INCOME TAX RETURN FOR EXEMPT BUSINESSES ......The tax that you determine to pay when filing your...

2000

Hacienda is at your service1

COMMONWEALTH OF PUERTO RICODEPARTMENT OF THE TREASURY

PO BOX 9022501 SAN JUAN PR 00902-2501

INCOME TAX RETURN FOR EXEMPTBUSINESSES UNDER THE PUERTO RICO

INCENTIVES PROGRAMS

MESSAGE FROM THE SECRETARY OF THE TREASURY

Dear taxpayer:

In this first communication as the new Secretary of the Treasury, I would like to reaffirmmy commitment to guide this Department following the unbreakable principles of publicservice. Honesty, integrity, fiscal pureness and the acknowledgement that our missionis to serve the people, guide our Administration. That way, we will provide the servicesof excellence that our people deserve and need.

The tax that you determine to pay when filing your income tax return is very important for ourpeople. We are in a new tax period, therefore I exhort you to fulfill your taxresponsibility in order to provide our fellow citizens the resources and services thatthey need.

Cordially,

Juan A. Flores Galarza

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TABLE OF CONTENT

Relevant Facts ............................................................................................................................

Taxpayer’s Bill of Rights ............................................................................................................

Instructions to Complete the Return ............................................................................................

Instructions to Complete the Schedules:

Schedule E - Depreciation ..................................................................................................

Schedule K Incentives - Computation of Tax ...................................................................

General Instructions for Schedules L, M, N, P, V and W Incentives .....................................

Schedule L Incentives - Partially Exempt Income under Act 52 of 1983 or Act 78 of 1993 ..

Schedule M Incentives - Fully or Partially Exempt Income under Act 57 of 1963 orAct 26 of 1978 ......................................................................................................................

Schedule N Incentives - Partially Exempt Income under Act 8 of 1987 ..........................

Schedule O Incentives - Optional Income Tax for Exempt Businesses pursuant toSection 3A of Act 8 of 1987 .................................................................................................

Schedule P Incentives - Income from Fully Taxable Operations or Partially ExemptIncome under Act 148 of 1988, Act 75 of 1995, Act 225 of 1995 and Act 14 of 1996 ..

Schedule V Incentives - Income Tax for Exempt Businesses under Act 135 of 1997 ...

Schedule V1 Incentives - Computation ot the Special Deductions under Act 135 of 1997 ...

Schedule W Incentives - Income Tax Film Entity under Act 362 of 1999 .........................

Form 480-E - Estimated Tax Declaration ...............................................................................

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NEW TAX BENEFITS

Act No. 362 of December 24, 1999 was created withthe purpose of develop the film industry in PuertoRico. The same grants tax and economic benefitsto investors that promote the production of featurefilms, series, catalogues or recordings and/or theconstruction or expansion of studios, laboratoriesor facilities for the transmission of images.

The Film Entity’s income derived from a Film Projector an Infrastructure Project, are subject to a fixedincome tax rate of 7%.

SIGNIFICANT CHANGES

Schedule W Incentives

This new schedule is created to be used exclusivelywith the Income Tax Return for Exempt BusinessesUnder the Puerto Rico Incentives Programs. Thesame will be used to inform the income derived bya Film Entity under Act No. 362 of December 24,1999. Also, the 7% fixed income tax rate on saidincome will be determined.

FINANCIAL STATEMENTS REQUIREMENT

If the entity had a business volume related to itsfully taxable operations of more than $1 million, thefinancial statements must be included with thereturn. Such financial statements should include abalance sheet, an income statement and astatement of cash flows. These statements shouldbe submitted with an audit report issued by a certifiedpublic accountant (CPA) licensed in Puerto Rico.

A report that includes consolidated financialstatements, in which the operations in PuertoRico are presented as supplementaryinformation, is not acceptable. Also, compiledor reviewed statements are not acceptable.They must be audited.

SIGNATURE OF THE RETURN BY THESPECIALISTS

If you pay for the preparation of the return,requiere the specialist's signature, registrationnumber, and employer's identification orsocial security number. The Puerto Rico InternalRevenue Code of 1994, as amended (Code),imposes civil and criminal sanctions to thoseSpecialists who fail to submit this information.

RELEVANT FACTS

The Specialist must declare under penalty of perjurythat he/she examined the return, and to the best ofhis/her knowledge and belief, is correct and complete.

If the return is prepared by an accounting firm dulyregistered as a Tax Return Specialist, it must includethe employer's identification number, the registrationnumber and be signed by the authorized person.

CONTRACTS WITH GOVERNMENTALENTITIES

Every person, natural or juridical, contracted by agovernmental entity, must comply with theExecutive Order 91-24, as amended, and theprovisions of the Circular Letters in force at the timeof processing the contracts. According to saidprovisions, every contract subscribed by agovernmental entity must include a clause to certifythat the contracted party filed the income tax returnsfor the last five years, and that the income, property,unemployment, temporary disability and driverssocial security taxes have been paid.

In addition, in order to approve a contract orpurchase order, the governmental entity mustrequire the tax return filing (Modelo SC 2888) anddebt certifications (Modelo SC 6096) from theInternal Revenue Area of this Department, theproperty tax certification from the CRIM and thecorresponding certification from the Department ofLabor and Human Resources. These documentsmust be requested annually.

In order to expedite the process of issuing thecertifications, every person who has filed income taxreturns for the last 5 years and who does not have taxdebts, or if having debts, has formalized a payment plan,will receive the Tax Return Filing and Debt Certificationautomatically by mail (Modelo SC 2628). For thispurpose, it is necessary that if the corporation iscontracted by a governmental entity, indicate soin the heading of the return, page 1.

Sometimes, a certification cannot be issued inconnection with the return corresponding to the lasttaxable year since such return may have not beenalready processed. Because of this possibility, itis recommended to personally hand in the originalreturn along with a copy, in order to receive backsaid copy sealed with the Department’s receiptstamp. This service will be offered at the Departmentof the Treasury, Intendente Ramírez Building in OldSan Juan, at the District Offices, at the Internal

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Revenue Collections Offices and at the TaxOrientation Centers.

COUPONS BOOKLET FOR THE PAYMENTOF ESTIMATED TAX (FORM 480.E-2)

The four installments of estimated tax correspondingto the 2001 calendar year or to the 2001-2002 taxableperiod, will be made with the booklet revised on 08.00.Payments made with coupons revised previous tosaid date could have problems in their application.

TAXPAYER'S SERVICE FACILITIES

In the Taxpayer's Service Offices, besidesinforming about the status of your refund, otherservices are offered: Tax Return Filing Certifications,Return's Copies, Inheritance and Donations Cases,Individuals, Corporations, Partnerships, ProfessionalServices Waivers and COLA Certificates.

Following is the address and telephone number ofour offices:

San JuanIntendente Ramírez Building10 Paseo Covadonga Office 211Telephone: 721-2020 extension 3610or 1-800-981-7666

BayamónRoad #22nd Floor Gutiérrez BuildingTelephone: 778-4949 or 778-4973

CaguasGoyco Street1st Floor Governmental Building Office 110Telephone: 258-5272 or 258-5255

MayagüezGovernmental Center#50 Nenadich Street Office 102Telephone: 265-5200

PonceEurobank Building#26 Hostos Ave.Telephone: 844-8800

TECHNICAL ASSISTANCE

For additional information on the technical contentsof this pamphlet or to clarify any doubts, pleasecall 721-2020 extension 3611 or 1-800-981-9236.Also, you can use TeleHacienda service at 721-0510 or toll free at 1-800-981-0675. This service isonly available in Spanish.

HACIENDA MAKING CONNECTION

The Department of the Treasury has a site on theINTERNET. Here you can access information aboutthe following services, among others:

Electronic transfer Individual Tax Return (OnlyShort Form returns with refund)

Program for the preparation of the IndividualIncome Tax Return 2000

TeleHacienda (Spanish only)

Income Tax Return of Taxable Corporations andPartnerships

Puerto Rico Internal Revenue Code of 1994,as amended (Spanish only)

Form SC 2898 - Change of Address

Form AS 4809 - Information of IdentificationNumber - Organizations (Employers)

Modelo SC 2800 - Planilla de ContribuciónSobre Caudal Relicto (Spanish only)

Modelo SC 2800A - Planilla Corta de ContribuciónSobre Caudal Relicto (Spanish only)

Modelo SC 2788 - Planilla de ContribuciónSobre Donaciones (Spanish only)

Informative Booklet to Provide Orientation aboutyour Income Tax Return (Spanish and English)

Informative Booklet to Provide Orientation onthe Income Tax Responsibilities of Federal,Military and Other Employees

Informative Booklet Regarding the 7% TaxWithholding in Case of Professional Services(Spanish and English)

Folleto Informativo Contribución sobre Ingresosde Sacerdotes o Ministros (Spanish only)

Folleto Informativo para Aclarar sus Dudassobre Aspectos Contributivos en la Venta deCiertas Propiedades (Spanish only)

You can access our site at: http:/ /www.hacienda.prstar.net. Also, you can let us knowyour opinion through our E-MAIL at:support@hacienda .prstar.net.

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The Taxpayer’s Bill of Rights grants the followingrights under the Code:

To receive a proper, considerate and impartialtreatment.

Confidentiality of the information submitted.

All interviews must be at a reasonable time andplace for the taxpayer, in coordination with theemployees of the Department of the Treasury(Department).

