Puerto Rico Swaps Sales Tax for VAT
- Mar 25, 2016 | Gail Cole
Puerto Rico is transitioning from sales and use tax to value added tax (VAT). The United States territory increased and broadened sales tax in 2015 and initially hoped to implement VAT on April 1, 2016. Yet an administrative determination issued at the end of December 2015 grants the Puerto Rico Tax Department 60 days of wriggle room, which it is taking. The latest date given for the launch of the new system is June 1, 2016.
VAT v sales tax
As its name implies, VAT is applied whenever value is added along the supply chain and culminates with a tax on the sale to the final purchaser. Sales tax is applied only once, on retail sales to the final consumer. Credits apply to business inputs in the VAT system, while sales tax generally applies to most business inputs (other than items purchased for resale and exemptions imposed legislatively). VAT is often included in the final price; sales tax must be separately stated.
When it’s all said and done, VAT typically generates more revenue for governments than sales tax. However, the Puerto Rico will not apply VAT to raw materials imported by manufacturers. This is normally a large source of tax revenue and the exception could negatively impact Puerto Rico’s bottom line. On the other hand, it could prevent manufacturers from abandoning Puerto Rico in the wake of the tax changes.
Periodically, there is talk of implementing VAT elsewhere in the United States. Many eyes will be on Puerto Rico in the coming months and years, gauging the effects of swapping sales tax for value added tax.
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