20 de septiembre de 2015

Administrative Determination 15-17 - Special Sales and Use Tax 4% / Basic Sales and Use Tax 11.5%



On August 31, 2015, the Puerto Rico Treasury Department (the "Department") issued the Administrative Determination No. 15-17 to define the applicability of the Special Sales and Use Tax of 4% (“Special-SUT of 4%”), the Basic Sales and Use Tax of 11.5% (“Basic-SUT of 11.5%”), and the processes to be followed by merchants who deliver designated professional services (or other services to merchants) to collect and remit such tax.

Since July 1, 2015, taxable services have been subject to the state Sales and Use Tax (“state SUT”) rate of 10.5% and to the municipal Sales and Use Tax (“municipal SUT”) rate of 1%, for a total rate of Basic-SUT of 11.5%. On the other hand, the services rendered to other merchants and designated professional services are subject to the Special-SUT of 4% from October 1, 2015. The terms taxable servicesservices rendered to other merchants, and designated professional services are defined as follows:

I.             Taxable Services Subject to Basic–SUT of 11.5%

The term taxable services means “any service rendered to anyone, except the services provided by designated professionals, services rendered by tax return specialists in the preparation of tax returns, and services rendered to other merchants, with certain exceptions”. For example, taxable services include, and are not limited to, the following services:


Example of Taxable Services Subject to Collection of Basic–SUT of 11.5%
·       Services rendered by barbers, stylists, estheticians, makeup artists, massage therapists, and related services
·       Services of body painting, tattoos, and related services
·       Security services and private investigation (unless they are rendered to residents’ associations or co-owners in a horizontal property regime)
·        Cleaning, laundry, and waste collection services (unless they are rendered to residents’ associations or co-owners in a horizontal property regime)
·       Repair and maintenance services (unless they are rendered to residents’ associations or co-owners in a horizontal property regime)
·       Installation services of equipment, appliances, and related goods
·       Bank charges to business accounts
·        Bill collection services
·        Daily lease of motor vehicles
·        Telecommunications services including cable TV services
·        Decoration services, event coordination, restaurants, and related services
·        Entertainment services, admission fees, and related services
·        Construction services of personal or real property

The term taxable services also includes services provided to consumers who are not merchants rendered by a merchant who is not a designated professional.


II.                Designated Professional Services Subject to the Special-SUT of 4%

The term designated professional services refers to legal services and services provided by professionals licensed by their respective Boards of Examiner ascribed to the Puerto Rico Department of State. The following is a list of professions subject to the collection of the Special-SUT of 4%:


Professionals Subject to Collection of Special-SUT of 4%
·         Brokers, Real Estate Sellers, and Companies
·         Professional Real Estate Appraisers
·         Legal Services
·         Attorney Offices
·         Other Legal Services
·         Certified Public Accountants
·         Architects
·         Landscape Architects
·         Engineers
·         Professional Draftsmans
·         Geologists
·         Surveyors (“Agrimensores”)
·         Agronomists


Beginning October 1, 2015, designated professional services will include tax preparation and refund claims services prepared by tax return specialists duly registered with the Department.

The term designated professional services also includes “services provided by professionals to other colleagues or professional firms who also render designated professional services when the professional is hired as an independent contractor and not as an employee”. In these cases, the professional providing the service must collect the Special-SUT of 4% for services rendered to the colleague or professional services firm, unless the supplier is exempt to collect SUT for having an aggregate annual business volume of up to $50,000.

After September 30, 2015, every designated professional service rendered will be subject to the Special-SUT of 4%. However, these services are not subject to the payment of the municipal SUT. In the case of legal services, Act No. 72-2015 provides that they will be subject to the Special-SUT of 4%. However, the Legislative Assembly is considering a bill to modify the taxation of these services.


III.        Services Rendered to Other Merchants Subject to the Special-SUT of 4%

Services rendered to other merchants are defined as “services provided to a person engaged in the exercise of a trade or business activity, or for the production of income”. That is, they are services between two merchants duly registered in the Department’s Merchants' Registry. However, the following services between merchants are not considered services rendered to other merchants and, therefore, are not subject to the Special-SUT of 4%, but are subject to the Basic-SUT of 11.5%:


Services Rendered to Other Merchants Subject to Basic-SUT of 11.5%
·         Bank charges (as described in AD No. 13-16)
·         Bill collection services
·         Security services
·         Cleaning, laundry, and waste collection services
·         Repair and maintenance services (non-capitalized) of tangible personal property
·         Telecommunication services
·         Ordinary lease of motor vehicles

