Examining Puerto Rico Tax Regime Changes: Addition of Value Added Tax and Amendments to Sales and Use, Income Taxes

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Last May, the Governor of Puerto Rico signed into law Act 72-2015, which amended various provisions of the Puerto Rico I.R.C. of 2011. In this article, Peter Molnar, Pablo Hymovitz Cardona, Rosa M. Rodríguez, Israel Maldonado and Pedro I. Mercado of Ernst & Young discuss the sales and use tax transition period rules and then continue with the implementation of the value added tax and income tax changes introduced under Acts 72 and 159.

By Peter Molnar, Pablo Hymovitz Cardona,
Rosa M. Rodríguez, Israel Maldonado
and Pedro I. Mercado

Peter Molnar is a member of Ernst & Young LLP's Atlanta VAT practice. Pablo Hymovitz Cardona and Rosa M. Rodriguez are Executive Directors in the Tax Advisory Division of the Tax Department at EY Puerto Rico. Israel Maldonado, CPA, is a Manager, Tax Services at EY Puerto Rico. Pedro Mercado is a Senior in EY's San Juan office.

On May 29, the Governor of Puerto Rico signed into law Act 72-2015, which amended various provisions of the Puerto Rico Internal Revenue Code of 2011 (Code). Although Act 72-2015's most notable provision is the introduction of a value added tax (VAT) as of April 1, 2016, it also includes amendments to the sales and use tax (SUT) and income tax provisions under the Code.

Several months after the enactment of Act 72-2015, the Puerto Rico Legislative Assembly enacted Act 159-2015 of Sept. 30, 2015. The main objective of Act 159-2015 was to clarify, expand and incorporate technical amendments to the provisions introduced under Act 72-2015.

Although much discussion has been centered on the phase out of the SUT and implementation of the VAT, the amendments to the income tax provisions will affect corporate and individual taxpayers, with the majority of the changes in effect for years beginning after Dec. 31, 2014. Thus, it is important for businesses to understand the implications of these changes as we approach the 2015 income tax filing season. Also, Act 159-2015 provides an additional window of opportunity through Dec. 31, 2015, to pay dividend tax at a reduced rate of 8 percent.

We begin this article by discussing the SUT transition period rules and then continue with the implementation of the VAT and income tax changes introduced under Acts 72 and 159.

Sales and Use Tax

Act 72-2015

Act 72-2015 increased the central government SUT rate from 6 percent to 10.5 percent, effective July 1, 2015, and retained the 1 percent municipal SUT under the Code. Consequently, the total combined SUT can be as high as 11.5 percent. Also, Act 72-2015 imposed a 4 percent SUT on certain business-to-business (B2B) services and designated professional services (DPS) rendered between Oct. 1, 2015, and March 31, 2016, or May 31, 2016, if the SUT sunset provisions are extended. B2B and DPS are not be subject to the 1 percent municipal SUT.

Merchants rendering DPS are allowed to use the cash method of accounting after Sept. 30, 2015, even if they use the accrual reporting method for regular tax return purposes.

Furthermore, for periods commencing after June 30, 2015, Act 72-2015 eliminated the 75 percent SUT credit limitation in place since 2014, and merchants that are resellers are now able to claim SUT credits up to the full amount of the SUT obligation. Unused SUT credits generated before April 1, 2016, or June 1, 2016, if the SUT sunset provisions are extended, may be used to reduce the VAT obligation until fully exhausted, but with no refund option.

As part of SUT changes, Act 72-2015 provides certain grandfather rules in the case of the sale of taxable items covered by contracts or auctions that were executed or awarded before July 1, 2015. In these cases, the applicable rate will be the reduced rate in effect on June 30, 2015. The grandfathered reduced tax rate will be in effect for the lesser of 12 months or the duration of the contract. For taxable services, the lower SUT rate will apply only if the services were paid before July 1, 2015. Also, Act 72-2015 required the registration of certain pre-existing construction contracts for commercial, industrial and housing projects in order to benefit from the lower rate in effect on June 30, 2015.

