Tax exemptions, 20% fixed rate extended to LUMA Energy
By The Star Staff
The island Treasury Department has extended to LUMA Energy, which is slated to operate the Puerto Rico Electric Power Authority’s (PREPA) transmission and distribution (T&D) system starting today, the benefits of administrative determination 20-06, which grants exemptions in the payment of property and municipal taxes and in the payment of the sales and use tax (SUT) for some items, as well as the benefit of paying taxes with a fixed income tax rate of 20%.
As first reported by the STAR in April, the benefit, according to Section 4.5 of the operation and management agreement signed in June 2020, will cover the estimated $130 million PREPA paid LUMA in service fees during the front-end transition phase that ended Monday, the service fee PREPA will pay LUMA during the duration of the 15-year contract and the back-end transition service fee to be paid in the last year of the contract.
LUMA Energy, a subsidiary of Quanta Services Inc. and ATCO Ltd., signed the contract with PREPA to operate the T&D system, customer service and billing effective June 1. Because PREPA is still in bankruptcy, LUMA Energy will operate under the terms of a supplemental agreement that is slated to last 18 months, during which time the utility is expected to exit bankruptcy. Under the supplemental agreement, PREPA will pay up to $115 million to LUMA for operating the T&D as an administrative expense per a recent court order.
The LUMA Energy contract is managed by the Public-Private Partnership Authority and is being overseen by a steering committee created by Gov. Pedro Pierluisi Urrutia. The purpose of the administrative determination, issued in March 2020, is to establish taxation rules applicable to a private firm that enters into an operation and maintenance partnership contract with a government agency under Act 29, the Public-Private Partnership Act, and under Act 120, known as the Act to Transform Puerto Rico’s Electrical System.
The 20% income tax rate will apply to LUMA Energy in lieu of any other income tax under Puerto Rican law, which means that neither the service or management fees nor the termination payment fees will be subject to the alternative minimum tax imposed under Section 1022.03 of the Puerto Rico Code or the 10% percent deemed dividend tax imposed under Section 1062.13 of the Puerto Rico Code.
The order also says that the partnering government entity fees collected by LUMA under the public-private partnership contract on behalf of PREPA from third-party customers will not be considered gross income or revenues of the contractor and the contractor will not be subject to Puerto Rico income taxes with respect to such fees.
LUMA Energy will not be entitled to deduct as ordinary and necessary business expenses under Puerto Rico’s tax code the pass-through expenditures incurred on behalf of PREPA.
LUMA will not be required to include the pass-through expenditures as part of its gross income to be reimbursed by PREPA for the expenditures.
Meanwhile, items purchased by Puerto Rico agencies are exempt from the payment of the sales and use tax. The Puerto Rico tax law provides that the term government of Puerto Rico includes those individuals who operate or act on its behalf, requiring that such individuals request and obtain a certificate to that effect from the secretary of the Treasury.
Accordingly, LUMA Energy may not have to pay sales and use tax on items it purchases as the operator of PREPA’s T&D. However, if the item is not required to be purchased under the contract, then LUMA Energy must pay the sales and use tax for it.
“Any item acquired by the contractor that becomes the property of the partnering government entity will automatically qualify as a covered item exempt from the payment of the SUT even if it is not included in the certification provided by the partnering government entity,” the administrative order says. “However, the taxable items acquired by the contractor that will become property of the contractor and that are not required to be acquired under the Operation and Maintenance Partnership Contract will not be covered by the tax exemption granted under Section 4030.08(a) of the PR Code and, accordingly, will be subject to the payment of the SUT.”
Under the administrative order, LUMA Energy may be exempted from paying the special contribution of 1.5% on professional services because in a public-private partnership, the contractor is not performing a professional or advisory service but rather performing the acts and duties of the partnering government entity.