AMNESTY PROGRAM FOR PROPERTY TAXES, NEW ESTIMATED TAX PAYMENTS REQUIREMENT FOR PERSONAL PROPERTY TAX, AND NATIONAL VOLUME OF BUSINESS TAX WAIVER FOR PASS-THROUGH ENTITIES
PROPERTY TAX AMNESTY
On December 11, 2013, Act 145, known as “Incentives Plan for the Payment of Taxes Owed” (“Act 145”) was signed into law. Act 145 eliminates all interest, surcharges and penalties on real and personal property taxes and provides payment plans for those eligible individuals and businesses (collectively, “Taxpayers”) that currently have outstanding debts with the Municipal Revenue Collection Center (“CRIM”, by its Spanish acronym) or have not filed their personal property tax returns.
On December 12, 2013, the Executive Director of the CRIM issued Administrative Order No. 2013-06 (hereinafter “AO 2013-06”), providing the rules and procedures for the Amnesty. The CRIM will offer an orientation for 30 days, beginning on December 16, 2013. The Amnesty will run from December 18, 2013 through March 27, 2014 covering the following periods: (1) for real property taxes of periods prior to 2013-2014 and (2) personal property taxes for years 2012 and before. Thus, real property taxes for the period 2013-2014 and personal property taxes for the year 2013 are not eligible for the benefits of Act 145.
In order to enjoy the benefits of Act 145, Taxpayers must: (1) sign an agreement and make the initial payment required under the payment plan, if applicable; (2) disclose and include in the agreement all outstanding debts which will be covered by the Act; and (3) comply with the payment terms of the agreement. In the case of real property, the taxpayer must have paid the tax for the fiscal year 2013- 2014. Non-compliance with any of these will void the waiver of penalties/interest/ surcharges and the original debt will be re-established with all applicable additions.
Personal Property Tax Returns Not Filed
Taxpayers that have not filed their 2012 personal property tax return and/or prior years can file the returns and become eligible for the benefits of Act 145 with respect to the waiver of interests, surcharges, and penalties. However, they must pay the full amount of the principal owed in a single payment and include copy of the income tax returns filed with the Puerto Rico Treasury Department (“Department”) for corresponding years, and/or evidence of the closing of the business, if that is the case.
Taxpayers under Examination/Audit/Administrative Hearing
Taxpayers that are currently under examination, audit, or in the process of an administrative hearing or judicial review are also eligible for the benefits offered by the Amnesty. In such cases, entering into the incentive plan will be sufficient cause to stop the particular intervention process with regards to those debts covered by Act 145. Additionally, Taxpayers that currently have a payment plan with the CRIM can re-negotiate the terms of their payment plan under the terms provided by the Amnesty. All Taxpayers that pay under Act 145 will be considered to have waived any objection to the assessment or notice of the debt. Lastly, none of the payments made under Act 145 are subject to any claim of reimbursement or credit.
The following Taxpayers are ineligible for the benefits offered by Act 145: (1) Taxpayers against whom criminal proceedings related to a tax crime have begun or are pending; (2) Taxpayers that have been convicted of tax fraud; (3) Taxpayers with any illegal sources of income or any activities that could be identified as a criminal activity or organized crime within the provisions of Act 33 of July 13, 1978, known as the “Act Against Organized Crime”; and (4) Taxpayers that are elected officials or government employees that have been appointed by the Governor or which have been confirmed by the Legislature.
Taxpayers in criminal proceedings may negotiate with the Prosecutors’ Office to suspend the proceedings until the Taxpayer has paid its debt according to the terms of Act 145. After the payment is made, the Prosecutors’ Office may take the payment of the debt into consideration in reaching any deals on the criminal case.
Petitions for a payment plan under the Amnesty can only be made in the Central Offices of the CRIM or its Regional Offices. Payments can be made through: a certified/manager’s check or postal/bank money order, credit/debit card or cash. The Municipal Offices will not be issuing the payment plans, but they can receive payments without objections and are made via a certified/manager’s check or postal/bank money order.
