In Administrative Determination 16-07 (AD 16-07) of April 18, 2016, Puerto Rico's Treasury Department (PRTD) has issued new transition rules in preparation of the value added tax (VAT) scheduled to come into effect on June 1, 2016. The transition rules in AD 16-07 are based on earlier guidance that was announced last February and partially repealed on March 8, 2016, when Administrative Determination 16-04 (AD 16-04) postponed the implementation of the VAT until June 1, 2016.

As reasons for the postponement, AD 16-04 cited the multiple requests for additional time from merchants, as well as certain bills that were presented in the Puerto Rico legislative assembly to modify the VAT statute. The issuance of AD 16-07 signals the PRTD's intent to move forward with the VAT implementation starting on June 1, 2016.

SURI

As part of the transition to VAT, the PRTD will introduce a new electronic filing system known as SURI. Beginning June 1, 2016, taxpayers must use SURI to:

 — File the new Monthly VAT Return and make payments (starting with the July filing)

 — 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 monthly import returns. Taxpayers also must use PICO for all other SUT transition filings that may be required after June 1, 2016.

Monthly VAT Return

The first Monthly VAT Return will be available after July 1, 2016, and must be filed electronically through SURI. The Monthly VAT Return for June 2016 must be filed by July 20, 2016.

Merchant number and registry

The SUT merchant registry number that is currently being used by registered merchants will remain unchanged under the VAT and SURI.

All Merchant Registry Certificates will expire on July 20, 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 SUT 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 June 1, 2016. All information must be verified no later than July 20, 2016. Once registration is complete, SURI will issue a Merchant Registry Certification with a control number. Taxpayers that fail to comply with the verification requirement will be subject to a $500 penalty.

Small merchants

Beginning June 1, 2016, all merchants that are eligible to request a Small Merchant Registry Certificate (SMRC) should file an application through SURI. Once the application is submitted, the PRTD will issue a provisional SMRC that will be valid for 90 days. The PRTD will proceed to analyze if the merchant qualifies for the SMRC and will issue an official certificate before the expiration of the 90-day period.

VAT exemption certificate

Reseller and municipal SUT exemption certificates, manufacturing exemption certificates and eligible reseller certificates that were in effect on December 31, 2015, will remain in effect until the PRTD issues the procedures and requirements for requesting those certificates under VAT. Eligible reseller certificates issued for SUT, however, will expire for all merchants on June 30, 2016, regardless of the expiration date shown on the certificate.

Fiscal invoices and credit and debit notes

In the case of sales between merchants, the general rule is that a merchant buyer will be able to request a fiscal invoice from the merchant seller that collected VAT. The fiscal invoice must be requested by the buyer and issued by the seller within defined periods and contain information specified in the VAT statute.

Beginning June 1, 2016, a receipt or invoice produced through merchants' systems or cash registers will be considered a fiscal invoice and evidence of the amount paid for VAT. The receipts and invoices will have to comply with the requirements in Section 4130.02(c) of Puerto Rico's Internal Revenue Code (PR Code). Thus, the receipts and invoices must include a description, the cost of the goods or services acquired and the VAT paid on the transaction. A merchant may use the receipt or invoice to claim the VAT credit on the Monthly VAT Return.

While merchants are not required to submit copies of the receipts and invoices with the Monthly VAT Return, they should maintain the receipts and invoices for a period of no less than six years beginning on the filing date of the Monthly VAT Return on which the merchant claimed the VAT credit. Merchants with a volume of business of $40 million or more, however, must submit with the Monthly VAT Return a breakdown of the VAT paid on goods or services acquired by the merchant to operate the business and which amounts are being claimed as a credit. The PRTD is supposed to publish a worksheet that merchants will use to itemize the VAT paid in the Monthly VAT Return.

For credit and debit notes, the merchant buyer should keep records as evidence of the adjustments calculated under Section 4150.01 of the PR Code. The merchant seller will not be required to issue the notes to the merchant buyer until the PRTD establishes procedures for the merchant seller to issue such documents.

Once the fiscal invoice requirements in the VAT statute are fully implemented, AD 16-07 states merchants will issue fiscal invoices, credit notes and debit notes through SURI.

Pre-existing contracts

Merchants with pre-existing contracts must continue to file the Monthly SUT Return Applicable to Pre-existing Contracts (Form SC 2915E). Merchants should file those returns through PICO until June 30, 2016. Beginning July 1, 2016, transactions under pre-existing contracts will be subject to VAT and must be included on the Monthly VAT Return.

Designated professional services using "cash basis" accounting

All designated professional services (DPS) performed before June 1, 2016, but after September 30, 2015, 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 June 20, 2016; if they are issued after such date, they will be considered rendered on the date the invoice is issued and will be subject to a VAT rate of 10.5%.

When merchants that have payments pending for services rendered before June 1, 2016, file their monthly returns for May 2016, the merchants should elect through PICO to file returns for June and the following months for the special 4% SUT collected after May 31, 2016. Once the election is made, merchants will have six months to report the collected special 4% SUT for services rendered before June 1, 2016, and invoiced no later than June 20, 2016.

It is worth noting that, beginning June 1, 2016, the special 4% SUT will no longer apply and DPS will be subject to the 10.5% VAT.

Implications

The SUT transition rules in AD 16-07 can be categorized as a list of business considerations that must be addressed as Puerto Rico shifts towards a VAT in the coming weeks. Merchants must take steps to ensure the provisions covered in this Tax Alert are analyzed within the context of their operations, as the effect of these provisions will be felt immediately upon implementation. In tandem, the effect on other areas of the business, such as supply chain, system planning and implementation, and compliance management, among others, needs to be analyzed and addressed as part of a company's VAT readiness efforts.

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