The changes in the Internal Revenue Code outlined as part of the Fiscal Plan propose that merchants send the money collected from the Sales and Use Tax (IVU, by its Spanish acronym) to the Department of Hacienda (Treasury) on a weekly basis.
This measure could go hand in hand with the eventual implementation of a system that would allow Hacienda to instantly receive the money from this tax when consumers pay with credit or debit cards, according to Hacienda Secretary Raúl Maldonado.
“We’re evaluating it. We have several alternatives. We don’t want to do anything that would imply a compliance cost on the merchant. We’re going to have transitions. A transition measure is paying the IVU weekly instead of once a month. We will do this in stages. We are going to do it first with large businesses that already have an electronic system to pay it weekly. We’ll go from there, depending on how large the businesses are. The last stage will be for small businesses. We’ll provide them with guidance, technology, and advice on accounting issues,” Maldonado explained in an interview with El Nuevo Día.
According to the Fiscal Plan—which was certified a week ago by the Oversight Board (OB)—this change, along with the use of tax analysis systems, could help improve the Government’s revenues by about $150 million for the 2018 fiscal year. This amount, according to the revenue projections, would exceed $300 million in the following years.
One of the hurdles to overcome is collecting on the portion of the tax that belongs to the municipalities. The sales tax comprises two parts: a municipal tax of 1%, and a state tax of 10.5%.
The weekly IVU payment could complicate the accounting efforts for businesses if the system is not synchronized with that of the municipalities.
“It’s something we have to evaluate, because what we want to do is simplify the system with the weekly filing and electronic payment,” Maldonado pointed out.
This is not the only tax analysis with municipal implications. The Hacienda Secretary explained that revising the real estate property tax would be the biggest change for municipal finances, and it will entail modifying rates, eliminating reference prices, and reappraising properties.
They expect to generate another $426 million with those changes. This money would compensate for the elimination of the $350-million annual subsidy currently granted to the municipalities by the state Government. The subsidy, which was implemented in the 1960s, is being eliminated as part of the austerity measures to be enforced to address the Government’s fiscal crisis.
Maldonado did not disclose the amount of the upcoming tax increase. He stated they would first begin the process of identifying the properties that are not in the tax system, as well as property appraisals. Once they have information on these properties, they would adjust the rates to secure the revenues needed.
“We’re also looking at additional alternatives. We could revise the Municipal License Tax Act. A combination of both measures could help reduce the tax burden,” Maldonado added, specifying that they are considering the idea of having the Municipal Revenue Collection Center (CRIM, by its Spanish acronym) and the Property Registry share information, to give continuity to the appraisals.
“The first phase will be to comply with the OB. The second phase will be to review the tax in its entirety. The property tax should have a margin, meaning that if your property loses value, you pay a lower tax, and if it increases, you pay a higher tax,” the Secretary explained.
And what are the corporate tax changes mentioned in the Fiscal Plan?
“We’re working on proposing permanent legislation to change the tax in Act 154, but keeping the idea that companies could get a credit for it in their federal taxes. The difficulty lies in looking for something that works for everyone, because if we leave out, say, 20% of companies, it implies a loss of (government) revenues of $200 or $300 million. We’re also consulting with the IRS (Internal Revenue Service) and the (Department of the) Treasury.”
Why are the revenues from that tax so drastically low in the Fiscal Plan’s revenue projections?
“It goes down in 2019 because it’s understood that the tax will change to the Modified Income Rule. If there were no change in legislation, that’s what would remain. But we’re looking at that. Now, in terms of corporate taxes, we’re looking at other changes. We’re examining the idea of eliminating many deductions and to only keep the ones for new employment, salary, and investment. We’re also assessing the minimum alternative tax, because we believe it’s been too cumbersome for businesses. We will possibly keep a single taxation method for the corporations,” he said.
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