The interview or audit must not be used to harassor intimidate in any manner the person interviewed.

To receive an explanation of the process to whichthe taxpayer will be exposed and subject, and therights that assist him.

Be assisted by an attorney, accountant, certifiedpublic accountant or any other authorized personat any moment during the interview.

Be informed prior to the interview, of the intention totape the interview and to be able to obtain an exactcopy of such recording prior to the payment of thecost thereof.

Be informed of the nature of your tax liability.

Be advised of your right against self-incrimination,to remain silent and that your silence should not betaken or commented against you, in case of apossible exposure to a criminal action.

Consult, and be advised by an attorney, accountant,certified public accountant, or authorized agent torepresent you within the Department, or to be ableto finish the interview even when it had commenced.

Be notified in writing of any adjustment made bythe Department as a result of a tax audit when itinvolves the addition of interest, penalties andsurcharges, as provided by the Code, as well asthe exact amount of the adjustment and the reasonsfor such changes.

TAXPAYER’S BILL OF RIGHTS

Waive the rights described in the precedingparagraphs, if such waiver is made knowingly andvoluntarily.

Grant a written power to authorize any person torepresent you during a tax interview or process. Suchperson shall receive, for purposes of the interview,equal treatment as you, unless you are notified thatsuch person is responsible for an unreasonabledelay or interference with the audit.

Not to be discriminated because of race, color, sex,birth, origin or social condition, or political, religiousideas or association of any taxpayer or hisrepresentative. No records will be kept containingtax information for these purposes.

The Department’s employees will explain and protectyour rights during all phases of the process. If youbelieve that your rights have been violated, youshould discuss this matter with the supervisor ofthe employee. If you do not agree with the actiontaken by the supervisor, you may file a complaintwith the Office for the Protection of Taxpayer's Rights.

OFFICE FOR THE PROTECTION OF TAXPAYER'SRIGHTS

The Office for the Protection of Taxpayer's Rights(Ombudsman of the Taxpayer) was created toassure the compliance of the provisions of theTaxpayer’s Bill of Rights. Said office is located atthe Department of the Treasury in Old San Juan,Office 800. For assistance, please call 723-1080 or721-1532.

The Ombudsman of the Taxpayer is responsible forattending to the problems and claims of thetaxpayers and to facilitate the process between thetaxpayers and the Department of the Treasury. Also,the Ombudsman of the Taxpayer has authority toprevent or correct any infringement, by anyemployee of the Department, of the rights of thetaxpayer.

For additional information, you can request thebooklet: “Carta de Derechos del Contribuyente”.

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not having any office or place of business in PuertoRico, the return must be filed not later than the 15thday of the sixth month following the close of thetaxable year.

The return can be mailed to the following address:

Returns with Refund:DEPARTMENT OF THE TREASURYPO BOX 50072SAN JUAN PR 00902-6272

Returns with Payment and Others:DEPARTMENT OF THE TREASURYPO BOX 9022501SAN JUAN PR 00902-2501

The return can also be delivered at the Department ofthe Treasury, Intendente Alejandro Ramírez Building,in Old San Juan, the Internal Revenue CollectionsOffice of your municipality, the District Offices of theDepartment, or the Tax Orientation Centers.

AUTOMATIC EXTENSION OF TIME TO FILETHE RETURN

A 90 days automatic extension of time will begranted for filing the return if it is requested not laterthan the due date to file the return. This will be doneusing Form AS 2644.

In case of corporations under the provisions ofSection 936 of the Federal Internal Revenue Code,the extension of time will be up to the fifteenth dayof the ninth month following the end of the taxableyear (five months after the prescribed date to filethe return).

Every corporation or partnership must pay with therequest for an automatic extension of time, the entireamount of tax determined, the special surtax andthe tollgate tax under Act 8 of 1987, if applicable.

An extension of time to file the return does notextend the time for the payment of tax or anyinstallment of the same.

SPECIFIC INSTRUCTIONS FORM 480.30(II)

Every corporation or partnership that during thetaxable year derives partially exempt income underone or more tax or industrial incentives acts, tourismor tourism development acts, or any special act,

WHO MUST FILE THIS RETURN?

Every corporation or partnership engaged in a trade orbusiness in Puerto Rico which derives fully or partiallyexempt income under any of the following acts:

Puerto Rico’s Industrial Incentives Act of 1963,as amended (Act 57 of 1963)

Puerto Rico’s Industrial Incentives Act of 1978,as amended (Act 26 of 1978)

Puerto Rico’s Tax Incentives Act of 1987, asamended (Act 8 of 1987)

Tourism Incentives Act of 1983, as amended(Act 52 of 1983)

Puerto Rico’s Tourism Development Act of 1993,as amended (Act 78 of 1993)

Agricultural Tax Incentives Act of Puerto Rico,as amended (Act 225 of 1995)

Tax Incentives Act of 1998 (Act 135 of 1997)

Furthermore, this return must be filed by acorporation or partnership which derives incomefrom the sale of entrance tickets for artistic andcultural spectacles that are performed according tothe provisions of one of the following acts:

Special Act for the Rehabilitation andDevelopment of Santurce, as amended (Act 148of 1988)

Special Act for the Rehabilitation andDevelopment of Río Piedras (Act 75 of 1995)

Special Act for the Rehabilitation andDevelopment of Castañer (Act 14 of 1996)

Also, this return must be filed by every corporationor partnership which has derived income from a FilmEntity engaged in a Film Project or an InfrastructureProject under the following act:

Film Industry Development Act (Act 362 of 1999)

WHEN AND WHERE TO FILE?

This return must be filed not later than the 15th dayof the fourth month following the end of the taxableyear. In case of a foreign corporation or partnership

INSTRUCTIONS TO COMPLETE THE RETURN

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(b)

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Inform the type of industry or business (principalbusiness activity). For example, if the source ofincome is agriculture and the main business activityis sugar cane growing, enter sugar cane; if coffeegrowing, enter coffee. If the source of income is atrading business and the main business activity ishardware, enter hardware. If the source of incomeis sale of furniture, write furniture. If the source ofincome is manufacturing and the main activity isthe manufacturing of shoes, enter shoes.

PART I - TAX LIABILITY

Line 1 - Tax liability

Enter your total tax liability, as determined onSchedules K, O, V and W Incentives of the return.

Line 2 - Payments

Enter on lines 2(a) through 2(f) the tax paid for thespecified concepts to be credited against the taxliability for the year.

Line 3 - Balance of tax due

If the amount on line 2(g) is larger than the amounton line 1(e), there is a tax overpayment. Theoverpayment may be credited against next year'sestimated tax or refunded, as indicated on line 5 or6. If you filed the return after its due date or requestedan extension of time, but you did not pay the totalamount due, you must compute the interest andsurcharges that apply since the due date to file thereturn through the date on which the return is filed.Refer to section Interest, Surcharges andPenalties.

Line 4 - Amount paid with this return

Enter the amount paid for each concept, asapplicable.

Make the check or money order payable to theSecretary of the Treasury. Indicate the employer'sidentification number and Form 480.30(II).

If you decide to pay in cash, you can do it at any ofour Collections Offices. Make sure to keep theofficial receipt of the amount paid.

Line 9 - Balance of tax due

If you file the return after its due date or yourequested an extension of time, but you did not paythe total amount due, you must compute the interestand surcharges that apply since the due date to file

must file Form 480.30(II), in addition to a separateschedule for each one of the acts under which itearned said partially exempt income.

In those cases where the corporation or partnershipis tax exempt under two or more tax exemptiondecrees issued under the same industrial, tax,tourism incentives or tourism development act, onlyone schedule under the applicable act must be filed.Such schedule should include all the operationscovered by the applicable act.

If the corporation or partnership also derives incomefrom fully taxable operations, it must file ScheduleP Incentives along with Schedules L, M, N, O, Vand V1 Incentives, as applicable.

The following instructions are applicable to everycorporation or partnership required to file anySchedule from L Incentives through V1 Incentives.

The schedules with the instructions are available inthe Department of the Treasury in Old San Juan,Forms and Publications Division, Office 603. Tocontact said office, please call 721-2020 extension2645 or 2646.

HEADING OF THE RETURN

If the taxable year of the corporation or partnershipis a calendar year, there is no need to enter thedates on which the taxable year begins and ends.Only the corresponding year should be indicated. Ifit is a fiscal year, you must enter the dates in thespaces provided in the return.

NAME, EMPLOYER'S IDENTIFICATIONNUMBER AND ADDRESS

Enter the name of the corporation and theregistration number assigned by the Department ofState. In case of a partnership, enter its legal name.

In addition, enter the employer's identificationnumber in the space indicated. The employer'sidentification number is necessary to processthe return.

Corporations or partnerships that do not have anemployer's identification number, shall request itfrom the Federal Internal Revenue Service and notifyit to the Department of the Treasury on Form AS4809.

Enter the complete physical address where theprincipal office of the business is located, and itstelephone number.

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Any overpayment of this tax will be credited onlyagainst the estimated prepayment of tollgate taxfor the following year.

INTEREST, SURCHARGES AND PENALTIES

Interest

The Code provides for the assessment of interestat a 10% annual rate over any tax not paid by itsdue date.

Surcharges

In case that imposition of interest is applicable, asurcharge of 5% of the amount due will be assessed,if the delay in paying exceeds 30 days, but not over60 days; or 10% of the amount due, if the delayexceeds 60 days.

