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Puerto Rico’s Tax Reform: IVU vs. IVA

This article is written by a student writer from the Her Campus at UPRM chapter.

Last Tuesday, March 3rd, professors Dr. Jeffry Valentín, Dr. José I. Alameda, Dr. Eduardo Kicinski and Dr. Edwin Irizarry Mora, held an on-campus conference regarding the controversial issue of the proposed tax reform that plans to change the IVU (sales and use tax) for the IVA (value-added tax).  Approximately 160 countries around the world have already adopted the IVA, however before delving into the pros and cons of this new tax reform students should understand the differences between the different tax systems Puerto Rico has had.

Initially PR had what is called an excise tax, which works the following way:

Assuming the tax rate was of 7%, every time a cargo came in the harbor it would be inspected and then the importer would have to pay 7% of the value of its product right then and there, before being able to distribute or sell the product.  What the importer paid for in taxes would be included in the final price of the product not as a separate tax for the following buyers.  The problem with this system was that not all the cargo that came into Puerto Rico was inspected. In fact, only about 3% of all the wagons that came in were inspected and most of the others would claim that the cargo was part of the 35 types of products that were exempt from paying taxes.  Therefore, the lack of inspection led to a mayor loss in revenue for the government.

Subsequently the sales tax or IVU was implemented:

This tax is remarkably different from the excise tax.  In this case the 7% tax is paid at the end of the chain, by the consumers, which pay the sales tax directly to the retailer.  In this case, the retailer has the responsibility of reporting its income and sending the tax they collected to Hacienda (Puerto Rico’s IRS).  However, many retailers fail to deliver the real amount of taxes that they receive.  It has become an issue that many of these entrepreneurs prefer accepting payment in cash from their costumers, so the transactions are not registered.  In this case, the revenue that was supposed to increase, significantly decreased due to- once again -lack of inspection and to the negligence of the business owners.

Puerto Rico’s debt has been in a constant rise for many years now and for that reason the government is now desperate to find ways to increase its income in order to pay for said debt. That is one of the mayor reasons for this tax reform.  In addition, Hacienda intends to catch those that dodge paying their taxes, which is another mayor reason for this reform.  According to statistics a surprisingly low amount of Puerto Ricans earn above $150,000 a year (a figure that does not match the spending’s of our society).

For these reasons, our government intends to introduce a third taxing system the value-added tax (IVA):

This system is significantly different from the previous two.  Here every step of the distribution chain has to pay a tax (from importers to retailers).  In this case, the importer has to pay 7% of selling price of the product to Hacienda. After that, the wholesaler pays that same percent of its selling price when selling to the retailer (however the wholesaler gets a credit for what the importer paid previously), lastly the retailer pays that same percent when selling to the consumers (they also get the same credit the wholesalers got).  This credit system is a way of forcing each step of the chain to pay its tax and in the case that one does not pay, the next one will have to pay for that difference. In this case, the need for constant inspection is decreased significantly: for that reason the government’s income is supposed to increase significantly.  In addition, those who evade paying their income taxes will be forced to pay anyways through this tax.  Another important aspect of this taxing system is its regressivity, which means that the majority of the tax payment falls on lower classes and not on the ones with higher income.  This is true for both IVU and IVA.

To this extent you should have a general idea of the different taxing system that have or are playing important roles in Puerto Rico.  Now there are some concerns with the tax reform that is being suggested.

Photo credit: elnuevodia.com


How can an in the percent of the tax (from 7% to 16%) help alleviate the consumers?

To further explain the difference between the IVU and the IVA, Dr. Alameda explained how, although in numbers a 16% is larger than 7%, the reimbursement being suggested along with the IVA plan to aleviate the regressivity will mitigate this difference in percentage. 

Are the reimbursements really going to be able to lighten the burden for the majority of the population?

Dr. Irizarry Mora further explained that the IVA intends reimburse part of the taxes paid to those of a lower income in order to overcome its regressivity.  However, experience with reimbursements from Hacienda has been that those usually take an absurd amount of time to be issued.  Then, although the plan that wants to be implemented in theory has great potential, it has to be taken into consideration the country that it is being implemented in.  We need an equilibrated system that puts the tax burden to those who can actually pay it.  An additional problem with this implementation is the historic moment, we are about to reach 9 years of recession and implementing this system will in fact increase the cost of life making it less affordable for the majority of the population. 

What are the pros and cons of this system?

On the one hand, Dr. Valentin concluded that it is important to consider that the IVA has the capacity to enable or reduce the marginal income tax rates and to increase the number of contributors.  On the other hand, the mechanisms to prevent fraud and the delay in reimbursement are subjects that have yet to be determined.

Now, lets talk about how this could affect college students!

Initially education was thought to be included in the new tax reform, which means that tuition cost would also have a 16% tax.  However, in response to different protests this tax was eliminated from education, as it would obviously make it much harder for students to continue their careers. That is definitely a big relief for us but the inevitable increase in prices of almost everything else will indirectly affect students significantly.  An increase in the prices for school supplies, books, rent, etc. will mean a greater decrease in the quantity of students that will be able to afford college and graduate schools.