Puerto Rico's legislative assembly has approved a bill that repeals the value added tax (VAT), overriding the Governor's veto of the bill. The VAT was scheduled to be implemented on June 1, 2016.

The bill to repeal the VAT was presented to Puerto Rico's legislative assembly on April 29, 2016. The Puerto Rico House of Representatives and Senate voted unanimously in favor of the bill. Subsequently, the Governor vetoed the bill on May 20, 2016.

The Puerto Rican Constitution states that, to override an executive veto, the legislative assembly must obtain approval of two-thirds of the members in both the House of Representatives and Senate. The House of Representatives overrode the veto and approved the bill on May 23, 2016. The Senate followed suit on May 26, 2016.

Implications

The repeal of the VAT leaves the existing version of the sales and use tax (SUT) in effect for the foreseeable future. This means taxable items will continue to be subject to the 10.5% central government SUT and the 4% SUT on certain business to business (B2B) and designated professional services. The 1% municipal portion of the SUT, which only applies to taxable items subject to the 10.5% SUT, also will continue in effect without any changes or modifications.

There are rumors that further amendments to the 4% SUT may be forthcoming. In the coming days and weeks, taxpayers should pay close attention to legislative action that may once again attempt to modify the existing SUT provisions.

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