Penalties

The Code imposes a progressive penalty from 5%to 25% of the total tax for late filing unless you canshow reasonable cause for the delay.

Any person required under the Code to file a returnor declaration, who voluntarily fails to file such returnor declaration within the term or terms required bythe Code or regulations, in addition to otherpenalties, shall be guilty of a misdemeanor andpunished by a fine of not more than $500 orimprisonment for a term of not more than 6 months,or both penalties, plus the costs of prosecution.

If any person voluntarily fails to file the abovementioned return or declaration (within theterms required by the Code or regulations) withthe intention to avoid or defeat any tax imposedby the Code, in addition to other penalties, shallbe guilty of a felony and punished by a fine ofnot more than $20,000 or imprisonment for afixed term of 3 years. If there were aggravatingcircumstances, the established fixed jail penaltymay be increased to a maximum of 5 years; ifthere were extenuating circumstances, it maybe reduced to a maximum of 2 years, or bothpenalties, at the discretion of the Court, plusthe costs of prosecution.

PART II - APPLICABLE TAX EXEMPTION ACTS

Check the box corresponding to the act underwhich the operations are fully or partiallyexempt. If you checked the box of Act 26 of 1978or Act 8 of 1987, you must complete Part III.

the return through the date on which the return isfiled. Refer to section Interest, Surcharges andPenalties.


The payments made by check or money order mustbe made payable to the Secretary of the Treasury.Indicate the employer's identification number andForm 480.30(II).

If you decide to pay in cash, you can do it at any ofour Collections Offices. Make sure to keep theofficial payment receipt provided by the Collector.

The Special Surtax must be paid to theSecretary in a separate check attached to theIncome Tax Return.

Line 12 - Prepayment of tollgate tax

This tax shall be paid to the Secretary of theTreasury in a separate check attached to theIncome Tax Return.

Every corporation or partnership that requestsan extension of time to file the income taxreturn, must include the payment of thePrepayment of Tollgate Tax with said request,in a separate check.

Any payment made after the due date, is subject tointerest and surcharges. If you filed the return afterits due date or you requested an extension of time,but you did not pay the total amount due, you mustcompute the interest and surcharges that applysince the due date to file the return through thedate on which the return is filed. Refer to sectionInterest, Surcharges and Penalties.

Line 13 - Tollgate tax applied against taxwithheld attributable to current yeardistribution

Enter the prepaid amount during the year on whichyou elected to apply the total tax paid in advance, ifthe tax determined over the distributed industrialdevelopment income (IDI) is equal to or larger thanthe prepaid amount.


Enter the amount paid for each concept, asapplicable (See instructions for line 12).

Line 18 - Amount overpaid to be credited toestimated prepayment of tollgate tax for next year.

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Line 6 - Determination of prepayment of tollgatetax

Enter in the corresponding box the 5% tax rate,unless the entity's decree provides for specialdistribution rules and it has been convened througha Closing Agreement with the Secretary to pay 50%of the applicable rate. Multiply line 5 by theapplicable tax rate and enter the amount on thisline.

Line 7 - Dividends declared from currentearnings

Enter the amount of dividends declared and paidrelated to earnings accrued during the current year.

Line 8 - Prepayment of tollgate tax attributableto current earnings

Enter 5% of line 7. If the entity is subject to a tollgatetax rate lower than 10% because its decree providesspecial distribution rules, and it has been convenedthrough a Closing Agreement with the Secretary toprepay 50% of the aforementioned tollgate tax, youmust enter 50% of your tax rate in the spaceindicated and determine the applicable tollgate taxprepayment.

Line 10(b) - Other credits

Any business exempt under Act 8 of 1987, includingthose covered under previous laws, that invests inPuerto Rico part of its IDI for a particular taxableyear in plant expansion, purchases of productsmanufactured in Puerto Rico, research anddevelopment of new products or industrialprocesses and in eligible activities under Section2(j), is entitled to a credit against the tax, but subjectto certain terms and conditions. For additionaldetails, refer to Section 4(b) and (d) of said act.

Also, if the parent company of an exempt businessis under Federal Bankruptcy proceedings, theexempt business is entitled to claim a credit againstthe income tax payment and the prepayment oftollgate tax, subject to compliance with certainconditions. For additional information, refer toSection 3(a)(3) of Act 8 of 1987.

For the credits under Act 26 of 1978, refer to Section4(h) of said act.

Any exempt business that has a converted decreeunder Section 3(i)(2a) of Act 26 of 1978, is entitledto carryfoward as a credit for future taxable years,an amount equal to two thirds of the net income tax

PART III - CONDITIONS THAT EXONERATEFROM THE PREPAYMENT OF TOLLGATE TAX

Complete this questionnaire if the entity derivesincome from partially exempt activities under Act 8of 1987 or Act 26 of 1978. Every entity operatingunder these acts, must make a tollgate taxprepayment of 5% on the industrial developmentincome (IDI).

If the entity is not subject to the tollgate taxprepayment, please check the applicable box. Incase that the tax exemption decree provides andestablishes special rules for the distribution andtaxation of the IDI, you must attach to the return aschedule indicating such rules.

PART IV - COMPUTATION OF PREPAYMENTOF TOLLGATE TAX

Line 1 - Net operating income for the year

Enter the amount shown on Schedule M Incentivesor N Incentives, Part I, line 1, whichever applies.

Line 2 - Adjustments

Enter on line 2(a) the interest income from eligibleinvestments (Section 2(j)) derived from obligationsissued by the Government of Puerto Rico, itsinstrumentalities or political subdivisions.

Enter on line 2(b) any adjustments required todetermine the amount of IDI that constitutes incomeand profits available for dividend distribution. Youmust submit a detailed schedule. For example:

Expenses incurred but not deductible (i.e. mealand entertainment, charitable contributions, etc.)

Income earned but not taxed on the return (i.e.proceeds from life insurance when the beneficiaryof the policy is the corporation, etc.)

Special deductions granted by the Act whichdo not represent a cash disbursement (i.e.deduction of $400 for each severelyhandicapped employee, etc.)

Line 4 - Tax determined on industrialdevelopment income

Enter on line 4(c) any tax paid to the United States,its possessions and foreign countries attributableto IDI. You must submit with the return evidenceof the tax paid and claimed as a credit, suchas a copy of the federal income tax return.

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paid as a result of the conversion, against any taxespaid or withheld at source on current dividenddistributions and in liquidation.

PART V AND VI - COMPARATIVE BALANCESHEET AND RECONCILIATION OF NETINCOME (OR LOSS) PER BOOKS WITH NETTAXABLE INCOME (OR LOSS) PER RETURN

The financial statements and reconciliation mustbe totally completed in order to consider the returnas filed. Do not submit this information in loosesheets to substitute the statements or thereconciliation. Returns that do not comply withthese requirements, will be returned to thetaxpayer.

SIGNATURE AND OATH OF THE RETURN

The return must be signed and sworn before a notaryby the president, vice president or other principalofficer and by the treasurer or assistant treasurer oragent of the exempt business.

INCOMPLETE RETURN

The return must be completed in all of its parts. Allthe information of the Income Statement, BalanceSheet and Reconciliation or Retained EarningsStatements must be detailed. Returns that do notcomply with this requirement will beconsidered as not filed.

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SCHEDULE E - DEPRECIATION

This schedule will be used to inform each of theproperties for which depreciation expense is claimed.Spaces are provided for current, flexible andaccelerated depreciation, and for improvementsamortization.

The following information must be provided on theschedule:

property classification;date acquired;allowable cost or basis;depreciation claimed on previous years;estimated useful l ife to determine thedepreciation;depreciation claimed this year.

Part (b) - Flexible Depreciation

To be entitled to claim flexible depreciation insteadof current depreciation, the Code requires to makethe election through a sworn statement to be filednot later than 30 days after the close of the taxableyear. Said option may be exercised only over propertyacquired by the taxpayer prior to June 30, 1995.

Part (c) - Accelerated Depreciation

The election may be exercised only over propertyacquired by the taxpayer during taxable yearsbeginning after June 30, 1995. The election, oncemade, is irrevocable.

Refer to the Code and its regulations todetermine who will qualify for the flexible andaccelerated depreciation deduction, and therequirements that must be met in order to beentitled to said deduction.

Submit Schedule E with your return.

SCHEDULE K INCENTIVES - COMPUTATIONOF TAX

PART I - NORMAL TAX AND SURTAX

Line 1 - Enter the net income subject to tax in thecorresponding line as determined on Schedules L,M, N and P Incentives.

Line 3 - Enter $25,000 in the corresponding column.If you have more than one operation covered under

an exemption decree or partially exempt under aspecial law, or totally taxable income, you may claimonly up to $25,000 in the aggregate.

Also, if the entity is a member of a controlled group,as defined in Section 1028 of the Code, the creditwill apply only to the controlled group. If an entity isa member of a controlled group as of December 31,the credit allowed to said entity for the taxable yearwhich includes such December 31, will be equal to$25,000 divided among the number of entities thatare component members of the controlled group.Nevertheless, the controlled group may elect,through an agreement, for a different apportionmentplan, as long as the sum of the amounts proratedamong the members of the group does not exceed$25,000.

If the entity is a member of a controlled group,it is necessary to include with the return of eachmember of the controlled group a scheduledetailing the apportionment plan, the nameand employer's identification number of eachentity that is a member of the group.

