Puerto Rico: Value Added Tax - Impact on the Hotel and Tourism Industries

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
Hotel and Tourism Industries
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 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 current
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 hotel
industry. In addition, and for your reference,
we have prepared a diagram to illustrate how
the value added tax is paid and credited by the
hotel business.
Tourism Development Exemption
Goods to be used in a tourism activity
provided that these are introduced in
Puerto Rico or subject to transactions in
Puerto Rico by a merchant engaged in a
tourist business that maintains the Exempt
Purchases Certificate will be exempt from
VAT.
The exemption on the introduction of
articles is not applicable to inventory nor
any other property held primarily for sale
in the ordinary course of business,
machinery, construction materials,
materials, equipment, furniture and office
materials, used on the administrative or
commercial phase of the business or to
give maintenance to the physical facilities
of the tourism business.
The VAT does not apply to the rental of
any property subject to the room tax
imposed by the Tourism Company.
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.
Services received by Tourism Business will
be subject to VAT (notwithstanding the
tourist exemption).
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 (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
hotel will need to make an allocation on the
VAT incurred on costs. If the hotel sells goods
or services that are exempt from VAT (rooms)
it will not have to collect VAT. However, the
hotel 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.
Reimbursement of VAT
Non-resident individuals that acquire goods
in Puerto Rico and have paid VAT may
request a reimbursement if the individual
leaves Puerto Rico within a period of 30
days from the date of the purchase of goods
and the total paid for the goods exceeds
$500.
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.
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 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 (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
Hotel and Tourism Industries
Total VAT paid:
Imported products 105,000$
Other products 136,500
Services and other 126,000
Total VAT paid: 367,500$
VAT not directly related to a good or service: $126,000
*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
Hotel imports:
- Exempt products - $1
million
- Other products - $1 million
Pays 10.5%* VAT on the
other products = $105,000.
- Hotel buys services in the amount of
$1,200,000 and pays 10.5%* VAT in the amount of
$126,000.
- Hotel acquires locally un-prepared food
free of VAT $2,000,000
- Hotel acquires locally other products
subject to VAT $1,300,000
- Pays 10.5%* VAT of $136,500 to the seller.
- Hotel rooms sales are not subject to VAT.
- Prepares the food - Adds Value.
- Overall sales amounted $10,000,000
- 60% are exempt sales and 40% taxable sales.
- Collects VAT of $420,000 (40%*$10,000,000)*10.5% VAT
- Takes a credit for the VAT paid for inventory sold of
$241,500 plus $50,400[(126,000*.40 (taxable sales
percentage allocation)] for a total credit of $291,900
- Consumer, the last on the chain pays the
tax on the purchase of the final product
- Not allowed to claim credits
- Business may be able to credit for the VAT
paid.

Puerto Rico: Value Added Tax - Impact on the Hotel and Tourism Industries

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Puerto Rico: Value Added Tax - Impact on the Hotel and Tourism Industries