Treasury outlines IVU enforcement, automation strategies
The Puerto Rico Treasury Department is currently working on a number of enforcement and automation initiatives to increase the island’s sales and use tax uptake from the current 68 percent while attacking the government’s fiscal shortfall, agency Secretary Melba Acosta told participants of the Puerto Rico Credit Conference Friday.
That strategy is coupled with new tax measures and tax exemption eliminations that Gov. Alejandro García-Padilla’s economic team has proposed to shore up some $1.5 billion in new revenue for the cash-strapped government.
That figure is split between $440 million in new tax measures that include “sin” taxes and a surcharge to self-employed workers — among others — as well as $1.05 billion through the elimination of certain exemptions.
To boost sales and use tax collections, known as IVU in Spanish, Treasury is working with the Puerto Rico Bankers Association, all Puerto Rico banks, and other related parties that process credit and debit cards to come up with a system to transfer IVU collections from the point of sale directly to the agency on a daily basis.
“Our goal is to transform our current ‘voluntary remittance’ state to an automatic remittance process at the point of sale,” Treasury Secretary Melba Acosta told about 300 investors who gathered for the conference held in San Juan on Friday. “We want to increase the IVU capture rate while decreasing evasion and fraud.”
Acosta said in her presentation that Treasury is also pursuing a “strategic alliance between key players to further strengthen the IVU collection process and improve the cash sales monitoring processes based on the same technology.”
“This is a system that will provide Treasury with information to audit and go after revenue in a reactive way. The automation process is going to increase our capture rate instantly,” said Acosta. “Splitting the IVU [between municipalities and the central government] is going to be more effective because we’re going to receive the money on a daily basis.”
However, no further details were provided about how much the agency will invest in this initiative and when it will be ready to launch.
The government’s markedly low IVU collection has been a source of concern for the agency as well as many members of the business community that is now arguing that better monitoring is the answer to increasing revenue, rather than the elimination of certain tax exemptions, such as that currently afforded to business-to-business transactions.
Acosta defends B2B exemption elimination
In her presentation during the Puerto Rico Credit Conference, Acosta said that eliminating the B2B exemption would generate $883 million for the government and is the cornerstone of the government’s plan to expand the IVU base.
She defended the controversial measure — which has drawn loud opposition by many local trade organizations grouping a broad professional segment, from retailers to architects — by saying that the government relied on a study by a group of unnamed local economists to assess its potential impact on consumer spending.
“According to the study, if additional tax revenues were passed through to consumers, a slight decline of 1 percent in current-dollar private consumption expenditures could be expected,” she said. “Conversely, if all additional revenue arising from B2B were absorbed entirely by business units, then private consumption in current dollars would increase about 0.5 percent in fiscal year 2014.”
Acosta further noted that a sharp decline in consumption “is not to be expected as the current economic recession is principally due to a persistent contraction in investment, especially construction, not to reduced consumption.”
“In addition, Puerto Rico is not facing inflationary pressure at this time and taxing of B2B services should not materialize in significant increase in consumer prices,” she argued, contradicting most claims that have been set forth so far by professional groups including the United Retailers Association, the Puerto Rico Chamber of Commerce and the Society of CPAs.
Meanwhile, she outlined a number of other exemptions on business telephone services that will produce $63 million, on purchases by credit unions, universities, hospitals, hotels and others that will generate another $54 million, and the elimination of the resellers’ exemption certificate to generate another $50 million.
One line of business that will keep its B2B exemption is advertising, which Acosta said Friday has been identified as “an important tool to boost economic development.”
“This decision is expected to be beneficial to small, medium and large businesses that use this tool. The decision includes include television, radio, print and digital media ads,” Acosta said.
Beefing up tax compliance division
Finally, Acosta said Treasury is taking its own steps in-house to crack down on evasion.
At present, the agency’s tax crimes division has more than 200 active investigations, with more than 30 cases already referred to the Justice Department. Another 50 cases should be referred soon, she said.
“There are well over 120 cases that are in the beginning of the investigative process, and we expect them to be concluded within the next few months,” Acosta said.
Meanwhile, the agency is also merging its consumer tax bureau with its alcoholic beverages and licenses bureau to increase efficiency in monitoring those areas.
The unified bureau will be responsible for managing the necessary processes to carry out the imposition of excise and sales and use tax, as well as inspection activities as needed to maintain control and supervision of alcohol, licenses and adult entertainment machines.