TAX ALERT: TAX BURDEN ADJUSTMENT AND REDISTRIBUTION ACT APPROVED
The following summarizes the major provisions of the “Tax Burden Adjustment and Redistribution Act” signed by the Governor of Puerto Rico as Act 40 of June 30, 2013 to generate revenues to cover the Budget deficit for fiscal year 2013-2014 and provide revenues for fiscal years thereafter.
Income Tax Provisions
- A new 2% surtax is imposed on self- employed individuals with gross income in excess of $200,000. This surtax is based on gross income and is not subject to payment of estimated tax. This surtax is not deductible for income tax purposes.
- The alternate basic tax for individuals at the maximum bracket of income subject to alternate basic tax in excess of $500,000 is increased from 20% to 24%.
- Surtax exemption is reduced from $750,000 to $25,000. The surtax exemption must be allocated among members of controlled group of corporations.
- The corporate surtax rates are reinstated to pre 2011 levels ranging from 5% to 19% for a maximum combined corporate income tax rate of 39% on net income in excess of $300,000.
- The option to remain under the provisions of the 1994 (“Opción 94”) IRC is amended to provide for voluntary revocation. Once revoked, the election may not be changed again.
Special Additional Tax on Gross Income
A new special additional tax on gross income is imposed at the following rates:
Gross Income Rate
Less than $1,000,000 – 0%
$1,000,000 to $3,000,000 – .2%
$3,000,000 to $300,000,000 – .5%
$300,000,000 to $600,000,000 – .7%
$600,000,000 to $1,500,000,000 – .8%
In excess of $1,500,000,000 – .85%
Financial Businesses – 1%
Financial institutions may credit .5% of their gross income against their regular tax or AMT. The credit may be carried over indefinitely but may not be refunded.
The special additional tax will only form part of the alternative minimum tax of corporations. It is also applicable to pass-through entities, but only as part of the alternative basic tax or alternative minimum tax of its members or partners.
The special additional tax on gross income will not be applicable to (i) companies with tax exemption grants under Act 73, Tourism Development Act and other tax incentives laws that provide income tax exemptions with respect to income from operations covered by their grants; (ii) bona fide agricultural businesses; and (iii) non-profit entities; (iv) affiliates of tax exempt companies subject to tax under the modified source of income rule; and (v) Medicare Advantage, Medicaid, Mi Salud premiums and annuities.
The special additional tax may be reduced by the Secretary to a minimum of 0.2% if the taxpayer can show undue burden by submitting documentation for an Agreed Upon Procedures from a Puerto Rico licensed CPA that participates in Peer Review Program.
The special additional tax is considered part of the income tax for the year and is subject to estimated tax. It will not be deductible for income tax purposes.
Alternative Minimum Tax of Corporations
- The alternative minimum tax of corporations is substantially amended. The highest of the regular tax or the following alternative taxes will apply.
(i) The sum of:
(a) 30% (increased from 20%) of the alternative minimum taxable income plus
(b) the new special additional tax on gross income; or
(ii) The sum of:
(a) 2% of the value of purchases from related parties, including transfers from home office to branches of foreign corporations doing business in Puerto Rico with the following exceptions:
- 0.5% in the case of alcoholic beverages.
- .25% in the case of gasoline and crude oil products.
- 1.5% in the case of motor vehicles;
(b) 20% of deduction for expenses incurred or paid to related parties outside Puerto Rico, including the home office in the case of foreign corporations doing business in Puerto Rico through a branch, which are not subject to Puerto Rico income tax; and
(c) the new special additional tax on gross income (except in the case of financial businesses).
- The 2% on purchases from related parties does not apply to:
(a) Purchases that derive less than
$10,000,000 gross income from Puerto Rico trade or business for any of the three preceding taxable years. This threshold is reduced from $50,000,000 to
(b) Purchases of property used in exempt operations under Act 73 or prior or subsequent similar tax incentives laws.
(c) The Secretary of Treasury may reduce applicable percentage (but not below 0.2%) in the case property purchased from a related party is sold by the related party for a substantially similar price to a third party. The rate may be reduced to less than 0.2% in the case of gasoline and crude oil products. A transfer pricing study would be required.
(d) Purchases or transfers from an affiliate that is subject to Puerto Rico income tax on the sale or transfer.
- AMT book income adjustment is increased from 50% to 60%.
- NOL deduction for AMT purposes is decreased from 90% to 80% of AMTI.
Net Operating Losses
- NOL carryover is extended from 10 to 12 years for losses incurred in taxable years commencing after December 31, 2004 and before January 1, 2013. NOL carryover for 10 years for losses incurred in taxable years commenced after December 31, 2012. For taxable years commenced after December 31, 2012, NOL deduction is limited to 90% of net income of the year in which deduction is claimed regardless of year in which loss is incurred.