The following table summarizes the major SUT rate changes introduced by Act 72-2015:

  Before July 1, 2015 From July 1, 2015 until Sept. 30, 2015 From Oct. 1, 2015 until March 31, 2016
Central Government SUT rate 6 percent 10.5 percent 10.5 percent
Municipal SUT rate 1 percent 1 percent 1 percent
B2B and DPS 0 percent 0 percent 4 percent (no municipal SUT)
Available SUT credit (only to resellers of tangible personal property) 75 percent of current SUT return liability 100 percent of current SUT return liability 100 percent of current SUT liability

Act 159-2015

The SUT changes introduced by Act 159-2015 were intended to expand and clarify certain Act 72-2015 provisions that went into effect Oct. 1, 2015. Namely, it modifies the definition of the terms “services rendered to other merchants,” “designated professional services” and “taxable services” for purposes of the transition SUT rules in place from Oct. 1, 2015, through March 31, 2016 (Transition Period).

Puerto Rico's Treasury Department (PRTD) issued Administrative Determinations 15-17 of Aug. 31, 2015, (AD 15-17) and 15-21 of Oct. 5, 2015, (AD 15-21), providing guidance on the application of the SUT on services during the Transition Period. Although both administrative determinations are related in terms of subject matter, the discussion in AD 15-21 is focused and limited to the changes introduced by Act 159-2015.

For purposes of this overview, we will refer to the 4 percent tax on services rendered to other merchants and DPS as the special 4 percent SUT, and to the 11.5 percent combined SUT imposed by the central government and municipal government as the basic SUT.

Below is a summary of the most relevant SUT provisions amended by Act 159-2015 as further clarified under the guidance of AD 15-17 and AD 15-21.

SUT Transition Period Rules

Exempt services

The Code provides that all DPS and services rendered to other merchants that are not considered taxable services will be subject to the special 4 percent SUT during the Transition Period, as long as the service is not exempt from the SUT. Additionally, all services, including taxable services, DPS and services rendered to another merchant, performed by a person not resident in Puerto Rico to a person located in Puerto Rico, regardless of the place where the services are rendered, will be subject to either a 10.5 percent or 4 percent SUT, depending on the transaction, for the duration of the Transition Period. Pursuant to AD 15-17, in the case of taxable services, the 1 percent municipal SUT portion of the basic SUT is not applicable because the taxable services are rendered outside of Puerto Rico.

Exported services

AD 15-21 clarifies that the exemption for exported services applies to services rendered to other merchants, DPS and taxable services when a merchant performs services in Puerto Rico for another person that is not doing business in Puerto Rico, or is doing business in Puerto Rico but the services performed are unrelated to the business activities in Puerto Rico. If the services performed by the merchant are related to the business activities in Puerto Rico of the purchasing merchant, those services will be subject to the special 4 percent SUT. AD 15-21 provides examples to illustrate the application of this exemption.

Services performed by a person not resident in Puerto Rico

Under the Code, if a person located in Puerto Rico receives services from a person not resident in Puerto Rico, the person located in Puerto Rico will be responsible for self-assessing and remitting the corresponding SUT. The tax rate will depend on the type of service received.

In accordance with Act 159-2015, AD 15-21 clarifies that services rendered to other merchants, DPS and taxable services performed by a person not resident in Puerto Rico for a person located in Puerto Rico will be subject to a tax of 10.5 percent or the special 4 percent SUT, regardless of where the services are performed, provided the services are directly or indirectly related to the activities or operations of the person located in Puerto Rico. AD 15-21 contains examples to illustrate this provision.

Services performed between related entities

Generally, services performed between controlled group members or related parties that are engaged in a trade or business in Puerto Rico and both entities are registered merchants, are exempt from the basic and special SUT. However, when an entity with a business in Puerto Rico receives services from a related entity without a business in Puerto Rico, AD 15-17 clarifies that those services will be subject to the special 4 percent SUT. The entity doing business in Puerto Rico will be responsible for self-assessing and remitting the SUT to the PRTD.

