On October 14, Puerto Rico enacted legislation, Act 117, which provides technical amendments to the major tax legislation, Act 40, enacted earlier this year.1 Act 40, also known as the Law for the Redistribution and Adjustment of the Tax Responsibility, made numerous changes including the imposition of an additional tax on gross income (“Patente Nacional”), a moratorium on certain tax credits, imposition of sales tax on services and the elimination of the reseller exemption certificate.2
Act 40 made major changes to income tax laws, including: (i) the imposition of an additional tax on the gross income (“Patente Nacional”) of corporations and pass-through entities on income of at least $1 million at graduated rates ranging from 0.2 percent to 0.85 percent for taxable years beginning after December 31, 2012 (which is part of the computation of the alternative minimum tax of corporations and individuals); (ii) a moratorium on certain tax credits; (iii) changes to the computation of the alternative minimum tax; (iv) limitations on the deduction for net operating losses (NOLs); and (v) changes to the computation of estimated tax payments. Act 40 also imposes sales tax on certain services. In addition, Act 40 eliminated the exemption certificate for resellers for purchases of tangible personal property for resale. Purchases by resellers are subject to sales tax that must be collected by the merchant selling to the reseller. The resellers may claim a credit against the sales and use tax owed on taxable sales.
Act 117 Technical Amendments
As discussed below, Act 117 makes numerous technical amendments to provisions concerning the new gross receipts tax (“Patente Nacional”), nondeductible expenses, estimated tax rules and requirements, individual income tax, sales and use tax, and special contribution on government contracts.
Gross Receipts Tax (“Patente Nacional”)
Act 117 reduces the minimum Patente Nacional tax rate that the Secretary may grant by waiver from 0.2 percent to 0.05 percent. In order to grant a waiver, the Secretary will be allowed to analyze the circumstances of the entire industry. Also, there will be no filing fee for merchants requesting a Patente Nacional waiver if their gross volume is less than $3 million. For those submitting a waiver request for the 2013 tax year, the request must be submitted on or before November 30, 2013. The Secretary has until February 28, 2014 to evaluate the application. For any future period, the Secretary will have 90 days to evaluate the application. If a response is not provided by the deadline, the request will be considered accepted and the applicable reduced rate will be 0.1 percent. Also, the legislation incorporates a 50 percent credit against the Patente Nacional for financial businesses that are taxed as pass-through entities.
For controlled groups of corporations or related entities, the gross income of all members of the group will be used to determine the tax rate applicable for Patente Nacional purposes. All members of the group will be subject to the tax even though they would not be liable for the tax individually.
The legislation reduces the disallowance of payments to partners, members or shareholders who hold at least a 50 percent interest in a partnership, special partnership and/or corporation of individuals from 100 percent to 51 percent. Also, the legislation clarifies that the expenses due to related parties subject to the 51 percent disallowance will be those expenses attributable to a trade or business in Puerto Rico.
Estimated Tax Rules and Requirements
Act 117 clarifies the estimated tax rules and requirements for individuals and corporations. Calendar year taxpayers have until October 25, 2013 to make a “catch up” payment.
Individual Income Tax
The special 2 percent tax imposed on gross income in excess of $200,000 from services or trade or business is not applicable to rental activity income or the distributive share of the income of a pass-through entity. Also, the legislation clarifies the changes to the alternate basic tax rates as they apply to individuals for 2013. Individuals who are members, partners or shareholders in pass-through entities must compute the Patente Nacional on the aggregate of their distributive share of the gross income of all pass-through entities in which they are members, partners or shareholders.
For married taxpayers filing under Schedule CO, Optional Computation of Tax, who are members, partners or shareholders in pass-through entities, the aggregate of the distributive share of the gross income of all pass-through entities in which they are members, partners or shareholders will be assigned to the spouse holding the investment. Previously, the income was assigned on a 50/50 basis.
Sales and Use Tax
Under Act 117, the cleaning, repairing, maintenance and waste management services exclusion from the sales and use tax business-to-business exemption will not apply to services rendered to homeowners’ associations. Therefore, these services will be exempt from sales and use tax. Also, the legislation eliminates the business-to-business exemption for motor vehicle operating leases which are not substantially considered a sale. Furthermore, the sales and use tax payment provision from Act 40 for repair services is eliminated. Thus, beginning November 1, 2013, the merchant providing the repair services will be responsible for collecting and remitting the sales and use tax payments.
Beginning July 1, 2014, all taxable items imported by merchants will be subject to use tax when the items are imported. The merchant will be allowed the credit method to claim any amounts of use tax paid on its monthly returns. Also, the Eligible Wholesaler and/or Voluntary Chain Waiver Certificate will only be effective for transactions made on or before June 30, 2014. The legislation provides a sales and use tax exemption for services rendered by care centers for the elderly. Also, every merchant with a volume of more than $50,000 will be required to file its monthly sales and use tax return electronically. Finally, the legislation provides a new penalty for taxpayers that deliberately provide incorrect information to obtain a sales and use tax waiver.
For a partnership that would have been considered a member of a controlled group or group of related entities if not excluded by a regulation, the legislation provides that taxable services provided among members of the group will be exempt under the business-to-business exemption. Also, the legislation clarifies the mechanism to request a credit for the tax paid on returned taxable items for sales and use tax purposes.
Special Contribution on Government Contracts
The legislation provides an exemption from the special contribution on government contracts to individuals whose annual contracts do not exceed $50,000. Also, the legislation establishes the deductibility of the special contribution on government contracts as a business expense.
1 Act 40 was enacted on June 30, 2013.
2 For a discussion of Act 40 and other recent Puerto Rico legislation, see GT SALT Alert: Puerto Rico Enacts Major Tax Laws, Releases Administrative Guidance Clarifying Legislation.