Next Phase of Puerto Rico's Tax Reform Starts October 1, 2015

Elizabeth Quintana
September 28, 2015

As October 1 is just about here, it may be helpful to review those areas of tax reform brought about by Act 72-2015, which will go into effect on October 1, 2015.

What Professions are Subject to the New 4% Tax in Puerto Rico?

The new provisions of this Act, which impact organizations doing business in Puerto Rico, are two-fold:

  1. A new source of revenue for the Department of the Treasury (Hacienda) opens up with the imposition of a new 4% tax on certain “designated professional services.”  The services subject to tax pursuant to this new provision are detailed in a list created by Hacienda. The list includes the following: agronomists, architects and landscape architects, professional draftsmen, certified public accountants, real estate broker dealers, geologists, engineers, surveyors and (most interestingly at least from our perspective) tax return specialists!

It is worth noting that there are bills before the Puerto Rico Legislature (Senate Bill 1433) that could create an exemption for legal services, which can only be provided by licensed attorneys or a notary public. Under the proposal, related services that are not technically “legal”, but are performed by an attorney, may be subject to the standard 10.5% rate.

Businesses that perform “designated professional services” that are not currently registered to collect tax will need to contact the Hacienda in order to apply for their commercial registrant number and begin filing and remitting tax based on the 4% rate for services rendered during the month of October. The first set of payments will be due on November 20 and can be made using the existing mechanism deployed by Puerto Rico for paying their state-level tax, known as the PICO system.

How Previously Exempt Business to Business Transactions Are Affected By the New Tax Structure

In addition, any resident of Puerto Rico who contracts for these services from vendors that are outside of Puerto Rico (and thereby not so registered), will also now have to self-assess and report use tax at the 4% rate. There are no changes to the Municipal-level tax rules related to these specifically designated professional services.

  1. A new 4% tax on Business to Business (B2B) services, which were previously exempt under the law.

A common misconception is that based on this new legislation, all services are now subject to tax at 4%. That is not the case. Most services remain taxable at 10.5% (6% prior to July 1, 2015). The new rate only applies to those B2B services that were previously designated as exempt under the 2013 Tax Reform. Services provided to individual consumers or to non-qualifying businesses continue to be taxed to the standard rate, just as before.

The Effectiveness of These New Tax Updates

These two new provisions are likely to be relatively short-lived. Under the law as it stands today, these measures will remain in effect until April 1, 2016, when it is expected the current Puerto Rico sales and use tax system will be replaced by a VAT that will apply alongside the existing municipal sales and use tax.

Sovos Compliance continues to closely monitor this ongoing tax reform for any new developments as they unfold. Stay Tuned!

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Elizabeth Quintana

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