Services between related entities that are covered under certain tax incentives laws

Act 159-2015 introduced an exemption for DPS, services rendered to other merchants and taxable services when the affiliate that is dedicated to business outside Puerto Rico, renders the services to the affiliate that is covered under the special tax incentives regimes of Act 73-2008, Act 83-2008, Act 20-2012, or their predecessor or successor acts, Act 55-1933, and entities authorized under the National Bank Act.

Toll and Contract Manufacturing services

Toll and contract manufacturing services as defined under PRTD Tax Policy Circular Letter 15-14, are exempt from the special 4 percent SUT if certain requirements and conditions are present. These manufacturing services must be provided by an entity covered under a tax grant issued under Act 73-2008 or any predecessor or successor incentives laws. Also, in order to be able to claim the exemption, the manufacturing plant providing these services must obtain a waiver from the PRTD.

Subcontracted services

Pursuant to Act 159-2015, subcontracted services will be exempt from the SUT, as long as the subcontracted service is related to a construction project, or telecommunication services hired by a merchant dedicated to providing telecommunication services. As provided in AD 15-21, a construction project will include labor and services related to obtaining permits, but exclude DPS and services related with the administration and sale of properties. AD 15-21 contains examples to illustrate this provision.

Transportation services

Act 159-2015 incorporated into the list of exempt services air, maritime and land transportation services, including those charges directly related to the delivery thereon.

Monthly Special SUT Return

AD 15-17 introduced the Monthly Special SUT Return. This new filing applies to merchants that render services to other merchants or DPS that have to withhold the special 4 percent SUT. This filing can also apply to other merchants that have to make SUT filings and merchants that receive services from other merchants or DPS outside of Puerto Rico. The Monthly Special SUT Return

should be filed through the electronic system known as PICO ( https://comerciantes.hacienda.pr.gov/ ).
Merchants should file the return no later than the 20th of the month following the month in which the special 4 percent SUT is collected. The first Monthly Special SUT Return should be filed for Oct. 2015 no later than Nov. 20, 2015.
Value Added Tax

With the transitory amendments to the existing SUT provisions already in place, the clock is now ticking toward the introduction of a Puerto Rico VAT. As previously mentioned, Act 72-2015 calls for the implementation of a VAT starting on April 1, 2016; however, the Act grants the Secretary PRTD (secretary) authority to extend the effective date of the VAT by 60 days, until June 1, 2016, in the event the PRTD's operations are not ready by the initial implementation date.

Puerto Rico's adoption of a VAT represents a major shift in tax policy and renders the Commonwealth as the first U.S. jurisdiction to adopt this tax regime. The adoption of a VAT will have an impact on all of the segments of the Puerto Rican economy and will entail a fundamental change in the way consumption taxes are enforced by the PRTD.

Broader context of the VAT introduction

The central government indirect tax system reform in Puerto Rico is consistent with broader global taxation trends. In the last eight to 10 years, we have seen a general shift in the emphasis of taxation from income to consumption. This general trend has materialized in recent VAT system adoptions (e.g., Malaysia and Puerto Rico), proposals put forward in a number of jurisdictions to implement VAT in the short term (e.g., India, Egypt, Gulf Cooperation Council), as well as increases in VAT rates in many existing VAT jurisdictions, instead of a general standstill or reduction of income tax rates. Noteworthy reasons behind these trends include the following:

•  VAT usually covers a broader scope of goods, services and activities than other taxes which can result in higher overall tax revenues.
•  The burden of tax administration in a VAT system in great part falls on the taxpayers, which means tax control and administration on the state side is lighter on the government's budget.
•  The increase in tax competition has also spurred countries towards taking the tax load off of income and onto consumption instead. Businesses looking to make capital investments are usually more attracted to locations with lower personal and business income tax rates and/or better income tax incentives, which has led to countries reducing their rates.
•  Consumption taxes generate tax revenues in a more predictable and reliable manner, which is especially important for distressed economies.
•  The foreseeable nature of consumption taxes has also been a factor appreciated by large scale sovereign financers, like the World Bank and IMF. These institutions have also been encouraging indebted countries to transition towards a VAT system or increase VAT rates as quasi collateral for continued financing.


