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Several tax reform measures are included in a fiscal plan published recently by the Government of Puerto Rico intended to stabilize the territory's tax revenue and put an end to serial budget deficits.
According to the Government, the revenue measures in the plan will reduce its funding gap by USD12.9bn over 10 years and include reforms to corporate taxation, the introduction of an internet sales tax, and tax compliance measures.
The plan envisages the replacement of the existing excise tax legislation with a reformed corporate tax system. Potential options include:
At present, domestic companies in Puerto Rico are taxed at 20 percent plus a progressive surtax of between five percent and 19 percent, less a deduction of USD25,000. Foreign corporations are taxed at regular corporate tax rates on effectively connected income, but a 29 percent withholding tax applies on income not effectively connected with that business.
According to the fiscal plan, the current corporate tax regime "lacks simplicity and stability" due to a history of "bolt on" taxes. This process, it says, has driven "a high degree of uncertainty" and has hindered investment.
The corporate tax reforms are expected to raise an additional USD1bn in revenue in 2019, and USD8.8bn over 10 years.
The fiscal plan also envisages the collection of sales tax on items purchased by residents of Puerto Rico over the internet. This could be achieved on a "click through" nexus basis, whereby a sales tax nexus is created by an affiliate in a state linking to another "out-of-state" business via an affiliate program. Alternatively, the Government could use an "economic nexus" to determine sales tax liability, whereby sales become taxable when a consumer spends over a certain threshold.
According to the Government, internet sales in Puerto Rico average USD2bn per year and an internet sales tax on a click through or economic nexus basis would raise an additional USD65m by 2019.
The Government also plans the implementation of a point of sale Sales and Use Tax as part of a package of measures designed to improve tax compliance. Other proposals in this area include the creation of a whistle-blower office, the deployment of advanced analytics to detect non-compliance, and an increase in the tax authority's audit capacity.
"[The] tax system has been plagued for years with high rates of informality and non-compliance," the plan states. "Limited use of technology/analytics hinder Hacienda's ability to detect evaders efficiently."
The Government currently has 174 auditors, but it plans to bring in an additional 200-300 collections staff from different parts of government "to centralize collections, and increase capacity and efficiencies."
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