#tucamaraenaccion

REFORMACONTRIBUTIVA

LaCámara deComercio dePuertoRicoysu Comité deAsuntos Contributivos presentan elForo:

Aspectos Relevantes: Corporaciones, Sociedades y Ciertos Otros

Rosa M. Rodríguez, Directora EjecutivaErnst and Young Puerto Rico LLC

#tucamaraenaccion

REFORMACONTRIBUTIVA

Thispresentationisprovidedsolelyforthepurposeofenhancingknowledgeontaxmatters.Itdoesnotprovidetaxadvicetoanytaxpayerbecauseitdoesnottakeintoaccountanyspecifictaxpayer’sfactsandcircumstances.

Theseslidesareforeducationalpurposesonlyandarenotintended,andshouldnotbereliedupon,asaccountingadvice.

TheviewsexpressedbythepresentersarenotnecessarilythoseofErnst&YoungLLP.

Thispresentationis©2018Ernst&YoungLLP.AllRightsReserved.

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.EY refers to the global organization, and may refer to one or more, of the member firms, of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

Disclaimer

#tucamaraenaccion

REFORMACONTRIBUTIVATaxrates– RegularandAMT• fortaxableyearscommencingafterDecember31,2018:

- reductiononcorporateregulartaxrates:- normaltaxisreducedto18.5%- surtax:nochanges- maximumtaxrate(normalandsurtax)wouldbe37.5%

- alternativeminimumtax- thegreaterof$500or18.5%ofthealternativeminimumnetincome- inthecaseoftaxpayerswithvolumeofbusinessof$3millionormorethetaxratewillbe23%- newlimitationsareimposedregardingdeductibleexpensestodeterminethenetincomesubjecttoalternativeminimumtax- optiontoclaimalltheordinaryandnecessaryexpensesiftaxpayersubmitsauditedfinancialstatements,AgreedUponProcedures(AUP)orComplianceAttestationReportsbyaCPAwithlicensetopracticeinPR

#tucamaraenaccion

REFORMACONTRIBUTIVA

TaxratesandOtherRegularandAMTRules• fortaxableyearscommencingafterDecember31,2018:

- alternativeminimumtax- newlimitationsareimposedregardingdeductibleexpensestodeterminethenetincomesubjecttoalternativeminimumtax- optiontoclaimalltheordinaryandnecessaryexpensesiftaxpayer

submitsauditedfinancialstatements- $3Millionormore- AgreedUponProcedures(AUP)orComplianceAttestationReports–

lessthan$1Million,or$1butlessthan$3Million- AllcasesthereportmustbeissuedbyaCPAwithaPuertoRicovalid

license

#tucamaraenaccion

REFORMACONTRIBUTIVAAlternativeMinimumNetIncomeDeductionsallowedtodeterminethenetincomesubjecttoalternativeminimumtax– TaxyearscommencingafterDecember31,2018• AMTnetincome–

• Onlycertaindeductionsallowed• GrossincomeperSection1031.01lessalloweddeductions

• AMTnetincomedeterminedonthesamebasisasthenetincomeforregulartaxpurposes• Onlyifauditedfinancialstatements,ortheAUPorCAreportasapplicableare

submittedwiththereturn• Secretarymustestablishbyregulationoradministrativeguidancethemannerin

whichthesenewruleswouldapply• Includingtransitionmeasures

#tucamaraenaccion

REFORMACONTRIBUTIVA

AlternativeMinimumNetIncomeDeductionsallowedtodeterminethenetincomesubjecttoalternativeminimumtax– TaxyearscommencingafterDecember31,2018

• 125%deductionforsalariespaidandreportedontheW-2's• amountofpaymentsforservicesdirectlyrelatedtothetradeorbusinessreported

oninformativereturns(withorwithoutwithholding),includes:• Rent• Telecom• Internetaccess

