General Description of Municipal License Taxes in Puerto Rico

The following is a general discussion of the Municipal License Tax Act of 1974, as amended (the "MLTA"). In general, every person engaged for profit in the rendering of any service, in the sale of goods, in any financial business or in any industry or business in Puerto Rico is subject, with certain exceptions, to the payment of the municipal license tax. I. Nature of the Tax The municipal license tax is a tax imposed by Puerto Rican municipalities on the businesses that operate within their boundaries. The tax is levied on the taxpayer’s "volume of business", a term that means the gross income that is received or earned from the rendering of any service, the sale of goods, or by any other industry or business in the municipality in which the main organization carries out its operations, or the gross income received or earned by the main organization in the municipality where it keeps offices, warehouses, branches, construction sites or any other kind of industrial or commercial organization to carry out business in its name, without taking its gains or profits into account. The MLTA provides that in the case of contractors on a cost-plus basis, volume of business shall be the gross amount of the contract without deducting any cost item, except for the cost of the machinery and equipment the contractor is required to acquire for permanent installation in the project. Special rules apply in the case of gasoline stations and in the case of persons engaged in cable or satellite television services or telecommunication services. II. Computation The license tax is to be computed by the taxpayer by taking as basis the volume of business during its accounting year ending within the immediately preceding calendar year. The accounting year should be the same as the one used by the taxpayer in preparing and filing its income tax return with the Treasury Department. III. Offices in Different municipalities Section 2(a)(7)(E) of the MLTA provides that the volume of business of persons who keep offices or any other kind of commercial organization in different municipalities of the Island shall be determined in each municipality separately in order that the main organization pays the corresponding tax to the municipality where each office or any other kind of commercial organization is located. IV. Returns The return must be filed annually on or before five (5) working days after April 15 of each taxable year. The return shall be filed with the Municipal Treasurer where the main headquarters or office is located, and a copy of said return is to be filed with the Municipal Treasurer of each municipality where the taxpayer has received or earned income subject to license tax levied under the MLTA. In the case of business operations with a volume of business in excess of $1,000,000, the return must include financial statements certified by a CPA holding a license issued by the Commonwealth of Puerto Rico. In the case of business operations with a volume of business of less than $1,000,000, the return must include copy of the pages of the income tax return where a detail of the gross income and operating expenses is provided. These documents must be accompanied by a statement from the taxpayer to the effect that they are true and exact copies of those filed with the Treasury Department. Any declaration not meeting these requirements is considered not filed. The Director of Finance may grant an extension to file the return. V. Tax Rate and Payment The rate of tax is determined by each municipality, but it cannot exceed .50 of 1% (0.5%) in the case of non-financial businesses. Persons engaged in any financial business are subject to a tax that cannot exceed 1.50%. The municipal license tax is a fiscal year tax; that is, it is paid for each fiscal year commencing July 1 and ending June 30. The tax is payable in semi-annual installments due on July 1 and January 2 of each year. However, if the payment is made at the time of filing the return the taxpayer is entitled to a 5% discount. VI. Starting operations Section 13 of the MLTA provides that any person who commences any business subject to the payment of the tax shall notify the Municipal Treasurer of the corresponding municipality no later than thirty (30) days after commencing such activity. In those cases, the Treasurer issues a provisional certificate or license, free of tax for the semester corresponding to that in which such business is commenced. At the beginning of the semester following the one in which the taxpayer commenced operations, the taxpayer must file a return and pay the corresponding license tax. The tax must be computed by taking as a basis the volume of business earned or received during the first semester, raised to an annual basis. VII. Statute of Limitations; Penalties; Interest A license tax deficiency may be assessed by the municipality within four (4) years after the declaration has been filed or six (6) years if the volume of business not reported exceeds 25% of the amount reported in the return. In addition, to the license taxes, municipalities may also assess penalties. Interest at the annual rate of 12% is charged as part of the license tax.