Client Alert – Municipality of Caguas Imposes New Municipal Tax
M E M O R A N D U M
To: All Clients
From: Goldman Antonetti & Córdova, LLC
Date: July 11, 2017
Subject: Client Alert – Municipality of Caguas Imposes New Municipal Tax
The Municipality of Caguas (“Caguas”) has approved Municipal Ordinance No. 37 (“Ordinance”) to establish a temporary Municipal Business Contribution (“Aportación Empresarial Municipal” or “AEM” for its Spanish acronym) of zero point thirty-five percent (.35%) of its Volume of Business to businesses and individuals that are subject to the Municipal License Tax (“Patente Municipal” for its Spanish name) or have the obligation to declare a Volume of Business in Caguas of Three Million Dollars ($3,000,000) or more for the calendar year previous to the effectiveness of the AEM.
The AEM appears to be an additional tax of zero point thirty five percent (.35%) stacked on the existing Municipal License Tax of zero point fifty percent (.50%) already imposed by Caguas, for an effective rate of zero point eighty-five percent (.85%) on the declared Volume of Business, or gross receipts. In the case of financial businesses with an existing Municipal License Tax of one point fifty percent (1.50%), the effective rate could increase to one point eighty-five percent (1.85%).
The tax will be effective for Fiscal Years 2017-2018 through 2020-2021 with payment due on August 15 of the fiscal year, though the taxpayer may choose to pay in quarterly installments with the first payment taking place on that very date. The Ordinance also provides for the application of monthly interest accrual of one percent (1%) and a surcharge of up to twenty-five percent (25%) on outstanding payable amounts.
The Ordinance, on its face, seems to be ripe for legal and judicial challenge. Municipalities of Puerto Rico are creatures of the Central Government’s Legislature and lack the inherent power to levy taxes, since the Constitution of Puerto Rico delegates that power exclusively to the Legislature. Municipal License Taxes are as such allowed by legislative grace, specifically through the Municipal License Tax Act of 1974 (the “Act”), as amended. The Act authorizes municipalities to impose a Municipal License Tax over Volume of Business not in excess of zero point fifty percent, in the case of non-financial businesses and in the case of financial businesses the Municipal License Tax may not exceed one point fifty percent (1.50%). The Ordinance seems to attempt to circumvent the clear provisions of the Act and the Constitution of Puerto Rico by rewording what may effectively be considered an additional Municipal License Tax in excess of the amounts allowed under the Act. Under that reading, the Ordinance may be ruled by a court of law to be in violation of the Act and Constitutional provisions regarding the delegation of the power to levy taxes, and may also be in violation of the constitutional provisions prohibiting double taxation.
Some in the business community of Caguas may find the imposition of this additional tax on Volume of Business to be onerous, especially those businesses with slim profit margins that meet the $3 million gross receipts threshold, as the AEM may further chip away at those profits. Any business with operations in Caguas or affected in any way by the new AEM, may find help among our professionals.
Goldman Antonetti & Córdova LLC stands ready to assist you and your business to adjust to changes in the law. If you need further assistance in this area, please feel free to contact the following members of our firm:
Although the information included in this document may concern legal issues, it is not a legal opinion or professional advice and clients shall not use it as such. We assume no responsibility or liability of any kind for any information contained herein, and we expressly disclaim all liability for any claim for damages arising from the use, reference to, or reliance on, such information. If legal or other expert assistance is required, the services of a competent professional should be sought.
IRS Circular 230 Disclosure:
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code; or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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