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Puerto Rico VAT is dead

  • May 27, 2016 | Gail Cole

 Puerto Rico will not implement VAT on June 1.

Puerto Rico VAT is dead. Long live Puerto Rico VAT?

To help tackle its massive debt, lawmakers in Puerto Rico decided in 2015 to transition from sales and use tax (IVU) to value added tax (VAT, or the Spanish acronym IVA). Yet from the beginning, the plan has been controversial and unpopular among business owners.

2015 changes

On July 1, 2015, the general IVU rate in Puerto Rico increased from 7% to 11.5%. On October 1, 2015, a 4% IVU was applied to numerous previously exempt B2B (business-to-business) services.

The transition from IVU to VAT/IVA was initially scheduled for April 1, 2016. However, the statute granted the Secretary of the Treasury authority to delay implementation for three months at his discretion. He exercised this right in March 2016, and the effective date was moved to June 1, 2016.

As planned, the new VAT/IVA system would have largely mirrored the IVU system: exemptions for non-prepared food, medical services and prescription drugs remained. Consumers would have noticed little difference between the two systems. Businesses, however, would have found the transition burdensome. In addition to a new accounting requirement, VAT imposition called for replacing the 4% IVU on B2B service transaction with the standard 10.5% VAT.

In addition, the 1% municipal IVU was to remain unchanged during the transition. The municipal IVU is similar to Puerto Rico’s IVU, except non-prepared food is subject to tax while most B2B transaction are not.

VAT rejected

As plans for implementation progressed, opposition from the island’s business leaders grew. Many people worried that VAT would complicate and increase the cost of doing business in Puerto Rico, causing more problems than it solved. This spring, the legislature was persuaded to reconsider VAT implementation, and in early May 2016, the Puerto Rico Legislative Assembly passed legislation repealing VAT entirely.

Governor Alejandro Garcia Padilla vetoed the legislation on May 20, but both legislative chambers easily overrode his veto — the House on May 23 and the Senate on May 26.

As of this writing, the plan to transition to VAT is dead.

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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.