The preceding have all played a role in propelling Puerto Rico towards becoming the next to implement a VAT system. A reduction in corporate and individual tax rates and certain other tax changes that generally accompany this kind of indirect tax transformation, as noted before, have not been adopted in Puerto Rico yet. Moreover, this may be viewed as more than an isolated tax regime change due to its status with the U.S.

Universal Principles and Local Characteristics

What is a VAT?

VAT is a broad-based consumption tax applied at each stage of the supply chain. As a general rule, under a VAT, a registered business can offset the VAT incurred on its acquisitions against VAT due on supplies. This credit mechanism means that VAT is levied on the value added at each stage of sales/production and it is in theory designed to be neutral to a business with the burden falling on the final consumer who cannot recover the VAT paid.

VAT is charged on any taxable supply of goods and services, as well as importations of goods and services. The default position is for VAT to be applied at the standard rate, unless an exception applies, such as zero rating (exemption with input tax credit) or VAT exemption (exemption without credit). While standard and zero rated supplies allow input VAT recovery, VAT exemption results in input VAT being a cost.

VAT as a tax type has significant differences from SUT, some of which are highlighted in the following table:

• Imposed on the value of goods and services at every stage of production/distribution
• Burden of tax accounting distributed across the production cycle (multi-stage tax)• Tax is levied on imports at the same rate as locally produced goods/services
• Transparent and neutral• Significant contribution to tax revenue in countries employing a VAT
• Imposed primarily on goods and certain select services
• Final supply alone bears the burden of the tax (single-stage tax)
• Complex in nature due to special provisions, tax preferences and credits
• Use tax relies on the final consumer to self-account for sales tax on purchases made in other U.S. states

VAT in Puerto Rico

Once the VAT comes into effect in 2016, it will be imposed at a standard rate of 10.5 percent and will coexist with the 1 percent municipal SUT. Thus, Puerto Rico's indirect tax system will become a SUT/VAT hybrid. No reduced rates are currently envisaged in the legislation.

The new VAT will apply to qualifying supplies of goods and services, as well as importations of goods and services. Zero rating will be applicable to exported goods and services. VAT exemption has been adopted for a broad scope of supplies of goods and services (e.g., certain foodstuffs, medicines, cars, gasoline, financial and insurance services, etc.)—with certain exemptions related to various certifications held by the buyers (e.g., hospitals, farmers, tourism operations, manufacturing operations, etc.).

VAT will be payable by the person who introduces or imports goods into Puerto Rico, sells goods or services in Puerto Rico, or receives services in Puerto Rico from overseas suppliers. In the case of domestic B2B supplies, the suppliers' liability is technically derived from the obligation to act as withholding agents and, thus, collect and pay VAT on behalf of the taxable customer. This concept also may make taxable customers accountable for the VAT if their suppliers fail to collect and pay the tax.

Deferred import VAT payment under bond will be available for registered merchants subject to certain conditions.

Registered merchants will be allowed to reclaim excess net input VAT credit, subject to certain conditions. A merchant holding an Eligible Merchant Certificate should be eligible for accelerated VAT recovery, by-passing the three-month wait time generally applicable to refund claims. However, refund amounts will always be first applied to any outstanding debt the merchants may have in the PRTD's records, even if unrelated to SUT or VAT.

Given the broad scope of exemptions, it may be expected that the number of taxpayers affected with input VAT recovery restrictions and input VAT apportionment (i.e., partial recovery calculation) will be larger than usual—adding to the complexities of VAT accounting considerably.

