Puerto Rico To Introduce Tax Reform In 2015

Puerto Rico's Department of the Treasury has disclosed the framework of the tax reforms that are proposed to be introduced during the first quarter of next year, together with a proposed increase in the excise tax charged on crude oil that would bolster the Island's Highways and Transportation Authority. As Puerto Rico looks to shore up its weak budgetary position by raising revenues, it intends to reposition its tax code by reducing its dependence on the collection of direct income taxes and reforming the present indirect sales and use tax (SUT).The aim would be to cut the large portion (estimated at 23 percent) of economic activity in Puerto Rico that is unrecorded and not currently subject to either income or sales taxes. For example, the plan would aim to ensure that 80 percent of individual taxpayers will not pay income taxes by establishing an initial tax threshold of USD60,000, while the income tax base would be broadened to make up part of the revenues lost by eliminating or adjusting the current, at least, 85 tax expenditures. To simplify the corporate code, it is also contemplated that the gross profits tax introduced last year will be repealed and that the corporate tax rate will be equalized with the maximum rate paid by individuals. This would eliminate any need for taxpayers to create flow-through tax businesses or conduits for tax planning purposes. In addition, there would be an elimination of inefficient business tax expenditures, while alternatives would be considered for the reform or substitution of the four percent Act 154 excise tax, which is imposed on a proportion of the income derived by large multinationals in Puerto Rico. At the same time, so as to minimize the underground economy, the present seven percent SUT will be transformed into a broader-based goods and services tax (GST), with the intention of introducing a value added tax at a later date. The single-rate GST would include exemptions for small business and relief for those on low income. It was stressed, however, that the revenue from the SUT that is currently transferred to the COFINA fund, which is allocated to repay the Island's public debt, would be protected, and that COFINA will stay as an important source of government revenue. At the same time, the Government Development Bank has proposed to raise the oil excise tax by USD6.25 per barrel to USD15.50 per barrel, from March 2015. Part of the increased funding would be utilized by the Puerto Rico's Infrastructure Financing Authority to assume and refinance the debt of the Highways and Transportation Authority, which is in financial difficulty, and assist it to issue up USD2.9bn in bonds.

Puerto Rico To Introduce Tax Reform In 2015