Taxation in Puerto Rico
Encyclopedia
The Commonwealth of Puerto Rico
is a commonwealth of the United States
, an organized unincorporated territory
. Puerto Rico has independent tax
-levying authority by mutual agreement with the United States Congress
under .
. According to the Internal Revenue Service
:
Employers in Puerto Rico are subject to both Federal Insurance Contributions Act (FICA) tax
(a payroll
withholding tax
, which funds Social Security
and Medicare
) and the Federal Unemployment Tax Act
(FUTA). Employers in Puerto Rico are legally obligated to withhold the employee portion of FICA taxes from their employees' wages and contribute the employer portion of FICA.
: Código de Rentas Internas de Puerto Rico). The code organizes commonwealth laws covering commonwealth income tax, payroll tax
es, gift tax
es, estate taxes and statutory excise taxes.
Puerto Rico has commonwealth income taxes
. Because the cutoff point for income taxation is lower than that of the federal Internal Revenue Code
, and because the per capita income
in Puerto Rico is much lower than the average per capita income on the mainland, more Puerto Rico residents pay income taxes to the local taxation authority than if the federal Internal Revenue Code were applied to the island.
On July 4, 2006, the government approved Law Number 117, The 2006 Contributive Justice Law, establishing a tax with a 5.5% rate at state level and an optional 1.5% rate at municipal level. The tax went into effect on November 15, 2006. The tax is better known as the Sales and Use Tax (Impuesto sobre Ventas y Uso), often referred to by its Spanish acronym IVU. The law amended Article B of the Code and created sub-article BB. On July 29, 2007, the government approved Law Number 80, making the tax mandatory for all municipalities of the island. Also the tax rates changed to 6% at the state level and 1% at the municipal level.
The tax originated in some municipalities (Caguas, Yauco and Villalba
) in 2005. Seeing the economic success of these municipalities, many other municipalities enacted sales tax ordinances, usually by copying the ordinance of Caguas. By the middle of 2006, more than 30 municipalities had enacted sales and uses taxes on the island. During the second and third quarters of 2006, the Commonwealth of Puerto Rico suffered several political struggles in its Legislative Assembly
. These were largely caused of the budget deficit of the government
and the refusal of the Legislative Assembly to approve the taxes proposed by the Governor of the Island
. Government offices were shut down until the Assembly approved the law 117 which included the first sales tax of that possession of the United States
.
On July 1, 2006, the first Commonwealth-wide sales tax was approved with a 5.5% rate at state level and an optional 1.5% rate at municipal level. The adoption of the municipal tax was mixed. The tax went into effect on November 15, 2006. Since the tax reform of July 2007, the tax is applied in all 78 municipalities of the island and at Commonwealth level. The tax rates are 6% at the state level and 1% at the municipal level. On February 6, 2008 the governor of the island proposed to remove the state part of the IVU.
Puerto Rico
Puerto Rico , officially the Commonwealth of Puerto Rico , is an unincorporated territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the United States Virgin Islands and the British Virgin Islands.Puerto Rico comprises an...
is a commonwealth of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, an organized unincorporated territory
Unincorporated territories of the United States
Unincorporated territory is a legal term of art in United States law denoting an area controlled by the government of the United States, but which is not a part of the United States proper ....
. Puerto Rico has independent tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
-levying authority by mutual agreement with the United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
under .
Federal taxes
Only certain Puerto Ricans are required to file federal income taxesIncome tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
. According to the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
:
Employers in Puerto Rico are subject to both Federal Insurance Contributions Act (FICA) tax
Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax is a United States payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers...
(a payroll
Payroll tax
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...
withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
, which funds Social Security
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
and Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
) and the Federal Unemployment Tax Act
Federal Unemployment Tax Act
The Federal Unemployment Tax Act is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service...
(FUTA). Employers in Puerto Rico are legally obligated to withhold the employee portion of FICA taxes from their employees' wages and contribute the employer portion of FICA.
Commonwealth taxes
The main body of domestic statutory tax law in Puerto Rico is the Internal Revenue Code of Puerto Rico (SpanishSpanish language
Spanish , also known as Castilian , is a Romance language in the Ibero-Romance group that evolved from several languages and dialects in central-northern Iberia around the 9th century and gradually spread with the expansion of the Kingdom of Castile into central and southern Iberia during the...
: Código de Rentas Internas de Puerto Rico). The code organizes commonwealth laws covering commonwealth income tax, payroll tax
Payroll tax
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...
es, gift tax
Gift tax
A gift tax is a tax imposed on the gratuitous transfer of ownership of property. The United States Internal Revenue Service says a gift is "Any transfer to an individual, either directly or indirectly, where full consideration is not received in return."When a taxable gift in the form of cash,...
es, estate taxes and statutory excise taxes.