Line 5 - If the entity is covered under the Industrial,Tax or Tourism Incentives Act, or TourismDevelopment Act, you must multiply line 2 by22%.

If the entity has partially exempt income under Act225 of 1995, Act 148 of 1988, Act 75 of 1995, Act14 of 1996 or has fully taxable income, you mustmultiply line 2 by 20%.

Line 6 - Multiply line 4 by the applicable tax rateand enter the result on the corresponding column.

If the income is derived from operations coveredunder Act 52 of 1983, Act 57 of 1963, Act 26 of1978 or Act 8 of 1987, the surtax is:

If the net income subjectto surtax is:

$0 $75,000

$75,001 $125,000

$125,001 $175,000

INSTRUCTIONS TO COMPLETE THE SCHEDULES

The tax shall be:

9%

$6,750 plus 19%of the excess over$75,000


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The tax shall be:

6%

$4,500 plus 16%of the excessover $75,000





The tax shall be:

5%

$3,750 plus 15%of the excessover $75,000

$175,001 $225,000

$225,001 $275,000

$275,001 or more

If the income is derived from operations coveredunder Act 78 of 1993, the surtax rate will becomputed as follows:


$0 $75,000

$75,001 $125,000

$125,001 $175,000

$175,001 $225,000

$225,001 $275,000

$275,001 or more

If the income is derived from partially exemptactivities under Act 148 of 1988, Act 75 of 1995, Act225 of 1995 or Act 14 of 1996, or from fully taxableincome, the surtax will be:


$0 $75,000

$75,001 $125,000

$125,001 $175,000

$175,001 $225,000

$225,001 $275,000

$275,001 or more

Line 7 - This tax shall apply to activities coveredunder Act 78 of 1993, Act 148 of 1988, Act 75 of1995, Act 225 of 1995 or Act 14 of 1996, or to fullytaxable income. If the net taxable income of the entityexceeds $500,000, a 5% tax will be imposed on saidexcess. Nevertheless, the total tax determined shallnot exceed 42% for operations covered under Act 78of 1993; and 39% for operations covered under Act148 of 1988, Act 75 of 1995, Act 14 of 1996 or Act225 of 1995 or to fully taxable income.

Line 9 - Enter the amount determined on line 26 ofSchedule D Corporation and Partnership - Gainsor Losses from Sale or Exchange of Property.

If during the taxable year the corporation’s net longterm capital gains exceeded the net short term capitallosses, the corporation may elect to pay thealternative tax.

The alternative tax is determined on the net incomeat the normal tax rates, without including the longterm capital gain, plus 25% of such gain.

Line 11(a) - Enter the amount determined onSchedule C Corporation and Partnership - Creditfor Taxes Paid to the United States, its Possessionsand Foreign Countries.

If the tax was paid in a foreign currency, you mustdetermine the equivalent value in dollars at the dateof payment. You must submit with the return aschedule indicating the conversion in dollars, andcopy of the United States or foreign countries taxreturn and cancelled checks to show the tax paidor accrued in said country.

Line 11(b) - Enter the credit granted under Article41 A-6 of the Regulations under the Puerto RicoIncome Tax Act of 1954, as amended, as a result ofan adjustment made by the Federal Internal Revenue

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Service under Sections 936, 61, 162 and 351, or anysucceeding provision. Only foreign entities activelyconducting a trade or business in Puerto Rico underSection 936 of the Federal Internal Revenue Code of1986, as amended, are eligible for this credit. This creditis limited to 50% of the tax determined for each year.

Line 11(c) - If the subsidiary of a parent companyof an entity doing business in Puerto Rico andoperating under Act 8 of 1987, is under bankruptcyproceedings, a credit against the Puerto Ricoincome tax payment can be claimed, subject tocompliance with certain requirements. To qualify forthis credit, the parent company must:

be incorporated under the laws of any state ofthe United States,

be under bankruptcy proceedings, and

reflect a loss in the consolidated federal incometax return after including the income of theexempt entity.

This benefit will be granted as a credit, which isdetermined as follows:

Tax for the particularyear of the loss

Nevertheless, said credit is limited to the total taxfor the particular year in which the loss was incurred.

This credit shall be requested from the Secretarythrough a sworn statement and it will be subject torecapture at the time the parent company recoverssaid loss.

Line 11(d) - Enter the amount determined onSchedule Q.

To claim this credit you must submit the following:

Schedules Q and Q1 duly completed.

A document indicating or evidencing the creditgenerated by the investment on the differentcapital investment funds or direct investments,such as Solid Waste Disposal Facilities,Agricultural Incentives, Feature Films, as wellas Tourism Development.

Copy of the certification issued by the pertinentagencies.

Copy of the notification made through a sworn

statement issued by said agency, in which thedistribution of the credit is informed.

Line 11(e) - Enter the tax credit acquired, if any, duringthe year through purchase, exchange or transfer madeby a primary investor.

To claim this credit, the assignor and the cessionarymust submit with the income tax return, a swornstatement notifying the Secretary the cession, in theyear on which the same took place.

Line 11(f) - Enter the amount determined on ScheduleQ.

Line 11(g) - In those cases in which the entity has paidan alternative minimum tax on the income derived fromfully taxable operations from previous years, it may claima credit against the regular tax from the taxableoperations, as long as it complies with certainrequirements. To be eligible to this credit, the regulartax of the year must exceed the alternative minimumtax for said year and have paid the alternative minimumtax for previous years. The credit will be determined asfollows:

Normal Tax (Schedule KIncentives, Part I, Column C, line 5)

Minus: Alternative MinimumTax (Schedule A Corporation andPartnership, Part V, line 30)

Regular Tax Subject to Credit(Subtract line 2 from line 1)

Credit for Alternative MinimumTax Paid on Previous Years(Schedule K Incentives, Part I,Column C, line 13 of the return fromprevious years which has not beenused. Submit schedule)

Allowable Credit (The smaller ofline 3 or 4)

If line 4 exceeds line 3, the balance will be carriedforward to future years.

Line 11(h) - Enter the credit attributable to dividendsreceived from industrial development incomecorresponding to the 3% of the investment made bythe branch in the acquisition, construction andenlargement of buildings and other structures used inmanufacture, in excess of the investment in suchproperties possessed by the subsidiary as of March31, 1997.

Average employmentduring the taxable yearEmployment required inthe tax exemption decree

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In those cases of corporations which have notenjoyed tax exemption under Act 57 of 1963, Act26 of 1978 or Act 8 of 1987 for two taxable years,this credit will be granted to the parent companyfor the increase in investments made by thesubsidiary after the end of its second year of taxexemption.

To be entitled to the credit, the investment shouldhave been made prior to January 1, 1993.

This credit can be carried forward to the followingtaxable years. Nevertheless, investments made inreal property to obtain the exemption indicated onparagraph 6, Subsection (a) of Section 4 of Act 8of 1987, cannot be used for the purpose of thiscredit.

Line 11(i) - Enter the contribution made up to $500to the Educational Foundation for the Free Selectionof Schools.

The contributions made in excess of the allowedcredit can be claimed as a deduction undercharitable contributions, up to the limit provided bythe Code.

To claim this credit, you must submit a certificationfrom the Educational Foundation for the FreeSelection of Schools or copy of the cancelled checkas evidence of the contribution made.

Line 13 - This tax will apply only to income derivedfrom taxable operations. Said tax will be equal tothe excess, if any, of:

the Tentative Minimun Tax for the taxable yearover,

the Regular Tax of the year.

The Tentative Minimum Tax for the taxable year willbe 22% of the total for which the Alternative MinimumNet Income for the taxable year exceeds the exemptamount.

Enter the amount determined on Schedule ACorporation and Partnership, Part V, line 32.

Line 14 - In addition to any other tax imposed bythe Code, those foreign corporations andpartnerships engaged in trade or business in PuertoRico that operates as branches, are subject to a10% tax of the amount equivalent to the dividend orprofit distribution for the taxable year.

This provision shall not be applicable to any taxable

year on which the foreign corporations andpartnerships engaged in trade or business in PuertoRico derive at least 80% of its gross income duringthe 3 taxable years period ended at the closing ofsaid taxable year, from sources within Puerto Ricoor from income effectively connected or treated aseffectively connected with the conduct of a trade orbusiness in Puerto Rico.

The corporations subject to this additional taxmust file Form AS 2879 Branch Profits Tax andinclude it with your return.

Line 15 - Enter the sum of line 15 of Columns A, Band C.

PART II - COMPENSATION TO OFFICERS

Enter the total compensation paid or accrued toofficers of the entity for salaries or other allowances.Also, you must include the name, social securitynumber and the percentage of stocks or sharespossessed, if any. The total amount reflected in thispart as compensation, will be equal to the amountclaimed on Schedules L, M, N, P, V and WIncentives. If the entity files more than one of theseschedules, the amount entered in this part must beequal to the sum of the amounts reflected on eachschedule for this concept.

PART III - RECONCILIATION OF TAXABLEINCOME IN PUERTO RICO (FORM 480.30(II)) ANDIN THE UNITED STATES (FORM 1120)

Enter in Column A the income and deductions aspresented on Form 480.30(II). Enter in Column Bthe income and deductions reflected on Form 1120.Any difference among both income must bereflected in Column C, explaining the reason forsuch difference (i.e. Section 263A of the FederalInternal Revenue Code, depreciation adjustment,etc.).

