Doing Business in Puerto Rico Blog: Business Coaching, News & Developments

IVU TAX NOW SET TO BE 7% FOR ALL COVERED MERCHANTS

Beginning August 1 2007, all merchants will collect  a 7% Sales and Use Tax  (IVU) for all taxable items.  This new laws makes  it mandatory for all Municipalities to charge 1.5% in addition to the 5.5% portion destined to the central government.  Before this law, not all Municipalities were collecting the 1.5% tax.

Merchants in Participating Municipalities will pay the full 7% to the Treasury Department (Hacienda).  The rest will split payments, sending 6% to Treasury and 1% to the Municipality.

You will need your Merchant's Registration Number (MRN) to file and pay your monthly sales and use tax returns. If the Sales and Use Tax Monthly Return is filed electronically, you can pay the amount owed only in an electronic manner, to wit: a direct transfer from your bank or a debit to your bank account.

For more information contact Hacienda at:http://www.hacienda.gobierno.pr/ivu/.

MUNICIPAL SALES TAX MAY NO LONGER BE DISCRETIONARY

The legislature approved on June 28, 2007 bill P C3190 to make mandatory for all municipalities in Puerto Rico the assessment of a 1.5 percent municipal sales tax. This tax applies to most consumer goods- sold, used, stored or used- but does not apply to fresh food.

Originally,  the  Sales & Use Tax (‘IVU’ in Spanish), which became effective November 15, 2006,  included a 5.5 percent sales tax  for the central government and up to 1.5 percent discretionary sales tax for local governments. Bayamón for example, was not assessing this tax. The bill is pending the Governor’s approval.

CLOSE CORPORATIONS IN PR CAN HAVE 75 SHAREHOLDERS

Act 276 of December 2, 2006 amended Puerto Rico's Internal Revenue Code to increase the number of allowed shareholders in a  close corporations electing special tax through provisions -  from 35 to 75.

EIGHT STEPS TO COMPLETE BEFORE OPENING UP FOR BUSINESS

If you are planning to open a business in Puerto Rico here are  eight  steps that you must follow to be in compliance.

1. Decide and create the type of legal structure  (corporation, proprietorship, limited liability corporation, partnership).
2. Register the company with the Puerto Rico Department of State. The Department issues an identification number and a certificate.
3. Apply for an employer identification number (EIN) with the  U.S. Internal Revenue Service.
   
4. Obtain occupancy permit from ARPE (requires several endorsements). This is assuming you are moving to an office building. Construction is more complicated. It requires the developer to obtain a  land use permit followed by a building permit.
5. Apply for a municipal business license (patente municipal). This is channeled through the appropriate county or municipality.Businesses are generally taxed up to .5% of the yearly gross receipts. Financial businesses pay more.
6. File with the Registry of Merchants and Business, the Commercial Development Administration and the Treasury Department (Hacienda). The law requires all persons or entities doing business in Puerto Rico (or are planning to do so) to register their activity with the Secretary of the Treasury. The registry will be the official record of a business in the Department. Merchants must fill form SC 2914 known as the Application for Merchant's Registration Certificate and Exemption Certificate.
7. If you will have employees, request unemployment and disability account numbers from the local Department of Labor (Departamento del Trabajo y Recursos Humanos).
8. Obtain a workers' compensation insurance policy for your employees with the State Insurance Fund Corporation (Corporacion del Fondo del Seguro del Estado (CFSE).

PAYROLL TAXES IN PUERTO RICO

In the U.S.A.  there is generalized misunderstanding  that the people of Puerto Rico  do not pay taxes. The fact is that we probably pay more than those in the States except that the money goes to the local Revenue Department. It has to do something with the fact that we do not have a vote or effective representation in either the House or Congress; no representation, no taxation. Another interesting fact is that businesses that open shop in the Island often enjoy more tax breaks than local businessmen.

Still all  businesses in Puerto Rico  have to pay Federal Unemployment Tax (FUTA) and Social Security (FICA). FUTA is imposed on businesses who employ one or more individuals for a portion of a day in each of 20 weeks in the current or preceding calendar year, or who pay in the aggregate $1,500 or  more of wages in a calendar quarter of the current or preceding calendar year.  For FICA the tax rate is 7.65% for each employee (of which 1.45% is  for Medicare) up to a maximum base ($76,200 for social security in 2000).  Self employed individuals pay to the federal government 15.3% tax rate (including 2.9% for Medicare).

REITS WANTED IN PUERTO RICO

The Government has touted its new law- No. 289 of December 26, 2006- promoting the creation of local REITS as an important tool to foster local capital markets and  increase economic activity in Puerto Rico.

REITs are a corporations or business trusts– generally trading in stock exchanges-that pools investors’ capital in all types of real estate investments such as office buildings, hotels, industrial facilities and apartments. Since REITS trade as shares, investors can participate in real estate investments without tying up enormous amounts of cash.

The law eliminates regulatory  barriers for REITS and lowers tax rates for dividends.  Seventy Five percent or more of their assets and gross income must be derived from local property.

CAPITAL GAINS TAX RATE

Some people have asked about the current rate for long-term capital gains. A year and a half ago, Puerto Rico's Internal Revenue Code was amended to increase the capital gains tax from 10% to 12.5% for  individuals and for 12.5% to 20% for regular corporations and partnerships. See, Act No. 40 of August 1, 2005. This law became effective January 1, 2006.

