Puerto Rico governor announces introduction of tax reform bill
SAN JUAN – Gov. Ricardo Rosselló announced Sunday the introduction of his bill for proposed changes to the Puerto Rico Internal Revenue Code as part of the anticipated tax reform, as well as that a new Incentive Code would be introduced “in the coming days,” according to La Fortaleza.
The governor said the tax reform will result in taxpayers saving $451 million in 2019. With the tax rate cuts for individuals and corporations, a lower sales and use tax (IVU bu its Spanish acronym), the elimination of the business-to-business tax (b-to-b) and the earned-income tax credit (EITC), some $849 million will be “returned” annually to taxpayers starting in 2023.
“This new tax model will be financed by specific sources so it has a neutral effect on the budget. It is time that our workers get an incentive that has been received by some companies for years that do not create the expected jobs nor result in benefits for the Treasury,” Rosselló said.
If passed as proposed, the first $12,500 earned by individuals would be exempt from taxes, instead of the current $9,000. In addition, there would be a reduction in tax rates for corporations and small and midsize businesses. Also, the b-to-b tax would be cut 1%, to 3%, in 2019 and eliminated by 2020.
Treasury Secretary Raúl Maldonado explained that “this b-to-b tax has been devastating for our business owners. Therefore, we have made adjustments to eliminate this tax that has affected our economic development.”
Regarding how the government will address tax evasion, the governor said a validation mechanism will be implemented through the use of CPAs so those who are self-employed can claim certain deductions.
As is currently the case, there will be an alternative minimum tax (AMT) for self-employed individuals, “which will be subject to taxes if greater than their regular taxes, but with validation mechanisms through the use of a certified public accountant.”
With the new system, which will also apply to corporations, “easy-to-corroborate deductions such as the payment of rent, payroll, services and utility expenses, and interest and insurance will be automatically recognized.” Meanwhile, “other expenses will be deductible only if a CPA validates they were incurred.”
The governor’s office said food and entertainment will be deductible expenses up to 25% (currently 50%) and travel up to 50% (100% deductible today).
Meanwhile, the reform will also offer the option for the self-employed and corporations to deduct tax from earnings before they are paid at reduced rates without having to fill out returns.
Some of the proposed changes follow:
-Reducing the IVU on prepared meals from 11.5% to 7% in verifiable transactions such as those using credit and debit cards.
-EITC of $300 to $2,000 according to income and number of dependents.
-Income up to $100,000 will be taxed 5%
-Income between $100,000 and $200,000 will be taxed 10%
-Income between $200,000 and $500,000 will be taxed 15%
-Income of more than $500,000 will be taxed 20%
-Changes to the dependents-deduction system to a credit system, whereby $200 to $600 would be received per dependent
-Tax rates for individuals: Those who earn $12,500 to $21,000 pay 0.9%; those who make $21,000 to $45,000 pay 9%; those who earn $45,000 to $58,000 pay 19%; and those who earn more than $58,000 pay 31%
-The annual exemption on retiree income will be increased to $25,000 from $15,000
-Corporate rates: The base rate of 20% would be reduced to 19% and the maximum additional tax to 12% from 19%
-Corporate graduated surtax, which is computed on the surtax net income, or the net taxable income subject to regular tax less a surtax deduction: 5% for surtax net income up to $75,000; 11% for surtax net income between $75,000 and $425,000; and 12% for surtax net income of more than $425,000
-Employer tax benefit to incentivize the hiring of university students who work 20 hours a week with a salary of more than $10 an hour