House Speaker Jaime Perelló told Treasury Department officials during a hearing Wednesday that they need to “go back to the table” on certain aspects of the proposed tax reform, including the frequency with which consumers will receive rebates to mitigate the impact of the new 16 percent value-added tax structure.
During the first of a two-week series of hearings, Perelló said issuing those checks every three months was not in line with the way consumers live, which “is from check to check on the 15th and the 30th of every month.”
“That refund cannot take three months to reach people’s pockets, it has to get to them quicker as to not affect their monthly incomes,” Perelló said.
“The bill has to clearly establish how we’re going to return that money to the most disadvantaged sectors, those who earn less than $20,000, the elderly, retirees — all of who are living below poverty level,” he said, without going into further detail about the exact conditions he is seeking.
The rebates Perelló was referring to are outlined in the tax reform, which Treasury Secretary Juan Zaragoza explained in detail Wednesday. They fall under a system the agency is still developing, called “RecIVA,” which would issue payments to qualifying taxpayers in March, July and November to compensate for what they have paid in VAT over consumed goods.
However, during the hearing, questions were raised as to how the system will work, with Zaragoza admitting that the regulation for the “RecIVA” system has not been written up yet.
“Specific details to qualify and related to the application for and payment delivery is estimated to be published about 90 days after the law is signed. The first payment is expected to be sent to eligible consumers during the month of November,” Zaragoza said.
Effect on small-, mid-sized businesses
Meanwhile, Perelló also expressed his concerns about how the reform will affect small- and mid-sized businesses, a number of which he said may not be able to initially bear the brunt of the new tax system.
“Treasury has already said it is willing to work with certain professional groups on a cash basis, which could possibly be extended [to more businesses]. The system of claiming a credit for VAT paid, as the reform proposes, could leave small businesses with a cash flow problem, at least until they can begin selling their products with the mark-up. We have to find an alternative, at least until this takes off.”
“We know that in the onset, switching from a sales and use tax to a VAT system could pose a cash flow problem for small businesses,” he said, of the sector defined by the bill as those reporting $75,000 or less in annual earnings.
He said that must also be changed to establish a higher cap.
“We have to work with that sector differently because if we’re looking to increase the government’s collections, we have to guarantee that the money spent on consumption remains in Puerto Rico,” Perelló said. “Otherwise we won’t be setting off the island’s economic development — we’ll just be setting of Treasury’s revenues.”
Implementation in phases
The new VAT system is expected to go into effect in phases, with the first kicking in May 1, if the bill is approved by March, as government officials have said. The 16 percent VAT tax would start on that date, as would the proposed drop in payroll withholdings for eligible taxpayers.
The 16 percent VAT is expected to shore up $4.4 billion annually, adding $1.2 billion in new revenue to the government’s coffers, Zaragoza said.