• contributionstohealthoraccidentplans

#tucamaraenaccion

REFORMACONTRIBUTIVAAlternativeMinimumNetIncomeDeductionsallowedtodeterminethenetincomesubjecttoalternativeminimumtax– TaxyearscommencingafterDecember31,2018

• Waterandelectricityservicesdirectlyrelatedtotheoperationofthetradeorbusiness

• Amounts paid inthe tax year directly related tothe operation ofthe trade orBusiness,andproperly reported inthe informative returns- advertising- promotion- Marketing

• Amountspaidinthetaxyearandpropertly reportedintheinformativereturnsfor:Property,contingencyandpublicliability(responsibility)insurance

#tucamaraenaccion

REFORMACONTRIBUTIVAAlternativeMinimumNetIncomeDeductionsallowedtodeterminethenetincomesubjecttoalternativeminimumtax- TaxyearscommencingafterDecember31,2018

• depreciationdeductionunderstraightline• interest,othertaxes,baddebts,contributionstoanemployeetrust,annuity

orcompensationunderadeferredpaymentplan,charitablecontributions,agriculturalincome,butonlyifaredirectlyrelatedtotheoperationofthetradeorbusiness

#tucamaraenaccion

REFORMACONTRIBUTIVA

Summary of AMT deductions-Deductible expenses Requirement

Salaries(125%deduction) W-2Servicesdirectlyrelatedtothetradeorbusiness InformativereturnContributionstohealth oraccidentplans -Rent,telecommunications, internet InformativereturnWaterandelectricityservices -

Advertising,promotion andmarketing- directlyrelatedthetradeorbusiness Informativereturn

Property,contingencyandpublicliabilityinsurance Informativereturn

Depreciationdeductionunder straightline -Interest,othertaxes,baddebts,contributionstoemployeetrusts ordeferredpaymentplan,charitablecontributions,agriculturalincome– directlyrelatedtothetradeorbusiness

-

#tucamaraenaccion

REFORMACONTRIBUTIVA

Optionalcomputationforcorporationsthatprovideservices

• Corporationsmayopttopayanoptionaltax• Sourceofincomeissubstantiallyfromtherenderingofservices• Effectivedate:

• fortaxableyearscommencingafterDecember31,2018• Secretaryhastheauthoritytopostponetotaxyears2020forward

#tucamaraenaccion

REFORMACONTRIBUTIVA

Gross Income Tax rate

Up to $100,000 6%Between$100,001-$200,000 10%Between$200,001-$300,000 13%Between$300,001-$400,000 15%

Between$300,001-$500,000 17%Over$500,000 20%

Optionalcomputationforcorporationsthatprovideservices-AppliesfortaxableyearcommencingafterDecember31,2018

#tucamaraenaccion

REFORMACONTRIBUTIVAOptionalcomputationforcorporationsthatprovideservicesRequirements– allthree(3)mustbemet:

- Totalgrossincomeisderivedsubstantiallyfromservicesrendered- Totalgrossincomewasreportedoninformativereturns- Totalgrossincomewassubjecttowithholdingatsourceorthepaymentofestimatedtaxes

• Iftheoptionalcomputationiselected• Applicabletaxratewouldbeappliedtothegrossincome• Taxpayerwillnotbeabletoclaimanyexpensesordeductions• Waivedfromtherequirementtosubmitauditedfinancialstatements,orAUPorACreportsasapplicable

#tucamaraenaccion

REFORMACONTRIBUTIVA

Corporate tax returns

• Onlyonesignaturewillberequired• Ifthetotaltaxongrossincomewaspaidbywithholdingatsourcenotaxreturnwillberequiredtobefiled

• InthecaseofLargeTaxpayers- returnneedstobecertifiedasreviewedorpreparedbyaCertifiedPublicAccountantwithlicensetopracticetheprofessioninPuertoRico

