Puerto Rico to Launch Tax Reform

February 12, 2015 Taxation in Peurto Rico

SAN JUAN – Puerto Rico is looking at introducing VAT, and using the newly collected funds to reduce income taxes and provide regular payments to low-income earners.

On February 11th the Governor of Puerto Rico Alejandro Garcia Padilla stated that the government will now consider enacting a significant tax reform in order to help boost the national economy, improve equality, and raise tax revenues.

The overhaul would revolve around the introduction of a Value Added Tax set at a rate of 16 percent, to replace the currently enforced sales tax at a rate of 7 percent.

It is believed that the change from sales tax to value added tax will remove some of the tax burden faced by individuals and place it on businesses, and would boost compliance levels from the currently estimated 56 percent to a level of 75 percent.

If the rate of compliance is improved in line with the projections, the collection of tax revenues will rise by approximately USD 1.5 billion per year.

The additional tax revenues will allow the government to abolish income taxes for individuals earning less than USD 40 000 per year, and, further, tweaks to the income tax system would ensure that no individual will face a marginal tax rate higher than 21 percent, compared to the current highest rate of 38 percent.

Further, individuals earning less than USD 35 000 per year would receive regular payments as a partial reimbursement for the raised VAT rate, while individuals with incomes of less than USD 20 000 would enjoy a full reimbursement for VAT paid.

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