Puerto Rico VAT Impact on Manufacturing

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.
Value added tax – impact on the
Manufacturing 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 March 31, 2016.
Effective July 1, 2015, the Sales and Use Tax
increased to 10.5% (state tax) for a transition
period that will end on March 31, 2016. The
municipal rate remains at 1%. 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
apply to services provided to other merchants
(B2B) and for designated professional services
unless these are exempt from a qualified
contract. Please refer to Tax Alert: Special
Sales and Use Tax transition rules
applicable to qualified contracts dated June
25, 2015. Visit our website under the
publications tab for more information.
On April 1, 2016, a new Value Added Tax will
replace the state Sales and Use Tax of 10.5%.
Designated services and services rendered to
other businesses (B2B) will be subject to a
10.5% VAT rate unless these are covered 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 this municipal
tax.
This alert concentrates on the specific aspects
related to Value Added Tax for a
manufacturing business. 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
manufacturing 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
the manufacturing plant is required to
obtain because of a requirement of law,
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.
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.
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 (16%) 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 purchased (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
manufacturer will need to make an allocation
on the VAT incurred on costs. If the
manufacturer sells goods or services that are
exempt from VAT, it will not have to collect
VAT. However, the manufacturer 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.
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
country, 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 certificate must be displayed at
all times in a place visible to the general
public in each place of business for which it
was issued.
Any person that conducts 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.
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 communications 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 this were excluded
from SUT. The person 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
(B2B) and designated services pursuant to
preexisting contracts executed before July
1, 2015 will be exempt from the 4% and
10.5% from April 1, 2016, on 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 and to the valued
added tax effective April 1, 2016.
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
Manufacturing Industry
MANUFACTURING INDUSTRY
Total VAT paid:
Imported products 157,500$
Other products 315,000
Services and other 126,000
Total VAT paid: 598,500$
*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
Manufacturing plant imports or
purchases:
- Raw material (0% VAT) - $1.5
million
- Other taxable goods - $1.5
million
Pays 10.5%* VAT on the other
products = $157,500
Manufacturing plant
- Acquires locally raw material for
manufacturing free of VAT for
$5,000,000
- Acquires locally computer equipment
and other products subject to VAT
$3,000,000
- Pays 10.5%* VAT of $315,000 to the
seller.
- Manufactures its product (adds value)
- Sells manufactured product and it is exported (subject to a
0% VAT)
- Sells manufactured product to local distributors $14,500,000
- Collects VAT of $1,522,500
- Takes a credit for the VAT paid on taxable goods, computer
equipment and other products and services for a total of
$598,500
- Deposits $924,000 = ($1,522,500-$598,500) at the PRTD
after taking the credits for VAT paid.
Customer
- Manufactured product is exported. Subject to a VAT of
0%.
- Local distributors will be able to credit depending on the
type of goods or services sold (i.e. exempt or taxable).
- Manufacturing plant buys professional
services and other supplies in the amount of
$1,200,000 and pays 10.5%* VAT in the amount
of $126,000.

Puerto Rico VAT Impact on Manufacturing

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