puerto rico: how the proposed value added tax will impact the construction industry

DISCLAIMER: This update and its content do not con stitute advice. Clients should not act solely on t he basis of the material contained in this publication. It is intended for information purpos es only and should not be regarded as specific advi ce. In addition, advice from proper consultant should be obtained prior to taking action on any is sue dealt with this update. © 2015 Kevane Grant Thornton LLP All rights reserve d. Kevane Grant Thornton LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the m ember firms are not a worldwide partnership. Services are delivered by the member f irms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. Please visit www.kevane.com for further details.

How the proposed value added tax will impact the Construction Industry

Act 72 which amends the Internal Revenue

Code for a New Puerto Rico introduces a value

added tax system in Puerto Rico that will

replace the Sales and Use tax system (“SUT”)

effective April 1, 2016, for state tax purposes.

The SUT will continue to be in place for

municipal tax purposes after April 1, 2016.

Effective July 1, 2015, the Sales and Use Tax

increased to 10.5% (state tax) for a transition

period that will end on March 31, 2016. The

municipal rate remains at 1%. The credit for

SUT to be claimed in the Monthly Sales and

Use Tax Return will be 100% of the tax

liability in the case of resellers of tangible

personal property (an increase from the

current 75%).

On October 1, 2015, a new tax of 4% will

apply to services provided to other merchants

(B2B) and for designated professional services

unless these are exempt by a qualified contract.

Please refer to our tax alert from June 25,

2015, where we discuss the special sales and

use tax transition rules applicable to qualified

contracts.

On April 1, 2016, a new Value Added Tax will

replace the state Sales and Use Tax of 10.5%.

Designated services and services business to

business (B2B) will be subject to a 10.5% VAT

rate unless these are exempt by a qualified

contract.

From a municipal point of view, the sales

and use tax will continue to be 1%. Services to

other merchants and designated professional

services will be exempt from municipal tax.

This alert concentrates on the specific aspects

related to value added taxes to the

construction industry. In addition, and for

your reference, we have prepared a diagram to

illustrate an example of how the value added

tax is paid and credited by the construction

business.

Are construction services subject to

VAT?

Construction services are subject to VAT.

However, the sale of any building or real

property structure is not subject to VAT.

There is also no VAT charged on the rental

of real property tax constitutes the principal

residence of the lessee, including student

and elderly housing as well as the

commercial lease including payments for

office or sales space, storage and parking

since Act 72 exempts these transactions

from VAT.

Contact us For assistance in this matter, please contact us via [email protected] Tax Partner or [email protected] Tax Manager

Kevane Grant Thornton LLP

33 Calle Bolivia Ste 400

San Juan, Puerto Rico 00917-2013

T + 1 787 754 1915 F + 1 787 751 1284

www.kevane.com

Follow us on and June 28, 2015

DISCLAIMER: This update and its content do not con stitute advice. Clients should not act solely on t he basis of the material contained in this publication. It is intended for information purpos es only and should not be regarded as specific advi ce. In addition, advice from proper consultant should be obtained prior to taking actio n on any issue dealt with this update. © 2015 Kevane Grant Thornton LLP All rights reserve d. Kevane Grant Thornton LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the m ember firms are not a worldwide partnership. Services are delivered by the member f irms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. Pl ease visit www.kevane.com for further details.

Exclusion of Contracts and Pre-

existing Bids

� The retail sales covered by executed

contracts and pre-existing bids at auction

before April 1, 2016, will be excluded from

VAT to the extent these were excluded from

SUT.

� Act 72-2015 provided transition rules for

preexisting contracts as of July 1, 2015, that

have been qualified by the PR Secretary of

Treasury according to the requirements

established through Tax Policy CL 15-10.

The rates that would apply to such sales will

be the ones as of June 30, 2015 (6% state

tax).

� Tax Policy CL 15-10 provides that the

owner of the construction project must have

submitted all documents required by Tax

Policy CC 15-10 by August 10, 2015, to

register the project. After evaluation from

Treasury and obtaining the Registry

Certificate, the primary contractor together

with the owner of the project must submit

the documents established by Tax Policy 15-

10 to register the contract. Once the

contract is registered, the Secretary will

expedite a Certificate that will allow getting

benefit of the rates as of June 30, 2015 (i.e.

6% instead of VAT rate of 10.5%).

� Purchase of tangible property to be used as

well as taxable services rendered in

connection with one of these registered or

qualified contracts will benefit of the rates as

of June 30, 2015.

� Services to other merchants (B2B) and

designated services received in connection

with one of these contracts will be exempt

from the 4% to the extent that a certification

of qualified contract has been obtained from

the Secretary of Treasury.

