Global Tax Alert (News from Americas Tax Center) | 7 November 2013

Puerto Rico's Treasury Department issues procedures for requesting waivers from new AMT components

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Puerto Rico’s Treasury Department (PRTD) has issued procedures1 on requesting a partial waiver of the applicable rate under the new Alternative Minimum Tax (AMT) component called additional tax on gross income (ATGI), a full exclusion from the disallowance of expenses incurred or paid to a related person for purposes of the AMT, and a partial waiver from the applicable tax rate of the AMT component related to purchases from related persons. Once granted, the waiver or exclusion will be in effect for two tax years. The summary that follows addresses only the key aspects related to Circular Letter 13-05 in connection with the ATGI tax rate partial waiver as supplemented by the most recently issued guidance by the PRTD through Circular Letter 13-20, and changes to the statute approved through Act 117-2013 signed on 14 October 2013.

Circular Letter 13-05 — Partial waiver of ATGI tax rate

Section 1023.10 of Puerto Rico’s Internal Revenue Code of 2011 (2011 Code), as amended, imposes the ATGI as part of the AMT calculation on the gross income of entities taxed as corporations and partners, shareholders and members of flow-through entities. Section 1023.10 also imposes the ATGI on financial businesses. The ATGI tax rates vary depending on the level of gross revenues. Also, the Secretary has the authority to grant a partial waiver of the tax rate, but that in any case would be less than .05%. To request a partial waiver on the ATGI rate, the taxpayer must submit the following documents to the PRTD:

1. A technical memorandum supporting the request.

2. An agreed upon procedures report (AUP) under which a certified public accountant (CPA) licensed in Puerto Rico and belonging to a peer review program, provides the following information for each of the four tax years (or years the entity has been in operation if less than four years) before the year in which the request is made:

  • The entity’s net taxable income
  • The amount of income taxes paid
  • The amount of salaries reported on Form 499R-2/W2PR to shareholders, partners and members
  • The amount of charges or expenses incurred or paid to shareholders, partners and members with no dedicated trade or business in Puerto Rico that own 50% or more of the partnership, corporation or limited liability company (LLC) if the payments will not be subject to income tax or withholding at source in the tax year in which the expenses are incurred or paid
  • The balance at the end of the tax year of loans to partners, shareholders or members, or if applicable, members of a controlled group or group of related entities

3. If an entity is a member of a controlled group or a group of related entities, the information must be provided for each group member.

The partial waiver option is not available to financial businesses.

Generally, financial businesses are subject to an ATGI of 1% regardless of their volume of gross revenues, and also to a credit mechanism.

Where to file

The required documents must be submitted to Assistant Secretary for Internal Revenue, Treasury Department, Intendente Ramírez Building, Office 620, San Juan, Puerto Rico. Once the documents are received, the Assistant Secretary will contact the taxpayer or authorized representative to set up a meeting to discuss the submitted information as necessary. Act 117-2013 approved in October 2013 updates the procedures that taxpayers need to follow. Also, the Secretary of the PRTD issued on 9 October 2013, Circular Letter 13-20, to provide the content of the required AUP report that is required to be submitted as part of the partial waiver request’s documents.

Due date — Year 2013

The partial ATGI tax rate waiver requests must be filed on or before 30 November 2013 in order to be eligible to be used for tax year 2013. The Secretary of the PRTD in turn has until 28 February 2014 to respond to the request.

Also, pursuant to Act 117-2013, if the PRTD does not respond within the 90-day period, the waiver request will be considered granted automatically at the partial ATGI rate of .1%

Filing fees

For partial waivers of the ATGI tax rate, the taxpayer must include a $1,500 check, bank draft or money order payable to the Secretary. Act 117-2013 provides no filing fee to those taxpayers with annual gross sales volume of less than $3 Million.

Implications

Circular Letter 13-20 and the provisions of Act 117-2013 must be considered and evaluated together with the rules and procedures issued through Circular Letter 13-05.

Endnote

1.Circular Letters 13-05, 13-06 and 13-07.

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

Ernst & Young Puerto Rico LLC, San Juan
  • María T. Riollano
    +1 787 772 7077
    maria.riollano@ey.com
  • Rosa M. Rodríguez
    +1 787 772 7062
    rosa.rodriguez@ey.com

EYG no. CM3943