Tax Reform

You wouldn’t ask a cardiovascular surgeon to change the spark plugs on your car, just like you wouldn’t ask an automotive expert for psychological advice. So then, why the heck wouldn’t our legislature use tax experts to work on tax legislation?

Some of the most recent technical amendments to this administration’s tax reform are yet another attempt at fixing a problem that many didn’t view as a problem to begin with. Some would argue that we are now putting a bandage on a wound that was created only by placing a bandage on something that many didn’t think was a wound to begin with.

The current technical amendments, being evaluated in conference between the Senate and the House, come on the coattails of a Tax Incentives Code that already included amendments to the original tax reform approved on Dec. 2018. The fact that the bill is subject to a legislative conference process is proof positive that this bill is the product of closed door negotiations and political mumbo jumbo to ensure passage.

As it stands, the legislative proposal would increase the threshold for the business to business exemption from $200,000 to $300,000 in order to offer small businesses a greater relief from the sales and use tax. Definitely a positive amendment. Additionally, the legislative language requires web merchants to collect the sales and use tax and subjects web marketplaces to the sales and use tax.

One of the hits of the 2018 tax reform was the optional tax computation for individual service providers, who were allowed to choose taxation at a preferential tax rate without claiming any deductions against their income, essentially implementing a “flat tax” of sorts for professionals in this tax sector.

There are unanswered questions in the 2018 tax reform and in the subsequent technical amendment legislation. This last round of technical amendments to the bill only clarified that you must derive at least 80 percent of your revenue from services in order to qualify. What about those who derive revenue from a one member LLC?  Or those who receive passive income such as retirement funds or investment income? This was a lost opportunity to promote a simpler and cleaner tax system, something taxpayers and the government  have always talked about.

What has really raised eyebrows in the tax community professionals is the last minute change that was introduced to increase the threshold that business need for audited financial statements from $3 million to $10 million. Now, I question the need for such an amendment if not for looking for votes? From a government perspective, the Puerto Rico Department of the Treasury is strapped for resources and cannot initiate enough tax audits to administer the tax system while the general fund is looking for more revenue to comply with all of its needs. When you throw in this type of venom into the equation, this is simply the concoction of a poison pill that we will all pay for dearly. From a taxpayer perspective, a business with $3 to $10 million in revenues usually will need audited financial statements for banks and financing purposes as well, so I wonder what the savings are to the business? The biggest loser here is the general fund. We all know that Puerto Rico has a longstanding history of tax evasion and some very aggressive tax planning that some unscrupulous accountants will sell to their clients. With no supervision or oversight, the government will have to accept whatever a tax return without audited financial statements wants to say. Why is the government changing this threshold? Why not grant business what they have been asking for a long time, elimination or a reduction in the property tax on inventory? Does that not make more sense? This, my friends, is the third round of changes to a tax legislation that not only impacts the government’s revenues but does little to promote the economic development that everyone has been requesting from the government.

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