Puerto Rico’s Governor, Alejandro García Padilla, on February 11, 2015, presented legislation to overhaul the nation’s tax regime, including the introduction of a value-added tax (VAT) and substantial cuts to income tax rates.
Confirming the reforms, García Padilla said: “We currently have a tax system that penalizes work and productivity while encouraging evasion. It is inefficient and unfair. The current system punishes the middle class and the poor that work so hard to provide for their families.”
He said that the tax overhaul aims to “evenly distribute the tax responsibility amongst citizens.” Currently income tax is the principal source of revenue for the territory, with 85 percent being paid by salaried workers and the remaining 15 percent coming from self-employed persons. However, García Padilla noted that only 12,000 people file tax returns including income of USD150,000 or more, which he said is in stark contrast to the luxury cars and houses seen on the territory’s streets.
“The current system hinders economic development because it rests on the shoulders of our hard workers,” he continued. “Over 80 percent of those that pay taxes are working class people who are unable to hide their income or come up with exemptions and avoid paying. The fact that some pay while others ignore their tax responsibility is an injustice that needs to end now.”
Under the plans, the Sales and Use Tax (SUT) and the Gross Receipts Tax (Patente Nacional) will be replaced with a VAT. With the expansion of the consumption tax base, Puerto Rico will introduce a personal income tax-exempt threshold of USD40,000 for individuals and USD80,000 for married couples, removing 850,000 taxpayers from the tax net.
According to García Padilla, effective personal income tax rates will be no higher than 21 percent under the new system, down from as high as 38 percent currently, and the tax rate on corporations will fall to 25 percent.
In addition, it is proposed that those on incomes below USD35,000 would get a refund of VAT, and those on incomes below USD20,000 would receive a full refund. Prescription medication, groceries, private property leasing, and public schools would be exempt from all taxes, he added.
“With this tax system overhaul we can help direct the island’s revenues towards the future, and ensure that we will borrow less, pay our current debts, and pay down the debt previous administrations committed to without the appropriate means for repayment,” he concluded.
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