Sales and use tax (SUT)
As a general rule, the SUT shall be applied, collected, and paid on all transactions of taxable items in Puerto Rico. Taxable items consist of tangible personal property, taxable services, admissions, and what is known as bundled transactions. Excluded from this definition are professional associations and certain membership fees; stamps issued by professional associations, the Commonwealth of Puerto Rico, or the federal government; human blood, tissue, and organs; maintenance fees paid to resident associations; air and maritime tickets; real property; and bingos, raffles, and lottery. Other transactions that are exempt from SUT include export transactions; duty-free stores located at airport or maritime ports; prescription medicines; insulin; taxable items acquired for certain manufacturing operations (e.g. raw materials); and food and ingredients for food (except for prepared food, diet supplements, sweets, and carbonated beverages).
The SUT rate is imposed at 10.5% at the state level and an additional 1% at the municipal level, for an aggregate 11.5%. Designated professional services and business-to-business (B2B) services are taxed at a 4% SUT rate.
Taxable services that are excluded from SUT include, among others, the following:
- Services rendered by merchants with annual volume of business of less than USD 50,000.
- Effective 1 March 2019 through 30 June 2020, services to other merchants and professional designated services rendered by merchants with annual volume of business of less than USD 200,000.
- Effective 1 July 2020, services to other merchants rendered by merchants with annual volume of business of less than USD 300,000.
- Services rendered by a non-resident to a related party that is engaged in a Puerto Rico trade or business and holds a tax grant pursuant to Act No. 73-2008, Act No. 83-2010, Act No. 20-2012, or any similar act.
- Intangible rights.
- Advertising and promotion services.
- Construction subcontracted services and subcontracted telecommunication services.
- Toll manufacturing services or contract manufacturing services.
- Repair, maintenance, and conditioning of aircraft provided by a merchant that holds a tax grant pursuant to Act No. 73-2008 or any other similar act.
SUT should be remitted to the Puerto Rico government as 10.5% or 4% to the Puerto Rico Treasury Department (PRTD) and the remaining 1% to the corresponding municipality.
Tangible personal property introduced into Puerto Rico is subject to use tax upon importation, holding the release on the ports until the use tax is satisfied, unless the taxpayer is a bonded merchant or an eligible reseller. The use tax paid upon importation of the merchandise can be claimed as a credit on the SUT return.
Every natural or juridical person who does or wishes to do business of any kind in Puerto Rico shall request registration in the Merchant's Registry of the PRTD at least 30 days before starting operations. Once the registration application is filled out and approved, the Secretary of the Treasury will grant a Merchant's Registration Certificate. This certificate constitutes the merchant's authorisation to do business in Puerto Rico and confirms the merchant's obligation as a withholding agent. The Merchant's Registration Certificate shall be displayed, at all times, in a visible place for the general public in the commercial establishment for which it was issued. Please note that if a merchant is doing business in one or more of the 78 municipalities in Puerto Rico, the merchant only needs to register with the PRTD.
Unless specifically exempted, all persons selling taxable items are required to file a monthly SUT return. This return shall be filed electronically with the PRTD no later than the 20th day of the calendar month following the month during which the sales occurred. Also, all persons that import tangible property to Puerto Rico must file a use tax on imports return no later than the tenth day of the calendar month following the import.
There is a credit for purchases of products manufactured in Puerto Rico for purposes of SUT. In general, the credit will be 10% of the excess of the purchases of eligible products over the average of the purchases of eligible products for three out of ten prior taxable years. This credit can be carried forward until exhausted. It is important to note that the credit used will be considered taxable income for income tax purposes of the year the credit is taken.
Act 40 introduced marketplace rules in PR for SUT purposes. It also introduced the concept of specified digital products and how these would be taxed in PR for SUT purposes.
Customs duties and import tariffs
Puerto Rico does not have customs duty and import tariff provisions. Since Puerto Rico is a Commonwealth of the United States, it follows the United States' customs duties and import tariffs.
There are certain articles subject to a special excise tax, such as cigarettes, fuels, crude oils, vehicles, alcoholic beverages, cement, sugar, and plastic products, among others.
