29 February 2016 Puerto Rico issues transition rules and proposed regulations on the value added tax On February 26, 2016, the Puerto Rico Treasury Department (PRTD) issued transition rules (Administrative Determination (AD) 16-01) in preparation for the value added tax (VAT) scheduled to come into effect on April 1, 2016. The AD focuses on procedural matters, such as the use of the Unified Internal Revenue System (SURI for its Spanish acronym) to report VAT transactions and file returns, merchant registration procedures and the issuance of VAT fiscal invoices. The PRTD has also circulated proposed regulations, providing guidance on Subtitle DD of the Puerto Rico Internal Revenue Code of 2011, as amended (VAT Act). The proposed regulations provide much needed explanations surrounding the collection, remittance and administration of the VAT, along with guidance and examples clarifying the process for claiming credits, overpayments and refunds. Although the PRTD has announced that it is accepting comments on the proposed regulations, it is unclear if the regulations will be finalized following the statutorily mandated mechanism that affords the public the opportunity to provide comments within a given time period or the emergency procedure in place for special circumstances that allows the Governor to certify their effectiveness immediately. As part of the transition to VAT, the PRTD will introduce a new electronic filing system known as SURI. Beginning April 1, 2016, taxpayers must use SURI, to: — Access the link where new merchants can complete and electronically file the Merchant Registry Application, and obtain a registration number and access code for completing the application — Access the link where new merchants can complete and electronically file the application for the Small Merchant Registry — Access the link where current merchants registered under the sales and use tax (SUT) provisions can validate and update their profiles and receive a new Merchant Registry Certificate The current electronic filing system known as PICO must be used to file import declarations and to obtain the release of imports. Taxpayers also must use PICO for all other SUT transition filings that may be required after April 1, 2016. All Merchant Registry Certificates will expire on March 31, 2016. Taxpayers that currently have a Merchant Registry Certificate for SUT should request a new certificate for VAT through SURI. The PRTD will notify taxpayers with a certificate and a PICO account that they need to access SURI and validate the information in the system in order to complete the Merchant Registry for VAT. Taxpayers that have a SUT certificate, but do not have a PICO account, will be able to access SURI beginning April 1, 2016. All information must be verified no later than May 20, 2016. Once registration is complete, SURI will issue a Merchant Registry Certification with a control number. Beginning April 1, 2016, all merchants that are eligible to request a Small Merchant Registry should file an application through SURI. The reseller and municipal SUT exemption certificate will apply solely to the 1% municipal SUT on sales of tangible personal property. All reseller and municipal SUT exemption certificates in effect on December 31, 2015, will remain in effect for the VAT until the Secretary determines that a certificate should be cancelled and a new one issued through SURI. Manufacturing exemption certificates and contract manufacturing certificates will remain in effect until the Secretary determines that the certificates should be cancelled. Beginning April 1, 2016, receipts and bills produced by systems or cash registers will be temporarily treated as fiscal invoices. In general, merchants will not have to include a copy of the receipts and bills with the Monthly VAT Return to obtain the credit for the VAT paid. Merchants with a volume of business of $40 million or more, however, must submit a document that breaks down the VAT paid on goods and services acquired by the merchant to operate the business and which amounts are being claimed as a credit. The first Monthly VAT Return will be available after May 1, 2016, and must be filed electronically through SURI. The Monthly VAT Return for April 2016 must be filed by May 20, 2016. Merchants that do not qualify as eligible merchants may qualify for a VAT refund if they pay more than $10,000 per month in VAT for three consecutive months beginning June 1, 2016. Thus, the August 2016 Monthly VAT Return, which will be filed September 20, 2016, will be the first return on which a VAT refund may be claimed. All designated professional services (DPS) performed after September 30, 2015 and before April 1, 2016, will be subject to the special 4% SUT. Merchants providing DPS that elected to use the cash basis of accounting method under the special 4% SUT must issue an invoice to their clients no later than April 20, 2016. When merchants that have payments pending for services rendered before April 1, 2016, file their monthly returns for March 2016, the merchants should elect through PICO to file returns for April and the following months for the special 4% SUT collected after March 31, 2016. Once the election is made, merchants will have six months to report the collected special 4% SUT for services rendered before April 1, 2016, and invoiced no later than April 20, 2016. It is worth noting that beginning April 1, 2016, the special 4% SUT will no longer apply and DPS will be subject to the 10.5% VAT. The proposed regulations would adopt a definition of "merchant" similar to that currently used in the regulations issued for SUT purposes, resulting in a continuation of the broad nexus requirements. The proposed regulations would require the VAT to be reflected separately from the sales price. The Secretary, however, has discretion to authorize a merchant who is unable to comply with this provision to reflect the VAT together with the sales price. As required under the VAT Act, the proposed regulations provide that merchant buyers can request fiscal vouchers from merchant sellers