Puerto Rico VAT Vetoed

With just days before enactment, both legislative branches in Puerto Rico voted to override the Governor’s original veto of legislation repealing the Puerto Rico (PR) Value Added Tax (VAT) on May 26, 2016. 

That’s right… the legislature originally voted to repeal the proposed VAT.  The Governor then vetoed the repeal requiring the legislature to carry a two-thirds majority in order to override the Governor’s veto and ultimately repeal the proposed VAT– which it did.

The change to the tax system was proposed by Governor Alejandro García Padilla and called for replacing the sales and use tax (SUT) with a VAT effective June 1, 2016. Representatives and the Governor hoped the tax reform would help stimulate Puerto Rico’s economy which has faced almost a decade of negative average growth.

Under the VAT system, tax would be paid along each step of the value chain with tax credits being applied for tax previously paid.

Some believe the VAT system is easier to administer and has fewer loopholes thus increasing compliance and collections.  The hope was to relieve Puerto Rico from its current debt crisis.

Since inception, the VAT system was largely opposed by the citizens and businesses of Puerto Rico due to poorly defined changes and requirements, an overall higher tax rate, as well as updates that would be necessary to billing systems. 

In an effort to communicate solidarity and protest, many businesses (including doctor’s offices), closed on March 3^rd to participate in “No Consumption Day.” The thought process behind the protest day was to show the government the impact that the people could have and to put pressure on representatives to fight for the repeal.

In response, Governor Padilla, exercised his right to veto the legislative decision to kill the bill that would create a radical transformation of the Puerto Rico tax system.  Padilla explained a need to stimulate the economy, creating a new tax system, and reducing tax evasion – all of which he believed the new VAT system would do.

So the people spoke and the legislators listened and exercised their right to override the veto of the Governor – sounds a bit confusing?  I would agree…however, they did it and now the PR VAT Tax is a No Go!