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ADA TAX NEWS

Taxes, Taxes and MORE TAXES.

On June 30, 2013, government enacted Act 40-2013, changing dramatically the Puerto

Rico tax system for corporations and individuals that are engaged in trade or business in

Puerto Rico. This Act is intended to provide about $1.5 billion dollars to balance the

2013-2014 governmental budget. Among the new changes are:

I. Alternative Minimum Tax:

1. Applicable rate is increased to 30% (from 20% in 2012)

2. No adjustment will be required for service payments paid to related

entities that are rendered outside Puerto Rico.

3. Adjustment for net book income over alternative minimum tax income

is increased from 50% to 60%.

4. Net operating loss deduction is limited to 80% of alternative minimum

tax income (previously 90%).

5. Threshold for the computation of AMT based on purchases from related

parties is lowered from $50Millions to $10 Millions.

6. Consideration of three different computations to determine the

requirement of payment of AMT. Now you must compare and choose

the higher of:

i. Regular Tax (based on the 1994 Code tax Rates)

ii. The AMT (30%) + Gross Income Additional Tax

iii. 20% of purchases to related parties or charges from Home

Office + 2% of purchases of personal property from a

related party or Home Office + Gross Additional Tax.

REACH YOUR GOALS, WE’LL TAKE YOU THERE!

TAX CHANGES TO THE 2011 PUERTO RICO TAX CODE

If you need more information on this

particular tax or any other tax issue, we

are at your service. If you have any questions or

comments please feel free to contact us at our

offices (787) 253-9595.

Our Team:

Partner: Jerry De Cordova CPA, JD

jdecordova@adacpa.com

Manager: Astrid Ortiz Couvertier CPA, Esq.

aortiz@adacpa.com

Supervisor: José E. Pagán Ramírez, CPA

jpagan@adacpa.com

VOLUME 3 ISSUE 4

P.O. Box 70262, San Juan, Puerto Rico 00936-8262

7 Rosa Street, Cond. Cecilia’s Place Suite C-1 Isla Verde, PR 00979

(787) 253-9595 office • (787) 253-9511 fax www. adacpa.com

THE CONTENTS OF THIS DOCUMENT ARE FOR INFORMATIONAL PURPOSES ONLY AND DO NOT

CONSTITUTE LEGAL OR TAX ADVICE. THE PUERTO RICO SECRETARY OF THE TREASURY MAY

ESTABLISH BY CIRCULAR LETTER OR OTHER ADMINISTRATIVE DETERMINATION OF A GENERAL

NATURE THE NECESSARY STANDARDS FOR THE APPLICATION

JULY 2013

Taxes, Taxes and MORE TAXES. (cont.)

“Let’s take your company to new heights-together.”

II. Gross Income Additional Tax

1. Applicable to Corporations and pass-thru entities.

2. Also, applies to entities that elected to be taxed under the

provisions of the 1994 Code. (94-Option)

3. Tax based on the gross income generated by the business

entity during the year. Some exceptions apply.

4. Financial institutions are subject to a 1% tax rate, but can

claim a credit limited to .5% of gross income.

5. Applicable Tax Rates are:

6. For controlled groups of corporations or related entities the

applicable rate will be determined considering the gross

income from all the members of the group.

7. Waiver can be requested to Treasury if the tax will result in

economic hardship to the entity. Entity is required to submit

an Agreed Upon Procedure from a PR licensed CPA that

participates in a peer review program. (Treasury will publish

additional requirements)

8. Tax is not applicable to:

i. Entities with tax exemption grants.

ii. Nonprofit businesses

iii. Bona fide agriculture businesses

iv. Premiums from Medicare Advantages, Medicaid,

government insurance (“Mi Salud”) and annuities.

9. Tax is NOT DEDUCTIBLE, and will be part of the entity tax

estimated tax computations.

III. Alternative Basic Tax (ABT)- Individuals

1. For taxable year 2014 individuals with net income subject

to ABT in excess of $500,000 will be subjected to a 24% tax

rate.