#tucamaraenaccion

REFORMACONTRIBUTIVA

Corporate tax returns

• Extensiontofile• TaxyearsthatcommencedafterDecember31,2016– 6months• Thiswouldalsobeapplicabletocorporationofindividuals,partnershipsandspecialpartnerships

• Filingofthereturn• Secretaryhasauthoritytorequiremandatoryelectronicfiling

• Paymentofthetax• Secretaryhasauthoritytorequiremandatoryelectronicpayment

#tucamaraenaccion

REFORMACONTRIBUTIVA

Group ofrelated entities – Section 1010.05Changesinthedefinitionusingtheconceptof“entities”insteadof“corporations”• Addsnewdefinition:Entity• Entityisdefinedaseveryindustryorbusinesscarriedonbya:

• corporation,limitedliabilitycorporation(LLC)orpartnershiptaxedasacorporation

• LLCorpartnershipsubjecttotaxationasapartnership• corporation,LLCorpartnershipsubjecttotaxationasaspecialpartnership• corporationorLLCsubjecttotaxationasacorporationofindividuals• Corporation,LLC,partnershiporanyothertypeofforeignentitythatifengagedinbusinessinPR,wouldfallonanyoftheabovecategories

#tucamaraenaccion

REFORMACONTRIBUTIVA

DefinitionsLimitedLiabilityCompany(LLC)

• ProvidesforLLCseries• Statutoryrule– partnershiptaxationifconsidereddisregardedorpartnerssubjecttotaxation• WouldonlyrequirethepartnershipmandatorystatustoforeignLLCs

• Newdefinition– Tradeorbusinesswouldnotinclude• Tradinginsecurities:residentindependentagentorforitsownaccount

• Residentindependentagentrule-OnlyapplicableifnoofficeorotherfixedplaceofbusinessinPRinthetaxyear

• Othernewdefinitions:PROMESA,mathematicalerror,amongothers

#tucamaraenaccion

REFORMACONTRIBUTIVA

LargeTaxpayers

• $50millionormore- volumeofbusinessdeterminedusingtheaggregateamountofallthemembersofthegroupofrelatedentities

• NotLargeTaxpayeranymore– taxpayercanrequestfromtheSecretarytobeexcludedfromtheLargeTaxpayerscategory• Requestmustbemadethroughfilingofanadministrative

determination

#tucamaraenaccion

REFORMACONTRIBUTIVADeductions-deductionsingeneral

- depreciation- businesseswithvolumeofbusinessof$3MMorlessmaycompute

thedeductionusinganusefullifeof2yearsforfixedassets,exceptforrealproperty,automobiles,amongothers(taxyearsafter12/31/2018)

- Automobiles- Expensesafter12/31/2017,allowsthedeductionforactualexpensesincurredfortheuseandmaintenance,subjecttoalimitthatwillbeestablished- AmounttobeestablishedbySecretaryshouldneverbelessthan

theonepublishedbytheUSInternalRevenueService

#tucamaraenaccion

REFORMACONTRIBUTIVADeductions-deductionsingeneral

- charitablecontributionsmadebycorporations- Taxableyearsbeginningafter12/31/2018- deductionwillonlybeallowedifmadetononforprofitentitiescertifiedbytheSecretary,thatprovideservicestoresidentsofPuertoRico

-Netoperatinglosses(carryover&deduction)- Taxableyearsbeginningafter12/31/2018- 90%ofgrossincome

limitationisreestablished- Eliminatesreferencestolimitationsaboutrelatedpartyexpenses

(51%/49%)

#tucamaraenaccion

REFORMACONTRIBUTIVA

Deductions-deductionsingeneral- Netoperatinglosses- corporatepartnerthatowns50%ormoreoftheinterestinapartnershiporspecialpartnership(seemsthatcouldbeapplicablefortaxyear2018dependingwhenthebillissigned)

- NotallowedtoclaimtheNOLdeductionagainstthedistributableshareincomeofsuchpartnership/specialpartnership

