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Puerto Rico's Potential Tax Reform

  • Feb 11, 2015 | Gail Cole

 Puerto Rico is in need of tax reform.

Puerto Rico is in need of tax reform. It suffers from a shrinking population, high unemployment, and no economic growth. The commonwealth has over-borrowed and has more than $70 billion in junk-rated bonds. Something must be done.

Governor Alejandro García Padilla knows this and is working toward a solution. His administration is expected to release a bold tax reform proposal soon (Forbes).

According to the Commonwealth of Puerto Rico Tax Reform Project, which is very much a work in progress, the new tax structure should do the following:

  • Produce adequate revenue
  • Distribute the burden of taxation fairly
  • Promote economic growth
  • Increase international competitiveness
  • Minimize interference with private decision making
  • Streamline compliance and administration

Change could involve overhauling the “island’s loophole-ridden 7% sales and use tax,” replacing it with “a broad-based VAT.” Currently, Puerto Rico allows many sales and use tax exemptions for services but taxes many business-to-business transactions. It also has a very low rate of compliance, between 56% and 65%.

Of several possible solutions, the most popular seems to be to adopt a GST. A GST with a single rate would do the following:

  • Tax final consumption, not businesses
  • Be a multi-staged, transaction-based tax levied at each stage of the supply chain
  • Be a broad based tax on most goods and services

Stay on top of tax changes in Puerto Rico and elsewhere. Learn more.

photo credit: SDC14267 via photopin (license)

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.