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CPAs Favor Implementation Of Sales Tax

Long-awaited study calls for replacing excise tax system with a sales tax, despite local economists’ preference for value-added tax


April 15, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

The much-awaited study by the State Society of Certified Public Accountants regarding whether to replace Puerto Rico’s excise tax system with a sales tax or a value-added tax (VAT) was finally made public during an April 13 press conference at the organization’s Hato Rey headquarters.

The study compiles the work of local economists Ramon Cao and Fernando Zalacain; stateside consultants Robert Conrad, Thomas Hexner, James Owens, and Donald Lubick; and Etien Duran and Antonio Fernos of the Puerto Rico Department of the Treasury (Hacienda). It also includes the input of the members of the Society of CPAs Sales Tax Study Committee: Rolando Lopez, Luis Torres, Teresita Fuentes, Raul Maldonado, and Edgardo Sanabria. The last three were undersecretaries at Hacienda during different administrations and were involved with initiatives for tax reform.

According to the study, Cao and Zalacain lean toward implementing a VAT mainly because they believe it has greater revenue potential than a sales tax. Stateside consultants favor a sales tax because they contend it is easier to implement.

After weighing the pros and cons of each option, as well as the recommendations of its Sales Tax Study Committee members, the Society of CPAs is publicly recommending the implementation of a sales tax system, the organization’s president, Jerry De Cordova, told CARIBBEAN BUSINESS.

"We are recommending a sales tax system can be implemented much faster. Additionally, our former Hacienda undersecretaries, through their cumulative experience, believe a sales tax would be more economical to administer than a value-added tax," said De Cordova.

He noted that retail businesses with more than $1 million in sales (megaretailers) make up 13.1% of all local businesses but are responsible for 78.3% of all retail sales. He said this makes a sales tax system easier to implement and manage.

The Society of CPAs study makes several recommendations with respect to the sales tax. One is that all businesses, no matter how small, must be included in the tax system, unless their scrutiny will cost more than what they produce in taxes. Second, the system should allow only two exemptions: prescribed medications and unprocessed foods. All other items should be taxed at the point of sale.

De Cordova stressed that because of cost limitations, the study didn’t cover the issue of implementation or provide cost estimates. However, it does recommend a massive and extensive campaign to make the public aware that a sales tax would replace the excise tax and wouldn’t mean new taxes. "We must also adequately plan the transition from one system to the other," said De Cordova.

The study also makes several observations, including the fact that implementing a sales tax in Puerto Rico would have an adverse effect on municipal finances through a reduction in property-tax collections. Among the solutions proposed in the study, said De Cordova, are for municipal business licenses (patentes) to include sale taxes, for funds to be allocated to municipalities from the general fund, and for a percentage of the sales tax go directly to the municipality in which the sale was made, as cities and counties in the States do.

The findings of the Society of CPAs will be used in independent studies by the Legislature and by Hacienda, whose study is being conducted by Bearing Point, said De Cordova.

This Caribbean Business article appears courtesy of Casiano Communications.
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