Taxpayers that have debts for years covered by the Amnesty and years not covered must make separate payments for those covered and for those not covered. Any taxpayer that is unable to avail itself of the benefits of Act 145 due to the CRIM’s inability to provide an account statement will be able to claim Act 145 benefits once the statement is provided.
Personal property tax returns cannot be amended in order to be eligible under the Amnesty. Taxpayer in bankruptcy must show an order from the Federal Court authorizing the use of the Amnesty.
Elimination of Debts
Act 145 also provides that the CRIM eliminate from its records personal and real property tax debts that have over 10 years since the tax return was filed and more than 15 years since receiving notice of the outstanding tax, respectively, and no collection attempt has been made by the CRIM.
We can assist you in assessing your eligibility for the Amnesty Program and its implications to your particular situation. Please contact you BDO Puerto Rico, P.S.C. representative for more information.
PERSONAL PROPERTY TAX ESTIMATED PAYMENTS
On December 14, 2013, the Governor signed into Law Act No. 136 (“Act 136”). Act 136 amends the Municipal Property Tax Act of 1991, as amended, to impose estimated tax payment requirements to personal property taxes for the years after December 31, 2013, similar to the estimated tax payment procedures that are required for income taxes as explained further.
As a general rule, for years after December 31, 2013, deadlines for the payments are: (1) on or before August 15, (2) on or before November 15; (3) on or before February 15; and (4) on or before May 15. However, if the requirement to file personal property tax arises in the following date ranges, the taxpayer must make the required payments as follows:
After the last day of April, but before the first day of August, the first payment should be done on or before August 15, the second on or before November 15 and the third payment on or before February 15; or
After the last day of July, but before the first day of November, the first payment should be done on or before November 15 and the second on or before February 15; or
After the last day of October, but before the first day of February, the first and only payment must be made on or before February 15.
The estimated tax must be the lesser of 90% of the current year’s tax liability or 100% of the prior year’s responsibility. If the taxpayer does not comply with the minimum payments, he is exposed to interest (10% annual rate), surcharges (up to 15% of the deficiency) and penalties (up to 25% of the deficiency) for late payments and/or underpayments.
The provisions of Act 135 will begin to apply immediately, thus, taxpayers must start to establish procedures to estimate their personal property tax liability for year 2014 and beyond.
NATIONAL VOLUME OF BUSINESS TAX WAIVER FOR PASS-THROUGH ENTITIES
Act 40 of 2013, known as the “Act for the Redistribution and Adjustment of Tax Responsibility” (hereinafter “Act 40”), implemented a new tax that is based on the taxpayer’s gross income and, in general, applies to all taxpayers with taxable operations in P.R. and have a volume of business in excess of $1 million. This tax is commonly known as the national volume of business tax (hereinafter “NVBT”). The NVBT applies to: (a) entities that are taxed as corporations, through their Alternative Minimum Tax (“AMT”); (b) partners, shareholders and members of Special Partnerships, Corporation of Individuals, and/or Partnerships (hereinafter collectively “Pass-Through Entities)”), through the AMT or the Alternative Basic Tax (“ABT”), depending on the taxation of the owner; and (c) financial institutions, as an additional tax.
On December 3, 2013, the Department issued Administrative Determination 13-20 (hereinafter “AD 13-20”) establishing: (a) the procedures that owners of Pass-Through Entities must follow (hereinafter “Application”) in order to request a Partial Waiver (hereinafter “Waiver”), (b) clarify how the NVBT will be determined in the case of owners of Pass-Through Entities that have different tax years from the Pass-Through Entities they own; and (c) determining the amount of NVBT to be paid by owners that have ownership interest in various Pass-Through Entities and only some of them have the Waiver.
Multiple Pass-Through Entities
Act 40 provides that the NVBT applies to the owners of the Pass-Through Entities and will be determined based on the gross income of all Pass-Through Entities. In the case of individuals, the amount will be reflected in the owner’s ABT, which as of December 31, 2013 will include: (a) the amount that results from applying the NVBT rate to the gross income of the PassThrough Entities that do not have a Waiver (the aggregate amount of the distributable share of the gross income of all PassThrough Entities will be used to establish the rate of the NVBT), plus; (b) total gross income of the Pass-Through Entities that have the Waiver times the reduced NVBT rate, if any.