PART IV - RECONCILIATION OF PASSIVEINCOME

In the Reconciliation column of Form 1120, enterthe passive income reflected in the financialstatements and on line 2 enter any adjustment toreconcile the income reflected on Form 1120.

In the Reconciliation column of Form 480.30(II),enter the passive income reflected on the financialstatements. Enter on line 2 any adjustment madeto obtain the income reflected on Form 480.30(II)such as, income from sources of the UnitedStates.

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GENERAL INSTRUCTIONS FOR SCHEDULESL, M, N, P, V AND W INCENTIVES

If an entity made an election under Section 3(f) ofAct 8 of 1987 or Section 6(f) of Act 135 of 1997, itmust submit with the return a copy of the swornstatement through which such election was made.

PART II - SCHEDULES L, M AND P INCENTIVES(SCHEDULE N AND W INCENTIVES, PART III ANDSCHEDULE V INCENTIVES, PART V) - GROSSPROFIT ON SALES AND OTHER INCOME

In this part you will determine your gross profit onsales, production or other income. Check theapplicable box to indicate the appraisal method forthe inventory at the beginning and end of the year.

Detail in Part IV of Schedules L, M and P Incentivesthe Other Direct Costs claimed on line 5 of Part II. Ifyou are completing Schedules N and W Incentives,detail the Other Direct Costs in Part V and claimthe same in Part III, line 5. If you are completingSchedule V Incentives, detail in Part VII and claimthe same in Part V, line 5.

The flexible depreciation of assets used inmanufacture will be claimed only on the Other DirectCosts item in Part IV, line 11 of Schedule PIncentives. The flexible depreciation of other assetswill be entered in Part III, line 37 of said schedule.

The assets used in any activity that generatespartially exempt income under Act 52 of 1983, orAct 57 of 1963, Act 26 of 1978, Act 8 of 1987 or Act135 of 1997, or Act 78 of 1993 or Act 225 of 1995cannot be depreciated under the flexible oraccelerated depreciation method.

PART III - SCHEDULES L, M AND P INCENTIVES(SCHEDULES N AND W INCENTIVES, PART IVAND SCHEDULE V INCENTIVES, PART VI)-DEDUCTIONS AND NET OPERATING INCOME

In this part of Schedules L, M, N, P, V and WIncentives enter the deductions related to youroperations. Following we present information relatedto some of these items:

a. Meal and entertainment expenses

You may deduct the 50% of the total expensesactually paid or incurred, up to 25% of the grossincome for the taxable year for meal andentertainment expenses directly related with theconduct of a trade or business or with the production

of income. Do not consider those that do notconstitute ordinary and necessary expenses fromthe trade or business.

No deductions shall be allowed for meal andentertainment expenses considered sumptuous orextravagant.

b. Contributions to pension and otherqualified plans

Enter the amount contributed to pension plans, profitsharing or other qualified plans approved by theSecretary of the Treasury. This deduction is subjectto certain limitations.

To claim this deduction, you must include with yourreturn a schedule showing the information requiredby the regulations under the Code.

c. Current depreciation and amortization

Submit detail of the current depreciation in Part(a) and improvements amortization in Part (d)of Schedule E - Depreciation.

The maximum basis to depreciate an automobileacquired and used in the trade or business, or forthe production of income, is $25,000. This rule alsoapplies to those automobiles acquired throughfinancial leases that are equivalent to a purchase.

In the case of an ordinary lease, the total amount ofrent paid during the taxable year, excluding financialcharges, shall be considered as current depreciation.

An automobile may be depreciated over a 3 yearsperiod if it is used exclusively in selling activities,and over a 5 years period if it is used for otherpurposes.

The basis limitation ($25,000) and the useful lifeterm do not apply to those automobiles acquiredby corporations or partnerships engaged in theleasing, or transportation of passengers or freightbusinesses.

Also, a deduction for goodwill amortization isgranted, as long as the goodwill is purchased fromthird parties during taxable years beginning afterJune 30, 1995. This deduction will be determinedusing the straight line method and an useful life of15 years.

d. Flexible depreciation

Enter the amount of flexible depreciation you are

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and the total will be entered as Other Deductions.Submit with the return a schedule detailingthese deductions.

SCHEDULE L - PARTIALLY EXEMPT INCOMEUNDER ACT 52 OF 1983 OR ACT 78 OF 1993

This schedule must be used by those entities thatoperate under Act 52 of 1983 or under Act 78 of1993. Check the applicable box for the act underwhich the entity operates and indicate the period inforce for income, and the actual and required numberof jobs directly related with tourism development.

In the case of a corporation or partnership thatoperates under Act 52 of 1983 or Act 78 of 1993,and has made the election under Section 5(b) or3(a)(1)(D) respectively, must submit with the returna copy of the notification addressed to the Secretaryof the Treasury making such election.

Any exempt business under Act 78 of 1993, mustinclude with the return a copy of the order issuedby the Director of the Tourism Company indicatingthe date the exemption began.

PART I - NET INCOME SUBJECT TO TAX

Line 2 - Enter the carryover balance of net operatingloss reflected at the end of the preceding year. Thenet operating losses under tourism incentives ortourism development acts can be deducted onlyagainst income derived from touristic activities. Thenet operating losses not covered under any of thepreviously mentioned acts, may be deducted onlyagainst the totally taxable income. You mustsubmit with the return a schedule supportingthe deduction claimed.

The excess of income loss from touristic activitiesfrom preceding years can only be carried over andclaimed against income from touristic activities.Said loss will be deductible up to an amount equalto the percentage of income from touristic activitiesthat would have been taxable. The losses will becarried over in the order in which they were incurred.

Any net loss incurred during the year on which theentity made the election under Section 3(a)(1)(D) ofAct 78 of 1993, can be carried over and taken as adeduction only against the tourism developmentincome derived by the exempt business in whichthe election was made under said Section.

In case of an entity that has renegotiated its decreeunder Act 78 of 1993, may take as a deduction thenet operating losses incurred from operations under

entitled, and submit a copy of the authorization forthe flexible depreciation option.

The detail of the flexible depreciation will beincluded in Part (b) of Schedule E - Depreciation.

This deduction is applicable only against the fullytaxable income (Schedule P Incentives) and islimited to property used in the activities indicated inthe Code.

Said option may be exercised only over propertyacquired prior to June 30, 1995.

e. Accelerated depreciation

In order to be entitled to this deduction, an electionto use the Accelerated Depreciation Method mustbe exercised with the return. Said election can beexercised only for property acquired by purchaseduring taxable years beginning after June 30, 1995.Once the option is exercised, the same is irrevocable.

This depreciation method does not apply toautomobiles, property used outside Puerto Rico,property used by exempt entities and property usedtotally or partially in activities under the Industrial,Tax and Tourism Incentives Acts or TourismDevelopment Act, Agricultural Tax Incentives Act orany other special act or to intangible property.

The detail of the accelerated depreciation will beincluded in Part (c) of Schedule E - Depreciation.

f. Bad debts

Enter the accounts receivable that are considereduncollectible. For taxable years beginning after June30, 1995, the corporations and partnerships cannotuse the reserve method to compute the deductionfor bad debts. Instead, they may claim a deductionfor debts that become uncollectible within thetaxable year (direct write-off method).

If the corporation or partnership has used the reservemethod, it shall include in its gross income 25% ofthe bad debts reserve balance determined at theclose of the last taxable year beginning prior to July1, 1995. In the following 3 years, you will recognize25%, as determined in the first year.

g. Other deductions

Those expense items for which a specific space isnot provided in Part III (Schedules L, M and PIncentives), Part IV (Schedules N and W Incentives)and Part VI (Schedule V Incentives) will be added

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previous decrees (Industrial or Tourism Incentives Act).

Losses incurred on a year on which the electionwas made under Section 5(b) of Act 52 of 1983 orunder Section 3(a)(1)(D) of Act 78 of 1993, may beclaimed as a deduction against income fromtouristic or touristic development activities for whichthe election was made.

Line 4 - Enter in the space provided the exemptionpercentage to which you are entitled in accordanceto the Resolution under the Tourism Incentives orTourism Development Act.

Multiply the net operating income from eligible tourismactivities subject to the computation (Schedule LIncentives), by the applicable exemption percentage.Enter the amount on this line.

SCHEDULE M INCENTIVES - FULLY ORPARTIALLY EXEMPT INCOME UNDER ACT 57OF 1963 OR ACT 26 OF 1978

This schedule must be used by those entities thatderive fully or partially exempt income under Act 57of 1963 or Act 26 of 1978. Check the applicable boxfor the act under which the entity operates andindicate the period in force for income, and the actualand required number of jobs directly related withmanufacture or designated service. If the entity haspartially exempt operations under both acts, aschedule for each activity must be used. If there areno specific instructions for a particular line under thissection, refer to the General Instructions Section.


Line 2 - Enter the income derived from qualifiedinvestments under Section 2(j) of Act 57 of 1963and Act 26 of 1978, whichever applies.

Line 4 - Enter the larger of the following amounts:

Line 4(a) - 5% of your total production payrollup to an amount that does not exceed 50% ofthe net industrial development income, or

Line 4(b) - $100,000 if the net industrialdevelopment income is smaller than $500,000.

For purposes of line 4(a), the production payroll shallbe for wages paid by the exempt business topersonnel directly related with the manufacture ofthe exempt product, excluding the salaries ofexecutives, supervisors and administrativepersonnel, and any payment for professional servicesrendered under contract by independent firms not

related to the exempt business, as long as theabove is not in conflict with the definition ofproduction employee adopted by the LaborStatistics Bureau of the Department of Labor andHuman Resources of Puerto Rico.

