act to transform the tax system of the commonwealth of puerto rico [p de la c 2329]
TRANSCRIPT
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Act to Transform the Tax System of the
Commonwealth of Puerto Rico
P de la C 2329
February 20, 2015
@2015 Kevane Grant Thornton LLP. All rights reserved.
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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
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Summary of P de la C 2329
“Act to Transform the Tax System of the
Commonwealth of Puerto Rico”
@2015 Kevane Grant Thornton LLP. All rights reserved.
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
More than $125,000 but
less than $200,000
$12,750 plus 20% of the
excess over $125,000
More than $200,000 $27,750 plus 30% of the
excess over $200,000
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Individual Income Tax
• Tax computation for married filing joint not electing
optional method
Net Taxable Income Tax
Not more than $80,000 0%
More than $80,000 but less
than $125,000
15% of the del excess over
$80,000
More than $125,000 but
less than $200,000
$6,750 plus 20% of the
excess over $125,000
More than $200,000 $21,750 plus 30% of the
excess over $200,000
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Individual Income Tax
• 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
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Individual Income Tax
• The Bill proposes the elimination of:
• Deductions:
• Mortgage Interest – new credit
• Educational IRA's
• Casualty losses
• Health Savings Accounts
• Special deduction to individuals – new
exemption level
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Individual Income Tax
• The Bill proposes the elimination of:
• Filing of income tax returns for those with only
salary income (W-2) which does not exceeds
$40,000 ($80,000)
• new informative return
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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
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Corporate Income Tax
• The Bill proposes the following:
• AMT preferences back to 2011 Code, including
expenses paid to related person and home office
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Flow Through Entities
• The Bill proposes the following:
• 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"
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Flow Through Entities
• The Bill proposes the following:
• 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
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Flow Through Entities
• The Bill proposes the following:
• 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.
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Flow Through Entities
• The Bill proposes the following:
• 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
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Flow Through Entities
• The Bill proposes the following:
• 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
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Preferential Tax Rates
• The Bill proposes the following:
• 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
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Preferential Tax Rates
• The Bill proposes the following:
• 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
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Preferential Tax Rates
• The Bill proposes the following:
• Eligible dividends
• Individuals – rate is 30%
• subject to withholding
• until 3/31/15 – 15%
• from 4/1/15 – 20%
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Changes that may affect all taxpayers
• The Bill proposes the following:
• 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)
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Changes that may affect all taxpayers
• The Bill proposes the following:
• Exclusions/Exemptions from gross income:
• Eliminates:
• literary, journalist, scientific, artistic awards
• amounts received from crop insurance
• IVU Loto awards – IVU Loto system is
eliminated
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Changes that may affect all taxpayers
• The Bill proposes the following:
• Exclusions/Exemptions from gross income:
• Eliminates:
• 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
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Changes that may affect all taxpayers
• The Bill proposes the following:
• Exclusions/Exemptions from gross income:
• Eliminates:
• 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
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Changes that may affect all taxpayers
• The Bill proposes the following:
• Exclusions/Exemptions from gross income:
• Eliminates:
• 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
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Changes that may affect all taxpayers
• The Bill proposes the following:
• Exclusions/Exemptions from gross income:
• Eliminates:
• reference to Act 135 (young workers)
since new tables cover the same
exemption of $40,000 of income.
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Changes that may affect all taxpayers
• The Bill proposes the following:
• 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
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Changes that may affect all taxpayers
• The Bill proposes the following:
• Deductions:
• automobile expenses – use and maintenance
• actual expenses
• Secretary may allow the use of standard
mileage rate by Regulations
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Changes that may affect all taxpayers
• The Bill proposes the following:
• Deductions:
• charitable contributions –
• only for non for profits operating in Puerto
Rico and registered with Treasury
Department
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Changes that may affect all taxpayers
• The Bill proposes the following:
• Deductions:
• payments to related person or Home Office
remain 51% non deductible
• no waivers to be issued
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Changes that may affect all taxpayers
• The Bill proposes the following:
• 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
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Changes that may affect all taxpayers
• 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 $140,000 but not
more than $155,000
the lesser of 9% of the
interest or $3,150
More than $155,000 but not
more than $170,000
the lesser of 6% of the
interest or $2,100
More than $170,000 the lesser of 3% of the
interest or $1,050
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Changes that may affect all taxpayers
• The Bill proposes the following:
• credit for mortgage interest will not be
reimbursable
• any amount not used will not be carried over
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Changes that may affect all taxpayers
• The Bill proposes the following:
• 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.
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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.
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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.
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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
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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
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VAT
New terms
3. Merchant
4. Place
5. Eligible consumer
6. Eligible merchant
7. Small merchant
Old terms
3. Nexus
4. Source
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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•
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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.
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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
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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
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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.
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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
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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
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VAT
• time and form of payment
• returns
• adjustments, credits and reimbursements
• regressivity relief
• registry
– merchants
– small business
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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