Global Tax Alert (News from Amercias Tax Center) | 4 February 2014

Puerto Rico issues regulation on the additional tax on gross income and further extends due date to request partial waiver for 2013

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Puerto Rico’s Treasury Department (PRTD) issued a regulation (Reg. 8444) on the additional tax on gross income (ATGI) imposed on entities taxed as corporations and shareholders, partners and members of pass-through entities with gross income of $1 million or more.

Under Section 1023.10(a) (3) of the 2011 Puerto Rico Internal Revenue Code, as amended (2011 Code) and Reg. 8444, taxpayers, except financial businesses, may request a waiver from the ATGI. A pass-through entity may request the waiver on behalf of its owners.

A taxpayer must show that the ATGI will result in undue hardship because the ATGI is a significant amount when compared to the taxpayer’s gross profit margin during the four-year base period (i.e., the four years before the tax year in which the waiver request is made). To be eligible for the waiver, the ATGI must be more than 7.5% of the taxpayer’s gross profit margin for the four-year base period. Once the 7.5% threshold is met, the Secretary of the PRTD will determine the reduced ATGI tax rate for the two tax years covered by the waiver.

Requests for a waiver of the ATGI were due 31 January 2014 for tax year 2013. How­ever, Reg. 8444 extends the due date for waiver requests to 28 February 2014.

Reg. 8444 contains numerous examples to illustrate its provisions.

The regulation also provides guidance and rules on the terms the PRTD will follow to issue its response, as well as managing the same when the Secretary requests additional information or clarification.

Implications

The evaluation criteria seems to be solely driven by the mathematical result of the ATGI, as compared to the taxpayer’s gross margin, which generally leaves no room for flexibility to grant the partial waiver. Also, the regulation uses average numbers when evaluating the gross income and gross profit margin of the taxpayers requesting the waiver.

The methodology to determine what would be the reduced rate of ATGI is also straight forward and uses a base amount to calculate it. The 7.5% relationship of the ATGI to the gross profit margin is generally used as a point of reference to fix the ATGI.

For pass-through entities, the regulation confirms the requirement that the partnership generally needs to request the partial waiver on behalf of those partners that opted to be included. It is recommended that taxpayers operating as pass-throughs refer to specific guidance in applying for the waiver issued by the PRTD through Administrative Determination 13-20.

It is important to highlight, particularly for taxpayers that have already filed the request for partial waiver, that the automatic .1% reduced rate provided in the 2011 Code when the Secretary does not respond within the required period of time does not apply to those entities that do not comply with the criteria provided in this recently issued regulation.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Puerto Rico LLC, San Juan
  • Teresita Fuentes
    +1 787 772 7066
    teresita.fuentes@ey.com
  • Marcel Ramos
    +1 787 772 7229
    marcel.ramos@ey.com
  • María T. Riollano
    +1 787 772 7077
    maria.riollano@ey.com
  • Rosa M. Rodríguez
    +1 787 772 7062
    rosa.rodriguez@ey.com

EYG no. CM4158