For purposes of line 4(b), if the exempt businessengaged in manufacturing is a member of a controlledgroup of corporations and partnerships that areexempt businesses, or is controlled in more than50% by one or more persons who directly or indirectlyown an exempt business, the business may elect,with the consent of the Secretary, the manner in whichthe total amount or part of the $100,000 deductionwill be apportioned among one or more of thecontrolled exempt businesses.

These deductions do not apply to corporationsunder Section 3(n) of Act 26 of 1978.

Line 6 - Enter the carryover balance of net operatingloss reflected at the end of the preceding year. The netoperating losses under the industrial incentives actsmay only be deducted against the IDI. The net operatinglosses derived from operations that are not covered underany of the previously mentioned incentives acts, mayonly be deducted against fully taxable income.

The loss excess of IDI from the preceding years,may only be carried over and claimed as a deductionagainst the IDI. Said loss will be deducted up to anamount equal to the IDI percentage that would havebeen taxable. Losses will be carried over in the orderin which they were incurred.

Line 9(a) - Enter in the space provided theexemption percentage to which you are entitled,according to your decree under Act 57 of 1963 orAct 26 of 1978.

Multiply the net operating industrial developmentincome after the adjustments by the applicableexemption percentage. Enter the amount on this line.

SCHEDULE N INCENTIVES - PARTIALLYEXEMPT INCOME UNDER ACT 8 OF 1987

This schedule must be used by those entities thatderive partially exempt income under Act 8 of 1987.Indicate in the corresponding box the period in forcefor income, and the actual and required number ofjobs directly related with manufacture or designatedservice.


Line 2 - Enter the income derived from qualified

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investments under Section 2(j) of Act 8 of 1987.

Line 4 - Enter the larger of the following amounts,as applicable:

Line 4(a) - 5% of its total production payroll up to50% of the net industrial development income (line1),if the eligible business:

enjoyed industrial tax exemption under any ofthe previously mentioned industrial incentivesacts and said tax exemption was authorizedprior to January 1, 1985, and then converted itsdecree to the dispositions of Act 8 of 1987 forthe remaining part of its exemption period; or

was operating in Puerto Rico under a decreeas of January 1, 1985 and subsequentlyobtained a new decree covering previouslyexempt operations based on negotiations inview to special conditions, and then requeststo convert its new decree under Act 8 of 1987.

Line 4(b) - 15% of the production payroll up to 50%of your net industrial development income, if in anytaxable year you generate a net income from theexempt operations of less than $30,000 perproduction job and said eligible business:

enjoys tax exemption under a new decreeissued under Act 8 of 1987; or

has a tax exemption decree issued afterDecember 31, 1984, but has not enjoyed taxexemption prior to that date, and converted saiddecree under Act 8 of 1987 for the remainingpart of the exemption period originally granted.For these purposes, the production payroll shallinclude the salaries of personnel directly relatedto the manufacture of the exempt product,excluding executive salaries and any paymentfor professional services rendered throughcontract to the exempt business by independentfirms.

The net income per production job will be obtaineddividing the net industrial development incomederived from the exempt operation, by the numberof production jobs reflected on the production payroll.

Line 4(c) - Enter the first $100,000 if the net industrialdevelopment income is smaller than $500,000 andthe business has kept an employment average of15 persons or more during said taxable year.

The exempt business that claims this deduction,will not be able to enjoy the deductions previously

indicated in items 1 and 2.

If the exempt business is controlled in more than50% by stockholders or corporations in common,with the consent of the Secretary, it may decidethe manner in which all or part of the $100,000deduction shall be assigned among one or more ofthe controlled exempt businesses.

Line 6 - Enter the carried over balance of the netoperating loss reflected at the end of the precedingyear. The net operating losses covered under theTax Incentives Act may only be deducted againstthe IDI. The loss excess of IDI from previous yearscan only be carried over and claimed as a deductionagainst the IDI. Said loss will be deductible up toan amount equal to the IDI percentage that wouldhave been taxable.

Any loss incurred in the year in which the entitymade the election under Section 3(f) of Act 8 of1987, can be carried over and taken as totaldeduction against the IDI derived by the exemptbusiness under the decree in which the electionwas made under Section 3(f) or against the IDIpercentage that would have been taxable in casethat the entity has not made the election.

Line 9(a) - Enter in the space provided theexemption percentage you are entitled to claimaccording to your decree under Act 8 of 1987.

PART II - SPECIAL SURTAX SECTION 3(a) OFACT 8 OF 1987

This special surtax applies to every entity that hasderived a total gross income from industrialdevelopment larger than $1,000,000 during thetaxable year.

For purposes of this computation, the term grossincome from industrial development includesthe following:

Income derived from certain investment activitieseligible under Section 2(j).

Net income derived from patent sales, royaltiesor any other entitlement to receive income,related to activities or intangible propertyresulting from exempt operations under Act 8of 1987.

Income derived from insurance policies forbusiness interruption, as long as there is noreduction on the job employment level of theexempt business as a result of the action that

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motivated the collection of such income.

The tax will be .00075 of the sales volume of theexempt business, but never more than half of onepercent (.005) of the net industrial developmentincome.

SCHEDULE O INCENTIVES - OPTIONALINCOME TAX FOR EXEMPT BUSINESSESPURSUANT TO SECTION 3A OF ACT 8 OF 1987

If the corporation elected the computation of theOptional Income Tax under Section 3A of Act 8 of1987, please complete this schedule.

PART II - COMPUTATION OF OPTIONAL TAX

Line 2 - Include the income from interest of eligibleinvestments (Section 2(j)), except exempt interestfrom obligations issued by the Government of PuertoRico, its instrumentalities or political subdivisions.

Line 4 - Check the box corresponding to theapplicable tax rate. If the entity has a decree thathas another tax rate, enter the same on line 4(d).

Line 8(b) - Any exempt business with a converteddecree under Section 3(i)(2a) of Act 26 of 1978, isentitled to carry forward as a credit for future taxableyears an amount equal to two thirds of the net incometax paid as a result of the conversion, against anyincome tax payment or withholding at source oncurrent dividend and liquidation distributions.

If the entity is exempt under Act 8 and the parentcompany is under Federal Bankruptcy proceedings,the exempt business is entitled to claim a creditagainst the income tax and tollgate tax payment,subject to compliance with certain conditions. Foradditional information, refer to Section 3(a)(3) of Act8 of 1987.

SCHEDULE P INCENTIVES - INCOME FROMFULLY TAXABLE OPERATIONS ORPARTIALLY EXEMPT INCOME UNDER ACT148 OF 1988, ACT 75 OF 1995, ACT 225 OF1995 AND ACT 14 OF 1996

This schedule must be used by those entities thatin addition to enjoy exemption under a decree, deriveincome from fully taxable activities. Those entitiesthat derived partially exempt income under Act 148of 1988, Act 75 of 1995, Act 225 of 1995 or Act 14 of1996 must also use this schedule. Check thecorresponding box if your activities are fully taxableor if they are partially exempt under one of theseacts.

If you have fully taxable operations, and at the sametime you have partially exempt operations underone of these special acts, a schedule for eachactivity must be used and check the correspondingbox. If there are no specific instructions for aparticular line on this section, refer to GeneralInstructions - Schedules L through W Incentives.

Those industries or businesses established ina special planning zone that do not deriveexempt income under Act 148 of 1988, Act 75of 1995 or Act 14 of 1996, must use Form 480.20or 480.10.


Line 2 - Enter the carried over balance from the netoperating loss reflected on the return of previousyears.

Line 4 - This line must be completed only by thoseentities that derived exempt income under one ormore of the following acts:

Act 148 of 1988, as amendedAct 75 of 1995, as amendedAct 225 of 1995, as amendedAct 14 of 1996, as amended

If the operations are partially covered by Act 148 of1988, and/or Act 75 of 1995, enter the 50%exemption of net income derived from the sale ofadmission tickets for artistic and cultural showsperformed in new structures, substantiallyrehabilitated or subject to improvements for a 5 yearsperiod, beginning on the date the construction,substantial rehabilitation or improvement iscompleted. In order to be entitled to those benefits,said construction, rehabilitation or improvement mustbe performed within 5 years beginning on the dateof the designation of the zone in which the businesswill be located.

If the operations are covered under Act 14 of1996, enter 90% of the exemption from the netincome derived from the sale of admissiontickets to artisanal, agricultural, artistic andcultural fairs, and sport events, if you meet thefollowing requirements:

The activity or event must be celebrated withinone of the special designated zones establishedby the Puerto Rico Planning Board inaccordance to said Act;

At least 50% of the persons employed in theactivity or event by the person claiming the

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(i)

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exemption, must be bona fide residents ofCastañer.

The Department of the Treasury established byregulations the procedures to be entitled to thisexemption.

If the operations are partially exempt underAct 225 of 1995, enter the 90% exemption, ifyou meet the following requirements:

You have a certification issued by the Secretaryof Agriculture of Puerto Rico, certifying that youare a bona fide farmer dedicated to anagricultural business;

You have derived at least 50% of your incomefrom agricultural activities; and

You have not elected the provisions of Section1023(s) of the Code.

