The Administration has filed House Bill 1073 to enact the “Tax Burden Adjustment and Redistribution Act” to generate revenues to cover the Budget deficit for fiscal year 2013-2014 and provide revenues for fiscal years thereafter. An equivalent bill was filed in the Senate (SB 544). The following summarizes the major provisions of HB 1073. It is anticipated there will be public hearings to discuss the provisions of this bill.

Income Tax Provisions

• A new 2% surtax for 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.
• Surtax exemption is reduced from $750,000 to an amount ranging from $25,000 to $250,000 depending on level of taxable net income. The higher the taxable income the lower the surtax exemption. The exemption is allocated among member of controlled group of corporations.
• 2% alternative minimum tax on value of purchases from related parties, including purchases from home office by branches of foreign corporations doing business in Puerto Rico.
  • 0.5% in the case of alcoholic beverages.
  • 1% in the case of gasoline and crude oil products.
  • 1.5% in the case of motor vehicles.
  • Does not apply to purchasers that derive less than $10,000,000 gross income from Puerto Rico trade or business. This threshold is reduced from $50,000,000 to $10,000,000.
  • Excludes purchases of property used in exempt operations under Act 73 or similar tax incentives laws.
  • Secretary of Treasury may reduce applicable percentage in the case property purchased from a related party is sold by the related party for a substantially similar price to a third party.
  • Excludes purchases from an affiliate engaged in trade or business in Puerto Rico.
• Disallowance of deduction of payments to nonresident related parties for services rendered outside Puerto Rico for alternative minimum tax (AMT) purposes is eliminated for taxable years commenced after December 31, 2012. In its place, a new 20% surtax is imposed on deduction for services rendered by related parties outside Puerto Rico, including home office in the case of foreign corporations doing business in Puerto Rico through a branch.
  • Not applicable to exempt corporations, including tourism exemption and other laws granting income tax exemption, but only with respect to operations covered by exemption.
  • Not applicable to bona fide agricultural businesses.
• AMT book income adjustment is increased from 50% to 60%.
• NOL deduction for AMT purposes is decreased from 90% to 80% of AMTI.
• 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 owing 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.

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.
• 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

• Leasing of motor vehicles is included as taxable services.
• Business to Business exemption is repealed.
• Professional Business to Business services not excluded from taxable services.
• Bank services charges to businesses not excluded from taxable services.
• Tax return preparer services not excluded from taxable services.
• Reseller’s exemption certificate is eliminated for sales after June 30, 2013 but reseller credit mechanism is established. The credit is limited to 50% of the sales tax but can be carried over indefinitely.
• The exemption for leasing of commercial real property is repealed.
• Exemption for universities and higher education institutions is repealed.
• Exemption for medical equipment used by hospitals is repealed.
• Back to school exemption is limited to uniforms and school supply.
• 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%.
• Credit Unions and other cooperatives are subject to sales tax.

Premiums Tax

• Special 1% premiums tax is imposed on premiums subscribed after June 30, 2013 by insurance companies, authorized to do business in Puerto Rico, including domestic insurance companies.

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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.