Act No. 154's excise tax
Companies with manufacturing operations in Puerto Rico may be subject to an excise tax on goods or services provided to offshore-related entities under Act No. 154 of 2010, as amended. This Act created an excise tax that works in tandem with Act No. 154's source rules. Where the excise tax applies, it is in lieu of the tax that otherwise would arise from the application of Act No. 154's source rules. Under this excise tax rule, offshore purchasers that acquire goods from Puerto Rico sellers with gross receipts in excess of USD 75 million for any of the three preceding taxable years and that otherwise meet the source-of-income rule thresholds (set forth above) are subject to this excise tax equal to the ‘applicable percentage of the value’ of such personal property or services, which is essentially a scaled-back percentage. The excise tax rate phases out as follows:
- 4.00% between 1 January 2013 and 31 December 2027.
Various tax credits are provided to offset the excise tax mentioned above.
The excise tax is collected by the Puerto Rico seller on receipts from the sale of personal property or services rendered to a related offshore purchaser. The tax has to be deposited with the Secretary of the Treasury on or before the 13th day of the month following the sale. Each person required to collect the excise tax must file a quarterly excise tax return on 30 April, 31 July, 31 October, and 1 January and pay any remaining tax liability not deposited on a monthly basis, as outlined above.
Act No. 154 sets forth the process for which a credit may be claimed for (i) taxes paid to any of the states of the United States on the acquisition of personal property and services and (ii) taxes paid to Puerto Rico by another member of the taxpayer’s controlled group on a series of purchases.
Personal property taxes
Every corporation engaged in a trade or business in Puerto Rico that on 1 January of each year owns personal property used in its trade or business within Puerto Rico, whether it is leased to another entity or not, is subject to tax on such property. The tax is self-assessed by the corporation, and it is paid together with the filing of an annual return. The tax ranges between 5.80% and 9.83%, depending on the municipality.
The tax return must be filed electronically through the Municipal Revenue Collection Center (MRCC) website (www.crimpr.net). In order to file the return, every taxpayer with over USD 10 million in volume of business and specialist who had prepared more than five returns for the prior taxable year need to register using this website. The signature and certification of the return will be satisfied by virtue of the electronic filing. Also, all returns filed electronically should be accompanied by the corresponding payment due on or before 15 May.
Every corporation must substantially satisfy its personal property tax liability, if any, through estimated tax payments. The amount of estimated taxes should be paid in equal instalments on the 15th day of August, November, February, and May of the taxable year of the corporation. The estimated payments should equal or exceed 90% of the actual personal property tax for the year or 100% of the personal property tax as reflected in the personal property tax return for the preceding taxable year, whichever is less. Any tax not covered by the estimated tax payments should be paid along with the personal property tax return. Failure to pay the tax by the due dates indicated above may result in a penalty of 10% of the instalment due.
A 5% statutory discount is available if 100% of the personal property tax, as reflected in the personal property tax return for the preceding taxable year, is made by the first instalment date (15 August).
In general, all personal property not specifically exempted, including cash, finished goods inventory, supplies, and depreciable property, is subject to the tax. The personal property tax is generally based on the book value of the asset as of 1 January. Finished goods inventory, however, is assessed on the average of the monthly balances for the 12-month period preceding 1 January of each year.
The valuation of the personal property subject to tax is determined by multiplying the book value of such property by the applicable tax rate determined by the municipality in which the property is located. If the book value of depreciable property is below its estimated residual value, the property should be assessed at its estimated residual value.
Real property taxes
The property tax system is administered by the MRCC. The tax on real property is directly assessed by the MRCC and may be paid in two instalments. The tax, (which varies from a minimum of 8.03% to a maximum of 11.83%, depending on the municipality) is applied to an amount based on the hypothetical fair market value (FMV) of the relevant property in the year 1957. In general terms, this hypothetical FMV normally ranges between 40% and 50% of the cost of the property.
Puerto Rico does not have transfer tax provisions.
Puerto Rico does not have stamp tax provisions. However, recordation fees are imposed at the time of officially recording a real estate transaction with the Puerto Rico Property Registry.
Withholding taxes on salaries and wages
All employers are required to withhold Puerto Rico income tax from all wages paid to its employees.
