Taxation in Puerto Rico consists of taxes paid to the United States federal government and taxes paid to the Government of the Commonwealth of Puerto Rico. Payment of taxes to the federal government, both personal and corporate, is done through the federal Internal Revenue Service (IRS), while payment of taxes to the Commonwealth government is done through the Puerto Rico Department of Treasury (Departamento de Hacienda).
Puerto Rico is an unincorporated territory of the United States and Puerto Ricans are U.S. citizens; however, Puerto Rico is not a U.S. state, but a U.S. insular area. Consequently, while all Puerto Rico residents pay federal taxes, many residents are not required to pay federal income taxes. Aside from income tax, U.S. federal taxes include customs taxes, [1] federal commodity taxes, and federal payroll taxes (Social Security, Medicare, and Unemployment taxes).
Not all Puerto Rican employees and corporations pay federal income taxes. Federal law requires payment of federal income tax from the following residents and corporations only: federal government employees in Puerto Rico, [lower-alpha 1] [lower-alpha 2] [4] residents who are members of the United States military, those with income sources outside of Puerto Rico, those individuals or corporations who do business with the federal government, and those Puerto Rico-based corporations that intend to send funds to the United States.
Residents of Puerto Rico are required to pay most types of federal taxes. Specifically, residents of Puerto Rico pay customs taxes, [5] [6] [lower-alpha 3] Federal commodity taxes, [6] and all payroll taxes (also known as FICA taxes, which include (a) Social Security, [8] (b) Medicare, [9] and Unemployment taxes). Puerto Ricans on the island paid over $4 billion in federal taxes in fiscal year 2021. [10]
Some Puerto Rico residents pay U.S. federal income taxes. Residents falling within the following categories must pay tax on their income to the United States federal government, via the Internal Revenue Service:
Puerto Rico residents who:
However, notwithstanding these requirements, some residents of Puerto Rico are not required to file federal income tax returns because their income falls below the poverty threshold. As of 2019, the median income of Puerto Rico was $20,166, which falls below the poverty threshold of $24,400. [16] [17] The IRS does not require individuals or households below the poverty threshold to pay federal income tax.
Puerto Rico residents pay more in federal income taxes every year than do residents of six U.S. states: "From 1998 up until 2006, when Puerto Rico was hit by its present economic recession, Puerto Rico consistently contributed more than $4 billion annually in federal taxes and impositions into the national fisc." This was more that the IRS collected from taxpayers in six States of the Union: Vermont, Wyoming, South Dakota, North Dakota, Montana, and Alaska, as well as the Northern Mariana Islands. [18] [19]
As the cutoff point for income taxation in Puerto Rico is lower than that imposed by the U.S. IRS code and because the per-capita income in Puerto Rico is much lower than the average per-capita income of the US states, more Puerto Rico residents pay income taxes to the local taxation authority than if the IRS code were applied to the island. This occurs because "the Commonwealth of Puerto Rico government has a wider set of [fiscal] responsibilities than do U.S. State and local governments." [20] As a result, the Commonwealth government imposes a separate income tax to make up for revenue funds that would otherwise be available through state-like funding resulting from federal income tax.
