CÁMARA DE COMERCIO DE PUERTO RICO

Rosa M. Rodríguez

Executive Director-Tax Department

Ernst & Young Puerto Rico LLC

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Agenda

• Introduction

• Individual Tax

• Corporate Tax

• Option 94

• Alternative Minimum Tax / “Patente Nacional”

• Tax credit moratorium

• Sales and Use Tax, Act 42-2013 (nexus expansion) and Act 46-2013 (payment of use tax at the port)

• Act 48-2013: 1.5% charge on governmental service contracts

• Questions

Individual income tax

2% Special additional tax

• 2% special additional tax to self-employed

– Gross income in excess of $200,000

– Gross income: sales less cost of sales

– Services and any other trade or business

• Exception: Not applicable to services as an employee

– Gross income on a consolidated basis (from

services and any other trade or business)

– Payable with the individual income tax return

• Not “deductible” against regular income tax

• Not subject to the payment of estimated taxes

• Applicable to individuals under Option 94

• Conduit entities:

• Extent: Would it be applicable to partners

• PRTD’s position

2% Special additional tax

Mortgage interest - Deduction

• Deduction is limited to $35,000 in total

– Maintains the limitation of 30% of modified adjusted

gross income

– Implications for taxpayers with CO Schedule and

related

Alternate Basic Tax

• Increase in Alternate Basic Tax (ABT)

– From $150k to $250k 10%

– Over $250k to 500k 15%

– More than $500k 24% (Increased from 20%)

– ABT includes the distributable share on Additional Tax on gross

income (“Patente Nacional”)

– Effective date: Taxable year 2014

• In conflict with effectiveness clause: taxable year 2013

• Technical amendments

2013 Income and Sales Tax Changes Under Act 40

Corporate & Conduit Entities Income Tax

Corporate Income Tax Rates

2011 Code Act 40-2013

Normal Tax Rate 20% 20%

Maximum Tax Rate 30% 39%

Surtax Exemption $750k $25k

Surtax Rate 5%-10% (approx.) 5%-19% (approx.)

Recapture None None

Consolidated surtax

calculation

Yes Yes

Surtax Rate

• Additional Tax Rate applicable to Surtax net income:

Not greater than $75,000 5%

$75,001 - $125,000 $3,750 + 15% excess of $75,000

$125,001 - $175,000 $11,250 + 16% excess of $125,000

$175,001 - $225,000 $19,250 + 17% excess of $175,000

$225,001 - $275,000 $27,750 + 18% excess of $225,000

In excess of $275,000 $36,750 + 19% excess of $275,000

Example No. 1- Facts - Tax Rates Increase

• Net income per books - $950,000

• Meals & entertainment - $20,000

• Net income per taxes - $960,000

• Gross revenues - $10,000,000

• Gross revenues during the previous 3 taxable years equals or exceeds $10,000,000

• No purchases of tangible personal property to related parties

• No expenses or allocations paid or accrued to relate parties

Example No. 1 - Tax Rates Increase

2011 Code Act 40 - 2013

Taxable Income $960,000 $960,000

(1) Regular Tax:

Normal Tax $192,000 $192,000

Surtax 10,500 162,150

Total $202,500 $354,150

(2) AMT:

Tentative Minimum Tax $192,000 $288,000

Gross Receipts Tax n/a 50,000

Total $192,000 $338,000

Tax Liability (Higher 1 or 2) $202,500 $354,150

NOL Carry Forward Limitations

• Limited to 90% - regular tax

• Years:

• Until 2004 7 years

• 2005 – 2012 12 years

• 2013 – after 10 years

Example No. 2- Facts - NOL Limitation

• Net income per books - $1,490,000

• Meals & entertainment - $20,000

• Net income per taxes - $1,500,000

• Gross revenues - $10,000,000

• Gross revenues during the previous 3 taxable years equals or exceeds $10,000,000

• No purchases of tangible personal property to related parties

• No expenses or allocations paid or accrued to relate parties

• NOL Carryover $5,000,000

Example No. 2 - NOL Limitation

2011 Code Act 40 – 2013

Taxable Income before NOL $1,500,000 $1,500,000

Less: NOL (1,500,000) (1,350,000)

Taxable Income after NOL 0 150,000

(1) Regular Tax:

Normal Tax $0 $30,000

Surtax 0 11,250

Total $0 $41,250

Alternative minimum net income before NOL $1,500,000 $1,500,000

Less: NOL plus Exempt amt. $50,000 1,400,000 1,250,000

Alternative minimum net income after NOL 100,000 250,000

(2) AMT:

Tentative Minimum Tax $20,000 $75,000

Gross Receipts Tax n/a 50,000

Total $20,000 $125,000

Tax Liability (Higher 1 or 2) $20,000 $125,000

Non-deductible Expenses

• National Gross Receipts Tax

• Corporations: 51% of expenses paid to foreign

affiliates not subject to tax in Puerto Rico

– Includes Branches

– Not applicable to tax exempt entities

– Waiver from the Secretary – Circular Letter 13-06

• Conduit entities: 100% of expenses paid to a 50% or

more partner if not subject to PR taxation or

withholding at source

Non-deductible Expenses

• Circular Letter 13-06: Option to apply for a

waiver “stress test” for certain expenses

– Circular Letter 13-06 establishes requirements

– Requires technical memorandum to support petition

– Requires Agreed Upon Procedure performed by a

local CPA on peer review program

– Lists information to be submitted for the last 4 years

Corporate AMT

2011 Code Act 40-2013

AMT Tax Rate 20% 30%

Book Income

Adjustment 50% 60%

NOL Limitation 90% 80%

Option 94

Option 94

• Permits adoption of Option 94 in 2013 – Individuals, corporations and conduit entities (partnerships,

special partnerships, LLC and corporations of individuals)

– Irrevocable election

• Obligation to comply with the Additional Tax on Gross Income (“Patente Nacional”) applies under Option 94 – Need to consider in estimated tax obligation

– Would safe harbor rules be applicable for first year of effectiveness • PRTD’s position appear to be that the 100% safe harbor rule would

not be applicable in first year

• Different set of rules of estimated taxes under 1994 PRIRC

• Technical amendments

Gracias

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