VAT recovery will not be allowed if it is incurred on Puerto Rican purchases by non-established businesses, unless any such business makes taxable supplies and registers for VAT in Puerto Rico.

Taxpayers will have to register for VAT and acquire and exhibit a Merchant Registration Certificate. Act 72-2015, however, also provides for an optional Small Merchant Registration Certificate simplification regime, which essentially entails that businesses under a revenue threshold of $125,000 may “opt out” of VAT, gaining relief from VAT collection and most VAT compliance liabilities, but forfeiting input VAT recovery.

Taxable merchants will be required to file monthly VAT returns and pay VAT within 20 days after the end of each month. In addition, monthly returns on importations must be filed within 10 days after the end of each month.

Under the VAT regime, registered merchants may be required to issue VAT invoices, debit and credit notes under certain conditions and upon request of the customer in a B2B scenario. In addition, taxpayers are required to keep appropriate records of all VAT relevant transactions in Puerto Rico.

VAT Act 159-2015 amendments

Most of the VAT amendments introduced by Act 159-2015 are aimed at ensuring a degree of consistency after the conclusion of the transition period on March 31, 2016. As a result, some of the VAT amendments mentioned below are similar to those adopted under Act 159-2015 for SUT purposes. Following are some of the relevant transactions that will be exempt from VAT under Act 159-2015:

Description of Transactions Exempt From VAT Comments
Retail sale of electric solar equipment Retail sales refer to sales to merchants for use in their business.
Services rendered to an entity dedicated to maintenance and repair operations (MRO Services) of aircraft The entity receiving the services must be a grantee of a tax exemption decree under Act 73-2008 or a similar law.
MRO Services of aircraft The entity providing the MRO services must be a grantee of a tax exemption decree under Act 73-2008 or a similar law. The MRO Services must be covered as an eligible activity under the tax grant.
Toll manufacturing or contract manufacturing services This exemption applies to toll manufacturing or contract manufacturing services if the provider of such services obtains a Collection Waiver Certificate from the secretary.
Services provided to a person engaged exclusively in the storage (including the leasing of tanks) and processing of gasoline, jet fuel, aviation fuel, gas oil, diesel oil, crude oil, crude oil derivative products and any other hydrocarbon mixture The storage and processing service must be performed in a Foreign Trade Zone.
Services provided to a merchant engaged in the generation and sale of electricity on a commercial scale Guidance may be issued to address the scope of services covered under this exemption.
Land transportation services of goods Act 159-2015 added to the existing exemption of air and maritime transportation services, the reference to land transportation.

The Code defines a service for VAT purposes as any business conducted by a merchant that is not the sale of goods. The Code also excludes certain activities from this definition, which was expanded by Act 159-2015 to include:

•  Rights to the use of intangibles
•  Services performed between members of the same controlled group or related parties whereby one party that is not engaged in a trade or business in Puerto Rico provides services for an entity whose operations are covered by a tax exemption decree under Act 73-2008, Act 83, Act 20 or the National Bank Act, among other similar laws
•  Maritime, air and ground transportation services, including charges directly related to such services
•  Services performed for any public or private entity formed pursuant to a statute that provides they will be exempt from all taxes

Zero-rated services and articles

Act 159-2015 expanded the scope of zero rated export services, specifically mentioning the definition of services for export to include services covered by an Act 20-2012 export services tax grant or an Act 73-2008 industrial tax incentive tax grant or similar tax incentives law, as long as such services do not have nexus to Puerto Rico.

In addition, the definition of manufacturing articles now includes machinery and equipment, including parts, tools and components, used in MRO Services of aircraft by the grantee of a tax exemption grant under Act 73-2008 or a similar law.

VAT credits

Input VAT paid in relation to exempt items under the Federal Nutrition Assistance Program or the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) will be deemed as paid in relation to a taxable transaction, thus allowing recovery of the corresponding input VAT.

Merchants mainly engaged in the sale of certain fuel products or automobiles that are subject to excise taxes will also be allowed to take a credit for input VAT paid or accumulated during the corresponding month.


