Puerto Rico Value Added Tax Takes Effect April 1, 2016

Puerto Rico will soon be replacing its existing state-level sales and use tax with a value added tax (VAT) system. Despite early indications that the transition would be delayed, the government has indicated that the implementation will take place in two major phases on April 1 and June 1, 2016. The VAT will be assessed at a rate of 10.5 percent, with an effective total tax rate of 11.5 percent on many transactions when combined with the municipal sales and use tax of 1 percent.

Background

In early 2015, the Puerto Rican government drafted H.B. 2329, a bill for comprehensive tax reform in Puerto Rico, to address the territory's budget deficit. This legislation sought to reduce certain income tax rates and phase in a VAT, the Impuesto de Valor Añadido (IVA). Although the initial bill was voted down, a subsequent bill imposing the IVA, H.B. 2482, was signed into law as Act 72-2015 on May 29, 2015.

Act 72-2015 provided for the phased implementation of several tax reforms, including raising Puerto Rico's state-level sales and use tax, the Impuesto sobre Ventas y Uso (IVU), from 6 percent to 10.5 percent, effective July 1, 2015. The 10.5 percent state IVU is levied alongside the existing 1 percent municipal IVU, making the effective tax rate 11.5 percent under many circumstances. In addition to raising the state IVU rates, Act 72-2015 created a new statutory IVU, applicable to business-to-business (B2B) services, and transactions involving certain designated professional services. This statutory IVU is imposed at a rate of 4 percent from October 1, 2015 until March 31, 2016, or the last day before implementation of the IVA. Transactions subject to the 4 percent statutory IVU are not subject to the 1 percent municipal IVU.

The IVA proposal in Act 72-2015 was initially met with some skepticism. However, the Comisión de Alternativas para Transformar el Impuesto al Consumo (CATIC), a committee designed to review the proposal, concluded that the IVA is a favorable alternative to Puerto Rico's previously imposed excise tax. CATIC noted that the required excise tax rate to achieve comparable revenue projections to current regulations would be between 19 percent and 38 percent, compared to the VAT/IVA rate of 11.5 percent. Skepticism was further reduced in December 2015 when the Puerto Rico Treasury Department issued Administrative Determination AD-26, affirming the implementation of Puerto Rico's IVA.

Implementation of VAT in Puerto Rico

VAT - General...