It is important to note that the following services are not considered repair and maintenance services subject to the Basic-SUT if rendered to merchants and, thus, they are subject to Special-SUT:

Repair and Maintenance Services Subject to Special-SUT
·         Repair and maintenance of automobiles, drives (“propulsores”), ATVs, motorcycles, boats, heavy equipment, buses, and trucks
·         Removal of machinery, equipment, or other tangible personal property or real property demolition
·         Maintenance of computer programs (“software”), such as installing patches (“patches”), programs version replacement (“upgrades”), technical advisory services, and problem solutions ("troubleshooting"), or a combination thereof
·         Inspection and validation of equipment and machinery, elevators, and fire detection system
·         Capitalized repair services

Services rendered to other merchants also include commissions earned by a merchant in a sale, whether or not they are taxable items. That is, the income from commissions is considered a payment for a service rendered to another merchant subject to the Special-SUT of 4%, except in the case of insurance commissions, which are exempt from the imposition of the SUT.

Similarly, in cases where the service is provided through outsourcing (this is, the contract where the merchant who provides a taxable service or “contractor” provides such service through another merchant or “subcontractor”), the service provided by the subcontractor to the contractor is also a service rendered to another merchant .

In the case of services rendered to other merchants, any service provided after September 30, 2015, will be subject to the Special-SUT of 4%. However, these services will not be subject to pay municipal SUT.

Merchants engaged in the delivery of designated professional services must update his/her Merchant's Registration Certificate, according to the procedures on CL No. 15-12, as informed in our previous communication.

As a transitional measure, services rendered to other merchants and designated professional services to be delivered before October 1, 2015, are not subject to the Special-SUT provided that such services are invoiced to the client no later than October 20, 2015 (See, AD 15-10).


Exemptions

The following services are exempt from payment of the Basic-SUT of 11.5% and the Special-SUT of 4%:


Exemptions from Basic-SUT of 11.5% and Special-SUT of 4%
·         Services provided to the Commonwealth of Puerto Rico or to the Government of the United States
·         Leases of real property which is the principal residence of the tenant, student housing, or commercial lease
·         Care services rendered by child care centers
·         Funeral services up to $4,000
·         Care services rendered by elderly care centers
·         Export of services (even if the service is carried out in Puerto Rico )
·         Educational services including child care
·         Interest and other charges for the use of money
·         Insurance services and commissions
·         Health (or medical) and hospital services
·         Services rendered by persons whose annual business volume does not exceed $50,000
·         Services between persons who are part of a controlled group of corporations or controlled group of related entities, if both the entity providing the service and the entity receiving it are engaged in the exercise of an industry, trade, or business or for the production of income in Puerto Rico
·         Services provided by the Electric Power Authority (“AEE”) and the Aqueduct and Sewer Authority (“AAA”)
·         Services provided to residents' associations, condo-owners’ councils, or associations of owners of residential complexes, including social interest residential housing projects which receive state and federal rent subsidies
·         Services provided to housing cooperatives organized according to Act. No. 239-2004 and which are exempt under Section 1101.01(a)(7)(A)


Taxation of Services Rendered to Other Merchants and Designated Professional Services

Beginning October 1, 2015, every designated professional service (and those services rendered to other merchants who are not considered taxable services) shall be subject to the Special-SUT of 4%, provided it is not excluded or exempt from SUT. Also, beginning October 1, 2015, and in conjunction with designated professional services, it shall be construed in the Administrative Determination 15-17 (or any other publication issued by the Department) that all the services sheltered under the exemption of business-to-business services (commonly known as “B-2-B”) shall be subject to the Special-SUT of 4% as services rendered to other merchants, for SUT purposes, unless otherwise provided in the Puerto Rico Internal Revenue Code of 2011, as amended (the “Code”).

Finally, beginning October 1, 2015, any service (including taxable services, designated professional services, and services rendered to other merchants) by a non-resident to a person located in Puerto Rico (regardless of where the service was provided) shall be subject to the Basic-SUT of 11.5% or the Special-SUT of 4%, as applicable.


Correlation with Other Taxes

The Code imposes that any person, natural or juridical, who, in the exercise of a trade or business or for the production of income in Puerto Rico, makes payments to another person for services rendered, to deduct and withhold 7% of such payments and remit the amount withheld to the Department. This retention is an income tax withholding and will be applicable only to the amount billed for the service, excluding the SUT and expenses to be reimbursed.

