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Puerto Rico Sales Tax Revenue Frozen

Puerto Rico’s plans to reduce a $123 billion dollar debt comprised of bonds and unfunded pensions has created contentious opposition from two distinct groups of creditors in federal court. What is in debate is the liquidation preference of $400 million dollars in sales tax revenue generated by Puerto Rico and which groups of creditors will be repaid first.

Half of Puerto Rico’s sales tax revenues were originally used to fund bonds issued by COFINA, the Puerto Rico Urgent Interest Fund Corporation owned by the commonwealth of Puerto Rico. This entity uses that portion of taxes in repayment of Puerto Rican Sales Tax Revenue Bonds that they have issued.

A second group of general obligation bondholders backed by the commonwealth of Puerto Rico say they are entitled to that sales tax revenue, citing Puerto Rico’s constitution which states “all available resources” should be used to ensure timely repayment, even if that means sales tax revenues.

The problem is that COFINA bonds have never missed repayment until this June, when litigators put a hold on that $400 million dollars in revenue to decide who should be repaid.

This large sum of sales tax is dwarfed by the more than $30 billion dollars in outstanding bonds between both of these groups of bondholders. This was just the first of multiple hearings these creditors will have as they are expected to meet every six weeks for the rest of the year until a decision is made.

 

What Comprises Puerto Rico’s Sales and Use Tax Rate?

In July of 2015, Puerto Rico government officials responded to the debt crisis by issuing a sales and use tax (SUT) rate hike from 7% to 11.5%, the highest sales tax rate in the U.S. Of this percentage, 5.25% went towards funding COFINA, and the rest was distributed between municipalities (1%) and the commonwealth (5.25%). In April of 2016, the Puerto Rico SUT transitioned into a Value Added Tax (or VAT), which deemed a broader scope of services taxable, and in turn generated more tax revenue.

 

Jack Yankopolus


For More Information

If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events at www.allynintl.com.

 

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