The tax reform package, announced in February, would have introduced a VAT while cutting corporate and personal income taxes. The package was key to the Puerto Rico’s Budget, which is due to be announced on June 13.
“When the governor made the proposal, which included also some tax reductions in the income tax area, they did it with a budget in mind, and obviously an estimate of collections in mind,” said Felipe Mariani Franco, a partner at Zaragoza & Alvarado, Taxand Puerto Rico.“They need other ways of trying to get that money from other sources in order to have similar collections,” he added.
After the initial Bill was hotly contested by various commerce associations, labour unions and economists, the government came up with two compromised versions.
The first set VAT at 10%, with few exemptions and not many zero rated products or services. If the alternative proposal had gone through, VAT would have stood at 14% (though this was later amended down to 13%), with a 10% rate for certain other items and many exemptions.
“The Bill that was presented was way more complicated than the original one,” said Mariani Franco. “But also, in order to grant those reductions, they reduced the benefits that were granted in the income tax area. They eliminated the benefits that were granted to corporations in the income tax area – plus they added some additional taxes for a certain group of corporations.”
“Mainly they were targeting what they call the ‘big extortionists’ – Walmart and that kind of store,” said Mariani Franco. “But they cannot target it directly, so they just use anyone that generates $600 million or more in sales.”
This plan went to a vote, and was narrowly defeated by 228 votes to 222, with six of the governor’s own party opposing it.
However, some of its ideas – targeting multinational corporations, for instance – are likely to endure.
“What may happen, and this is what I think should be the concern for businesses in general, is that when you look at the purpose of the tax reform, it was mainly to increase collections, because the recurring collections of the government are lower than their current costs,” said Mariani Franco. “They are in a deficit position.”
“So they have two options: cut government spending, or somehow come up with a different tax Bill.
“At this moment, they have only been talking about government spending cuts. The alternative is to get together the money from someone else, and the legislature starts to look again at a tax Bill. Who usually foots the tax bills? Usually it’s going to be corporates, it’s going to businesses.”
Though taxes may increase on corporates, taxpayers should be pleased that the modified version of the Bill, with 13% VAT, was not passed.
Aside from it not being as good a deal for companies as the Bill which was originally proposed, most US multinationals run their operations in Puerto Rico from the US, rather than outside America, meaning that there is a relative lack of experience in dealing with VAT.
Frank Worley-Lopez, co-founder of the Libertarian Party of Puerto Rico, had said that a 16% VAT would be “the final nail in the coffin for Puerto Rico’s economy”.
“I think most of the business community was happy that the bill was defeated,” said Mariani Franco. “We’ve got a big amount of US-based companies in Puerto Rico.”
“Usually, most of the companies are not Puerto Rican, and I think those companies, even though they may be multinational and have VATs in other jurisdictions, they don’t feel comfortable with a VAT and it wasn’t their first choice. They’d rather be in a sales and use tax kind of regime, which they are used to.”
“Most of the times, these people have somehow avoided dealing with VAT, and have left it to other areas of the company, so I think they felt relieved not to have to go through a VAT process.”
It is unlikely that the governor will seek to revive the VAT Bill in any form, with little time to implement it before elections in 2016.
An increase in corporate tax rates, the introduction of business-specific taxes and a hike in the sales and use tax are the most likely measures which the government will take in June’s budget.
