Puerto Rico's Treasury Department (PRTD) has issued guidance (Internal Revenue Circular Letter (CL) 17-07) on the procedure for providing information electronically for tax credits held by natural and legal persons.

Background

Administrative Order 2017-01 (AO 17-01) of March 7, 2017, requires the Secretary of the PRTD to take an inventory of tax credits (Credits Inventory) that have been granted and requires all holders of authorized tax credits to provide certain information about those credits. (For more information on the Administrative Order, see Tax Alert 2017-532.) Following the issuance of AO 17-01 and in response to its mandate, Resolution 2017-01 (Resolution) was issued to specify the extent to which tax credits may be used for tax year 2016.

Under the Resolution and subject to the reporting guidance issued under CL 17-07, a taxpayer may sell or claim a granted tax credit against the income tax for the 2016 tax year without limitations or conditions other than those stated in the Puerto Rico Internal Revenue Code of 2011 (PR Code), a special law relating to the granted credit or any other law valid on the date the AO was issued. Furthermore, the Resolution specifically lists and defines what are considered granted credits for purposes of the Credits Inventory requirement. The credits granted under Act 154-2010 are excluded from the limitations and provisions of AO 17-01.

The listed credits, which are considered granted credits under AO 17-01, must have been granted, issued or authorized on or before March 7, 2017, the issuance date of AO 17-01.

Mandatory notification for each tax credit

CL 17-07 requires holders of granted credits to report on Form 480.71, Information Return for Tax Credits Held, information on all tax credits held as of April 19, 2017, that meet one of the following characteristics:

— All or part of a tax credit was or will be claimed against the income tax for tax year 2016

— A portion of the tax credit balance can be sold or claimed against the income tax for tax year 2017 and thereafter

If authorized tax credits are acquired through purchase, assignment or transfer on April 19, 2017, CL 17-07 requires the acquirer to report the amount of the authorized tax credits acquired on April 19, 2017, and the amount that was claimed or will be claimed against the income tax for 2016 and thereafter.

CL 17-07 also requires authorized tax credits under Section 5 of Law 73-2008 to be reported on Form 480.71.

Information to be included on Form 480.71 for each tax credit

Original tax credit holder

CL 17-07 requires the tax credit holder with whom the tax credit originated (original tax credit holder) to report: (1) the law under which the credit is authorized; (2) the total amount of the authorized tax credit; (3) the amount of the tax credit that was sold on April 19, 2017, or claimed on a tax return for a tax year before 2016; and (4) the amount of the tax credit that was claimed or will be claimed on the income tax return for 2016.

Tax credit purchaser

A tax credit holder that purchases the tax credits must report: (1) the law under which the authorized tax credit was acquired; (2) the balance of the acquired tax credit on April 19, 2017, that was claimed or will be claimed on the income tax return for 2016 and/or tax years thereafter; and (3) the amount of the acquired credit on April 19, 2017, that was claimed or will be claimed on the tax return for 2016.

Electronic reporting procedure for filing Form 480.71 by May 15, 2017

Tax credit holders must file Form 480.71 through the PRTD's electronic system. The filing deadline is May 15, 2017.

Implications

It is of the utmost importance that tax credit holders report their credits by filing Form 480.71 on or before the deadline of May 15, 2017. Failure to report the tax credit will result in loss of the tax credit for tax year 2016 and subsequent tax years. Thus, for calendar year taxpayers, credits claimed on the 2016 income tax return that was filed on April 18, 2017, must be included on Form 480.71. Similarly, entities that may have filed extensions for tax year 2016 to file the final income tax return, and those with fiscal years that have not yet ended, will have to do their best to estimate the credit to be used or claimed in tax year 2016.

Credit holders that acquired or are entitled to a tax credit under a closing agreement with the PRTD must also report the credit under these rules to the extent the closing agreement has been signed on or before March 7, 2017.

When assessing whether to report credits held, credit holders should pay special attention to the key dates provided under the Resolution (March 7, 2017) and CL 17-07 (April 19, 2017).

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