In April of 2016, the Treasury Department will implement a Value Added Tax (IVA for its Spanish acronym). As a precursor to the IVA, the Treasury Department will begin to implement a series of changes related to the Sales and Use Tax (IVU for its Spanish acronym) that affects both consumers and business owners.
To provide orientation to our customers who are owners of small and medium-sized businesses, Popular recently sponsored a workshop on Law Number 72 of 2015, which proposes a transformation of the consumption tax. The session was offered by lawyer and certified public accountant (CPA) Jerry De Córdova. Following is a summary of four points that you should know about these changes. The workshop was recorded and is available on our YouTube Channel.
Tax changes between businesspeople and business owners
On July 1, 2015, there was an increase in the IVU tax rate. Previously, businesses charged 7% of sales; now, it is 11.5%, of which 10.5% is remitted to the Treasury Department and 1% to the municipality where the business is located.
A new change that occurred on October 1 will directly affect services provided among companies (business to business) and designated professional services. These businesses and professionals, who were previously exempt, will now charge their customers a 4% IVU. As part of this change, the designated professional services will now include:
- Architects, including landscapers
- Authorized public accountants
- Real estate brokers, salespeople and companies
- Professional designers
- Professional real estate inspectors
- Geologists, engineers and surveyors
- Professionals who prepare or review income tax returns, declarations and claims for refunds in Puerto Rico and the United States
- Some legal services
At the same time, those professionals whose annual revenues do not exceed $50,000, will be exempt from charging their customers the 4% IVU. For more information on exempt services click here to visit the Treasury Department webpage.
Business owners who perform these designated professions must complete the Business Registry at the following link: http://www.hacienda.gobierno.pr/ivu/registro-de-comerciante.
The Treasury Department will create an inter-agency portal for the purpose of preventing tax evasion. “Much has been said about how Treasury will use the databases the various agencies have to review information that individuals and businesses file on their tax returns,” said De Córdova.
The speaker gave an example of how the proposed system could work. An individual indicates on his tax return that he receives an annual salary of $20,000, but he has a car, house and a luxury boat that do not match the money he earns. The purpose of the portal is to gather all of the information on the taxpayer and raise a red flag in those cases where there could be tax evasion.
Limitations on the use of operational and capital losses
According to the Tax Policy Bulletin Number 15-09 “taxpayers who are self-employed and report net operational losses in their industry or business for three consecutive years will be limited to the accumulative amount of the loss the third year, and any subsequent year will be limited to 50% of the loss. At the same time, the limitation on the amount of losses on sales or exchanges of capital assets will be reduced from 90% to 80%.”
In the case of corporations, “the limitation on the deduction for carryover losses will be reduced from 90% to 80% when determining net income subject to regular taxation.”
Special tax – Individual in business or DBA (doing business as)
One piece of good news is that beginning in 2015, individuals who are self-employed or have their own business will only pay taxes on their income. In other words, they will not have to contribute the additional 2% of gross income (in excess of $200,000) because they have an office or a kiosk where they pursue their profession or offer their products and services.
De Córdova gave as an example a doctor who billed $1 million and under Law 72 of 2015 would have to pay an additional $20,000 beyond his tax payment on income for his office or location. Now, that 2% will be eliminated and he will only have to pay taxes on the amount generated by his practice.
Click here to see the complete workshop offered by De Córdova. It is divided into four parts so it is easier to review. We also recommend you visit the Treasury Department webpage, where you will find the required publications and forms, along with additional information about the IVU and the IVA.
The information provided in this material should be used only as a guide and not as a legal reference. The information is current as of August 21, 2015. The author, Banco Popular Inc. and/or its subsidiaries are not responsible for losses or damages that may be suffered by any institution, business or person, directly or indirectly, due to the information contained here. All information published was part of an orientation session offered August 21, 2015.