It’s been a busy year for Puerto Rico. In addition to the island’s mounting debt, Puerto Rico also attempted to transition to a value-added tax (VAT) this year.
Despite being set to begin June 1st, the VAT was ultimately repealed before it even began. “Transition to a VAT was approved a year ago, but became unpopular just before it was to take effect,” Lucien O. Chauvin reported in Bloomberg BNA’s Weekly State Tax Report.
Interestingly, the VAT was first considered in Puerto Rico several years ago, Jeanelle Alemar-Escabi, principal at JAE Legal Services LLC, told Bloomberg BNA June 1. In 2001, the Puerto Rico Treasury Department ordered a study be done to determine what the ideal tax structure would be for Puerto Rico. After evaluating different countries’ tax systems, the study issued by the independent firm Bearing Point by the end of 2004, found that a consumption tax, in the form of a VAT, would be the best option, she noted.
Nevertheless, the administration that commenced on January 2005 decided to implement a sales and use tax in July 2006 instead, which is the consumption tax used in the U.S. mainland, Alemar-Escabi said. Yet the current administration tried to implement a VAT again, since they understand that Puerto Rico has different conditions than states on the U.S. mainland. In theory, since Puerto Rico is an island, they understand that a VAT would be easier to implement because all of its goods must go through a port before reaching the island; however, implementing a VAT requires certain infrastructure adjustments within the Puerto Rico Treasury Department and training of its employees, as well as merchants collecting and remitting the tax to the government, she added.
In the end, the Puerto Rican Legislature felt it was not responsible to put such changes into place at this time, Alemar-Escabi said, so the VAT was repealed and ultimately not implemented in Puerto Rico. There are also economic and political considerations at play in the decision because the current government doesn’t want to strain merchants and employees any further as they are already overwhelmed with the current fiscal situation on the island, she noted.
Jeanelle Alemar-Escabi is co-author of Portfolio 2650, Business Operations in Puerto Rico.
*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Do you think a value-added tax system is ideal for Puerto Rico?
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