Puerto Rico: How the proposed Value Added Tax will impact the Renewable (Green) Energy Industry

DISCLAIMER: This update and its content do not con stitute advice. Clients should not act solely on t he basis of the material contained in this publication. It is intended for information purpos es only and should not be regarded as specific advi ce. In addition, advice from proper consultant should be obtained prior to taking action on any is sue dealt with this update. © 2015 Kevane Grant Thornton LLP All rights reserve d. Kevane Grant Thornton LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the m ember firms are not a worldwide partnership. Services are delivered by the member f irms. 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.

How the proposed value added tax will impact the Renewable (Green) Energy 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 current Sales and

Use Tax increased to 10.5% (state tax) for a

transition period that will end on March 31,

2016. 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 be

applied to services provided by 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 renewable

green energy 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 green energy

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

Contact us For assistance in this matter, please contact us via [email protected] Tax Partner or [email protected] 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

Follow us on and June 30, 2015

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DISCLAIMER: This update and its content do not con stitute advice. Clients should not act solely on t he basis of the material contained in this publication. It is intended for information purpos es only and should not be regarded as specific advi ce. In addition, advice from proper consultant should be obtained prior to taking actio n on any issue dealt with this update. © 2015 Kevane Grant Thornton LLP All rights reserve d. Kevane Grant Thornton LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the m ember firms are not a worldwide partnership. Services are delivered by the member f irms. 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. Pl ease visit www.kevane.com for further details.

the manufacturing plant is required to

obtain because of a requirement of Law,

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.

Will the solar equipment be exempt

from VAT?

The exemption of solar equipment used to

produce electric energy including accessories

and parts when such are necessary to meet its

purpose of producing energy is not exempt

from VAT.

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 purchases (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

green energy business will need to make an

allocation on the VAT incurred on costs. If

the green energy business sells goods or

services that are exempt from VAT it will not

have to collect VAT. However, the green

energy 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. Please refer to

our previous alerts, in specific Part III of our

series, for a list of exempt and excluded goods

and services.

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.

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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 that does 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 includes 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 communication on this

issue.

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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 and

designated services pursuant to preexisting

contracts executed before July 1, 2015, 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.

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.

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Impact of proposed value added tax

Renewable (Green) Energy Industry

Total VAT paid:Imported products 105,000$ Other products 315,000 Services and other 210,000 Total VAT paid: 630,000$

VAT not directly related to a good or service: $147,000

*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

Green business imports:

-Exempt products - $1 million

-Other products - $1 million

Pays 10.5%* VAT on the

other products = $105,000

- Green Energy buys engineering and maintenance services in

the amount of $2,000,000 and pays 10.5%* VAT in the amount of $210,000.

- Green business acquires locally raw material

for manufacturing free of VAT $5,000,000.

- Green business acquires computer equipment

and other products subject to VAT $3,000,000

- Pays 10.5%* VAT of $315,000 to the seller.

- Green business generates energy that is sold in Puerto Rico

to PREPA (excluded from the payment of VAT)

- Green business manufactures renewable energy equipment

(Adds Value).

- Sells manufactured product and is exported (subject to a 0%

VAT).

- Overall sales amounted $30,000,000 30% are exempt sales

(i.e. sale of energy), 40% are taxable (i.e. sale of export product

suject to a 0% VAT), 30% of sales are sold to local distributors

$9,000,000.

- Collects VAT of 10.5% $945,000

- Takes a credit for the VAT paid on imported goods, computer

equipment of $420,000 (see note) plus $147,000,

($210,000*.70) for a total of $567,000.

Note: Until further guidance is issued, there is a possibility of

allocating computer equipment VAT to all operations, too.

- Deposits $378,000 at the PRTD ($945,000-$567,000).

- Consumer, the last on the chain will not pay VAT to

PREPA on the purchase of energy.

- Business may be able to credit for the VAT paid on

purchase of taxable goods.

Puerto Rico: How the proposed Value Added Tax will impact the Renewable (Green) Energy Industry

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