Puerto Rico sales-tax elimination proposal portends revenue drop
SAN JUAN – The proposal under evaluation by Puerto Rico Treasury Secretary Raúl Maldonado to eliminate or modify the sales & use tax (IVU by its Spanish acronym) and return to a general tax paid at the ports, anticipates that the problem of oversight and communication between the agency and businesses could last until 2018.
“We are evaluating, in the middle of this crisis, that the [IVU] requires businesses to be connected, and right now I have no communications. Stores are reinventing themselves, almost everyone is using cash,” Maldonado explained to Caribbean Business, justifying the proposal he is considering submitting to Gov. Ricardo Rosselló.
The secretary explained that faced with this reality, Treasury has lost millions of dollars in revenue since it is unable to monitor the IVU withheld in business transactions.
“I have to look at what we can control, and we can control the ports. I can even control them manually because there are fewer taxpayers–400 large importers–bringing 80% of the cargo to Puerto Rico,” he said.
“The governor has asked us to again take an integrated look at all of Puerto Rico, and that is an alternative we are considering and that is viable,” Maldonado added.
Before hurricanes Irma and María disrupted the island’s everyday life by destroying the electrical and telecommunications infrastructure, and leaving thousands without homes or jobs, the Rosselló administration was working on a tax reform proposal about which few details are known.
In general, it was informed that it would reduce taxes on both salaried and contract workers and would change corporate rates.
It was also said to be neutral in terms of collections. To compensate for the reduction in taxes, there would be greater oversight of the capture rate for collections from individuals and businesses.
Faced with the current communication problems between Treasury and taxpayers, the way to achieve those objectives must be reconsidered.
“This is the time to bring everything to the table. We have a Puerto Rico that is going to have different economic development, directed right now toward an organization that is planned both socially and economically. This is the time to get things right. And if we are going to do economic development of this nature, we must have a tax system in accordance with the best international practices. This is the time to do it,” the secretary said.
“The ‘sales tax’ as it is cannot be checked at this time. Within the range of solutions available, we need to look at which are viable,” he insisted.
Maldonado said the proposal could result in a hybrid between the IVU and the dock tax. “We are evaluating different alternatives,” he added.
For the president of the P.R. Society of Certified Public Accountants (CPAs), Ramón Ponte, the situation that businesses are facing at this time could very well call for a measure like that, although temporarily.
“After the hurricane, the situation has businesses back in the last century, where most of the transactions were in cash and Treasury had no way of supervising the points of sale,” Ponte said.
The CPA said it will be necessary to look at the details of the proposal, “but if the base of collections falls, that is the only alternative.”
“You have to look at their structure, how much they expect to raise and what exemptions they would make. We haven’t seen those details yet,” Ponte said.
Tax has never been enough
In 2006, Puerto Rico changed from charging a 6.6% (effective rate) on general arbitrage, to a sales tax of 7%. The total transformation has taken years, with merchants disputing the cost that operating this business tax entails. Now, the IVU is at a rate of 11.5%, including the percentage destined to the municipalities.
In 2015, the government presented a new proposal to eliminate the IVU and establish a value-added tax (VAT) that would be charged throughout the distribution chain—”from the dock to the consumer.” The proposal was defeated in the Legislature because it allegedly increased the cost of living.
Another important aspect of the IVU is that part of its revenues, as legislated in 2006, are committed to paying the nearly $17 billion in bonds issued under the Sales Tax Financing Corp. (Cofina by its Spanish acronym) framework. Whatever is left after the creditors were paid was deposited into the general fund to cover the government’s regular expenses. The latter occurred in the middle of the fiscal year, or approximately in January each year.
As for the most recent increase in the IVU rate—from 7% to 11.5%—it belongs entirely to the government, since it is not part of the revenue destined to Cofina.
At this time, the IVU revenues that are supposed to pay Cofina’s debt are part of Puerto Rico bankruptcy lawsuits under Title III of Promesa, the P.R. Oversight, Management & Economic Stability Act. Given the intention of the government and the Fiscal Control Board to redirect these funds to Treasury—despite objections from Cofina’s creditors—Judge Laura Taylor Swain in the summer ordered this money deposited into a segregated account until the dispute is resolved.
Asked how the temporary changes to the IVU would affect the debt restructuring processes under Title III and the controversy with Cofina, Maldonado merely stated this analysis corresponds to the P.R. Fiscal Agency & Financial Advisory Authority.
In 1987, when a general 5% tax was imposed, but whose effective rate was 6.6%, its collection was around $550 million annually. In fiscal year 2016-17, the general fund paid more than $1.7 billion in IVU, according to the certified tax plan.
Alert over cost of change
Manuel Reyes, president of the Chamber of Food Marketing, Industry & Distribution (MIDA by its Spanish acronym), indicated he does not have a firm position on the proposal, but any such changes should be carefully evaluated.
“We cannot lose perspective that what was collected as discretionary was lower than what is now collected with the IVU, and we would have to see what the arbitration rate would have to be in order to achieve the required income,” Reyes said.
For his part, Nelson Ramírez, president of the United Retailers Association, stated that the elimination of the IVU is something his organization has been requesting for years.
“We have a study from 2014 by the Estudios Ténicos firm, which tells us that with a 12% tax at the docks, some $2.4 billion would be collected with some exemptions,” he said.
Ramírez argued that the communication and control problems with the IVU could take months or even a year to overcome, which is why he considers the elimination, although partial, would be as beneficial for small and midsize businesses as it would be for the government.
“That would benefit us greatly,” he said.
In any case, the secretary of Treasury emphasized amendments to the Internal Revenue Code must be presented and approved by the Legislature before the end of the year.
“What we are looking at is that these alternatives have to be discussed by the governor and his fiscal team over the next few months, but it must be before Dec. 31 because we need to start the new calendar year with a sustainable tax system,” he concluded.