested by using FormAS 2650.

AMENDED DECLARATION

If after filing the Declaration it is determined that theestimated tax will be substantially increased orreduced as a result of a change in income, deductionsor for any other reason, an amended Declaration mustbe filed. The Amended Declaration must be identifiedby checking the applicable box. The increase orreduction of the estimated tax will be proportionallydistributed among the remaining installments. AnyAmended Declaration filed after the 15th day of theninth month following the beginning of the taxableyear as a result of an increase in the previouslyestimated tax, must include the total amount of saidincrease. The Amended Declaration in this case willbe unnecessary if on the date prescribed for its filing,the final income tax return has been filed and thebalance of tax due has been paid.

PENALTIES

The Code establishes penalties for not filing theDeclaration and for not paying the estimated taxinstallments. Also, a penalty is imposed fordetermining a substantially lower amount of estimatedtax.

the 15th day of the fourth month

the 15th day of the sixth month

the 15th day of the ninth month

the 15th day of the twelfth month

the 15th day of the sixth month





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MESSAGE FROM THE SECRETARY OF THE TREASURY