On April 29, 2016 a bill was presented in the Puerto Rico legislative assembly to eliminate the value added tax (VAT) that is scheduled to be implemented on June 1, 2016 (Replacement Bill). Thereafter, on May 2nd and May 5th, the Puerto Rico House of Representatives and Senate voted in favor of the Replacement Bill. The vote in favor of eliminating the VAT was unanimous in both legislative chambers. This sort of bipartisan collaboration is not common and could indicate growing opposition to the VAT's implementation within the government.

The next step following the approval of the Replacement Bill is the approval or veto by the Governor of the Commonwealth. According to public statements made by the Governor, he does not agree with repealing the VAT. Should the Governor proceed to veto the Replacement Bill, the Constitution of Puerto Rico provides for an override mechanism if two thirds of the members of both chambers vote in favor of a bill. Leadership in Puerto Rico's House and Senate have expressed that such an override is a possibility if the Governor vetoes the Replacement Bill.

Guidance issued by the Puerto Rico Treasury Department

At about the same time the legislative assembly was approving the Replacement Bill, Puerto Rico's Treasury Department (PRTD) issued VAT returns, a second draft of the proposed VAT regulations and guidance on the small-merchant certificate and eligible-merchant certificate.

VAT return and instructions

On April 29, 2016, the PRTD issued the Value Added Tax Monthly Return Instructions along with Form 2915.1 G (VAT Return) and a VAT return template. The VAT Return instructions are for all merchants doing business in Puerto Rico, or with Puerto Rico nexus, that are required to collect and remit to the PRTD the 10.5% VAT, under the Puerto Rico Internal Revenue Code of 2011, as amended (PR Code). The VAT Return instructions provide information for completing the VAT Return for all taxable sales, exempt transactions, zero-rated sales and sales under preexisting contracts.

Proposed VAT regulations

The PRTD also issued a second draft of the proposed VAT regulations on April 29, 2016. Following is a high-level summary of some of the changes incorporated into the second draft of the VAT regulations:

— Amends the definition of prescription drugs to exclude all products of the cannabis plant, whether in its natural form or derived from the cannabis plant, including, but not limited to, oils, creams, sprays, liquid, tablets and others, although the product of medicinal cannabis (also called medical marijuana) that is considered, or has been prescribed by a health professional, for treatment, a cure or to prevent any medical condition is considered a prescription drug

— Emphasizes that small merchants are required to collect and remit the 1% municipal SUT, even though they are not subject to VAT by virtue of the small-merchant certificate

— Requires all governmental agencies to provide an exempt-purchases certificate to make purchases without being charged VAT

— Requires adjustments to VAT paid for articles imported into Puerto Rico related to changes in the purchase price after the introduction date to be reflected through an amendment to the Monthly Imports Declaration and an amendment to the VAT return

— Limits input VAT credit directly related to taxable transactions to the VAT paid on the purchase of goods

— Eliminates the provision on the credits for VAT paid for the purchase or construction of fixed assets

— Requires the election to be treated as a merchant principally engaged in the sale of food or food ingredients, prescriptions drugs, or cash & carry to be made with the VAT return corresponding to the month of June 2016 in order to be effective for the first VAT tax year of the merchant

— Requires any SUT overpayment reflected on the last monthly SUT return to be claimed on the VAT return

Administrative guidance

The PRTD also issued Informative Bulletin 16-11 of April 29, 2016, to inform taxpayers that they may request a small-merchant certificate through the soon-to-be-implemented electronic filing system, known as SURI by its Spanish acronym. It also notes that small merchants that: (1) sell tangible personal property or perform services and (2) have income over $50,000 are not exempt from collecting the 1% municipal SUT. The small-merchant certificate that will be issued by SURI will indicate whether the merchant is a withholding agent for purposes of the municipal SUT.

On May 3, 2016, the PRTD also issued Tax Policy Circular Letter 16-03 (CL 16-03) with the steps that need to be followed for requesting an eligible-merchant certificate. A merchant with this certificate will be able to request a refund of any input VAT in excess of $10,000 in the month that it is generated. It also binds the PRTD to issue such refund within a stated timeframe. According to CL 16-03, a merchant that intends to claim a refund for input VAT in excess of $10,000 during the month of June 2016, must file the request no later than May 31, 2016, to be considered an eligible merchant. Merchants that file later than May 31, 2016, will not be able to claim a refund for input VAT for June on the VAT return filed on or before July 20, 2016. Such merchants, however, may request a refund of the overpaid VAT reflected on the VAT return, beginning with the month in which the eligible-merchant certificate is issued.

Implications

The unanimous vote by the legislative assembly to repeal the VAT in Puerto Rico reflects a high degree of uncertainty for the VAT in the weeks before its implementation. Nonetheless, the VAT is still part of the statutory mandate under the PR Code until the VAT legislation is modified or repealed.

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