Act 159-2015 added a new subchapter under the Code dedicated to VAT penalties and fines. The approved provisions are similar to those that currently apply under the Code for SUT purposes.

Special characteristics

As reflected by the above summary, the main building blocks of the upcoming Puerto Rican VAT regime will be consistent with international VAT principles. However, the Puerto Rican VAT system will carry numerous similarities to the existing SUT system as well. In certain instances, aspects of the Puerto Rico VAT completely deviate from the typical VAT characteristics of other VAT jurisdictions. Some of the more notable “anomalies” are outlined below.

Atypical Puerto Rico VAT rules that parallel current SUT rules:

•  Very broad nexus rules
•  Generally, the person purchasing the good or rendering the service in Puerto Rico pays the VAT
•  Import VAT reporting separate from general VAT returns
•  Exemptions based on customer status, not transaction type
•  Very broad scope of exemptions, also including vehicles and fuel

Atypical Puerto Rico VAT rules that represent a departure from the SUT rules:

•  Business customers ask taxable suppliers to issue VAT invoices
•  Certain taxpayers may obtain a direct pay permit and pay VAT directly to the PR secretary
•  Certain irrecoverable consumption taxes incurred outside Puerto Rico may be claimed as a credit against VAT payable in Puerto Rico
•  Companies might need to calculate a deductible pro-rata even if this is not the case in other jurisdictions


Getting ready

In comparison to a SUT, a VAT is more deeply interwoven with a number of major business processes, touching areas such as tax accounting, IT infrastructure, contracts, costing/pricing, supply chain and compliance, just to name a few. Therefore, to accommodate VAT, companies engaged in business in Puerto Rico will need to prepare for a business transformation, not just a tax change.

Typical challenges in a VAT readiness process include:

•  Lack of detail or contradictions in law, regulations and guidelines
•  Relatively short time frame for implementation
•  “Operationalizing” the tax—a complete transformation of the indirect tax planning, organization and compliance structure of any business operating (not just established) in Puerto Rico
•  Major changes in the entire indirect tax accounting process, including Enterprise Resource Planning (ERP) systems, Accounts Payable (AP) function and new compliance and reporting processes
•  Internal resources to deliver the project—training needs for personnel
•  Project management

All these items suggest that timely action is required to become VAT ready by the 2016 implementation.

Income Tax

In this section, we will focus on the income tax changes from a corporate and individual income tax perspective.

Alternative Minimum Tax (AMT)

One of the areas affected by the amendments introduced by Act 72-2015 was the AMT computation. Generally, prior to the enactment of Act 72-2015, the AMT was computed as the higher of:

•  30 percent of the alternative minimum tax net income (AMTI), or
•  The sum of:

o 20 percent tax on expenses incurred or paid to a related person if such expenses are attributable to the conduct of a trade or business in Puerto Rico and are not subject to income tax or withholding at the source in the tax year in which the expenses are incurred or paid, including the costs or allocation of expenses from a home office to its branch.

o 2 percent tax on purchases of personal property from a related person.

While the 30 percent rate applicable to the AMTI and the 20 percent rate on expenses paid to a related person remained the same, Act 72-2015 introduced a graduated tax rate table applicable to tax years commencing after Dec. 31, 2014, effectively increasing the tax rate on purchases of personal property from related persons from 2 percent up to a 6.5 percent rate based on the purchaser's gross income from the conduct of a trade or business in Puerto Rico. (See rate table below)

Gross Revenues Tax Rate
Equal or higher than $10 million but less than $500 million 2.5 percent
Equal or higher than $500 million but less than $1.5 billion 3.0 percent
Equal or higher than $1.5 billion but less than $2.0 billion 3.5 percent
Equal or higher than $2.0 billion but less than $2.75 billion 4.5 percent
Equal or higher than $2.75 billion 6.5 percent

