Puerto Rico drops introduction of VAT

Mon 4th May 2015

The House of Representatives has last week rejected a proposal to introduce Value Added Tax into Puerto Rico in 2016 to replace the existing Sales & Use Tax (SUT) and Gross Receipts Tax. It has also voted against a rise in the SUT from 7% to 16% in 2015.

The immediate effect of the much-needed fiscal reform was to send the valuations of government bonds down. The island’s current deficit is over $70 billion per annum and rising. The national bank has warned of a government shut down at the end of the summer unless action is taken.

The current SUT is seen as too low, and on too narrow a range of products. In particular, the Use Tax requires consumer to self-assess their element of the tax, and declare and pay through a return. This discourages compliance, and has led to a large tax gap.

The ruling government had hoped that a VAT regime based on the OECD standards would go a long way to restoring the financial fortunes of the country, and restore the financial market’s faith in the government.