Linkedin
Facebook
Email
more
On February 6, 2023, Puerto Rico Governor Hon. Pedro Pierluisi and Secretary of the Treasury Hon. Francisco Parés presented proposals to amend the Puerto Rico Internal Revenue Code of 2011, to reduce tax rates, among other changes.
The proposed changes are the result of the work of the Tax Reform Advisory Committee presided by Secretary Parés and constituted by various government officials and private sector representatives. The legislative bills pretend to enact the changes discussed below, which are expected to be introduced by the end of February.
Individual Taxpayers
Below is a comparison between the current tax rates versus the proposed tax rates for individual taxpayers, which would be as follows:
Current Regular Tax Bracket for Individuals | Proposed Regular Tax Bracket for Individuals | ||
Taxable Income | Marginal Rate | Taxable Income | Marginal Rate |
$0-$9,000 | 0% | $0-$9,000
| 0% |
$9,001-$25,000
| 7% | $9,001-$25,000
| 7% |
$25,001-$41,500
| 14% | $25,001-$41,500
| 14% |
$41,501 - $61,500
| 25% | $41,501 - $81,500
| 24% |
Over $61,501 | 33% | Over $81,501 | 30% |
As noted above, the main change for individuals is the reduction of the top rate from 33% to 30% and the expansion of the income subject to the top rate from $61,501 to $81,501. The lower tiers of the tax rate table would remain unchanged. Other notable proposed changes include the following:
Cost of Living Adjustments (COLA) will be incorporated starting taxable year 2023.
The 5% and 3% income tax credits introduced under Act 257-2018 and Act 40-2020 would be limited to taxpayers whose adjusted gross income does not exceed $100,000.
Senior Citizens would be eligible to receive a refundable $400 income tax credit.
Corporate Taxpayers
The proposal intends to simplify the current corporate tax system that provides for a combined marginal tax rate of 37.5% composed of a normal tax of 18.5% and a surtax of up to 19%. The proposed corporate flat tax system would forego the 19% surtax and reduce the top corporate rate to 33%.
Proposed Corporate Tax Rates | |
Taxable Income | Tax Rate |
$0-$275,000
|
17% |
$275,001-$3,000,000
| 27% |
Over $3,000,000 | 33% |
Sales and Use Tax
The proposal includes the elimination of the Sales and Use Tax (SUT) on:
(i) the introduction of taxable items into Puerto Rico for resale, and
(ii) the purchase of taxable items for resale.
The current SUT credit system would be converted to an exemption system. The intention of this amendment is to eliminate the provisions that are more akin to a Value Added Tax (VAT) system.
Comments
The proposed rate reductions should be monitored as they move through the legislative process, as these could present tax planning opportunities for the taxable year 2023. In addition, the impact of potential corporate tax rate reductions should be evaluated for income tax accounting purposes and potential impacts on deferred tax calculations and notes to financial statements.
The proposed SUT changes should also be reviewed in order to monitor any proposed transition rules as the SUT credits would no longer be available, and the SUT would revert to an exemption system for resellers, as is the case for more traditional SUT systems.
The proposal did not provide for changes to SUT on business to business (B2B) services which are not usually taxed on traditional SUT systems. Amendments to SUT on B2B services might arise to the extent that the current administration intends to remove the remaining VAT characteristics from the current SUT.
At RSM Puerto Rico, we can provide you with additional information and advice regarding these matters. Please contact our tax advisors at (787) 751-6164 | [email protected] for help or more information.