Only certain residents of Puerto Rico are required to file federal income tax returns. According to the Internal Revenue Service:
In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are only required to file a U.S. federal income tax return if they have income sources outside of Puerto Rico or if they are employees of the U.S. government. Bona fide residents of Puerto Rico generally do not report income received from sources within Puerto Rico on their U.S. income tax return. However, they should report all income received from sources outside Puerto Rico on their U.S. income tax return. Residents of Puerto Rico who are employed by the government of the United States or who are members of the armed forces of the United States also should report all income received for their services to the government of the United States on their U. S. income tax return. United States citizens or resident aliens who are not bona fide residents of Puerto Rico during the entire tax year are required to report all income from whatever source derived on their U.S. income tax return. However, a U.S. citizen who changes residence from Puerto Rico to the United States and who was a bona fide resident of Puerto Rico at least two years before changing residence can exclude from U.S. taxable income the Puerto Rican source income received while residing in Puerto Rico during the taxable year of such change of residence. [21]
Bona fide residents of Puerto Rico cannot claim deductions and/or credits allocable to or chargeable against Puerto Rican source income that is excluded from a U.S. tax return. The deductions and credits not attributable to specific income must be divided between excluded income from sources in Puerto Rico and income from all other sources to find the part that can be deducted or credited on a U.S. tax return. Examples of deductions not attributable to specific income include alimony, the standard deduction, and certain itemized deductions such as medical expenses, charitable contributions, and real estate taxes and mortgage interest on your personal residence. Personal exemptions are generally allowed in full. If you have taxable Puerto Rican source income on your U.S. income tax return, then you can claim a credit for foreign taxes paid to Puerto Rico. However, you are not allowed to claim a credit for foreign taxes paid with respect to Puerto Rican source income that is excluded from a U.S. tax return. Therefore, to properly calculate your foreign tax credit, you must reduce your foreign taxes paid by the amount of taxes allocable to excluded Puerto Rican source income. [22]
While the Commonwealth government has its own tax laws, Puerto Rico residents are also required to pay US federal taxes, [23] [24] [25] [26] [27] [28] but most residents do not have to pay the federal personal income tax. [29]
Employers in Puerto Rico are subject to both Federal Insurance Contributions Act (FICA) tax (a payroll withholding tax, which funds Social Security and Medicare) and the Federal Unemployment Tax Act (FUTA). Employers in Puerto Rico must withhold the employee portion of FICA taxes from their employees' wages and contribute the employer portion of FICA. [30]
In 2016, Puerto Rico paid close to $3.5 billion into the US Treasury in the form of Business Income Taxes, Individual income tax withheld and FICA tax, Individual income tax payments and SECA tax, Unemployment insurance tax, Estate and trust income tax, Estate tax, Gift tax and Excise taxes. [31]
In general, "many federal social welfare programs have been extended to Puerto Ric[o] residents, but usually with caps inferior to those allocated to the states." [32] [lower-alpha 5]
Residents of Puerto Rico who have paid into Social Security are eligible for benefits upon retirement. Residents of Puerto Rico who have paid into Social Security however are excluded from receiving Supplemental Security Income (SSI) benefits would they otherwise qualify. Commonwealth of Puerto Rico residents, unlike residents of the Commonwealth of the Northern Mariana Islands and residents of the 50 States, currently do not qualify for SSI. (SSI benefits are generally for low-income, disabled, as well as for elderly.) On 10 April 2020, the U.S. Court of Appeals for the First Circuit ruled that residents of Puerto Rico were eligible for SSI benefits, finding that residents of Puerto Rico make substantial contributions to the federal treasury in higher amounts than taxpayers in at least six states and the territory of the Northern Mariana Islands. [33] In March 2021, the US Supreme Court agreed to look at the constitutionality of the SSI issue. [34] [35]
Puerto Rico receives less than 15% of the Medicaid funding it would receive were it a state and Medicare providers receive less-than-full state-like reimbursements for services rendered to beneficiaries in Puerto Rico even though the latter paid fully into the system. [36] [37]
The main body of domestic statutory tax law in Puerto Rico is the Código de Rentas Internas de Puerto Rico (Internal Revenue Code of Puerto Rico). [38] The code organizes commonwealth laws covering commonwealth income tax, payroll taxes, gift taxes, estate taxes and statutory excise taxes. [39] [20] [40] All federal employees, [11] those who do business with the federal government, [41] Puerto Rico-based corporations that intend to send funds to the US, [42] and some others also pay federal income taxes (for example, Puerto Rico residents who earned income from sources outside Puerto Rico. [43] In addition, because the cutoff point for income taxation is lower than that of the US IRS code and because the per-capita income in Puerto Rico is much lower than the average per-capita income on the U.S. mainland, more Puerto Rico residents pay income taxes to the local taxation authority than if the IRS code were applied to the island. That occurs because "the Commonwealth of Puerto Rico government has a wider set of [fiscal] responsibilities than do U.S. State and local governments." [20]
Property taxes are the main fund of the 78 municipalities of Puerto Rico. [44]
The Puerto Rico Sales and Use Tax (SUT, Spanish : Impuesto a las Ventas y Uso, IVU) is the combined sales and use tax applied to most sales in Puerto Rico. As of 2020, the tax rate is 11.5%: 1.0% of the tax collected goes to the municipality where the sale was executed (there are 78 municipios - municipalities), and 10.5% of the tax collected goes to Government of Puerto Rico ("state" level). Furthermore, half of the portion that belongs to the state government is destined to the Urgent Interest Fund Corporation (COFINA) to pay the public debt of Puerto Rico, making it a three-tier tax.
