This article is a collaboration of the Puerto Rico Society of Certified Public Accountants
By CPA Cecilia C. Colón Ouslán, CGMA, Esq.
Past Chairman of the Board of Directors – Puerto Rico Society of Certified Public Accountants
If your business pays for professional services received, then you are a Withholding Agent and you have certain obligations by law that you must fulfill. Several provisions associated with making withholdings and reporting those payments were amended under the Tax Reform. Those changes became effective on January 1, 2019 and any person operating a business, either as an individual, through a corporation or another type of legal entity, is under the obligation to comply with the new provisions.
Review your obligations
- You must withhold income tax at the source on supplier payments and deposit the withheld tax with the Puerto Rico Department of the Treasury.
- At the end of each year, you must file an Informative Declaration to report the total amount paid to the supplier and the amount of tax withheld.
Take note of what you need to know to comply with the new rules:
- Withhold what you must – You must withhold 10% income tax on the total invoiced amount for the service. However, if the invoice includes reimbursed expenses such as purchase of items used in the service provided, you will only calculate 10% of the amount of the actual service. Do not include the Sales and Use Tax (IVU, in Spanish). Remember: the first $500 paid during the calendar year is not subject to tax withholdings at the source.
- Submit what you withhold – Any tax withheld during the month must be electronically deposited using the Sistema Unificado de Rentas Internas or SURI (Unified Internal Revenue System) no later than the 15th of the following month. For example, on August 1 you receive a $900 invoice for legal services. You pay it on August 30, withholding 10% of the total, issuing a check for $810. Using SURI, you must deposit the $90 withheld no later than September 15.
There are some exceptions
You do not have to withhold 10% on these services:
- Insurance premiums paid
- Medical services
- Rental Payments related to real estate (offices, commercial premises, etc.)
- Construction services
- Air or sea transportation services
Some service providers may obtain withholding waiver certificates if they meet certain criteria. If a supplier gives you a Total Waiver Certificate you will not be required to withhold any tax to such supplier. Keep a copy of the document to include its control number on the Informative Declaration you will file with the Department of the Treasury. If the certificate specifies a partial waiver, then you must withhold 6%.
The new Optional Tax
A service provider could give you an Affidavit stating that they will choose the new Optional Tax and they want you to withhold only 6% instead of 10%. Keep a copy of the document to include it in your Informative Declaration.
The new forms
As of tax year 2019 and thereafter, Withholding Agents must complete two new forms:
- Informative Declaration-Services Provided (480.6SP) – File it no later than February 28 following the calendar year during which you made payments for services. On that date, give your supplier a paper or electronic copy of the Informative Return.
- Quarterly Return-Tax Withholdings on Payments for Services Provided (480.6SP-1) – You must file it no later than the last day of the month following the end of each quarter (March 31, June 30, September 30 and December 31 of every year). The total of the tax withheld reported in the year must be equal to the total amount withheld reported in the Annual Reconciliation Statement of Services Provided.
Do not forget
To make it easier to complete the Informative Declarations it is important that you ask all your service providers to supply:
- Full name (or legal name if it is an entity)
- Social Security Number or Employer Identification Number
- Mailing address
Keep a record of payments and withholdings for each supplier and the amounts deposited each month. This will be necessary to complete the forms that you will file in SURI.
You must fulfill your Withholding Agent obligations in order to have the right to deduct payments for services obtained and paid by your business. Expenses for supplier services that you fail to report on the Informative Declaration cannot be deducted from the Income Tax Return. And this applies to all payments: those subject to withholdings and those that aren’t. For example, if you pay monthly rent for your business’ premises, this is not subject to withholding but you are required to report it in an Informative Declaration. If you do not file this form, you won’t be able to deduct that expense.
Other expenses that are not subject to withholdings:
- Telecommunications services
- Internet access
- Cable or satellite television in PR
- Payments for ads or insurance premiums
However, those who receive payments for these services have an obligation to report them. If you pay insurance premiums for your business, the insurer must give you an Informative Declaration (Form 480.7E) that reports how much you paid. Be diligent in obtaining this document, as without that form you won’t be able to deduct that expense in your Tax Return.
We urge you to read the following articles that also discuss tax topics: Explore the New Optional Tax for services rendered in Puerto Rico and Your Business’ Deductions According to the 2018 Tax Reform
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