Puerto Rico: Summary of changes to information reporting, tax withholding
December 19, 2018
Puerto Rico’s governor on December 10, 2018, signed into law Act No. 257 (formerly known as “House Bill 1544”) that makes amendments to the 2011 Puerto Rico Internal Revenue Code (as amended). As part of this legislation, there are changes to the alternative minimum tax (AMT) for corporations and individuals as well as an optional manner of taxation for service corporations and self-employed individuals—changes that directly affect the reporting of payments and withholding of tax on services.
KPMG observation
The federally appointed Financial Oversight and Management Board (FOMB) has raised concerns about the law’s compliance with the fiscal plan. Thus, even though the law has been enacted, it is still subject to challenge by the FOMB if, in the board’s view, the government does not meet the standards set by the board.
Overview of changes to information reporting, tax withholding
Among the changes made by the new law are the following:
- Withholding tax on salaries
- Payments made after December 31, 2018, will be considered salaries for services provided with respect to:
- Agriculture services
- Domestic services at home, local collegial club, or local chapter of a fraternity or collegial sorority
- Religious organization services
- Compensation or indemnization paid to an employee due to dismissal
- Salaries for services rendered in temporary or seasonal work
- An employer will be allowed to withhold 2% on total salaries for payments made before January 1, 2019, and 5% for payments made after December 31, 2018.
- Payments made after December 31, 2018, will be considered salaries for services provided with respect to:
- Withholding tax on indemnity payments
- Withholding tax for payments made before January 1, 2019, is 7% and will increase to 10% for payments made after December 31, 2018.
- The amount paid to a legal representative will also be considered taxable income subject to withholding tax.
- The tax withheld is to be remitted to the Puerto Rico Treasury Department (PRTD) no later than the 15th day following the month in which the tax was withheld.
- Withholding tax on services rendered
- Withholding tax for payments made before January 1, 2019, is 7% and will increase to 10% for payments made after December 31, 2018.
- Commission payments made for an insurance premium paid to an agent will be subject to withholding tax.
- The exception for the withholding tax rules are revised to exclude:
- Payments less than $1,500 made before January 1, 2019, will not be subject to withholding tax. Payments under $500 made after December 31, 2018, will not be subject to the withholding tax.
- Services payments made to individuals, corporations, and partnerships for their first three years of operations until December 31, 2018, will not be subject to withholding tax. However, payments made to such entities after December 31, 2018, for the first year of operations will be exempt.
- Payments made by a partnership, special partnership or “corporation of individuals” to an individual who is a partner, shareholder or owner of such entity for services rendered will not be subject to withholding tax.
- The tax withheld must be remitted to the PRTD no later than the 15th day following the month in which the tax was withheld.
- Withholding tax waiver: The waiver will allow payments made after December 31, 2018, to be subject to a withholding tax of 6% (instead of 3%) if the entity submits audited rinancial statements and does not owe any taxes. If an entity’s volume of business exceeds $1 million and the entity provides audited financial statements, no withholding tax will be required.
- Quarterly reconciliation return: Each person required to deduct and withhold the tax on services rendered must file a quarterly return, with details of payments made and the tax withheld and remitted to the PRTD.
- Withholding tax at source for nonresident individuals
- If a person required to file an information declaration does not file the declaration and does not remit payment to the PRTD, that person will not be able to claim the payments as an ordinary and necessary expenses in its operations.
- In situations involving a sale of a partnership interest by a nonresident person, the seller must withhold 15% of the amount of gain from the sale that constitutes income from sources within Puerto Rico.
- Information at source
- Payments of $500 or more made to individuals, trusts, or entities for rent, salary, wages, premiums, annuities, services, advertising, insurance premiums, telecommunication services, internet services, cable or satellite television services, compensation, remunerations or emoluments or other fixed or determinable gains, profits, and income must be reported in an information return on or before February 28 of the following year.
- To be able to deduct a payment for purposes of the alternative basic tax for individuals or the alternative minimum tax for corporations, all payments must be reported in an information declaration even if payment is less than $500.
- Information return on extension of credit transactions
- After January 1, 2019, an information return must be filed for each approved transaction concerning a request or extension of credit, including loans and motor vehicles financing of $100,000 or more ($250,000 or more for mortgages).
- Reports on income subject to alternative minimum tax
- Each person that has not filed its information declaration at the time of filing its income tax return, will not be able to claim the amount of the payments as an expense for its operations.
- Information declaration on transactions made by electronic means
- For transactions made as of January 1, 2019, any entity engaged in the business of processing payments by electronic means will be required to report annually the total amount of payments processed and credited to the merchant participating in the processing of payments.
- Failure to file information declarations will result in the taxpayer not being able to claim such payments as ordinary and necessary expenses. Taxpayers under the accrual method of accounting or having a fiscal year will be able to claim an expense deduction even though the amount is not reflected in the information declaration, provided that the taxpayer includes a reconciliation of the expenses claimed on the return and the amount included in the information declaration on the income tax return.
For more information, contact a KPMG tax professional in Puerto Rico:
Rolando Lopez | +1 (787) 622-5340 | rlopez@kpmg.com
Carlos Molina | +1 (787) 622-5311 | cmolina@kpmg.com