Also, prior to the enactment of Act 72-2015, taxpayers could request, and the secretary had the authority to grant, waivers from the 20 percent component of the AMT calculation, as well as for the 2 percent on related party purchases of personal property. Act 72-2015 limits the authority of the secretary with respect to the granting of these waivers and establishes that, in the case of the 20 percent AMT component, the secretary may waive up to a maximum of 60 percent of the total amount of payments made to related parties. An exception to this new rule was introduced by Act 159-2015, which provides that in the case of entities subject to the provisions of the Bank Act, or organized or authorized to do business under the National Banking Act, the secretary may waive up to 100 percent of the expenses subject to the 20 percent tax. Additionally, in the case of the 2 percent on purchases of personal property from related parties, the secretary's authority to grant reduced tax rates for tax years beginning after Dec. 31, 2014, is eliminated. However, any waiver already granted by the secretary will remain in effect for the years granted.

Net operating loss (NOL) deduction and capital losses

Continuing with the trend of limiting the benefits of tax attributes carried over from prior periods that we have seen in recent tax legislation enacted as part of the government's effort to deal with the fiscal crisis, particularly Act 40-2013 and Act 77-2014, Act 72-2015 limits the amount of income against which corporations may apply the NOLs carried over from prior periods effective for years commenced after Dec. 31, 2014, from 90 percent to 80 percent of net taxable income for regular tax and from 80 percent to 70 percent for AMT purposes. It is important to note that this limitation does not apply to entities with operations covered under tax exemption grants.

Additionally, companies will be required to reduce the amount of NOL carryovers by 49 percent of expenses paid or incurred to related persons allowed for regular tax purposes after the 51 percent adjustment required by Section 1033.17(a)(17) of the Code. In other words, no amount of related party expenses subject to the 51 percent disallowance will be allowed for creating or increasing a NOL.

With regard to capital losses, these will be limited, for tax years beginning after Dec. 31, 2014, to 80 percent of the gain realized on the sale of an asset, which represents a 10 percent decrease from the previous limitation of 90 percent.

Nondeductible expenses

Act 72-2015 provides that no deduction will be allowed for expenses incurred or paid for services rendered by a non-resident person if the taxpayer has not paid the applicable SUT or VAT. Also, the cost or depreciation expense of any good or taxable item will not be allowed if the taxpayer has not paid any applicable SUT or VAT. It should be noted that Act 159-2015 clarified that this disallowance will not apply if the service or item is excluded or exempt from the payment of SUT or VAT.

As relates to the 51 percent disallowance on related party payments, it is provided that the amount that the secretary may exclude from the limitation through the waiver mechanism shall not exceed 60 percent of the total payments subject to the limitation, except for entities operating under the Bank Act or the National Bank Act, in which case up to 100 percent of the expenses may be waived at the secretary's discretion.

‘Large taxpayer’ definition

Act 72-2015 added, under the definitions of the Code, the term “large taxpayers.” This term is defined as taxpayers engaged in a trade or business in Puerto Rico that are:

•  A commercial bank or trust
•  A private bank
•  A brokerage or securities house
•  An insurance company
•  Engaged in the telecommunications business
•  Entities with volume of business of $50,000,000 or more during the preceding tax year.


Once the entity qualifies under any of the above categories, it will be considered a large taxpayer for all other purposes under the Code. Act 72-2015 authorizes the secretary to establish an office or electronic portal to be used by large taxpayers to file their tax returns for tax years commencing after Dec. 31, 2014, and late filing penalties may be imposed on large taxpayers that fail to file their tax returns as required by the secretary.

Nonprofit organizations

Both Act 72-2015 and Act 159-2015 set forth provisions related to nonprofit organizations, specifically as to the secretary's authority to request information and evidence related to the nonprofit activity. Also, these amendments permit the revocation of the entity's tax-exempt status if it is determined that the organization has not complied with any of the requirements of the exemption, is in violation of any provisions of the Code or has incurred expenses that are extravagant in nature, are not clearly related to the exempt purpose of the organization or constitute personal expenses of the directors, officers or employees of the organization or their family members.

