No. 361 (Approved December 24, 1999) AN ACT

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1 (S. B. 1853) (Reconsidered/Reconsidered) No. 361 (Approved December 24, 1999) AN ACT To add subsections (C), (D), (E), (F), and (G) to paragraph (1) and amend subsection (C) of paragraph (2) of subsection (d) of Section 1169, and amend Section 6060 of Act No. 120 of October 31, 1994, as amended, known as the Puerto Rico Internal Revenue Code of 1994, (the Code ), in order to reduce the tax rate applicable to distributions of a individual retirement account that originated from income derived by the individual retirement account from sources within Puerto Rico. STATEMENT OF MOTIVES The dramatic changes in the public policy of the countries of the Western Hemisphere caused by the creation of global free trade markets have caused Puerto Rico s economy to have more competition in its own markets. Thus, the Legislature is bound to draft and approve legislation addressed to encourage savings, investment, productivity, and the economic growth of our Island. As part of these efforts, our Government has implemented a strategic plan under the concept of a new economic development model to promote the diversification of the economy thus creating a favorable climate for the development of enterprises, especially those with local capital. One way of achieving the abovementioned objectives is to encourage savings in individual retirement accounts which, in turn, invest part of their funds in Puerto Rico, as promoted by Act No. 42 of July 22, Through

2 the approval of said Act No. 42, Section 1169 of the Internal Revenue Code was amended to allow individual retirement accounts to invest part of their funds in shares and other activities of local companies. Currently, there are several individual retirement accounts that have reacted to this initiative and have invested part of their funds in shares of local companies, and are becoming the most attractive and important participants of our local capital market. However, although the individual retirement accounts now invest part of their funds in local companies and make other investments in Puerto Rico, the regulations contained in the Code for the taxing of the distributions of these accounts which originate from the income of said investments, are not at a par with the legislative purpose of Act No. 42, supra, of promoting the investment of said funds in Puerto Rico. In view of these facts, the Legislature deems that it is necessary to approve the amendments included in this Act, to provide the beneficiary of an individual retirement account, the option of paying taxes for the distributions of said account which originate from income from sources within Puerto Rico, at the rate of seventeen (17) percent. BE IT ENACTED BY THE LEGISLATURE OF PUERTO RICO: Section 1.- Subsections (C), (D), (E), (F), and (G) are hereby added to paragraph (1), and subsection (C) of paragraph (2) of subsection (d) of Section 1169 of Act No. 120 of October 31, 1994, as amended, is hereby amended, to read as follows: Section 1169 Individual Retirement Account (d) Distribution of Individual Retirement Account Assets.- (1) Taxation of payments or distributions of an individual retirement account.-

3 (C) (i) The owner or beneficiary of an individual retirement account who receives a total or partial distribution from an individual retirement account which does not constitute a distribution of interest described in Section 1013, nor a distribution of his contribution to the individual retirement account, and which consists of income from sources within Puerto Rico, as defined in clause (ii) of this subsection, received by said individual retirement account, may opt to pay a tax on said amount in lieu of any other tax imposed by this Subtitle, equal to seventeen (17) percent for the taxable year in which the owner or beneficiary of the individual retirement account actually receives said total or partial distribution. If the owner or beneficiary of the individual retirement account opts to pay the seventeen percent (17%) tax provided in this clause (i), the trustee of individual retirement account shall be bound to deduct and withhold the seventeen percent (17%) tax of the distributed amount. The trustee shall not be bound to make the deduction and withholding provided herein if the distribution qualifies as a contribution for a transfer under Section 1169 (d) (4), and the distribution is transferred directly by the trustee to the trustee of the other individual retirement account by the instructions of the owner or beneficiary thereof. (ii) The term income from sources within Puerto Rico, shall be defined for purposes of this Section, according to the regulations, circular letter, or other administrative decision of general application promulgated by the Secretary. In these regulations, circular letter, or other administrative decision of general application, the Secretary shall give similar treatment, for the purposes of this subsection, to the distributions on the shares in common or collective investment trusts maintained by a bank or trust company organized under the laws of Puerto

