Puerto Rico: How the proposed Value Added Tax will impact the Renewable (Green) Energy Industry

DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this
publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant
should be obtained prior to taking action on any issue dealt with this update.
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Kevane Grant Thornton LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide
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liable for one another’s acts or omissions. Please visit www.kevane.com for further details.
How the proposed value added
tax will impact the Renewable
(Green) Energy Industry
Act 72 which amends the Internal Revenue
Code for a New Puerto Rico introduces a value
added tax system in Puerto Rico that will
replace the Sales and Use tax system (“SUT”)
effective April 1, 2016, for state tax purposes.
The SUT will continue to be in place for
municipal tax purposes after April 1, 2016.
Effective July 1, 2015, the current Sales and
Use Tax increased to 10.5% (state tax) for a
transition period that will end on March 31,
2016. The credit for SUT to be claimed in the
Monthly Sales and Use Tax Return will be
100% of the tax liability in the case of resellers
of tangible personal property (an increase
from the current 75%).
On October 1, 2015, a new tax of 4% will be
applied to services provided by other
merchants (B2B) and for designated
professional services unless these are exempt
by a qualified contract. Please refer to our tax
alert from June 25, 2015, where we discuss the
special sales and use tax transition rules
applicable to qualified contracts.
On April 1, 2016, a new Value Added Tax will
replace the state Sales and Use Tax of 10.5%.
Designated services and services business to
business (B2B) will be subject to a 10.5% VAT
rate unless these are exempt by a qualified
contract.
From a municipal point of view the sales and
use tax will continue to be 1%. Services to
other merchants and designated professional
services will be exempt from municipal tax.
This alert concentrates on the specific aspects
related to value added taxes to the renewable
green energy industry. In addition, and for
your reference, we have prepared a diagram to
illustrate an example of how the value added
tax is paid and credited by the green energy
business.
Exemption Certificate and Zero Tax
for Manufacturing Plant
It provides manufacturing plants the right
to import or acquire articles for
manufacturing subject to a 0% tax rate. It
will be effective for three (3) years and will
need to be presented when claiming the
exemption at the moment of introduction
or acquisition of articles to be used on the
manufacturing process. Merchant seller
should maintain copy of the exempt
certificate as evidence to document the
exempt sale.
Articles for manufacturing will include the
raw material used or integrated by a
manufacturing plant on a finished product,
the machinery, equipment and accessories
used on the manufacturing process or that
Contact us
For assistance in this matter,
please contact us via
maria.rivera@pr.gt.com
Tax Partner
or
javier.oyola@pr.gt.com
Tax Manager
Kevane Grant Thornton LLP
33 Calle Bolivia Ste 400
San Juan, Puerto Rico 00917-2013
T + 1 787 754 1915 F + 1 787 751 1284
www.kevane.com
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June 30, 2015

publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper
consultant should be obtained prior to taking action on any issue dealt with this update.
partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are
not liable for one another’s acts or omissions. Please visit www.kevane.com for further details.
the manufacturing plant is required to
obtain because of a requirement of Law,
federal or state regulation for the operation
of the manufacturing plant as well as the
articles for which an exemption for excise
taxes is provided under Section 9(a) of Law
73-2008 better known as Economic
Incentives Law for the Development of
Puerto Rico.
Will the solar equipment be exempt
from VAT?
The exemption of solar equipment used to
produce electric energy including accessories
and parts when such are necessary to meet its
purpose of producing energy is not exempt
from VAT.
Returns and declaration
Imports Declaration –upon the
introduction of goods into PR and before
release of merchandise
Tax on Imports Monthly Return – on
the 10th day following the closing of each
month
Small Merchant Annual Informative
Declaration – within a period of 60 days
from the date of the filing of the income
tax return
Monthly VAT Return – on the 20th day
following the closing of each month
The VAT Monthly Return will show the
merchant’s VAT liability for a month
computed as follows:
VAT (10.5%) on goods and services
sold during a month
Plus/Minus: adjustments that
increase/decrease the sales price of
goods sold
Minus: Credit for VAT paid on goods
or services purchases (imported)
Credit for value-added taxes paid
Every merchant, except small merchants
holding a Small Merchant’s Registration
Certificate, will be allowed to claim a credit for
the VAT paid during the corresponding
month in the case that the merchant sells
taxable goods or services subject to the 10.5%
or 0% VAT. If there is a combination of
exempt and taxable goods and services the
green energy business will need to make an
allocation on the VAT incurred on costs. If
the green energy business sells goods or
services that are exempt from VAT it will not
have to collect VAT. However, the green
energy business will not be able to recover any
VAT paid on costs, either charged by its
suppliers or paid on the importation of goods
or services, which are directly or indirectly
related to those exempt sales. Please refer to
our previous alerts, in specific Part III of our
series, for a list of exempt and excluded goods
and services.
In general terms, the amount of the credit will
be computed based on the sum of the
following items:
VAT paid upon introduction of taxable
items into Puerto Rico that are directly or
indirectly related to the sale of taxable items
and services, plus;
VAT paid by a merchant on the purchase
of taxable items and services that are
directly or indirectly related to the sale of
taxable items or services as reported in the
fiscal statement, plus;
VAT paid by the merchant for a service
provided by a non-resident and included on
the VAT Monthly Return.