In July 2006, the government approved Law Number 117, The 2006 Contributive Justice Law, which established a tax with a 5.5% rate at state level and an optional 1.5% rate at municipal level. The tax went into effect on November 15, 2006. The tax is better known as the Sales and Use Tax' (Impuesto sobre Ventas y Uso), often referred to by its Spanish acronym "IVU". The law amended Article B of the Code and created sub-article BB. On 29 July 2007, the government approved Law Number 80, making the tax mandatory for all municipalities of the commonwealth. Also, the tax rates were changed to 6% at the state level and 1% at the municipal level.
On 1 July 2015, the sales tax rate was increased from 7% to 11.5%, in response to a suffering economy. The new tax contributes 1% to the municipality level and 10.5% to the "state" level. [45] [46] The IVU was scheduled to expire on 1 April 2016, to be replaced with a value-added tax (VAT) of 10.5% for the state level, with the 1% IVU continuing for the municipalities. [47] On 2 May 2016 the House of Representatives voted to repeal the adoption of value added tax (VAT), followed shortly by the Senate on 5 May 2016. The Legislature decided to continue the existing Sales and Use Taxation (SUT) system. [48]
A common misconception is that customs taxes (also called import/export taxes) collected by the U.S. government on products manufactured in Puerto Rico are all returned to the Puerto Rico Treasury. That is not the case, and such taxes are returned to the Puerto Rico Treasury only for rum products. Even then, the US Treasury keeps a portion of the taxes. [49]
Puerto Rico, officially the Commonwealth of Puerto Rico, is a self-governing Caribbean archipelago and island organized as an unincorporated territory of the United States under the designation of commonwealth. Located about 1,000 miles (1,600 km) southeast of Miami, Florida, between the Dominican Republic in the Greater Antilles and the U.S. Virgin Islands in the Lesser Antilles, it consists of the eponymous main island and numerous smaller islands, including Vieques, Culebra, and Mona. With approximately 3.2 million residents, it is divided into 78 municipalities, of which the most populous is the capital municipality of San Juan, followed by those within the San Juan metropolitan area. Spanish and English are the official languages of the government, though Spanish predominates.
The United States has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2020, taxes collected by federal, state, and local governments amounted to 25.5% of GDP, below the OECD average of 33.5% of GDP.
The Foraker Act, Pub. L.Tooltip Act of Congress#Public law, private law, designation 56–191, 31 Stat. 77, enacted April 12, 1900, officially known as the Organic Act of 1900, is a United States federal law that established civilian government on the island of Puerto Rico, which had recently become a possession of the United States as a result of the Spanish–American War. Section VII of the Foraker Act also established Puerto Rican citizenship and extended American nationality to Puerto Ricans. President William McKinley signed the act on April 12, 1900 and it became known as the Foraker Act after its sponsor, Ohio Senator Joseph B. Foraker. Its main author has been identified as Secretary of War Elihu Root.
The government of the Commonwealth of Puerto Rico is a republican democracy established by the Constitution of Puerto Rico in 1952. Under a system of separation of powers, the government is divided among three branches: the executive, the legislative, and the judicial. As a territory of the United States, the government of Puerto Rico is under the jurisdiction of the federal government of the United States.
