The package of tax changes – that Governor Ricardo Rosselló Nevares intends to sign into law in the coming days – will provide some relief to individuals, but, according to two experts, it will not help boost the economy, one of the ulterior objectives of the fiscal balance and reforms process that the Oversight Board promotes.
According to Cecilia Colón Ouslán, President of the School of Certified Public Accountants (CPA), an analysis of the House bill 1544 and the amendments made by the Senate points out that, regardless the level of employees, they will see a 5 percent relief on their tax liability.
This improvement would be seen in the payroll during the election year, that is, when 2019 contribution is reported.
However, Colón Ouslán indicated that it would be possible for individuals to see this favorable adjustment next year, once the Department of the Treasury publishes the new wage tax rates in light of tax changes, which, in essence, remained unchanged.
The Earned Income Tax Credit (EITC), a benefit that can be claimed by taxpayers with incomes of up to $ 42,000 and that will depend on the number of dependents, would be added to this.
"This is not what we would have wanted, but it is a first step," said Colón Ouslan, recalling that the government seeks to reduce contributions even under the Board´s pressure.
Last week, the Board warned that what was approved is far from the objectives set out in the fiscal plan and noted that several tax changes could affect the Treasury, such as the legalization of thousands of slot machines outside casinos.
Yesterday, the government representative before the Board, Christian Sobrino Vega, refuted the Board´s statements.
In a letter to the Board, the executive director the Fiscal Agency and Financial Advisory Authority (FAFAA) made it clear that the relief will be less than what was initially proposed, but there will be a way to honor it. This, as a result of the oversight strategies implemented by Treasury and because the reform contemplates other sources of income.
On one hand, the government extended the contribution base so that the alternate basic tax would apply to a larger number of individual taxpayers, except employees. In addition, the tax rate that corporations will pay under the same model of alternate taxation – and which is known as alternative minimum tax (AMT) – increased to 23 percent in the case of entities with gross sales of over $ 3 million.
On the other hand, the government will retain 10 percent in origin to the self-employed, instead of 7 percent as it currently happens.
For Colón Ouslán, the new requirements – so that companies can only deduct expenses previously reported to the Treasury– are positive moves from the area of tax administration.
"The requirement (to inform the Treasury what is paid to third parties) has always existed, but there was never a penalty for not complying," said the CPA president, adding that, in Puerto Rico, there is a tendency to reach cash payment contractual agreements so as not to pay taxes to the Treasury.
Although the legislation could somehow help individuals, the relief will come at the expense of not granting tax tools to companies on the island, just when other economies are doing the opposite, said the president of the Puerto Rican Chamber of Commerce (CCPR), Kenneth Rivera Robles.
According to Rivera Robles, Puerto Rico needed to alleviate its contributory system, especially after the federal fiscal reform.
While in the AMT, companies with gross sales exceeding $ 3 million, would be subject to more taxes, the approved bill would only reduce the corporate rate from 39 to 37.5 percent. The company will be forced to pay the highest contribution of any of the two formulas: the AMT or the regular contribution.
"In light of global competitiveness trends, we are off the radar, in a bad way," said Rivera Robles, noting that while there is no competitive difference within the federal reform, Puerto Rico will not have any way to compensate the business structure on the island, which includes expensive energy, high costs for environmental compliance, permits and labor laws.
According to the CCPR president, an organization that insists on repealing contribution on inventories, one of the adverse effects of the proposal could be to increase the cost of tax compliance to companies.
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