Credit for Consumption Tax Paid to
Foreign Countries for Services
Rendered by Related Entities
Any merchant to which a related entity not
engaged in trade or business in Puerto Rico
has provided a service may claim a credit
on its Monthly VAT return for the amount
paid for the concept of consumption taxes
paid to foreign countries after any credit
claimed for such tax on the foreign county,
with respect to the service.
VAT Overpayment
A VAT overpayment will be the excess of
any adjustment or credits over the
applicable VAT on sales of goods and
services made during the corresponding
month, as disclosed on the Monthly VAT
Return.
If the VAT overpayment does not exceed
$10,000, it must be applied against the
VAT liability shown in the monthly VAT
return and for the following months until
fully exhausted.
If the VAT overpayment exceeds $10,000,
the merchant may request a refund if it is
considered an eligible merchant or it has
reflected overpayment on its Monthly VAT
Returns for the last three months.
Merchant’s Registration Certificate
Any person who wants to do business in
Puerto Rico must be registered at the
Puerto Rico Treasury Department before
commencing operations.
The original must be displayed at all times
in a place visible by the general public in
each place of business for which it was
issued.
Any person that does business in PR that
does not maintain the registry certificate or
when such certificate has expired will be
subject to penalties.
Merchants that are part of a controlled or
affiliate group could elect to be treated as
one merchant.
Exempt Purchases Certificate
It is available to eligible persons on the
import or acquisition of goods or services
exempt from VAT.
It is valid for three years. The Secretary at
its discretion may extend or limit the
validity of such certificate.
Eligible persons includes the Government
of the United States of America and its
States, the District of Columbia and the
Government of the Commonwealth of
Puerto Rico, any hospital unit, merchants
dedicated to the tourism industry and
bona-fide farmers.
Eligible Merchant’s Certificate
It will be issued to those merchants with an
annual volume of business in excess of
$500,000 for the last three preceding years
and which 80% of its sales are subject to a
0% VAT tax rate.
Effectiveness of current certificates
and new certificates for VAT
Effectiveness of certificates issued under
the 2011 Code was not part of the
discussion of Act 72. We will continue to
monitor PRTD communication on this
issue.

Transitory provisions
Bonds approved under the SUT provisions
will be effective until its expiration date.
Credits not claimed as a refund and
available as of March 31, 2016, as reflected
on the Monthly SUT return filed not later
than April 20, 2016, could be used as a
credit on subsequent monthly VAT returns
until these are exhausted.
Administrative determinations and closing
agreements issued under the 2011 Code
with provisions are similar to VAT
provisions enacted with Act 72 and that
affect the taxpayer responsibility for a
taxable event after April 1, 2016, will be
applicable under the provisions of Subtitle
DD (VAT) under Act 72.
Exclusion of Contracts and Pre-
existing Bids
The retail sales covered by executed
contracts and pre-existing bids at auction
before April 1, 2016, will be excluded from
VAT to the extent these were excluded from
SUT. The merchant may acquire the taxable
items subject to such contract or auction
during a period of 12 months or contract
term, whichever is less.
Services provided to other merchants and
designated services pursuant to preexisting
contracts executed before July 1, 2015, will
be exempt from the 4% to the extent that a
certification of qualified contract has been
obtained from the Secretary of Treasury.
Such certification needs to be requested to
the Secretary of Treasury not later than
September 30, 2015. If the certification is
not obtained the services rendered after
September 30, 2015, will be subject to a 4%
state tax.
Commission for Alternatives to
Transform the Consumption Tax
This is a mechanism to evaluate the Puerto
Rico Tax System based on the fiscal and
budgetary reality of the government.
Its function will be to evaluate the different
tax models and provide a report not later
than 60 days after the enactment of Act 72
(i.e. May 29, 2015) with recommendations
on the feasibility of implementing a model
as a transformation of the actual tax on
consumption taking in consideration the
collections necessary for the Government
and the compliance of its obligations.
The following table summarizes the effective
date of all changes in sales and use tax and
value added tax introduced by Act 72-2015.

Impact of proposed value added tax
Renewable (Green) Energy Industry
Total VAT paid:
Imported products 105,000$
Other products 315,000
Services and other 210,000
Total VAT paid: 630,000$
VAT not directly related to a good or service: $147,000
*Only 10.5% VAT at the state level. Municipal remains at a 1% under SUT.
Audit · Tax · Advisory
Member firm of Grant Thornton International Ltd
Green business imports:
-Exempt products - $1 million
-Other products - $1 million
Pays 10.5%* VAT on the
other products = $105,000
- Green Energy buys engineering and maintenance services in
the amount of $2,000,000 and pays 10.5%* VAT in the amount of $210,000.
- Green business acquires locally raw material
for manufacturing free of VAT $5,000,000.
- Green business acquires computer equipment
and other products subject to VAT $3,000,000
- Pays 10.5%* VAT of $315,000 to the seller.
- Green business generates energy that is sold in Puerto Rico
to PREPA (excluded from the payment of VAT)
- Green business manufactures renewable energy equipment
(Adds Value).
- Sells manufactured product and is exported (subject to a 0%
VAT).
- Overall sales amounted $30,000,000 30% are exempt sales
(i.e. sale of energy), 40% are taxable (i.e. sale of export product
suject to a 0% VAT), 30% of sales are sold to local distributors
$9,000,000.
- Collects VAT of 10.5% $945,000
- Takes a credit for the VAT paid on imported goods, computer
equipment of $420,000 (see note) plus $147,000,
($210,000*.70)for a total of $567,000.
Note: Until further guidance is issued, there is a possibilityof
allocatingcomputer equipment VAT to all operations, too.
- Deposits $378,000 at the PRTD ($945,000-$567,000).
- Consumer, the last on the chain will not pay VAT to
PREPA on the purchase of energy.
- Business may be able to credit for the VAT paid on
purchase of taxable goods.

Puerto Rico: How the proposed Value Added Tax will impact the Renewable (Green) Energy Industry

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