within 30 days of receiving the goods or services. Moreover, merchant sellers would have to issue fiscal vouchers within 30 days of the merchant buyer's request. The proposed regulations state that, when recurring sales occur in a given month between a merchant buyer and merchant seller, the merchant seller would be allowed to issue one monthly fiscal voucher to the merchant buyer as long as the buyer consents to this arrangement. The proposed regulations would allow merchant sellers to issue fiscal vouchers, debit notes and credit notes in electronic format. Services rendered between entities that are members of a controlled group or a group of related entities would be excluded from the definition of "services" if: — Both entities are engaged in a trade or business in Puerto Rico and registered in the Merchant's Registry of Puerto Rico — The payments from the merchant buyer are for services that are an ordinary and necessary expense paid or incurred in the ordinary course of business or for the production of income The proposed regulations also would exclude services for freight goods from the definition of "services," so those services would not be subject to VAT. Freight services would include sea, air or land property services, including charges directly related to the sea, air or land delivery of goods. Some charges related to the operation of freight services would be excluded from the definition of "services" subject to certain limitations. The proposed regulations would require a provider of ground transportation services to be registered and authorized by the Public Service Commission for the freight services to be excluded from the "services" definition. Additionally, the proposed regulations would not treat the following services as ground transportation services for purposes of the exclusion for freight services: The proposed regulations would define "financial services" as services related to deposits of any nature, loans, credit cards, lines of credit, currency exchanges and other similar financial services provided by financial businesses. Generally, financial businesses are exempt from collecting VAT, except for bank charges. The proposed regulations would generally exclude collection services and bookkeeping services from "financial services." Lastly, under the VAT Act, the definition of financial services includes insurance services. According to the proposed regulations, commissions generated upon the issuance of insurance instruments are considered insurance services. Under the proposed regulations, the term "sale" would include a distribution of goods as a donation. Thus, gifting an item of inventory to a third party would constitute a transfer subject to VAT on the basis of the cost of the inventory — The sale or exchange of all or substantially all of the assets of a business, outside the ordinary course of business — The delivery of goods or any material (tangible or intangible) that evidences a donation, including the delivery of fingerprints, decals, hearts or other articles of no commercial value that merely show that the real object of a contribution is to give a donation — The portion of an admission fee for an activity or performance for the benefit of a charitable entity that could be regarded as a donation — The reimbursable amount required as a deposit to receive a service; if the deposit is not returned, it would be considered a service and taxed accordingly The proposed regulations would allow merchants with sales to exempt persons that are the lesser of 5% of all monthly sales or $1,000 to claim a credit for all VAT paid that is indirectly related to its sales. The proposed regulations would require merchants to claim a credit for VAT paid in the amount of $10,500 or more on the purchase or construction of fixed assets (as defined under US GAAP) in a month until the VAT credit is either depleted or a 12-month period beginning on the date the asset is purchased or put into service has expired. At the end of the 12-month period, the proposed regulations would allow a merchant to claim the credit as a refund. The proposed regulations would include an anti-abuse provision under which the separation of transactions to avoid the application of the VAT credit would be ignored and the transactions would be treated as if they took place at the time of the first transaction. The proposed regulations would allow a merchant to claim a credit for VAT paid on inputs that are clearly identified as a component of a taxable good or service. The proposed regulations would require merchants to separate the VAT credit related to taxable sales of goods from the VAT credit related to the performance of taxable services. The proposed regulations would include formulas to calculate the amount of the VAT credit directly related to the sale of taxable goods and services. For the VAT credit directly related to the performance of taxable services, the proposed regulations would allow a credit for VAT paid only when services are subcontracted and VAT is paid (e.g., a merchant contracts another merchant (subcontractor) to provide a taxable service and pays VAT to the subcontractor who then remits the VAT to the PRTD). The proposed regulations would establish an election that would allow eligible merchants to claim as a credit all of the VAT paid that is directly or indirectly related to the merchants' sales. The election would be available for merchants dedicated to the sale of food, prescription medicines, articles for the treatment of health conditions and certain goods subject to excise taxes (e.g., oil and vehicles). Merchants would make the election on the Application for a Merchant's Registry Certificate. The proposed regulations would require merchants to prepare a reconciliation of sales to exempt persons for purposes of direct credit allocation. The reconciliation requirement would apply to merchants that have taxable and exempt sales in the same month. The reconciliation requirement would begin the second month after the VAT begins to apply.
Document ID: 2016-0410 | |||||||||||||||||||