- The total deduction for mortgage interest on residential property is limited to $35,000.
- Payments to nonresident partners, shareholders or members owning 50% or more of interest in pass-through entities are disallowed as deductions if payments are not subject to tax in Puerto Rico, such as payments for services rendered outside Puerto Rico. This disallowance is not applicable to entities with tax exemption grants under Act 73 and similar tax incentives laws that provide income tax exemption. The Secretary of Treasury is given discretion to waive this disallowance.
- 51% of payments or transfers to related parties not engaged in trade or business in Puerto Rico or to home office are disallowed as deductions if payments are not subject to tax in Puerto Rico, such as payments for services rendered outside Puerto Rico. This disallowance is not applicable to persons with tax exemption grants under Act 73 and similar tax incentives laws that provide income tax exemption. The Secretary of Treasury is given authority to waive this disallowance.
Tax Credit Provisions
- Establishes moratorium of various tax credits for taxable years commencing after December 31, 2012 to taxable years commencing before January 1, 2016.
- Tax credits subject to the moratorium which have been purchased or granted prior to June 30, 2013 may be used during the moratorium period but may not reduce the income tax liability in more than 50%.
- An informative return summarizing tax credits generated or owned on the taxpayer, including those generated under the various tax incentives laws, must be filed on or before July 31, 2013 to preserve the credits.
Sales Tax Provisions
- Daily rental of motor vehicles is included as taxable services. Financing leases are excluded.
- Business to Business exemption remains in effect but the following services are not eligible for Business to Business exemption:
– bank service charges;
– collection services;
– security and armored services;
– cleaning services;
– laundry services;
– repair services;
– telecommunication services; and
– waste disposal services.
If services are between related parties the Business to Business exemption will apply.
- Professional Business to Business services remain excluded from taxable services.
- Bank services charges to businesses are not excluded from taxable services.
- Tax return preparer services remain excluded from taxable services.
- Reseller’s exemption certificate is limited for sales after July 31, 2013 to eligible resellers that mainly sell to businesses that purchase articles exempt from sales and use tax or for export. Commencing August 1, 2013, the sales and use tax must be collected on sales to resellers that do not qualify as Eligible Resellers. A reseller credit mechanism is established for resellers other than Eligible Resellers. The credit is limited to 70% of the sales tax for the month but can be carried over indefinitely. The credit may increase to 100% once a deposit account is established by the taxpayer in Puerto Rico. The Secretary of Treasury is given discretion to authorize credits of more or less than 70%.
- A bank account in Puerto Rico may be required to merchants even if they are not collectors of sales tax. The Secretary will provide by regulations the procedures for establishing the accounts.
- Prescription medicines for human use are exempted from sales and use tax.
- Exemption for purchases made by universities and higher education institutions is repealed.
- Exemption for medical equipment used by hospitals is partially repealed. The exemption will not apply to equipment used for administrative, maintenance or commercial functions.
- Back to school exemption is limited to uniforms and school supplies. Sales of textbooks are exempted from sales and use tax any time of the year.
- The municipal sales tax is reduced from 1.5% to 1% effective December 1, 2013 for a total sales tax of 6.5% instead of 7%. The decrease in sales tax may be postponed or reversed upon further study.
- Credit Unions and other cooperatives are subject to sales tax.
- Special 1% premiums tax is imposed for taxable years commenced after December 31, 2012 on premiums earned after June 30, 2013 by insurance companies, authorized to do business in Puerto Rico, including domestic insurance companies. This excludes annuities and premiums for Medicare Advantage, Medicaid and Mi Salud programs.
- The Municipal Property Tax Act is amended to exclude the sales and use tax from the valuation of inventory for personal property tax purposes.
Tax on Imports
- Act 46-2013 requires declaration and payment of the use tax on imported goods at the time of entry into Puerto Rico. This does not apply to goods imported for resale.
Tax on Crude Oil Products
- Act 31-2013 reduces the tax on diesel from 8¢ to 4¢ per gallon and increases the tax on crude oil products and hydrocarbons from $3.00 per barrel under the current tax structure dependent on the price of crude oil to a fixed $9.25 per barrel. The bill provides for an adjustment for inflation every four years.
Tax on Government Contracts
- Act 48-2013 imposes a special contribution of 1.5% of the value of contracts for professional and consulting services, including advertising, legal, public relations, communications and lobbying services executed by the Government of Puerto Rico or any of its agencies, instrumentalities, public corporations, including the legislative and the judicial branches. This contribution is not creditable or deductible for income tax purposes.
Because of the general nature of this newsletter, nothing herein should be considered as legal advice or a legal opinion. For further information about the contents of this newsletter, or should you need further assistance in connection with these matters, please contact the firm’s Tax Practice Group.