Puerto Rico has commonwealth income taxes
State income tax
State and local income taxes are imposed in addition to Federal income tax. State income tax is allowed as a deduction in computing Federal income tax, subject to limitations for individuals. Some localities impose an income tax, often based on state income tax calculations. Forty-three states...
. Because the cutoff point for income taxation is lower than that of the federal Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
, and because the per capita income
Per capita income
Per capita income or income per person is a measure of mean income within an economic aggregate, such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate and dividing it by the total population...
in Puerto Rico is much lower than the average per capita income on the mainland, more Puerto Rico residents pay income taxes to the local taxation authority than if the federal Internal Revenue Code were applied to the island.
On July 4, 2006, the government approved Law Number 117, The 2006 Contributive Justice Law, establishing a tax with a 5.5% rate at state level and an optional 1.5% rate at municipal level. The tax went into effect on November 15, 2006. The tax is better known as the Sales and Use Tax (Impuesto sobre Ventas y Uso), often referred to by its Spanish acronym IVU. The law amended Article B of the Code and created sub-article BB. On July 29, 2007, the government approved Law Number 80, making the tax mandatory for all municipalities of the island. Also the tax rates changed to 6% at the state level and 1% at the municipal level.
The tax originated in some municipalities (Caguas, Yauco and Villalba
Villalba, Puerto Rico
Villalba is a municipality of Puerto Rico located in the central region, northeast of Juana Díaz; south of Orocovis; and west of Coamo. Villalba is spread over 6 wards and Villalba Pueblo...
) in 2005. Seeing the economic success of these municipalities, many other municipalities enacted sales tax ordinances, usually by copying the ordinance of Caguas. By the middle of 2006, more than 30 municipalities had enacted sales and uses taxes on the island. During the second and third quarters of 2006, the Commonwealth of Puerto Rico suffered several political struggles in its Legislative Assembly
Legislative Assembly of Puerto Rico
The Legislative Assembly of Puerto Rico is the territorial legislature of the Commonwealth of Puerto Rico. The structure and responsibilities of the Legislative Assembly are defined in Article III of the Constitution of Puerto Rico....
. These were largely caused of the budget deficit of the government
2006 Puerto Rico budget crisis
The 2006 Puerto Rico budget crisis was a political, economic, and social crisis that saw much of the government of Puerto Rico shut down after it ran out of funds near the end of the 2005-2006 fiscal year. The shut down lasted for two weeks from May 1, 2006 through May 14, 2006, leaving nearly...
and the refusal of the Legislative Assembly to approve the taxes proposed by the Governor of the Island
Governor of Puerto Rico
The Governor of Puerto Rico is the Head of Government of the Commonwealth of Puerto Rico. Since 1948, the Governor has been elected by the people of Puerto Rico...
. Government offices were shut down until the Assembly approved the law 117 which included the first sales tax of that possession of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
.
On July 1, 2006, the first Commonwealth-wide sales tax was approved with a 5.5% rate at state level and an optional 1.5% rate at municipal level. The adoption of the municipal tax was mixed. The tax went into effect on November 15, 2006. Since the tax reform of July 2007, the tax is applied in all 78 municipalities of the island and at Commonwealth level. The tax rates are 6% at the state level and 1% at the municipal level. On February 6, 2008 the governor of the island proposed to remove the state part of the IVU.
See also
- Legal profession in Puerto RicoLegal profession in Puerto RicoThe Legal profession in Puerto Rico it is practiced in both the state level and the federal level.Thus the legal professionals in Puerto Rico must study both Law of Puerto Rico and the Law of the United States....
- Law of Puerto RicoLaw of Puerto RicoThe legal system of Puerto Rico is a mix of the civil law and the common law systems.- United States Code :Title 48 of the United States Code outlines the role of the United States Code to United States territories and insular areas such as Puerto Rico....
- Jones–Shafroth Act
- Puerto Ricans in the United StatesPuerto Ricans in the United StatesStateside Puerto Ricans are American citizens of Puerto Rican origin, including those who migrated from Puerto Rico to the United States and those who were born outside of Puerto Rico in the United States...
- Puerto Rican citizenshipPuerto Rican citizenshipPuerto Rican citizenship was first legislated by the U.S. Congress in Article 7 of the Foraker Act of 1900 and later recognized by the Puerto Rican constitution...
- Federal voting rights in Puerto Rico