Puerto Rico Governor, Alejandro Garcia Padilla, announced in his first Mensaje de Situación de Estado y Presupuesto (Message on the Status of the State and Budget) plans to lower the Island’s Sales and Use Tax rate to 6.5% from 7.0%.  The Administration plans to introduce legislation to effect the change in the rate, expected to take effect December 1 of this year, without affecting the Puerto Sales Tax Financing Corporation (abbreviated as “CONFINA” in Spanish).  The Administration proposes to do this by expanding the Sales and Use Tax (“SUT”) to sales of items and services that are now exempt.  While the Governor did not specify which exempt items will be affected by the change, he added that currently exempt items such as unprepared food, medicines, and medical and educational services should be permanently exempt. 

“This budget eliminates certain exemptions to the SUT, which make no sense today. By eliminating these exemptions the SUT base is broadened, achieving more revenues and correcting the structural imbalance in the country's finances.”    Governor Alejandro Garcia Padilla

The Governor also announced several additional tax measures in his Budget that “close the gaps in corporate contributions and address other similar issues” with measures that will not impact most Puerto Ricans, except those who are “self-employed earning $200,000 or more in revenue and those who purchase homes worth $1m or more.”  This is an interesting development given recent efforts to attract high net worth individuals to Puerto Rico to take advantage of the incentives offered under Law 22 (Ley Num. 22 de 17 enero 2012).  Law 22 eliminates all taxes on passive income, such as capital gains, interest and dividends, that accrues after an individual relocates to Puerto Rico.

The Administration’s Budget also includes over $1.9b investment over the next 18 months in public works projects with $658m dedicated to “infrastructure development projects through partnerships with the private sector.”

This Blog will continue to monitor and report on these initiatives as they move through the Puerto Rico legislature.