After years of attempts to find increased revenue, the Puerto Rico legislature enacted act 72-2015 on May 29, 2015 (“Act 72-2015”), which amends various sections of the 2011 Internal Revenue Code, as amended, adding Subtitle DD titled “Value Added Tax”.This legislation makes Puerto Rico the first United States territory to adopt a comprehensive Value Added Tax regime.
The law does more than enact a Value Added Tax immediately. Effective July 1, 2015, the Puerto Rico Sales/Use Tax increased from 6% to 10.5%. Effective October 1, 2015, business to business (B2B) services and designated professional services will be subject to a reduced sales and use tax rate of 4%. Currently these services are exempt from Puerto Rico Sales and Use Tax. Municipal taxes will remain at 1% for a total combined rate of 11.5%. Effective April 1, 2016 the Puerto Rico Sales/Use tax, including the reduced rate on B2B and designated professional services, will be replaced by a Value Added Tax.
Puerto Rico has yet to recover from the Great Recession and is facing a budget shortfall of $72 billion. Despite passing the comprehensive tax reform, the United States Senate has introduced a bill to authorize Puerto Rico’s public entities to file for bankruptcy protection highlighting the continued dire need for an economic rebound. We will continue to provide updates on Puerto Rico’s transition to a Value Added Tax in the coming months.
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