The tax system in Puerto Rico faces a radical transformation under Governor Alejandro Garcia Padilla. This proposed law would significantly lessen the corporate and personal income tax, exclude the local sales and existing state tax and change lost revenue into Value Added Tax (known as IVA in Spanish). It implies a massive change to the pocket which government is plunge through in order to get money it needs. The government slightly get its hand out from their pockets on those who are paid to put in to those who consume.

IVA tax in Puerto Rico is different from excise tax. Every step in the distribution needs to pay a tax. In these circumstances, the importer and the wholesaler need to pay seven percent of the product price to El Departamento de Hacienda (or Treasury in English). The retailer also pays the same percent as he sells the product to the consumers. This system is just a way of obliging each step of the chain to pay the tax and if just in case there is someone does not pay the tax, the next step of the chain is a need to pay for the difference. For this reason, the need for constant inspection decreased. That is why the income of the government will increased significantly. Another thing is that, those who escape in paying their own income taxes, they are oblige to pay in this tax. This taxing system is regressive meaning most of the tax payments fall on lower classes.

The making of a VAT has created many strong opposition. Doctors and businesses offices have declared plans to close their shop and cancel medical appointments as a sign of protest. Activists also declared plans and have participated in the protest called “No Consumption Day”. Some businesses used social media to show their disagreement and declared that they will stay closed and inspire consumers to refrain shopping as sign of their protest.

Leaders from Working People’s Party (PPT), New Progressive Party (PNP), and Puerto Rican Independence Party (PIP) appeared on the committee of House of Representatives with their proposals opposing the VAT. According to them Vat is disadvantageous to workers. To express their approval against the tax reform, lots of people marched to the Executive headquarters.

Based from this proposed system, education and medical services is not included in the exemption. The following services and goods are not exempt from VAT.

Goods:

– Prescription medicines

– Real property

– Food which are not processed

– Medical equipment and drugs under Medicare and Medicaid

– Intangibles

– Any fuels based from petroleum except from propane gas

– Trucks, buses, trailers and motor vehicles

Services:

– Health care

– Rental housing for students

– Real property leases

– Financial services

Usage and Entity:

– Sales by non-profit organizations and churches

– Sales by businesses with less than seventy-five dollar per year

– Purchases by certified exporters

– Purchases by bonafide farmers (agricultural equipment and machinery)

– Imports and purchases by hospitals

– Purchases of services and goods public agencies and government

The main purpose of this bill is to change the Puerto Rico tax system. This system is complicated if you are going to compare it to Sales and Use Tax (IVU). Many countries indeed already have a form of IVA however have all implemented a relatively low percentage versus Alejandro Garcia Padilla’s proposed 16%. Even in Singapore (Puerto Rico is often referenced as the Caribbean Singapore) the IVA tax there was slowly increased over several years until it reached what is now only 7%. There are many reasons amongst these mentioned that this proposed tax system remains controversy in Puerto Rico.