If the owner of a partnership or a special partnership is a corporation, then it must add to its gross income the distributable share in the gross income of the partnership or special partnership in order to determine the rate and AMT applicable as part of the corporation’s NVBT.
Even though the determination and payment of the NVBT falls on the owners of the Pass-Through Entity, various sections of the Puerto Rico Internal Revenue Code of 2011, as amended (hereinafter “Code”) provide that the partner, corporation or member of the Pass-Through Entities in charge of the administration will be responsible for withholding and remitting to the Department the larger of: (a) 30% of the estimated distributable share, plus the applicable percentage of income and gains that are subject to a preferential tax rate; and (b) the amount determined after applying the NVBT to the distributable share.
NVBT for Pass-Through Entity with different tax year from its owners
In cases where the Pass-Through Entity has a different tax year from its owners, the latter must include their distributive share of gross income, using as a basis the Pass-Through Entities’ return for the taxable year that said entity completed within the taxable year of the owner.
Procedure for Pass-Through Entities to Request the Waiver
AD 13-20 establishes that in the case of Pass-Through Entities, the entity will be the one applying for the Waiver and not the individual owners. However, the Waiver will be issued in favor of the owners and the Pass-Through Entity. The Department can issue a Waiver to each of the owners or only some, based on the circumstances of each owner and the Pass-Through Entity taken as a whole. The Waiver will be issued according to the tax year of each owner. The Pass-Through Entities that will request the Waiver must follow the procedures established in Circular Letter 13-05 (hereinafter “CL 13-05”), Circular Letter 13-20 (hereinafter “CL 13-20”) and AD 13-20. For more information on the process of requesting the Waiver, please refer to our September Tax Alert.
In the case of Chain Partnerships, in which certain intermediate partnerships are not considered doing business in Puerto Rico, the Waiver must only be requested by the partnership(s) doing business in Puerto Rico on behalf of the taxpaying owners that are interested in being included in the application. Therefore, the requirements of CL 13-05, 13-20, and AD 13- 20 will only apply to the petitioning partnership(s) and its ultimate owners deemed engaged in business in Puerto Rico. In addition to the requirements of CL 13-05, CL 13-20, and AD 13-20, the Application must include a detailed description of the corporate structure showing the intermediary partnerships and their owners, up to those that are not considered PassThrough Entities. Also, for each partnership not doing business in Puerto Rico, the Application must include: name, address, employer identification number, and percentage of participation in the income, gains and losses of the partnership doing business in Puerto Rico.
In addition, the Application must include the following: (a) Agreed Upon Procedure Report, as established in CL 13-05 and CL 13-20 for each of the following: (1) Pass-Through Entities requesting the Waiver; (2) Owners of the Pass-Through Entities that are juridical entities and have a 25% or greater ownership in the Pass-Through Entities; and (3) the PassThrough Entities’ affiliated entities; (b) copy of the income tax returns for the last 4 years of each owner (being individuals, corporations or another Pass-Through Entity) of the Pass-Through Entities being included in the Application; (c) copy of the income tax returns of the Pass-Through Entities for the last 4 years; and (d) a sworn statement by each of the owners included in the Application stating their ownership in the Pass-Through Entities requesting the Waiver. If the Waiver is approved, it will be valid for 2 years.
The Waiver has a filing fee of $1,500 for each Pass-Through Entity requesting the Waiver that has a volume of business over $3 million. Those with a volume of business below $3 million will not have a filing fee.
A copy of the Waiver must be included with all the income tax returns in which the reduced NVBT rate is being claimed. Taxpayers that filed their request for a Waiver prior to AD 13-20 can submit the additional information required under AD 13-20 at no additional cost and the 90-day term that the Department has to notify the approval or denial of the Application will be suspended until all the information requested in AD 13-20 is presented. The Waiver will only apply to the distributive share of the owner included in the request.
The additional requirements set forth in AD 13-20 will begin to apply immediately.