In the law of the United States, an insular area is a U.S.-associated jurisdiction that is not part of a U.S. state or the District of Columbia. This includes fourteen U.S. territories administered under U.S. sovereignty, as well as three sovereign states each with a Compact of Free Association with the United States. The term also may be used to refer to the previous status of the Swan Islands, Hawaii, Guam, Puerto Rico, and the Philippines, as well as the Trust Territory of the Pacific Islands when it existed.
Commonwealth is a term used by two unincorporated territories of the United States in their full official names, which are the Northern Mariana Islands, whose full name is Commonwealth of the Northern Mariana Islands, and Puerto Rico, which is named Commonwealth of Puerto Rico in English and Estado Libre Asociado de Puerto Rico in Spanish, translating to "Free Associated State of Puerto Rico." The term was also used by the Philippines during most of its period under U.S. sovereignty, when it was officially called the Commonwealth of the Philippines.
Excise tax in the United States is an indirect tax on listed items. Excise taxes can be and are made by federal, state, and local governments and are not uniform throughout the United States. Certain goods, such as gasoline, diesel fuel, alcohol, and tobacco products, are taxed by multiple governments simultaneously. Some excise taxes are collected from the producer or retailer and not paid directly by the consumer, and as such, often remain "hidden" in the price of a product or service rather than being listed separately.
The Jones–Shafroth Act – also known as the Jones Act of Puerto Rico, Jones Law of Puerto Rico, or as the Puerto Rican Federal Relations Act of 1917 – was an Act of the United States Congress, signed by President Woodrow Wilson on March 2, 1917. The act superseded the Foraker Act and granted U.S. citizenship to anyone born in Puerto Rico on or after April 11, 1899. It also created the Senate of Puerto Rico, established a bill of rights, and authorized the election of a Resident Commissioner to a four-year term. The act also exempted Puerto Rican bonds from federal, state, and local taxes regardless of where the bondholder resides.
The United States federal government and most state governments impose an income tax. They are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. Most business expenses are deductible. Individuals may deduct certain personal expenses, including home mortgage interest, state taxes, contributions to charity, and some other items. Some deductions are subject to limits, and an Alternative Minimum Tax (AMT) applies at the federal and some state levels.
International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries, or the international aspects of an individual country's tax laws as the case may be. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residence-based, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more.
Tax protesters in the United States have advanced a number of arguments asserting that the assessment and collection of the federal income tax violates statutes enacted by the United States Congress and signed into law by the President. Such arguments generally claim that certain statutes fail to create a duty to pay taxes, that such statutes do not impose the income tax on wages or other types of income claimed by the tax protesters, or that provisions within a given statute exempt the tax protesters from a duty to pay.
This is a table of the total federal tax revenue by state, federal district, and territory collected by the U.S. Internal Revenue Service.
The economy of Puerto Rico is classified as a high income economy by the World Bank and as the most competitive economy in Latin America by the World Economic Forum. The main drivers of Puerto Rico's economy are manufacturing, which primarily includes pharmaceuticals, textiles, petrochemicals, and electronics; followed by the service industry, notably finance, insurance, real estate, and tourism. The geography of Puerto Rico and its political status are both determining factors on its economic prosperity, primarily due to its relatively small size as an island; its lack of natural resources used to produce raw materials, and, consequently, its dependence on imports; as well as its relationship with the United States federal government, which controls its foreign policies while exerting trading restrictions, particularly in its shipping industry.
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax law. It is an agency of the Department of the Treasury and led by the Commissioner of Internal Revenue, who is appointed to a five-year term by the President of the United States. The duties of the IRS include providing tax assistance to taxpayers; pursuing and resolving instances of erroneous or fraudulent tax filings; and overseeing various benefits programs, including the Affordable Care Act.
