On May 29 the Governor of Puerto Rico signed into law HB2482 which officially enacts Law 72-2015. This new law introduces fundamental changes to the direct and indirect tax regimes of the Commonwealth of Puerto Rico. For our purposes, we will focus on the changes as they apply to indirect tax.
The new law proposes that the indirect tax changes happen in three stages as described immediately below:
- First Stage: Standard Tax Rate Increase. On July 1, 2015, the Commonwealth-Level sales and use tax will be increased from 6% to 10.5%. This new rate does not come with any immediate modifications or adjustment to product taxability rules. Further, the tax rate applicable at city level will remain 1%, meaning that a total tax rate of 11.5% will apply across the island.
- Second Stage: Temporary Tax Rates and Transition to a VAT. Effective October 1, 2015, a new 4% tax rate will enter into effect and it is intended to apply to all business to business (B2B) sales of services as well to all sales of professional services to final consumers. Under current rules, such services are exempt from sales tax. Early reports indicated that this new 4% rate would be applied as a VAT, however the legislation positions the new 4% rate as a special sales tax on those specified services. Personal services provided to private consumers will continue be subject to tax at the 10.5% rate.
- Third Stage: New Valued Added Tax. Effective April 1, 2016, the Commonwealth will implement a new Value Added Tax that will be applied only at the Commonwealth-Level. The VAT is detailed in Subtitle DD of Law 72-2015. The VAT will have two basic rates: A standard rate of 10.5% plus a 0% rate intended for exports and certain sales to manufacturers. The 4% rate applicable to B2B transactions and professional services will be eliminated and virtually all taxable transactions will be subject to the standard rate. The list of exemptions applicable under the VAT is very similar to those that currently apply under the sales tax, with some important exceptions that we will discuss in a later posting. Also, the current deferral system used for bonded taxpayers will remain in place. The city level 1% sales tax will also remain in place, subject to the same rules that currently apply.
Sovos Compliance is in the process of delivering the necessary content changes to our tax engine to support the first stage of this transition. However, with respect to the second and third stages, we are anticipating the issuance of regulatory guidance from the Treasury Department of Puerto Rico that will provide substantial detail as to how the 4% rate will be applied. Our experience has been that the Treasury Department is likely to introduce a number of important provisions that will substantially impact the manner in which the new tax is to be administered. This is especially true with respect to the third stage of the reform, as Subtitle DD paints with very broad strokes and as such is heavily reliant on the issuance of clarifying regulations.
Stay tuned for updates as we continue to follow these developments.
