At a meeting of the Puerto Rico chapter of the CPA Society, officials from the Puerto Rico Treasury Department (PRTD) shared certain preliminary facts about the upcoming transition to the new Value Added Tax (VAT). Although not binding on the PRTD, these comments offer insight into the PRTD's plans for implementing the VAT.

Background

Puerto Rico enacted a VAT¹ on May 29, 2015, that was scheduled to become effective April 1, 2016. On December 29, 2015, the PRTD announced that it will implement the new VAT in two phases, beginning April 1, 2016, and June 1, 2016. (See Tax Alert 2015-2461 for details.)

To increase awareness of the VAT's upcoming effective date, the PRTD has been actively pursuing a media campaign about the need for consumers and businesses alike to be ready for the tax regime change. As part of this effort, PRTD officials appeared before a forum sponsored by the Puerto Rico chapter of the CPA Society on January 22, 2016, to discuss the new VAT's implementation.

Upcoming VAT developments

At the forum, PRTD officials outlined developments that are likely to occur around the VAT in the coming weeks. Those developments include the following:

— PR VAT draft regulations addressing the tax technical aspects of the VAT statute are expected the first week of February 2016.

— Guidance on the administrative aspects of VAT implementation is likely to be issued the second or third week of February 2016.

— Businesses currently registered in the Sales and Use Tax (SUT) Merchant Registry will receive instructions from the government on how to register for VAT purposes by validating certain information in a government website.

— SUT-registered merchants with any outstanding tax debts may face problems registering in the new VAT merchant registry.

— The PRTD is evaluating three options for the manual version of the VAT fiscal invoice (VATFI) that will be in effect on April 1, 2016, including: (i) a PRTD-provided VATFI form; (ii) altering the merchant's existing invoice to include the required VATFI information; or (iii) stamping the required VATFI information to the back of the merchant's existing invoice and entering specific merchant information manually.

— As of April 1, 2016, merchants can satisfy the sequential numbering requirement for the VATFI if they: (1) continue using their existing methods for tracking or numbering invoices; or (2) adopt a system for tracking or numbering invoices if they do not currently have one. As long as merchants have a system by April 1, the PRTD will not intervene at this stage.

— A new electronic filing system for certain VAT returns will be announced in the coming weeks.

Implications

The adoption of any of these items will only be certain when the PRTD issues guidance on them and other VAT areas in need of clarification. Nonetheless, what appears to be highly certain is that Puerto Rico intends to proceed with the adoption of a VAT on April 1, 2016, whether or not businesses are prepared. To ensure VAT readiness, organizations must understand the effects that the VAT will have on their business transactions and operations. Non-compliance with the VAT requirements, including the VATFI rules, can result in stiff penalties. In certain cases, the penalty applies to each VAT-related rule violated, which can increase the amount of the total penalty significantly.

For those businesses that still have not started their VAT-readiness preparations, the window of time is becoming increasingly smaller to identify those critical components that must be addressed to ensure compliance with the statutory mandate, safeguard stakeholder interests, and mitigate or plan for the proper management of any adverse consequences that could arise upon implementing this new tax. Some areas that merit immediate attention as the April 1st implementation date approaches include:

— Preparing leadership for the upcoming VAT changes and agreeing on tasks to be done by responsible parties

— Conducting workshops to review transaction flows and business impacts stemming from the transition from a SUT to a VAT

— Working towards satisfying invoicing requirements that will be required from Day One and potential changes once the process evolves from manual to automated

— Understanding how financial data will flow to VAT returns — which will very likely differ from the current SUT

— Preparing procedures to ensure ways to file timely and complete VAT returns

— Seeking the advice needed to assist in the journey to VAT

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ENDNOTES

¹ Act 72 of May 29, 2015, as amended (Act 72), introduced Subtitle DD — Value Added Tax, into the Puerto Rico Internal Revenue Code of 2011, as amended.