Credit for the purchase or transmission of television programming made in Puerto Rico

Act 159-2015 introduced a credit for the purchase of television programming produced in Puerto Rico. In general, any television channel that purchases or broadcasts programming made in Puerto Rico by independent producers, and where at least 90 percent of the artists are Puerto Rico residents, will be able to claim a tax credit of 15 percent of expenses paid by the TV channel for the purchase and broadcasting of such TV programming.

Special tax on dividend distributions and prepayment on deemed distributions

Act 159-2015 establishes an 8 percent special tax on dividend distributions made during the period between Oct. 1, 2015, and Dec. 31, 2015, in lieu of any other tax imposed by the Code.

In the case of deemed distributions, the corporation will be able to designate any amount up to the amount of accumulated earnings and profits as a distribution subject to the 8 percent special tax without having to actually make the distribution as long as this is done within the period described above.


The tax rates previously in effect for tax years commencing after Dec. 31, 2012, but before Jan. 1, 2014, are made effective for all tax years after Dec. 31, 2012. Refer to the graduated rates table below. These rates also apply to tax year 2014 because the government's budgetary, financial and economic metrics required for the scheduled reduction in rates to take place as originally approved under the Code were not achieved.

If the net taxable income is: The tax shall be:
Not over $9,000 0 percent
Over $9,000 but not over $25,000 7 percent of the excess over $9,000
Over $25,000 but not over $41,500 $1,120 plus 14 percent of the excess over $25,000
Over $41,500 but not over $61,500 $3,430 plus 25 percent of the excess over $41,500
Over $61,500 $8,430 plus 33 percent of the excess over $61,500

The gradual adjustment, which was not in effect for tax years after Dec. 31, 2014, applies again for tax years after Dec. 31, 2014, at a rate of 5 percent of the excess of net income subject to tax over $500,000. The gradual adjustment continues to be limited to a certain cap amount.

The 2 percent special tax on self-employed individuals is eliminated for tax years commencing after Dec. 31, 2014.

For tax years commencing after Dec. 31, 2014, only those contributions made to nonprofit entities acknowledged as such, and tax-qualified by, the secretary of PRTD will be deductible. Prior to this amendment, donations made to entities qualified by the U.S. IRS were also deductible.

Limitation of capital losses for individuals was relaxed as follows:

Current status
Tax years ended before Jan. 1, 2015
Act 72-2015
Tax years ended after Dec. 31, 2014
Limited to 90 percent of the gains from the sale or exchange of capital assets, plus the net income of the taxpayer or $1,000, whichever is smaller. Available to offset capital gains generated during the year. Any excess can be used against the taxpayer's net income or a $1,000 deduction, whichever is lower.

Individuals with NOLs from their trade or business for three consecutive years may carry over only 50 percent of the NOL amount.

Moratorium on tax credits

Act 72-2015 modifies the existing tax credit moratorium period for the use of credits granted or purchased, as well as the issuance of tax credits, by extending the moratorium from tax years commencing before Jan. 1, 2016, to tax years commencing before Jan. 1, 2018. Act 72-2015 also includes certain annual limitations on the issuance of tax credits under certain special laws. The right to use certain tax credits subject to the moratorium, issued during fiscal years 2014-15 through 2017-18, will continue to be subject to a 50 percent limitation rule as extended by Act 72-2015.


As can be seen above, the tax landscape in Puerto Rico is undergoing a tremendous amount of transition in a very short period of time. The SUT changes that have recently become effective and the trend towards a comprehensive VAT will directly impact how businesses operate in Puerto Rico.

It is important to understand these changes and to begin preparing now for the larger operational and accounting changes which VAT will demand. Failure to follow and address these numerous tax changes could result in unforeseen tax costs and penalties.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

The views expressed are those of the authors and are not necessarily those of Ernst & Young LLP, Ernst & Young Puerto Rico LLC, the global EY organization and/or its member firms.

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