4 Rico for the common of collective investment trust funds of individual retirement accounts and the dividends distributed by registered investment companies. (D) Requirements for Opting for the Seventeen Percent (17%) Tax.- The option of paying the seventeen percent (17%) tax provided in subsection (C) and in Section 1013 may be exercised at any time before the trustee of the individual retirement account makes the payment or distribution of the individual retirement account. (E) Obligation to pay or deposit taxes deducted or withheld.- Every trustee of an individual retirement account who is bound to deduct and withhold the tax provided in clause (i) of subsection (C), shall pay the total amount of the tax thus deducted and withheld, in the Internal Revenue Collection Centers of Puerto Rico, in the Department of the Treasury, or deposit it in any of the banking institutions designated as depositaries of public funds, that have been authorized by the Secretary to receive said tax. The tax shall be paid or deposited on or before the tenth day of the month following the date the distribution was made. (F) No Withholding.- If the trustee of the individual retirement account, in violation of the provisions of this Section, fails to perform the withholding referred to in subsection (C), the amount that should have been deducted and withheld (unless the receiver of the distribution pays the tax to the Secretary) shall be collected from the trustee of the individual retirement account following the same procedure and in the same way as if it were a tax owed by the trustee. (G) Penalty.- For the provisions regarding penalties and additions to the tax, see Section 6060 of the Code.

5 (2) Excess contributions returned prior to the deadline for filing.- The provisions found in paragraph (1) do not apply to the reimbursement of any contribution made during a taxable year to an individual retirement account to the extent that said contribution exceeds the amount allowable as a deduction under Section 1023 (bb) (2), if: (A)... (B)... (C) Said reimbursement is accompanied by the amount of the net income attributable to said excess contribution. Any net income described in this paragraph shall be included as the individual s income for the taxable year in which the contribution was made. Any reimbursement during the taxable year that corresponds to interests as described in Section 1013 and to income described in subsection (C) of paragraph (1) of subsection (d) of this Section, shall be taxed according to the provisions of Section 1013 and subsection (C) of paragraph (1) of subsection (d) of this Section, provided that the requirements of Section 1013 and Section 1169 (d), respectively, are complied with. Section 2.- Section 6060 of Act No. 120 of October 31, 1994, as amended, is hereby amended, to read as follows: Section For Failing to Withhold or Deposit Certain Taxes In the event that any person fails to deposit the taxes deducted and withheld under Sections 1012, 1141, 1142, 1143, 1145, 1148, and 1169, which should have been withheld and deposited within the term established in Subtitle A of this Code, there shall be imposed upon such person, in addition to any other penalties imposed by the Code, a penalty of two (2) percent of the amount of the insufficiency if the omission of thirty (30) days or less, and an additional two (2) percent for each period or fraction of an

6 additional period of thirty (30) days as long as the omission exists, which shall not exceed a total of twenty-four (24) percent. For the purposes of this Section, the term insufficiency means the excess of the amount of the tax which should have been deposited on the amount, if any, of the same amount which was deposited on or before the date set for it. For the purposes of this Section, the omission shall not be deemed as continuous after the date on which the tax is paid. Section 3.- Effectiveness.- This Act shall be applicable to all taxable years commencing after December 31, 1999.

7 CERTIFICATION I hereby certify to the Secretary of State that the following Act No. 361 (S.B. 1853) (Reconsidered/Reconsidered) of the 6 th Session of the 13 th Legislature of Puerto Rico: AN ACT to add subsections (C), (D), (E), (F), and (G) to paragraph (1) and amend subsection (C) of paragraph (2) of subsection (d) of Section 1169, and amend Section 6060 of Act No. 120 of October 31, 1994, as amended, known as the Puerto Rico Internal Revenue Code of 1994, (the Code ), in order to reduce the tax rate applicable to distributions of a individual retirement account that originated from income derived by the individual retirement account from sources within Puerto Rico, has been translated from Spanish to English and that the English version is correct. In San Juan, Puerto Rico, today 30 th of April of Elba Rosa Rodríguez-Fuentes Director