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P.R. Legislature debates elimination of inventory tax

By on March 27, 2018

Editor’s note: The following article originally appeared in the March 22-28 print edition of Caribbean Business.

SAN JUAN — Merchants, who for years have requested the elimination of the tax on commercial inventories to encourage businesses to have more products available in their warehouses in case of emergency, should have gone to the Puerto Rico Legislature.

Given the Puerto Rico government’s critical financial situation, especially for the municipalities, legislators’ response to merchants’ request to eliminate this tax was to propose increasing the municipal business tax, or patente, to compensate municipal governments for income lost by not paying the inventory tax.

Rep. Antonio Soto (Juan J. Rodríguez/CB)

The inventory tax implies that merchants must pay taxes on products they have stored, even though they do not sell them, which causes the companies to keep their inventories low to avoid paying this tax on items that are not providing them a profit.

The merchants have continually warned about the consequences of this tax; the lack of supplies evident after Hurricane Maria triggered the government to act to address the situation before the next emergency occurs.

For House Finance Committee Chairman Antonio Soto, House Bill 1411 proposes to eliminate the tax in exchange for increasing the patentes businesses pay to the municipality, and “simplifies” the merchants’ process by just having them file a tax return.

“Certainly, the income municipalities receive from this tax is [revenue] municipalities need to continue to offer their services. However, it is no less true that it is an unfair and disproportionate burden that goes against production, of the business sector, in Puerto Rico,” Soto explained.

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The movable property tax is received by the Municipal Revenue Collections Center, known as CRIM by its Spanish acronym. According to this entity, collection for this purpose amounts to about $409 million, and for some municipalities, this income can represent up to 70 percent of their total income.

In the first public hearing on the measure, the executive director of CRIM, Reinaldo Paniagua, indicated one alternative is to amend the Municipal Contribution Law so businesses pay the tax on their goods at the time of sale, and not while they are being stored.

On the other hand, the executive vice president of the Chamber of Food Marketing, Industry & Distribution (MIDA), Manuel Reyes Alfonso, opposed the elimination of the tax on inventories being tied to an increase in municipal business taxes.

“For years, MIDA has warned that maintaining the tax on inventories makes Puerto Rico’s supply chain, economic development, and food security vulnerable. This situation was demonstrated by the emergency that occurred last year after the passage of hurricanes Irma and Maria,” Reyes Alfonso said.

HB 1411 specifically seeks to amend the Municipal Property Tax Act of 1991 and Municipal Business Tax Act to eliminate the excise tax on inventories and increase the patente from 1.5 percent to 1.8 percent, and the 0.5 percent patente to 0.8 percent, respectively.

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“Years ago, there was a generalized consensus in the private sector, and even among gubernatorial candidates in the past two elections, that the tax on inventories should be eliminated. However, few formal proposals have been presented to achieve that goal.

“The current measure proposes to completely exempt inventories from the tax on movable property, which we certainly endorse. However, it proposes an increase in the municipal patente, which is imposed on taxpayers’ income volume. We presume that it does this to maintain municipal income, although comparative statistics on collections are not offered before or after the proposed change,” Reyes Alfonso said last week before the House Government Committee chaired by Rep. Jorge Navarro.

Read the rest of this article in Caribbean Business’ epaper here.


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