- NotallowedtouseitscurrentNOLtooffsetthedistributableshareincome

- Lossesfromotherpartnershiporspecialpartnershipsagainstshouldcontinuebeingallowedsubjecttotaxbasisandotherpertinentrules

#tucamaraenaccion

REFORMACONTRIBUTIVADeductions-deductionsingeneral

- lossespassthroughentities- reducesthelimitationto90%oftheshareofnetincomeinpassthroughentitiesfortaxyearsbeginningafter12/31/2018

- employmentofyoungcollegestudents/recentgraduates- establishes150%- 200%deductionsonsalariespaidtocollege

studentsandrecentlygraduatedindividuals- capitallosses– reinstates90%limitationfortaxyearscommencingafter

December31,2018

#tucamaraenaccion

REFORMACONTRIBUTIVA

Deductions• nondeductibleitems

- meals&entertainmentexpensesReducesto25%thedeductibleportion-taxyearscommencingafter12/31/2018

- travelandlodgingexpensesNottoexceed50%- taxyearscommencingafter12/31/2018

- paymentsandrelatedlegalexpensesforsexualharassmentNotdeductible- taxableyearscommencingafter12/31/2018- applicabletoagreementswithanondisclosureclause

#tucamaraenaccion

REFORMACONTRIBUTIVADeductions• nondeductibleitems

- 51%disallowanceofrelatedpartycostsandexpenses- Eliminateslimitationfortaxableyearscommencingafter12/31/2018- requirestransferpricingstudythatincludesanalysisoftheoperationscarriedoutinPR- preparedinconformitywiththeprovisionsoftheUSIRCSection482- ReferencetobeingrevisedbytheUSIRS- ControlledgroupinwhichnomemberhasoperationsintheUS-transferpricingstudyinconformitywithOECDwouldbeallowed

- Secretaryshallissueregulationoradministrativeguidance-toestablisheffectiveness/validityofthetransferpricingstudy

- Secretaryisauthorizednottoacceptthosestudiesthatarenotincompliancewiththerules

#tucamaraenaccion

REFORMACONTRIBUTIVA

Sourceofincomerules- Saleofinterestinapartnership• Saleofaninterestinapartnership

• PartnershipthatgeneratesincomefromsourceswithinPR• 2011PRIRC– sourcefromplaceoforganizationorresidenceofseller• PRsourcesincome- totheextentthatthepartnershipwouldhave

generatedPuertoRicosourceincomehaditsoldalltheassetsatfairmarketvalue(FMV),regardlessof• residenceofthepartner,and• ruletomakedeterminationatthepartner,shareholderormember

• Transactionsafter12/31/2018

#tucamaraenaccion

REFORMACONTRIBUTIVAWithholdingatsource– nonresidentindividualsSaleofinterestinapartnership• Specialruletonon-residentpersons

• Buyerrequiredtodowithholdingof15%ontheportionofthegainthatisconsideredfromPRsources

• Buyerrequiredtododeposittaxandfileannualreturnwithrespecttowithholdingmade• Buyernotallowedtoclaimdeductionifdepositandannualinformative

filingarenotmade• Totheextentdeductibleasordinaryandnecessaryexpenses(most

likelynotthecaseinapurchasefromanon-PRresident)• Transactionsafter12/31/2018

#tucamaraenaccion

REFORMACONTRIBUTIVA

Sourceofincomerules– Personalservicestogovernmentalentities

• PuertoRicosourceincome- ServicesrenderedtoanyagencyorinstrumentalityoftheGovernmentofPR,publiccorporation,legislature,judicature,municipalitiesoreanyotherentitycreatedbystateorFederallaws• FundingfromGeneralFund• EveniftheservicesarerenderedfromoutsidePR• Effectivedate:asofthedateofsignature