Such certification needs to be requested to

the Secretary of Treasury not later than

September 30, 2015. If the certification is

not obtained, the services rendered after

September 30, 2015, will be subject to a 4%

state tax.

� Imports subject to use tax introduced after

June 30, 2015, pursuant to one of the

qualified contracts will be subject to a 10.5%

SUT. Merchant may qualify to obtain a

refund of 4.5% in certain cases.

� Tax Policy CL 15-10 provides that the

certifications approved will be effective until

June 30, 2016, or the date the contract ends,

whichever occurs first. The effective date for

the certification may be extended after June

30, 2016, by Secretary for an additional

period of 12 months.

What happens if the business is a

contractor and developer?

� If the construction business is the contractor

and developer of a new property, it must

consider what the business will be selling. If

the construction business constructs and

sells the property, that is treated as a supply

of goods and not a supply of services. If the

business is contracted to construct a

building or a structure, it is classified as

construction services.

Returns and declaration

� Imports Declaration –upon the

introduction of goods into PR and before

release of merchandise

� Tax on Imports Monthly Return – on

the 10th day following the closing of each

month

� Small Merchant Annual Informative

Declaration – within a period of 60 days

from the date of the filing of the income

tax return.


� Monthly VAT Return – on the 20th day

following the closing of each month

The VAT Monthly Return will show the

merchant’s VAT liability for a month

computed as follows:

� VAT (10.5%) on goods and services

sold during a month

� Plus/Minus: adjustments that

increase/decrease the sales price of

goods sold

� Minus: Credit for VAT paid on goods

or services purchased or imported

Credit for value-added taxes paid

Every merchant, except small merchants

holding a Small Merchant’s Registration

Certificate, will be allowed to claim a credit for

the VAT paid during the corresponding

month in the case that the merchant sells

taxable goods or services subject to the 10.5%

or 0% VAT.

If there is a combination of exempt and

taxable goods and services the construction

business will need to make an allocation on

the VAT incurred on costs. If the construction

business sells goods or services that are

exempt from VAT (i.e. sale of real property) it

will not have to collect VAT. However, the

construction business will not be able to

recover any VAT paid on costs, either charged

by its suppliers or paid on the importation of

goods or services, which are directly or

indirectly related to those exempt sales.

In general terms, the amount of the credit will

be computed based on the sum of the

following items:

� VAT paid upon introduction of taxable

items into Puerto Rico that are directly or

indirectly related to the sale of taxable items

and services, plus;

� VAT paid by a merchant on the purchase

of taxable items and services that are

directly or indirectly related to the sale of

taxable items or services as reported in the

fiscal statement, plus;

� VAT paid by the merchant for a service

provided by a non-resident and included on

the VAT Monthly Return.

Credit for Consumption Tax Paid to

Foreign Countries for Services

Rendered by Related Entities

� Any merchant to which a related entity not

engaged in trade or business in Puerto Rico

has provided a service may claim a credit

on its Monthly VAT return for the amount

paid for the concept of consumption taxes

paid to foreign countries after any credit

claimed for such tax on the foreign county,

with respect to the service.

VAT Overpayment

� A VAT overpayment will be the excess of

any adjustment or credits over the

applicable VAT on sales of goods and

services made during the corresponding

month, as disclosed on the Monthly VAT

Return.

� If the VAT overpayment does not exceed

$10,000, it must be applied against the

VAT liability shown in the monthly VAT

return and for the following months until

fully exhausted.


� If the VAT overpayment exceeds $10,000,

the merchant may request a refund if it is

considered an eligible merchant or it has

reflected overpayment on its Monthly VAT

Returns for the last three months.

Merchant’s Registration Certificate

� Any person who wants to do business in

Puerto Rico must be registered at the

Puerto Rico Treasury Department before

commencing operations.

� The original must be displayed at all times

in a place visible by the general public in

each place of business for which it was

issued.

� Any person doing business in PR that does

not maintain the registry certificate or when

such certificate has expired will be subject

to penalties.

� Merchants that are part of a controlled or

affiliate group could elect to be treated as

one merchant.

Exempt Purchases Certificate

� It is available to eligible persons on the

import or acquisition of goods or services

exempt from VAT.

� It is valid for three years. The Secretary at

its discretion may extend or limit the

validity of such certificate.

� Eligible persons include the Government

of the United States of America and its

States, the District of Columbia and the

Government of the Commonwealth of

Puerto Rico, any hospital unit, merchants

dedicated to the tourism industry and

bona-fide farmers.

Eligible Merchant’s Certificate

� It will be issued to those merchants with an

annual volume of business in excess of

$500,000 for the last three preceding years

and which 80% of its sales are subject to a

0% VAT tax rate.