This exemption of income tax payment applies totaxable years beginning on January 1, 1996. Thisexemption is not extensive to income from interest,dividends, royalties or gains derived from the saleof assets, including those assets used in theagricultural business, or any other income derivedby bona fide agricultural businesses and that doesnot come directly from the agricultural activity.

To claim such exemption, you must include with thereturn a copy of the certification issued by the Secretaryof Agriculture of Puerto Rico and a schedule showingthe income percentage derived from agriculturalactivities over the total income of the entity.

For purposes of calculating 50% or more of thegross income, income from all sources will beconsidered, realized and recognized, adjusted orreduced by the following items:

The cost of raw material used, if any;

In case of sale of real property, the capitalrestoration which is considered the adjustedbasis of such real properties, and excluding:

the total amount of exclusions from grossincome under Section 1022(b) of the Code;

the total amounts received for which creditsare allowed under Section 1026(a) of theCode; and

those amounts that by law do not constituteincome.

Line 6 - Enter 85% of the amount received asdividends or profits from a domestic corporation orpartnership subject to taxation under the Code, butlimited to 85% of the net income of the corporationor partnership.

If the dividend received is from industrial developmentincome derived from operations covered by theprovisions of Act 57 of 1963, the credit will be 82.70%of the amount received, but limited to 82.70% of thenet taxable income.

This credit does not apply to dividends or profitdistributions derived from operations covered underAct 78 of 1993 or Act 8 of 1987.

However, the Code provides the followingexceptions:

In the case of a small business investmentcompany operating in Puerto Rico under the“Small Business Investment Act of 1958”, thereshall be allowed as a credit an amount equal to100% of the total amount received as dividendsor profits from a domestic corporation orpartnership taxable under the Code.

In accordance to certain requirements imposedby the Code, a credit of 100% is allowed againstthe net income from the total amount received asdividends from corporations organized under thelaws of any state of the United States or of theCommonwealth of Puerto Rico, whose principalincome is derived from IDI accrued during taxableyears beginning prior to January 1, 1993 andinvested in obligations of the Commonwealth ofPuerto Rico, its instrumentalities or politicalsubdivisions, or invested in mortgages securedby the Puerto Rico Housing Bank and FinanceAgency or in loans or other securities guaranteedby mortgages granted under any pension orretirement system of a general characterestablished by the Legislative Assembly of PuertoRico, the municipalities and the agencies, entitiesor public corporations of the Commonwealth ofPuerto Rico.

A 100% credit will be granted against the netincome from the total amount received asdividends by corporations organized under thelaws of any state of the United States or of theCommonwealth of Puerto Rico, whose principalincome is derived from IDI accrued duringtaxable years beginning prior to January 1, 1993invested in obligations of the GovernmentalDevelopment Bank for Puerto Rico or any of itssubsidiary corporations, for the financing

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date in each one of such special acts and the fifthyear after the effective date of each one of said specialacts, and has a value that exceeds $12,000 per unitor represents 30% of the property's market value priorto the rehabilitation, excluding the value of the landin which it is located, whichever is larger.

To claim this deduction, you must include with thereturn a certification issued by the Secretary ofConsumers Affairs indicating the basic rent establishedfor the unit and the ajusted rent. Nevertheless, thisdeduction must not exceed $4,800 per year per unit,and can only be claimed while the unit is rented bythe tenant who did so prior to the rehabilitation of theunit, and for a 10 years period starting from the datethe rehabilitation was completed.

For more detailed information, refer to Act 148 of1988, Act 75 of 1995 and Act 14 of 1996.

SCHEDULE V INCENTIVES - INCOME TAXFOR EXEMPT BUSINESSES UNDER ACT 135OF1997

This schedule must be used by those exemptbusinesses under Act 135 of 1997. Indicate in thecorresponding boxes the enforcement period forincome, and the actual and required number of jobsdirectly related with manufacture or designated service.

PART I - QUESTIONNAIRE

Line 1 - Indicate if the exempt business exercisedthe option provided in Section 3A of Act 8 of 1987 orif it was subject to a fixed tax rate stipulated on thedecree during any of the years included in thecomputation of the basis period income.

Line 2 - If you answered "Yes", the 2(j) income, upto an amount not over the 2(j) income for the basisperiod, will also be subject for the remaining exemptperiod of the renegotiated preceding decree, to therate applicable to the basis period income underthe preceding act.

Line 3 - Indicate if for any of the years included inthe basis period you had 2(j) tax exempt incomeand 2(j) taxable income. The 2(j) basis period incomewill be taxable or exempt in the same proportion thatthe 2(j) exempt income bears with the 2(j) total incomesubject to income tax earned during the basis period.

PART II - COMPUTATION OF THE BASIS PERIODAVERAGE INCOME

Line 4 - Enter the amount of Column (a) in Part III,line 8. If the 2(j) income was subject to the Optional

through the purchase of mortgages, or theconstruction, purchase or housing improvementsin Puerto Rico started after December 31, 1984.

A 100% credit will be granted against the netincome of the total amount received as dividendsor profits from a domestic controlled corporationor partnership.

PART III - DEDUCTIONS AND NET OPERATINGINCOME

If there are no specific instructions for a particularline in this section, refer to section of GeneralInstructions for Schedules L, M, N, P, V and WIncentives.

Immediately afterwards we explain certain specialdeductions applicable to operations that qualify forbenefits granted under Act 148 of 1988, Act 75 of1995 and Act 14 of 1996.

Any industry or business established in a specialplanning zone in Santurce, Río Piedras or Castañerin the period beginning on the designation date ofsaid zone, may claim a special deduction basedon the following:

10% of the lease paid for a period of 10 years inthe zone of Santurce and Río Piedras, and 15%for a period of 5 years in the zone of Castañer.

5% of the minimum wage applicable for everynew job created. To be entitled to this deduction,it is necessary that the new job does noteliminate or substitute a job existing prior tothe approval of this Act, be a complete workingweek of 40 hours per week (35 hours per weekin case of the Castañer zone), and be occupiedin a continuous basis by the same person for aperiod of not less than six months. Thisdeduction is for a 5 years period beginning onthe date the business is designated to that zoneby the Planning Board.

Also, every person that owns an eligible property inSanturce or Río Piedras subject to the ReasonableRents Act, that performs a substantial rehabilitationto such eligible property and afterwards it still beunder the provisions of said act, will be entitled to aspecial deduction equivalent to the differencebetween the ajusted rent, as defined in each one ofsaid special acts, and the basic rent.

To be entitled to this deduction, it is necessary thatthe rehabilitation of the eligible property begins andconcludes within the period between the enforcement

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the basis period income tax and over the fixed rateunder Act 135 of 1997, said credits can be claimed,at the exempt business option, up to the totalamount allowed by law against the basis periodincome tax or against the fixed rate; or allocated,up to the amount allowed by law, between the basisperiod income tax and the fixed tax rate. The sumof the allocated amounts cannot exceed the totalamount of the credit.

Line 3(b) - The exempt business can claim a creditagainst the IDI fixed tax, for purchases of productsmanufactured in Puerto Rico including componentsand accesories, equal to a 10% of said productspurchases during the taxable year on which thecredit is claimed (subject to certain limitations). Foradditional information, refer to Sections 3(a) and3(b) of Act 135 of 1997.

Line 3(c) - Any exempt business with a decreegranted under Act 135 of 1997, that is a subsidiaryof an U.S. parent company, that reflects a loss inthe consolidated federal return or is under bankruptcyproceedings under the federal regulations, will beallowed to claim a credit against the fixed taxapplicable to the IDI earned during the taxable yearof the loss. For additional information, refer toSection 5(a) of Act 135 of 1997.

SCHEDULE V1 INCENTIVES- COMPUTATIONOF THE SPECIAL DEDUCTIONS UNDER ACT135 OF 1997

PART I - COMPUTATION OF THE SPECIALDEDUCTIONS

Use this schedule to determine the specialdeductions allowed among: payroll deduction, humanresources training and improvement expensesdeduction, research and development expensesdeduction, and special deduction for investment onbuildings, structures, machineries and equipment.

Payroll deduction - In addition to other deductionprovided by law, every exempt business with a decreeunder this act engaged in the manufacture and thatgenerates a net income from its exempt operations(computed without taking into consideration the benefitof the special deductions provided in Section 4 of thelaw) smaller than $30,000 per production job, will beallowed to claim a special payroll deduction equivalentto a 15% of the production payroll of the exemptbusiness, up to 50% of the IDI, computed without thebenefit of the production payroll special deduction.

The exempt business that has a decree under thisact engaged in manufacture, which IDI computed

Tax or was taxable under special dispositions ofyour decree during all or part of the basis period,enter the amount of Column (b) on Schedule OIncentives, Part II, line 2.

PART III - NET INCOME SUBJECT TO TAX

Line 2 - Enter the income from qualified investmentsunder Section 2(j) of Act 135 of 1997.

Line 4 - Enter here the net operating losses fromthe preceding year, including the share on lossesfrom special partnerships which own or operatetourism businesses under Act 78. You must submita schedule with the case number, amount of theloss and carryover computation.

Line 8 - Applies only to exempt businesses whichrenegotiated their decrees under Act 135 of 1997.Enter this amount on Schedule M or N Incentives,Part I, line 8.

Line 9 - If line 9 is smaller than line 8, enter thenet operating income of the year (Part III, line 1 ofthis schedule) on Schedule M Incentives, Part I,line 1, if the preceding renegotiated decree wasissued under Act 57 of 1963 or Act 26 of 1978; or onSchedule N Incentives, Part I, line 1, if the precedingrenegotiated decree was issued under Act 8 of 1987,and complete the corresponding schedule.