Federal Social Security and Medicare (FICA)
The Federal Social Security and Medicare Law applies in full in Puerto Rico. The tax rate is imposed on both the employer and the employee. For 2018, the tax rate is 7.65%, which consists of 6.2% of Social Security and 1.45% of Medicare Tax. The Social Security Tax is calculated on the first USD 128,400 (year 2017) of wages received, and the Medicare Tax is calculated on the total wages, without ceiling.
In addition, an employer must withhold a 0.9% Additional Medicare Tax from wages paid to an employee in excess of USD 200,000 (for a single taxpayer; married filing jointly is USD 250,000 and married filing separately is USD 125,000) in a calendar year. The employer is required to begin withholding Additional Medicare Tax in the pay period in which wages are paid in excess of USD 200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the USD 200,000 withholding threshold.
State (PR) Unemployment Tax (SUTA)
The unemployment tax is paid only by the employer and is paid on the first USD 7,000 of total wages paid to each employee during the calendar year, based on an experience rating system. In addition, the employer must also pay a special tax equal to 1% of the wages subject to unemployment tax. However, the special tax together with the experience-based tax cannot exceed 5.4%.
Federal Unemployment Tax (FUTA)
Similar to the FICA, FUTA also applies in Puerto Rico. All persons who employ at least one individual during any 20-week period or pay USD 1,500 or more in salaries during any trimester of the calendar year are subject to the FUTA tax.
The employer is solely responsible for payment of the tax. The rate is 6.0% on the first USD 7,000 of total wages paid during the calendar year to each employee. However, a credit of 5.4% is granted for the Puerto Rico unemployment tax paid. Therefore, the effective tax rate is 0.6% (6.0% less 5.4%).
The Puerto Rico Department of Labor and Human Resources Bureau of Employment Security also administers the disability insurance program. This program is funded principally through the imposition of a tax, in equal amounts, on the employer and employee.
A contributory tax of 0.6% is imposed on the first USD 9,000 of the total wages paid in the year. From the total tax, half (0.3%) is paid by the employer and the other half by the employee.
Employers may establish private insurance plans if approved by the Puerto Rico Department of Labor and Human Resources.
Workmen’s Accident Compensation Insurance
The Workmen’s Accident Compensation Insurance Act (WACA) establishes a compulsory insurance program that covers employees who suffer injury, become disabled, or lose their lives due to a job related accident. The insurance premium is based on total wages paid during the government’s fiscal year, which runs from 1 July to 30 June. The actual rates vary among industry types. The employer is solely responsible for payment of the assessed premium.
Chauffeurs' Social Security
Every employer having one or more drivers is subject to Chauffeurs’ Social Security tax. It also applies to an employer whose employees are usually or regularly required or allowed to operate a motor vehicle as an inherent part of their work.
The tax is imposed on both the employer and the employee as follows:
- Every employer must pay USD 0.30 per week or fraction thereof for each covered employee.
- Every employee must pay USD 0.50 per week or fraction thereof.
Municipal license tax
Every corporation is required to file an annual volume-of-business declaration with each of the municipalities in which it establishes or conducts business operations during the year. The declaration must indicate the actual volume of business (i.e. net sales, gross income from any service rendered, and other gross receipts) attributable to each municipality. When a business operates in more than one municipality but does not receive income in all of them, the license tax shall be computed based on a distribution of sales apportioned to each municipality by square feet of the building used in each municipality.
For a non-financial business, the license tax payment varies from a minimum of 0.20% to a maximum of 0.50%, depending on each municipality. The payment must be made in two equal instalments on or before 15 July and 15 January on the basis of the volume of business generated by the entity during its accounting year ended within the immediately preceding calendar year before the due date of the declaration. A 5% discount is available when the tax is fully paid on the declaration due date (on or before five working days after 15 April of each year).
For the first six months after a new business is established, the new company is generally exempt from the municipal license tax, provided that the business informs the municipality that it has established a new business in the municipality within the first 30 days of operations and requests the provisional license tax as established in each municipality. A copy of the municipal licence is generally requested as a perquisite for obtaining other licences and permits in Puerto Rico.