Puerto Rico's Sales & Use Tax News

The new Sales & Use Tax (‘IVU’ in Spanish) which became effective November 15, 2006 includes a 5.5 percent sales tax  for the central government and up to 1.5 percent for  local governments which can impose their own sales tax. This tax applies to most consumer goods- sold, used, stored or used- but does not apply to fresh food (unmixed, served without utensils, unheated) or cars (already subject to a different tax).   Services are taxable unless specifically excluded. For example, funeral services are not exempt but educational, insurance, medical and legal are. Manufacturers are excluded.  Merchants selling goods subject to the tax are deemed withholding agents and must collect and remit tax along with the filing of monthly returns.

All merchants doing business in Puerto Rico must register with the Treasury Department (regardless of whether they are exempt or not) and request a Certificate of Merchant Registry. This can be done over the phone by calling 1 888 721 5551,  by e-mail - ivuconsultas@hacienda.gobierno.pr or online at: http://www.hacienda.gobierno.pr/ivu/.

The Merchant Certificate (or Certificate of Exemption, as the case may be) will be issued by the Treasury Department and it will be the merchant’s  authorization to do business in Puerto Rico and sell taxable goods subject to the ‘IVU’. Of course this is just one of many authorizations and permits a business must have before it can lawfully operate in the Island.  The Certificate of Exemption identifies a Merchant as a re-seller or manufacturer exempt from payment of the IVU in purchases related to its business activity. 

All withholding must be informed in a monthly return that can  be filed over the phone,  online (www.hacienda.gobierno.pr ) or via mail:

DEPARTAMENTO DE HACIENDA PLANILLA MENSUAL IVU PO BOX 9024140 SAN JUAN, PR 00902-4140

It must be done no later than the 20th day of the following month of the date the transaction took place. Depending on the method of filing, payment can be made through a variety of means including check or money order or electronic transfer of funds. Merchants with a volume of sales exceeding $500,000 must file the return and pay through electronic means. You will need your Sales and Use Tax Registration Number (IVU) to file and pay your business taxes online. However as of this article,  it seems that the Treasury’s online paying system is still in the testing phase.

Jumpstarting Puerto Rico's Economy

A joint project between The Center for the New Economy in San Juan and The Brookings Institution in Washington recently  released a study on the Island's  economy.  Under the title The Economy of Puerto Rico: Restoring Growth, the publishers claim that it is "[t]he most exhaustive study of the Puerto Rican economy done in the past 75 years. . . . " 

According to the Brookings Institution:

Restoring Growth in Puerto Rico examines the island's economy and presents policy options for sustainable growth. A number of overlapping issues are at the heart of Puerto Rico's economic difficulties: labor supply and demand, entrepreneurship, the fiscal situation, financial markets, and trade. Here, economists from Puerto Rico and the United States propose a set of policy recommendations to increase employment, encourage private sector development, improve education, upgrade infrastructure, and fix governmental finances.

The study reveals many  troubling facts about our current economic situation:

• Our current living standards have  fallen back.  They are farther away from the U.S.  than 30 years ago.
• Official statistics overstate local production of goods and services  by 20% .
• Less than 1/4 of all able workers are employed in the private industry; the rest are government workers, employed by government subsidized companies or unemployed.
  
• Government handouts undermine the incentive to work (we knew that!).
  
• U.S. tax policy has hurt Puerto Rico by providing U.S. Corporations  investment incentives without linking them to local  jobs.
• Labor productivity here is 2/3 of the U.S. level.
• Per capita income is 1/3 of the  U.S.
• Puerto Rico males have a exceptionally low involvement in the labor market.
  
• Females are taking over- in 2002-03 only 39% of college students were males.
• Minimum wage laws discourage hiring of less skilled workers
• Puerto Rico's Tax Code is filled with breaks for special interests at the expense of the rest.
• Puerto Rico's regulatory environment  and permitting process retards progress and blocks private investment and growth.
  

7% Withholding for Services Rendered

In Puerto Rico, people or entities  engaged in trade or business must withhold 7% from every payment made for services rendered in connection with their trade or business.  It is not an additional tax.  Rather, it is advanced payment of income tax that the taxpayer being retained may later claim as a credit in his/her tax return. No withholding needs to be done when the payment is for a personal non-business activity.

Certain payments are excluded from the withholding requirements.   These include: the first $1,500 paid, payments to hospitals and clinics that offer hospitalization services, payments to non-profit organizations, payments to contractors or subcontractors for construction projects (excluding engineering, architectural and design services), commissions paid to direct sellers for the sale of consumer products.

Certain payments to partners by a partnerships are also subject to 7 % withholding.

Corporations and partnerships  that do not owe taxes and have filed all required income tax returns can request a  Waiver Certificate. This document grants a waiver from withholding.  The waiver can be partial (3% withholding) in the case of corporations or partnerships or total in the case of the first three years of rendering services by individuals, corporations and partnerships.

The withholding agent must deposit the amounts withheld with the Secretary of the Treasury no later than the 10th day of the month following the month in which the withholding was made. Deposits must be made with Form 480.9A- a payment voucher.

An annual informative return covering payments and withholdings for the previous year  must be filed no later than February 28 of the following year.  This return is filed using the Informative Return- Income Subject to Withholding, Form 480.6B and Form 480.5, Summary of  the Informative Returns.   Form 4806A is used to include payments of compensation for services rendered not subject to the 7% withholding.