Therefore, when a merchant makes payments to a service provider, the payer merchant must retain 7% of income tax on the amount invoiced for the service and must pay the service provider the remaining 93% with the total payment of expenses to be reimbursed and the SUT determined in the bill, including the Special-SUT of 4%, if applicable, unless the merchant has a valid Waiver Certificate of Withholding at Source on payments for services rendered (Models SC2618, SC2755, or SC2756 - "Waiver Certificate"), in which case the payer merchant must withhold and pay the percentage stated by the Waiver Certificate. Meanwhile, the service provider must collect and remit the corresponding SUT and remit the SUT charged to the Department.



Special-SUT Monthly Return

As a result of these changes, a new Monthly Return of Sales and Use Tax Applicable to Services Rendered to Other Merchants and Designated Professional Services (Model SC 2915F – “Special-SUT Monthly Return”) was created. This return must be filed electronically through the Integrated Merchant Portal (“PICO”, in Spanish), by accessing the following link: https://comerciantes.hacienda.pr.gov/.

The Special-SUT Monthly Return must be filed no later than the 20th of the month following the month in which the Special-SUT of 4% is billed. Therefore, the first Special-SUT Monthly Return will be the return for the month of October 2015, which must be filed no later than November 20, 2015. This return is an additional form that only applies to merchant providers of designated professional services or services rendered to other merchants who are required to collect and retain the Special-SUT of 4%.

Merchants who are required to file the Import Declaration (Model SC 2970 ), the Monthly Return of Import Duties and Tax (Model SC 2915D), or the Monthly Return of Sales and Use Tax (Model 2915A SC-“SUT Monthly Return”) must also file the Special-SUT Monthly Return--especially if designated professional services or merchant-to-merchant services are rendered. The former return must also be completed and submitted by those merchants or taxpayers receiving designated professional services or services to other merchants outside Puerto Rico. The payment of the Special-SUT of 4% must be submitted electronically in conjunction with the Special-SUT Monthly Return.


Accounting Method

Every merchant shall use, for SUT purposes (including Basic-SUT and Special-SUT), the same accounting method used to report income on the income tax return.

The responsibility for paying the SUT arises at the time the client’s payment is received. The term payment includes “the receipt of cash and any property or services. Also, includes a buyer’s commitment (written or not) to satisfy the purchase price plus the applicable tax, among other things”.

In the case of the sale of services by a merchant who uses the accrual method (“accrual basis”), the act of sending the invoice pursuant to an agreement (written or not) to render the services billed constitutes a buyer’s commitment to satisfy the purchase price plus the applicable tax.

Paragraph (b) of Section 4041.01 of the Code provides, by way of exception, those merchants who provide designated professional services could use the cash receipt method (“cash basis”) for purposes of remitting the SUT to the Department. Therefore, merchants who deliver designated professional services may choose to remit the Special-SUT of 4% on the services provided in the month they receive the payment for the service, regardless of when the client was billed and the accounting method used for purposes of determining net income in the income tax return. Those who choose to use the cash receipt method for SUT purposes can do so along with the filing of the Special-SUT Monthly Return for the month of October 2015, which is filed no later than November 20, 2015.

Merchants that engage in the delivery of designated professional services, begin operations after October 2015, and who wish to use this method for purposes of the Special-SUT must select the appropriate method in the first Special-SUT Monthly Return they file. If the merchant does not file the first Special-SUT Monthly Return promptly, the accounting method applicable to such merchant will be the accounting method used to determine the net income on his/her income tax return. Once the appropriate method is applied, if the merchant wants to change the accounting method for purposes of the Special-SUT of 4%, he/she must request an Administrative Determination to this effect, in accordance with Department’s Circular Letter 99-01 of March 3, 1999. The change in the accounting method for purposes of the Special-SUT of 4% shall not apply until the Secretary of the Treasury approves it. Please note that already filed monthly returns cannot be amended retroactively to change the accounting method applicable to the Special-SUT of 4%.

We expect the Department will issue additional publications related to the application of the 4% tax, including the application of exemptions and the obligation to file Form SC 2915F “Monthly Return of Sales and Use Tax Applicable to Services Rendered to Other Merchants and Designated Professional Services”, among other topics. Therefore, we encourage you to pay close attention to our communications.

At Carbonell & Co., LLP, we are ready to assist our customers with these new requirements. 

Should you have any questions or need further information concerning these new provisions, do not hesitate to contact us.