VOLUME 3 ISSUE 4

JULY 2013

Gross Income Tax Rate

From $1MM to $3MM .20%

In excess of $3MM up to $300MM .50%

In excess of $300MM up to $600MM .70%

In excess of $600MM up to $1,500MM .80%

In excess of $1,500MM .85%

10. Must be considered for the remainder estimated tax installment

for taxable year 2013.

11. It will be applicable for taxable year 2013.

III. 1994 CODE Corporate Tax Tables are reintroduced

1. Maximum Tax – 39%

2. Additional Tax rates are from 5% to 19%

3. Additional tax credit is reduced from $750,000 to $25,000.

Also applicable to controlled groups.

4. Limitation on expenses paid to related parties, branches, and

subsidiaries that are not subject to PR Tax. (51% disallowance).

Waiver is available.

IV. Net Operating Loss limitation

1. Deduction is limited to 90% of net income.

2. Carry forward period was amended as follows:

V. Reactivation of Tax Credit Moratorium

1. Limitation in the use of certain tax credits for taxable years

2013 thru 2015.

2. Credits purchased on or before June 30, 2013 can be claimed

during the moratorium period, but subject to a 50% limitation

of the tax.

3. Informative Return must be filed as of June 30th listing the

credits that will be covered by the moratorium.

VI. OPTION-94

1. Taxpayers can revoke the election effectively for year 2013.

Period when loss was generated Carry forward

period

Up to year 2004 7 Years

From year 2005 thru 2012 12 Years

On or after year 2013 10 Years

OTHER TAXES: 1% as an additional tax on Premiums.

Not Applicable to Premiums from Medicare Advantages, Medicaid, government insurance (“Mi Salud”) and annuities.

Cooperatives- Will not be exempt from SUT.

EFECTIVENESS OF CHANGES?

Income Tax Provisions for Individuals

and Corporations- Taxable Years

commenced After December 31, 2012.

o Tax Credit Moratorium:

July 1, 2013

SUT Provisions- July 1st

, 2013:

o Resellers Provisions

August 1, 2013.

REACH YOUR GOALS, WE’LL TAKE YOU THERE!

VII. Special Surtax of 2% for Service Providers

1. Applicable to individuals with gross income from services in excess of $200,000. Must consolidate all service income to determine tax basis. (no salary income included)

VIII. Limitation on Mortgage Interest Deduction (Individuals)

1. Maximum Deduction- $35,000 per year

2. Deduction is still limited to the 30% of the modified adjusted gross income.

IX. Alternate Basic Tax (“ABT”)- Individuals

1. Applicable rate was increased for those individuals with net income subject to ABT in excess of $500,000 from 20% to 24%.

X. Sales and Use Tax (“SUT”)

1. Effective December 1, 2013- Rate will be reduced from 7% to 6.5%.

2. Reseller Exemption ends on July 31st, 2013. As of August 1, 2013 most resellers will be required to pay SUT on the purchase of inventory for resale. Resellers will be entitled to a credit of the SUT paid, limited to 70% of the tax reported on the monthly return. If a demand deposit account is opened the credit will be 100%.

3. Manufacturers will continue with the SUT exemption. The exemption certificate will be valid for three years.

4. Introduction of term “Eligible Reseller”- For those resellers that purchase taxable items MAINLY for the sale to persons that are exempt from the SUT payment. These Eligible Resellers will have an exemption certificate subject to certain limitations.

5. Merchants are required to have a “demand deposit account” in a local financial institution to remit the SUT payment to Treasury. (Pending for Regulations).

6. Taxable Services:

a. Leases, including ordinary vehicle leases (“operating leases”) that constitute a daily rental.

b. The following Business to Business services are now taxable services:

i. Bank services charges by financial institutions

ii. Security Services- exemption for residential services

iii. Cleaning and Laundry Services

iv. Telecommunication services

v. Collection of Waste

vi. Repair and Maintenance

VOLUME 3 ISSUE 4

VOLUME 3 ISSUE 3

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Taxes, Taxes and MORE TAXES. (cont.)

JULY 2013