Puerto Rico: Value Added Tax - Impact to Educational services & Non-profit organizations

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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Value added tax - impact on the
Educational services and
Non-profit organizations
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
March3 1, 2016.
Effective July 1, 2015, the Sales and Use Tax
increased to 10.5% (state tax) for during 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 covered by 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 taxes for the colleges,
educational services and non-profit
organizations. In addition, and for your
reference, we have prepared a diagram to
illustrate how the value added tax is paid and
credited by the education and non-profit
organizations.
Will the education services be subject
to VAT?
Education services will be exempt from the
value added tax including the tuition costs and
other charges related to offering courses by
entities regulated by the Education Council of
Puerto Rico. The materials that are used to
provide educational services will not be
considered exempt if these are shown separate
on the invoice that is provided to the buyer.
The sale of printed books and child care
services will also be exempt.
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 29, 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.
Taxable Services
The following services are subject to VAT:
designated professional services
storage of goods
lease, including operating leases of motor
vehicles (“daily rental”)
computer programs, including
modifications to pre-designed programs
installation of goods by the seller or a third
party
repairs of goods
Excluded Services
The following services are excluded from the
VAT:
services rendered between members of a
controlled group of entities
services rendered by the Puerto Rico and
US Government
services rendered as an employee
services for marine and air transportation
of goods including charges for marine and
air delivery
Exempt Services
The following services are exempt from the
VAT:
educational services and child care
financial services, except for those that
generate bank charges
services that qualify for reimbursement
from Medicare, Medicaid and the Puerto
Rico Government’s Health Insurance Plan
services rendered to the Puerto Rico and
US Governments
real property lease that constitutes the
principal residence of the lessee, including
student and elderly housing
real property lease for commercial purposes
paid by a merchant including payments for
office or sales space, warehousing and
parking
gratuitous services provided by non for
profit entities
health and medical services for humans and
animals
legal services under a contingency fee on
judicial claims related to family, food and
loss suffered by individuals because of
medical malpractice and physical losses and
mental claims cases.
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 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 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 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 educational
institution or non-profit organization will need
to make an allocation on the VAT incurred on
costs. If the educational institution sells goods
or services that are exempt from VAT it will
not have to charge VAT. However, the
educational institution 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 or excluded
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 may 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 include 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
under SUT 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 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 the 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
It 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.
Up to 6/30/15
General SUT – 6%*
Designated services – exempt
B2B – exempt
Municipal Level
*Resellers receive a credit and is applicable to taxable B2B
4/1/16
General VAT – 10.5% or 0% (credit)
Designated services – 10.5% (credit)
B2B – 10.5% (credit)
Up to 6/30/15
General SUT – 1%
B2B – exempt
7/01/15 – 9/30/15
General SUT – 10.5%*
B2B – exempt
10/1/15 – 3/31/16
General SUT – 10.5%*
Designated services – 4%
B2B – 4%
7/01/15 – 9/30/15
General SUT – 1%
B2B – exempt
10/1/15 – 3/31/16 4/1/16
General SUT – 1% General SUT – 1%
Designated services – exempt Designated services – exempt
B2B – exempt B2B – exempt
State Level

Impact of proposed value added tax
Educational services and Non profit organizations
Total VAT paid:
-$
Other products -
Services and other 31,500
Total VAT paid: 31,500$
VAT not directly related to a good or service: $31,500
*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
Imported products
School Imports /Purchases:
- Non-Prepared Food $300,000
- Books (exempt) - $500,000
- School acquires locally non-prepared
food for resale - free from VAT $500,000
- Acquires locally books in the amount of
$700,000 - free from VAT
- Student pays the tax on taxable goods
and services.
- Not allowed to claim credits.
- School buys taxable services
in the amount of
$300,000 and pays 10.5%*
VAT of $31,500.
- School overall sales amounted to $2,050,000
- 90% are exempt sales and 10% are taxable sales.
- Collects VAT of $21,525 ($2,050,000 * 10.%) *10.5% VAT
- Takes credit for the VAT paid on services $3,150
[$ 31,500 VAT paid * .10 (taxable sales percetage allocation)]
- Deposits $18,375 ($21,525-$3,150) at the PRTD after taking
the credits for VAT paid.

Puerto Rico: Value Added Tax - Impact to Educational services & Non-profit organizations

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