Business community troubled by b-to-b taxes
A bill dubbed the "Tax Load Redistribution & Adjustment Law," presented by Gov. Alejandro García Padilla last week, has many in the business community up in arms about the economic impact of new taxes on, until recently, exempt purchases and services, as well as business- to-business (b-to-b) transactions, saying the increased burdens would lead to an economic slowdown.
Executive Bill 2013-0037, also known as House Bill (HB) 1073, now under consideration by both the House of Representatives and the Senate, includes changes to the current tax system, affecting many products and services. Strong criticism has invaded the Capitol from all sectors, who have said the negative impact these changes could bring to an already ailing economy include inflation, which would further hurt Puerto Rico's economic outlook.
The Puerto Rico Chamber of Commerce (CofC) and the Society of Certified Public Accountants are among the leading professional organizations sounding the alarm. "While we are all aware of Puerto Rico's precarious fiscal situation, the CofC feels that simply raising taxes on all sectors in Puerto Rico isn't the answer," CofC President Pablo Figueroa said. "The CofC has repeatedly recommended that the best bet is to invest in human resources and technology to improve the IVU [Spanish acronym for sales & use tax] capture rate and combat tax evasion."
Both trade groups argue that imposing the IVU on b-to-b transactions will drive up operational costs that will ultimately be passed on to consumers. "Even if a business can shoulder it, there is no doubt that these increased costs will have a cascade effect on prices, increasing prices for consumers already struggling with other cost-of-living hikes," Figueroa said.
The tax hike plans include eliminating the resellers' exemption certificate and replacing it with a tax credit system; charging the IVU on telecommunication transactions for businesses; a new 1% tax on insurance premiums; a new tax on certain intercompany purchases; a special 4% tax on government contracts; an additional 2% tax for individuals with a yearly gross income of more than $200,000; a cap of $35,000 on mortgage interest deductions; and a freeze on several tax credits.
The entire proposal aims to raise $2 billion in increased government revenue. The increased revenue comes despite García Padilla's pledge to cut the IVU in December to 6.5% from the current 7%. Some economists have argued the proposals could have the cumulative effect of increasing the sales & use tax to 13%.
New Progressive Party Rep. Jenniffer González told CARIBBEAN BUSINESS the tax hikes would have a devastating impact on small and midsize businesses. "The governor, in his budget address, spoke of taxing big corporations, but what he didn't say was that he was expanding the taxable income margins to impose more taxes of up to 20%, in some cases.
"These are the businesses that generate the most employment. This additional contribution will lead Puerto Rico to an economic slowdown and the loss of more jobs," said former House Speaker González.