Tax & Accounting Blog

Puerto Rico Senate Confirms Repeal of VAT

Blog, Indirect Tax, ONESOURCE, VAT-GST Management May 26, 2016

Today the Puerto Rico Senate voted to end a nearly one-year flirtation with an overhaul of their retail consumption tax. Facing what has grown to a nearly $70 billion dollar deficit, on 29 May 2015 the legislature adopted Ley 72-2015, which among other things sought to end the sales and use tax (SUT) and replace it with a value added tax (VAT). The legislature provided a quote from Peter Drucker encapsulating the reasons for the transition, “The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.”

Ley 72-2015 phased in the transition by first raising the SUT to 10.5% on 1 July 2015, then by imposing a Business to Business (B2B) reduced rate on 1 October 2015. By 1 April 2016 the whole system was to be scrapped and replaced with a 10.5% VAT. As early as 1 January 2016 it was apparent the transition would not occur as scheduled, and in mid-March the Secretary of the Treasury delayed the transition to 1 June 2016. By May however, the legislature had already adopted a plan to repeal. On 2 May 2016 the House of Representatives voted to repeal, followed shortly by the Senate on 5 May 2016. Governor Alejandro Garcia Padilla, fighting turbulence and desire to act with yesterday’s logic, issued a veto of the proposed repeal:

“Puerto Rico must move to the forefront of global power in terms of tax justice. To combat injustice emanating from a system that punishes the worker for work…should be the guiding principle in our exercise of government. One is an accomplice of injustice when they identify injustice and do not combat it. The bill subject to this veto recognizes the injustice and seeks to postpone the fight.”

With today’s vote, the Legislature has elected to turn back the clock of tax reform and continue the current SUT, placing the final nails in the coffin of VAT.

Puerto Rico