Effectiveness of current certificates

and new certificates for VAT

� Effectiveness of certificates issued under

the 2011 Code was not part of the

discussion of Act 72. We will continue to

monitor PRTD communications on this

issue.

Transitory provisions

� Bonds approved under the SUT provisions

will be effective until its expiration date.

� Credits not claimed as a refund and available

as of March 31, 2016, as reflected on the

Monthly SUT return filed not later than

April 20, 2016, could be used as a credit on

subsequent monthly VAT returns until these

are exhausted.

� Administrative determinations and closing

agreements issued under the 2011 Code with

provisions similar to VAT provisions

enacted with Act 72 and that affects the

taxpayer responsibility for a taxable event

after April 1, 2016, will be applicable under

the provisions of Subtitle DD (VAT) under

Act 72.


Commission for Alternatives to

Transform the Consumption Tax

� This is a mechanism to evaluate the Puerto

Rico Tax System based on the fiscal and

budgetary reality of the government.

� Its function will be to evaluate the different

tax models and provide a report not later

than 60 days (i.e. May 29, 2015) after the

enactment of Act 72 with recommendations

on the feasibility of implementing a model

as a transformation of the actual tax on

consumption taking in consideration the

collections necessary for the Government

and the compliance of its obligations.

The following table summarizes the effective date of all changes in sales and use tax and value added tax introduced by Act 72-2015.

Impact of proposed value added tax Construction Industry - from the developer perspective

Total VAT paid:Imported products 157,500$ Other products 735,000 Services and other 84,000 Total VAT paid: 976,500$

*If the contract was qualified with the Secretary of Treasury according to the requirements of Tax Policy CC 15-10 the state tax of 6% will apply. If the contract was not qualified the state tax will be 10.5% VAT at the state level. Municipal remains at a 1% under SUT.

Merchant pays 10.5% VAT on products subject to use tax (merchant may qualify to obtain a refund of 4% in certain cases).

Audit · Tax · Advisory

Member firm of Grant Thornton International Ltd

Construction business

imports:

- Taxable goods - $1.5

million

Pays 10.5% VAT on products

subject to use tax =

$157,500.

- Construction business buys architectural, engineering and consulting

services in the amount of $800,000 and pays 10.5%* VAT in the

amount of $84,000.

- Construction business acquires locally

material for construction $5,000,000.

- Construction acquires computer equipment

and other products $2,000,000 subject to

VAT of 10.5%* (see note below).

- Pays 10.5% VAT of $735,000 to the seller.

- Sale of real property by developer is exempt from the

payment of VAT.

- Overall sales amounted $50,000,000

- Since the sale is classiffied as an exempt sale,

developer is not able to claim a credit on the VAT paid

on the import of goods, material for construction,

equipment and other products, neither the services paid

to professionals involved on the construction business.

- Consumer, the last on the chain will not pay

VAT on the purchase of real property neither on

the lease of real property for residential purposes

nor on the lease of commercial property.

Impact of proposed value added tax Construction Industry - from Sub-Contractor Perspective

Total VAT paid:Imported products 157,500$ Other products 315,000 Services and other 105,000 Total VAT paid: 577,500$

*If the contract was qualified with the Secretary of Treasury according to the requirements of Tax Policy CC 15-10

the state tax of 6% will apply. If the contract was not qualified the state tax will be 10.5% at the state level.

Municipal remains at 1% under SUT.

Pays 10.5% VAT on products subject to use tax (merchant may qualify to obtain a refund of 4% in certain cases).

Audit · Tax · Advisory

Member firm of Grant Thornton International Ltd

Construction business imports:

-Taxable goods - $1.5 million

Pays 10.5% VAT on products

subject to use tax = $157,500.

(see note below)

- Construction business buys architectural, engineering and

consulting services in the amount of $1,000,000 and pays 10.5% VAT

in the amount of $105,000.

- Sub-contractor acquires locally material for

construction $2,500,000.

- Sub-contractor acquires computer equipment

and other products $500,000 subject to VAT of

10.5%,

- Pays 10.5% VAT of $315,000 to the seller.

- Sale of construction services to developer are subject to VAT.

- Sale of construction services for installations, repairs,

maintenance and refurbishment are taxable.

- Overall sales amounted $15,000,000

- Collects VAT of $1,575,000 (10.5%)

- Takes a credit for the VAT paid on imported goods, material for

construction, computer equipment and services in the amount of

$577,500.

- Deposits $997,500 at the PRTD ($1,575,000-$577,500).

- Developer will not be able to credit the VAT paid

for construction services when the sale made by

developer is for real property (i.e. exempt for VAT

purposes).

puerto rico: how the proposed value added tax will impact the construction industry

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