#tucamaraenaccion

REFORMACONTRIBUTIVA

Distributablesharetopartners– limitationonallowanceoflosses

• Specialruletopartner’sadjustedbasis– Indeterminingthepartner’sdistributableshareinthelossesofapartnership• shouldincludethepartner’sdistributableshareofthecharitable

contributionsmadebythepartnership• donationofpropertywithfairmarketvalueinexcessofitsadjusted

basis- onlytheadjustedbasismaybeconsidered• partner’sdistributableshareinFTCs

#tucamaraenaccion

REFORMACONTRIBUTIVA

Continuationofpartnership

• saleorexchangeof50%ormoreofthetotalinterestinapartnership'sprofitsandcapitalwouldnotbeconsideredaterminationofthepartnership

#tucamaraenaccion

REFORMACONTRIBUTIVAAuditedFinancialStatements(AFS)Requirements

VolumeofBusiness 2011PRIRCHB1544

TaxYear2018 Commencingafter12/31/2018

Lessthan$1,000,000 NoAFSrequired. NoAFSrequired.

VoluntarysubmissionofAUPorCAnottobesubjecttoABTandAMTlimitations. CPAwithvalidlicenseinPR.

Equalorgreaterthan$1,000,000butlessthan$3,000,000

NoAFSrequired;optionaltoobtain7%fullwaiver(corporations)orpartialwaiver(other).

NoAFSrequired;optionaltoobtain7%fullwaiver(entities)orpartialwaiver(other).

VoluntarysubmissionofAUPorCAnottobesubjecttoABTandAMTlimitations.CPAwithvalidlicenseinPR.

Equalorgreaterthan$3,000,000 AFSrequired. AFSrequired. AFSrequired.Also,willnotbe

subjecttoABTandAMTlimitations.

AUP– Agreeduponproceduresreport;CA– ComplianceAttestationReport

#tucamaraenaccion

REFORMACONTRIBUTIVAAuditedFinancialStatements(AFS)Requirements– Consolidatedorcombined

VolumeofBusiness 2011PRIRCHB1544

TaxYear2018 Commencingafter12/31/2018

Equalorgreaterthan$3,000,000(relatedentitiesandpersons)

Members- lessthan$1,000,000,noAFSrequired.

Members- lessthan$1,000,000,noAFSrequired. AUPorCArequired.

Members- equalorgreaterthan$1,000,000,stand-aloneAFSrequiredlistinginthenotesallrelatedentitiesETBinPuertoRico.

Members- equalorgreaterthan$1,000,000,stand-aloneAFSrequiredlistinginthenotesallrelatedentitiesETBinPuertoRico.

Members- equalorgreaterthan$1,000,000,stand-aloneAFSrequiredlistinginthenotesallrelatedentitiesETBinPuertoRico.

ETB– Engagedintradeorbusiness

#tucamaraenaccion

REFORMACONTRIBUTIVA

AuditedFinancialStatements– Notforprofit

• non-for-profitcorporationswithunrelatedbusinessincomeof$3,000,000ormorewillberequiredtosubmitauditedfinancialstatementsfortaxableyearsbeginningafterDecember31,2018

#tucamaraenaccion

REFORMACONTRIBUTIVA

SupplementalInformation(SI)

• Generally,sameruleswouldapply• Secretarywouldestablishbyregulationandadministrative

guidancethedatetosubmittheSIwhichshouldbeadateaftertheduedateoffilingthereturn,includingextensions

• SecretaryisalsoauthorizedtoestablishtherequirementsfortheSIschedulestogetherwiththePRCPAStateSociety

#tucamaraenaccion

REFORMACONTRIBUTIVA

UncertainTaxPosition(UTP)

• Everyentityrequiredtosubmitauditedfinancialstatementsmustincludeastatementwiththereturn

• StatementmustincludedetailofUTPspursuanttoguidanceinaccountingforincometaxesstandards

• Secretarytoestablishcontentofthestatement• TaxyearsthatcommenceafterDecember31,2018

Gracias

www.camarapr.org #tucamaraenaccion