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Hacienda Reverses Position On Withholding Tax Waiver

Large Number Of Corporations And Partnerships Are Again Entitled To Total Waiver Certificates


August 8, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

In an attempt to quell the controversy and uproar created by the business sector over the recently adopted 7% or 3% withholding tax on payments to service providers, the Puerto Rico Treasury Department (Hacienda) has determined that a large number of corporations and partnerships are indeed entitled to a waiver from that tax as prescribed by Section 1143 of the Puerto Rico Internal Revenue Code.

Hacienda determined that, based on the provisions of Section 1143, certain sectors or types of enterprises or businesses shall not be subject to the 7% or 3% withholding tax on payments for services. Accordingly, it will send them a letter granting a total waiver from that withholding tax (a total waiver certificate).

Under the new rules, the full amount of the withholding will continue to be applied to corporations, partnerships, and individual service providers with revenue [of $1 million or less] and who don’t have audited financial statements.

Raul Rodriguez, president of the Puerto Rico Society of Certified Public Accountants (CPAs), told CARIBBEAN BUSINESS that this determination by Hacienda is much more reasonable than what was previously in place. "This was a good decision, because it comes down to a happy medium," he said. "On one hand, you are including those that are complying with their tax responsibility; on the other hand, you are transferring to the CPAs the responsibility that corporations get their statements audited."

By law, a CPA must audit any business or corporation with $1 million or more in sales or revenue. Businesses or corporations must include their audited statements with their local income tax returns.

Business sectors eligible for the new waiver include corporations and partnerships whose income tax returns reflect a net operating loss, after deducting any net operating losses carried over from prior years, as well as corporations and partnerships that must include financial statements audited by a CPA with their Puerto Rico income tax returns and are up to date with their tax responsibility.

Corporations and partnerships that meet the criteria and have not yet received their total waiver certificate through the mail must request it from Hacienda. Time is of the essence, however, as persons required to withhold the 7% and 3% tax (the payors) and who have no evidence of a service provider’s total waiver certificate will generally have to start withholding the appropriate on all payments made after July XX, 2002.

Under the original law, partnerships and corporations could obtain a total waiver on the 7% withholding, while individuals, i.e., professionals doing business on their own, were allowed a partial waiver of 2%.

According to the law that went into effect July 1 but has since been reversed, total waiver certificates were no longer available. A partial waiver could be allowed for partnerships and corporations, but not for individuals. A minimum 3% withholding was required, while the full 7% was retained upfront for individuals–without the possibility for a partial waiver.

This Caribbean Business article appears courtesy of Casiano Communications.
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