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New tax model for P.R. seeks to spur employment, economic development
April 17, 2018
Puerto Rico Gov. Ricardo Rosselló submitted his vision for a new tax model to the island’s Legislative Assembly aimed at encouraging work and create economic development through changes to the Internal Revenue Code.
The proposed new tax model consists of two draft laws: one that calls for substantial amendments to the Commonwealth’s tax structure and a new Incentives Code that seeks to remove incentives that represent costs and do not produce benefits, he said.
“This new model tax model will be financed from specific sources so that it will have a neutral effect on the budget. It is time that our workers receive an incentive that for years have been granted to certain companies that do not create expected jobs or result in benefit to the government’s coffers,” Rosselló said.
With the reduction in tax rates to individuals and corporations, a reduction of the Sales and Use (IVU), the elimination of the Business to Business (B2B) tax and the granting of a work tax credit, some $849 million will be returned annually to taxpayers starting in 2023, he said.
For the year 2019 the savings to taxpayers will represent $451 million, he added.
Among the citizen benefits, the new tax model provides a total exemption of the first $12,500, plus a reduction in tax rates for all individuals; this represents a savings of $100 million in 2019 and $159 million annually starting in 2023. Currently, this exemption is $9,000.
In addition, there will be a reduction in tax rates for corporations and small and medium enterprises (SMEs), for a savings of $65 million in 2019 and $159 million annually as of 2023.
Meanwhile, the B2B tax will be reduced to 3 percent in 2019 and removed by 2020. This reduction will generate savings of $19 million for 2019 and $172 million annually as of 2023.
“This B2B tax has been devastating for our merchants. Therefore, we have made adjustments to eliminate this tax that has affected our economic development,” Treasury Secretary Raúl Maldonado said.
Regarding the IVU, the governor said taxpayers will see a tax reduction in prepared foods, from 11.5 percent to 7 percent through verifiable transactions such as electronic cards and ATH Móvil, among others. This means a savings of $79 million by 2019 and $87 million annually starting on 2023.
In addition, the work tax credit will result in savings of $200 million annually, providing a benefit of between $300 and $2,000 per worker, according to their income and number of dependents. Payment will be granted through a credit on tax returns.
Cracking down on tax evaders
Meanwhile, Rosselló acknowledged that there are taxpayers who have abused the system to evade their responsibility and have left almost the entire load to salaried workers.
That said, the government will implement measures to ensure that income, deductions and income of people who are self-employed and corporations are “verifiable and accurate.” This seeks to avoid overloading the obligation of salaried workers and reduce tax rates for all taxpayers, he said.
Self-employed workers will be subject to an Alternate Basic Tax that must be validated by a CPA. The new mechanism will automatically recognize deductions that are easily validated, such as rent payments, payroll, services and utilities expenses, interest, and insurance. Other expenses may be deducted if a CPA validates that they were incurred.
All deductions are available as they are presently, except that food and entertainment expenses will be deductible by 25 percent vs. 50 percent at present, and travel expenses will be deductible by 50 percent, vs. 100 percent currently.
This expense validation system for deductions also applies to corporations under the current Alternative Minimum Tax model.
Meanwhile, self-employed workers and corporations may also be able to pay taxes at reduced rates without filling out tax forms or compute expenses and profits outlined above.
“These taxpayers may voluntarily pay reduced rates on income at the source and not have to file a return or pay more in April; that way, they are freed from having to file returns and compute deductions,” Maldonado said.
That alternative applies to taxpayers who are self-employed and whose only source of income is self-employment or if the corporation only has service-related revenue.
Income of $100,000 will pay 5 percent, in contrast to the current 33 percent for individuals and 39 percent on corporate profit. Income between $100,000 and $200,000 will pay 10 percent; between $200,000 and $500,000 will pay 15 percent; and more than $500,000 will pay 20 percent, according to the proposed tax overhaul.
The new tax model also includes a tax reduction for individuals.
“The deductions system will changed from one that is dependent-based to a credit-based system,” Maldonado said. For example, at present, it is $2,500 per dependent. Under the new model the tax payer will receive a credit of $200 to $600 per dependent. Instead of reducing the responsibility as a deduction, it will be done through a credit system that will represent a dollar-for-dollar credit.”
Individual tax rate revisions
Individual income tax rates — applicable to regular employees and self-employed people — will offer a total exemption to those earning up to $12,500, up from the current $9,000 threshold; those earning between $12,500 and $21,000 will pay 0.9 percent (now 7 percent); those earning between $21,000 and $45,000 will pay 9 percent (now 14 percent); those earning between $45,001 and $58,000 will pay 19 percent (now 25 percent); and those earning more than $58,000 will pay 31 percent (now 33 percent).
The vast majority of those taxpayers will have a work tax credit of between $300 and $2,000, government officials explained.
Similarly, self-employed individuals will have a new withholding tax alternative that eliminates filing a tax return and grants a reduced rate, starting at 5 percent up to 20 percent.
Retirees, one of the most vulnerable sectors will get an increased annual income exemption from $15,000 to $25,000. This proposal goes hand-in-hand with the Rosselló administration’s public policy “to pay 100 percent of pensions to our retired public sector and oppose the cuts proposed by the Fiscal Oversight Board,” the governor said.
As for corporations and SMEs, the plan proposes slashing the average contribution of 20 percent to 19 percent for corporations and applying a maximum surtax rate from 19 percent to 12 percent.
Corporate surtaxes will be set at 5 percent up to $75 billion; 11 percent from $75,000 to $425,000 (which is now between 15 percent and 18 percent); and 12 percent on $425,000 (which now stands at 19 percent.) These taxpayers will also have reductions on IVU applicable to prepared foods and the elimination of the B2B tax.
At the same time, corporations and SMEs will have a new withholding alternative without having to file tax returns to pay a reduced rate (starting at 5 percent up to 20 percent.)
Rosselló also announced a tax benefit to encourage employers to hire young people.
“It is important to retain our young people given the migration we have experienced for more than 10 years ,” said Rosselló.
Under the proposed new tax model, “employers will be allowed to deduct 150 percent of wages paid to college students who work 20 hours a week for nine months and 800 hours a year (at more than $10 an hour.) If the case of the Treasury Department’s student internship programs, the deduction will be 200 percent,” the governor said.