If when the decree was renegotiated under Act 135of 1997, the exempt business had in force the optionunder Section 3A of Act 8 of 1987, Schedule M or NIncentives, whichever applies, and Schedule OIncentives must be completed.

If line 9 is larger than line 8, enter the basis periodincome on Schedule M Incentives, Part I, line 8, ifthe preceding renegotiated decree was issued underAct 57 of 1963 or Act 26 of 1978; or on Schedule NIncentives, Part I, line 8, if the preceding renegotiateddecree was issued under Act 8 of 1987, andcomplete the corresponding schedule starting fromsaid line 8.

If when the decree was renegotiated under Act 135of 1997, the exempt business had in force the optionunder Section 3A of Act 8 of 1987, you must enterthe basis period income on Schedule O Incentives,Part II, line 1 and complete said schedule.

PART IV - TAX COMPUTATION

Line 3 - In case of exempt businesses whichrenegotiated their decrees under Act 135 of 1997and are entitled to claim the same credits against

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without the benefit of the special deductions providedin Section 4 on any taxable year is smaller than$500,000, and that has kept an average employmentof 15 or more persons during said taxable year, isallowed to deduct the first $100,000 of said incomein order to be totally exempt from the payment of theIDI fixed tax rate provided in Section 3(a) of this act.For additional information, refer to Section 4(a) ofAct 135 of 1997.

Human resources training and developmentexpenses deduction - A special deduction will beallowed for training expenses incurred to improve theproductivity and quality control, to promote totalquality management and to improve employeescommunication skills, incurred in excess of theannual average of said expenses during the 3 taxableyears ended prior to January 1, 1998.

Research and development expense deduction -A special deduction will be allowed equal to theexpenses incurred in the research and developmentof new products or industrial processes, or theimprovement of said products and processes, thatare deductible in the taxable year under the Code(subject to certain limitations).

Special deduction for the investment on buildings,structures, machinery and equipment - Everyexempt business that has a decree under this act,is allowed to elect to deduct on the taxable yearincurred, instead of any expense capitalizationrequired by the Code, the total expense incurred afterthe effective date of this act, in the purchase,acquisition or construction of buildings, structures,machinery and equipment, as long as said buildings,structures, machinery and equipment have not beenused or depreciated previously by any other businessor person in Puerto Rico, and are used in themanufacture of products or to render the services forwhich said benefits were provided under this act.

Line 10 - In those cases in which the exemptbusiness is allowed to claim more than one of thespecial deductions mentioned before, and the sumof said deductions after determining the amount thatis allowed before taking into consideration thelimitation based on the IDI, results in an excess ofthe IDI for said year, or that the exempt businesscannot claim the total benefit of said deduction forsaid year, it will determine the limitation of the specialdeductions following the order indicated in Part II.

SCHEDULE W INCENTIVES - INCOME TAXFILM ENTITY UNDER ACT 362 OF 1999

This schedule must be used by those Film Entities

that derive income directly from a Film Project oran Infrastructure Project under Act No. 362 ofDecember 24, 1999.

The fixed income tax rate (7%) will be in forcefor a 10 year period starting on the day on whichthe Film Project or Infrastructure Project beginsoperations, but never before the filing date of aLicense request for the benefits of this Act.


Line 2 - Enter the carryover balance of the netoperating loss at the end of the previous year. If theFilm Entity incurs in a net operating loss from aFilm Project or an Infrastructure Project, said losswill be deductible and will be used only againstincome from the Film Project or InfrastructureProject, whichever applies.

On the other hand, once the exemption period forincome tax purposes is expired (10 years), the netlosses incurred being carried over at the expirationdate of said period, may be deducted from anytaxable income in Puerto Rico, subject to thelimitations provided by the Code.

PART II - COMPUTATION OF TAX

Line 4 - The Film Entity's income derived directlyfrom Film Projects or Infrastructure Projects will besubject to a fixed income tax rate of 7%, instead ofany other tax, if any, provided by law.

PART lIl - GROSS PROFIT ON SALES AND OTHERINCOME

Lines 9 and 10 - The gain or loss from the sale orexchange of the Film Entity's assets will not beconsidered directly derived from Film Projects orInfrastructure Projects.

For more detailed information, refer to Act 362of 1999.

FORM 480-E - ESTIMATED TAX DECLARATION

The Estimated Tax Declaration (Form 480-E) mustbe filed not later than the 15th day of the fourthmonth of the taxable year, except when therequirements to file are met for the first time:

After the last day of the third month and prior tothe first day of the sixth month of the taxableyear, the filing date will be not later than the15th day of the sixth month of the taxable year;or

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After the last day of the fifth month and prior tothe first day of the ninth month of the taxableyear, the filing date will be not later than the 15thday of the ninth month of the taxable year; or

After the last day of the eighth month and priorto the first day of the twelfth month of the taxableyear, the filing date will be the 15th day of thetwelfth month of the taxable year.

The Declaration must be filed with the InternalRevenue Collections Office of the Municipality wherethe taxpayer resides or sent to:

DEPARTMENT OF THE TREASURYRETURNS PROCESSING BUREAUPO BOX 9022501SAN JUAN PR 00902-2501

You must enter in the heading of the Declaration,the name, address and employer's identificationnumber, and check the applicable box to indicate ifit is original or amended. In addition, you mustindicate the taxable year to which the estimatedtax payments will be applied, and the type oftaxpayer.

Determine the estimated tax to be paidfor the indicated taxable year. Thisamount cannot be less than the smallerof the following amounts:

90% of the tax to be paid at the end ofthe taxable year, or

100% of the tax paid in the previoustaxable year.

Enter as estimated credit the amountwithheld for services rendered by theentity or the amount withheld ondistributable profits from SpecialPartnerships. If you are filling out anAmended Estimated Tax Declaration,also enter on this line the total amountof the installments paid, if any, beforethis amendment.

Enter as credit the tax paid in excess inthe previous year applied as estimatedtax payment in the income tax return. Ifyou choose to claim this credit againstone of the determined installments, enterzero and go to line 5.

Divide the result on line 5 by the numberof remaining installments.

Enter the tax paid in excess in theprevious year applied as estimated taxpayment in the income tax return thatwill be claimed against the amount ofany installment. If such credit wasalready considered on line 4, it cannotbe considered again.

PAYMENT OF ESTIMATED TAX

If the Declaration is filed before the first day of thefourth month of the taxable year, the estimated taxwill be paid in four installments:

1st installment:

2nd installment:

3rd installment:

4th installment:

If the Declaration is filed after the last day of thethird month and before the first day of the sixthmonth of the taxable year, the installments willbe:

1st installment:

2nd installment:

3rd installment:

If the Declaration is filed after the last day of the fifthmonth and before the first day of the ninth month ofthe taxable year, the installments will be:

1st installment:

2nd installment:

If the Declaration is filed after the last day of theeighth month and before the first day of the twelfthmonth of the taxable year, the total estimated taxwill be paid on the 15th day of the twelfth month ofthe taxable year.

The estimated tax installments will be paid alongwith a payment coupon (Forms 480.E-1 or 480.E-2). Taxpayers who filed a Declaration on the previousyear, will receive a booklet of 4 coupons (Form 480.E-2) preprinted with their name, address andemployer's identification number. Taxpayers whohave not received the coupon booklet, must visitthe Estimated and Employer Manual CouponsSection (Office 421-A) of the Department of theTreasury (Old San Juan), where a payment coupon

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the 15th day of the fourth month

the 15th day of the sixth month

the 15th day of the ninth month

the 15th day of the twelfth month

the 15th day of the sixth month





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booklet (Form 480.E-1) will be prepared. Foradditional information, call 722-1499 or 721-2020,extension 2446 or 2456.

Estimated tax payments must be made atparticipant banks (if you have the preprinted coupon),at the Internal Revenue Collections Offices or at theReturns Processing Bureau at the addresspreviously indicated.

Payments with checks in the participating banksmust be made payable to the order of such banks.Payments made at the Internal Revenue CollectionsOffices shall be made with manager's checks,personal checks or money orders payable to theSecretary of the Treasury.

EXTENSION OF TIME

If for a reasonable cause, a taxpayer is unable tofile the Declaration or pay the tax as indicated, anextension of time to file the Declaration may berequested to the Secretary. No extension of timewill be granted for a period longer than 3 months.The extension shall be requested by using FormAS 2650.

AMENDED DECLARATION

If after filing the Declaration it is determined that theestimated tax will be substantially increased orreduced as a result of a change in income,deductions or for any other reason, an amendedDeclaration must be filed. The Amended Declarationmust be identified by checking the applicable box.The increase or reduction of the estimated tax willbe proportionally distributed among the remaininginstallments. Any Amended Declaration filed afterthe 15th day of the ninth month following thebeginning of the taxable year as a result of anincrease in the previously estimated tax, mustinclude the total amount of said increase. TheAmended Declaration in this case will beunnecessary if on the date prescribed for its filing,the final income tax return has been filed and thebalance of tax due has been paid.

PENALTIES

The Code establishes penalties for not filing theDeclaration and for not paying the estimated taxinstallments. Also, a penalty is imposed fordetermining a substantially lower amount ofestimated tax.

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INCOME TAX RETURN FOR EXEMPT BUSINESSES ......The tax that you determine to pay when filing your...

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