Tax protesters in the United States advance a number of administrative arguments asserting that the assessment and collection of the federal income tax violates regulations enacted by responsible agencies –primarily the Internal Revenue Service (IRS)– tasked with carrying out the statutes enacted by the United States Congress and signed into law by the President. Such arguments generally include claims that the administrative agency fails to create a duty to pay taxes, or that its operation conflicts with some other law, or that the agency is not authorized by statute to assess or collect income taxes, to seize assets to satisfy tax claims, or to penalize persons who fail to file a return or pay the tax.
The Commonwealth of Puerto Rico is an unincorporated territory of the United States. As such, the archipelago and island of Puerto Rico is neither a sovereign nation nor a U.S. state.
The Foreign Account Tax Compliance Act (FATCA) is a 2010 U.S. federal law requiring all non-U.S. foreign financial institutions (FFIs) to search their records for customers with indicia of a connection to the U.S., including indications in records of birth or prior residency in the U.S., or the like, and to report such assets and identities of such persons to the United States Department of the Treasury. FATCA also requires such persons to report their non-U.S. financial assets annually to the Internal Revenue Service (IRS) on form 8938, which is in addition to the older and further redundant requirement to report them annually to the Financial Crimes Enforcement Network (FinCEN) on form 114. Like U.S. income tax law, FATCA applies to U.S. residents and also to U.S. citizens and green card holders residing in other countries.
Three main alternatives are generally presented to Puerto Rican voters during Puerto Rico political status referendums: full independence, maintenance or enhancement of the current commonwealth status, and full statehood into the American Union. The exact expectations for each of these status formulas are a matter of debate by a given position's adherents and detractors. Puerto Ricans have proposed positions that modify the three alternatives above, such as (a) indemnified independence with phased-out US subsidy, (b) expanded political but not fiscal autonomy, and (c) statehood with a gradual phasing out of federal tax exemption.
The political status of Puerto Rico has ramifications into many spheres of Puerto Rican life, and there are limits to the level of autonomy the Puerto Rican government has. For example, the Island's government is not fully autonomous, and the level of federal presence in the Island is common place, including a branch of the United States Federal District Court. There are also implications relative to the American citizenship carried by people born in Puerto Rico. Specifically, although people born in the Commonwealth of Puerto Rico are natural born U.S. citizens, their citizenship is not protected by the Citizenship Clause of the 14th Amendment to the U.S. Constitution. As such, the American citizenship of Puerto Ricans can be taken away by the U.S. Congress unilaterally. Puerto Ricans are also covered by a group of "fundamental civil rights" but, since Puerto Rico is not a state, Puerto Ricans are not covered by the full American Bill of Rights. As for taxation, Puerto Ricans pay U.S. federal taxes, but most residents of the island are not required to file federal income tax returns. Representation-wise, Puerto Ricans have no voting representative in the U.S. Congress, but do have a Resident Commissioner who has a voice in Congress. Puerto Ricans must also serve in the United States military anytime conscription is ordered, with the same duties as a US citizen residing in the 50 states.
The Puerto Rican government-debt crisis was a financial crisis affecting the government of Puerto Rico. The crisis began in 2014 when three major credit agencies downgraded several bond issues by Puerto Rico to "junk status" after the government was unable to demonstrate that it could pay its debt. The downgrades, in turn, prevented the government from selling more bonds in the open market. Unable to obtain the funding to cover its budget imbalance, the government began using its savings to pay its debt while warning that those savings would eventually be exhausted. To prevent such a scenario, the United States Congress enacted a law known as PROMESA, which appointed an oversight board with ultimate control over the Commonwealth's budget. As the PROMESA board began to exert that control, the Puerto Rican government sought to increase revenues and reduce its expenses by increasing taxes while curtailing public services and reducing government pensions. These measures provoked social distrust and unrest, further compounding the crisis. In August 2018, a debt investigation report of the Financial Oversight and management board for Puerto Rico reported the Commonwealth had $74 billion in bond debt and $49 billion in unfunded pension liabilities as of May 2017. Puerto Rico officially exited bankruptcy on March 15, 2022.
