Puerto Rico: How the proposed Value Added Tax will impact the Construction 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 Construction
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 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 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
construction 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 construction
business.
Are construction services subject to
VAT?
Construction services are subject to VAT.
However, the sale of any building or real
property structure is not subject to VAT.
There is also no VAT charged on the rental
of real property tax constitutes the principal
residence of the lessee, including student
and elderly housing as well as the
commercial lease including payments for
office or sales space, storage and parking
since Act 72 exempts these transactions
from VAT.
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 28, 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.
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.
Act 72-2015 provided transition rules for
preexisting contracts as of July 1, 2015, that
have been qualified by the PR Secretary of
Treasury according to the requirements
established through Tax Policy CL 15-10.
The rates that would apply to such sales will
be the ones as of June 30, 2015 (6% state
tax).
Tax Policy CL 15-10 provides that the
owner of the construction project must have
submitted all documents required by Tax
Policy CC 15-10 by August 10, 2015, to
register the project. After evaluation from
Treasury and obtaining the Registry
Certificate, the primary contractor together
with the owner of the project must submit
the documents established by Tax Policy 15-
10 to register the contract. Once the
contract is registered, the Secretary will
expedite a Certificate that will allow getting
benefit of the rates as of June 30, 2015 (i.e.
6% instead of VAT rate of 10.5%).
Purchase of tangible property to be used as
well as taxable services rendered in
connection with one of these registered or
qualified contracts will benefit of the rates as
of June 30, 2015.
Services to other merchants (B2B) and
designated services received in connection
with one of these contracts 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.
Imports subject to use tax introduced after
June 30, 2015, pursuant to one of the
qualified contracts will be subject to a 10.5%
SUT. Merchant may qualify to obtain a
refund of 4.5% in certain cases.
Tax Policy CL 15-10 provides that the
certifications approved will be effective until
June 30, 2016, or the date the contract ends,
whichever occurs first. The effective date for
the certification may be extended after June
30, 2016, by Secretary for an additional
period of 12 months.
What happens if the business is a
contractor and developer?
If the construction business is the contractor
and developer of a new property, it must
consider what the business will be selling. If
the construction business constructs and
sells the property, that is treated as a supply
of goods and not a supply of services. If the
business is contracted to construct a
building or a structure, it is classified as
construction services.
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 purchased or 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 construction
business will need to make an allocation on
the VAT incurred on costs. If the construction
business sells goods or services that are
exempt from VAT (i.e. sale of real property) it
will not have to collect VAT. However, the
construction 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.
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 doing 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 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
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 affects the
taxpayer responsibility for a taxable event
after April 1, 2016, will be applicable under
the provisions of Subtitle DD (VAT) under
Act 72.

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 (i.e. May 29, 2015) after the
enactment of Act 72 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
Construction Industry - from the developer perspective
Total VAT paid:
Imported products 157,500$
Other products 735,000
Services and other 84,000
Total VAT paid: 976,500$
*If the contract was qualified with the Secretary of Treasury according to the requirements of Tax Policy CC 15-10
the state tax of 6% will apply. If the contract was not qualified the state tax will be 10.5% VAT at the state level.
Municipal remains at a 1% under SUT.
Merchant pays 10.5% VAT on products subject to use tax (merchant may qualify to obtain a refund of 4% in certain cases).
Audit · Tax · Advisory
Member firm of Grant Thornton International Ltd
Construction business
imports:
- Taxable goods - $1.5
million
Pays 10.5% VAT on products
subject to use tax =
$157,500.
- Construction business buys architectural, engineering and consulting
services in the amount of $800,000 and pays 10.5%* VAT in the
amount of $84,000.
- Construction business acquires locally
material for construction $5,000,000.
- Construction acquires computer equipment
and other products $2,000,000 subject to
VAT of 10.5%* (see note below).
- Pays 10.5% VAT of $735,000 to the seller.
- Sale of real property by developer is exempt from the
payment of VAT.
- Overall sales amounted $50,000,000
- Since the sale is classiffied as an exempt sale,
developer is not able to claim a credit on the VAT paid
on the import of goods, material for construction,
equipment and other products, neither the services paid
to professionals involved on the construction business.
- Consumer, the last on the chain will not pay
VAT on the purchase of real property neither on
the lease of real property for residential purposes
nor on the lease of commercial property.

Impact of proposed value added tax
Construction Industry - from Sub-Contractor Perspective
Total VAT paid:
Imported products 157,500$
Other products 315,000
Services and other 105,000
Total VAT paid: 577,500$
*If the contract was qualified with the Secretary of Treasury according to the requirements of Tax Policy CC 15-10
the state tax of 6% will apply. If the contract was not qualified the state tax will be 10.5% at the state level.
Municipal remains at 1% under SUT.
Pays 10.5% VAT on products subject to use tax (merchant may qualify to obtain a refund of 4% in certain cases).
Audit · Tax · Advisory
Member firm of Grant Thornton International Ltd
Construction business imports:
-Taxable goods - $1.5 million
Pays 10.5% VAT on products
subject to use tax = $157,500.
(see note below)
- Construction business buys architectural, engineering and
consulting services in the amount of $1,000,000 and pays 10.5% VAT
in the amount of $105,000.
- Sub-contractor acquires locally material for
construction $2,500,000.
- Sub-contractor acquires computer equipment
and other products $500,000 subject to VAT of
10.5%,
- Pays 10.5% VAT of $315,000 to the seller.
- Sale of construction services to developer are subject to VAT.
- Sale of construction services for installations, repairs,
maintenance and refurbishment are taxable.
- Overall sales amounted $15,000,000
- Collects VAT of $1,575,000 (10.5%)
- Takes a credit for the VAT paid on imported goods, material for
construction, computer equipment and services in the amount of
$577,500.
- Deposits $997,500 at the PRTD ($1,575,000-$577,500).
- Developer will not be able to credit the VAT paid
for construction services when the sale made by
developer is for real property (i.e. exempt for VAT
purposes).

Puerto Rico: How the proposed Value Added Tax will impact the Construction Industry

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