In 2007, the accounting sector and its clients were still adjusting to the many changes required by Puerto Rico’s sales & use tax (known as IVU by its Spanish acronym for Impuesto a las Ventas y Uso), implemented Nov. 15, 2006. The monthly tax-filing obligations mandated by the state and municipal IVU resulted in a lot more work for the island’s accountants and headaches for their clients.

The IVU is a 7% general-consumption tax collected at the point of sale. It replaced the 6.6% arbitrios or general excise tax, which was imposed at the port of entry.

In 2008, accountants unexpectedly were busy again when the central government opened an IVU-free window during the weekend of Sept. 24-27 allegedly to help flood victims after the passing of a severe storm, forcing businesses to prepare another set of financial statements and two tax-filing reports for the month (one without the IVU-free event and another one that included it).

Ernst & Young tax partner Jorge Cañellas quipped that the “Tax Fairness Act of 2006” might have been more aptly named “The CPA Full-Employment Act,” as clients find themselves spending more money on accounting services as a result of improvisations with the law.

For 2009, expect the Society of Certified Public Accountants (Society of CPAs) to be in the forefront of the fiscal and tax reform debate, as the new government administration tackles the challenges of declining revenue, a mounting budget shortfall, payment obligations to bondholders, increased public debt-refinancing costs while trying to deliver much-needed and promised income-tax cuts to the working and middle classes.

The Society of CPAs on June 17 presented its fiscal reform proposal for this year’s gubernatorial candidates in the hopes it is adopted and included in their political platforms.

The 80-page proposal, prepared by the Society of CPA’s Fiscal Reform Committee, headed by Diego Robles, featured local economist Carlos Colón de Armas as a consultant and analyst.

The document includes 71 recommendations in four main areas which, if fully implemented, would reduce government expenditures by $233 million, resulting in an $83 million surplus, according to the document.

The fiscal-reform proposal is one of several studies to be evaluated by the Economic Reconstruction & Fiscal Advisory Committee that the then-Gov.-elect Luis Fortuño announced Nov. 10 to address the government’s and the island’s dire economic problems.

In 2006, leaders of the Society of CPAs were active participants in the tax-reform process, providing constant (though not always heeded) input to both the Treasury Department and the Legislature. The Society of CPAs energetically advocated the adoption of the IVU since 2004, when it released a study on the issue. The study, prepared by a task force that included local and stateside experts, recommended the elimination of the 6.6% excise-tax system and replace it with a sales & use tax.

Competitive environment for local firms

Several local-capital accounting firms, such as Kevane Grant Thornton LLP and Scherrer Hernández & Co., jockeyed for position in the changing competitive environment brought about by the flurry of local posttax-reform activity. The extra business brought on by the IVU resulted in several firms hiring more personnel.

With 50 CPAs, Kevane Grant Thornton LLP remained the leading local-capital CPA firm with a broad cross-section of clients from manufacturing, wholesale, retail and hotels. It retained the No. 4 position among Puerto Rico’s largest accounting firms and the first local-capital CPA firm on the island, according to total number of CPAs as of June 2008, in the 2009 CARIBBEAN BUSINESS Book of Lists.

Moreover, Scherrer Hernández & Co. moved up one notch, from No. 6 to No. 5, with 44 CPAs and clients in banking, retail and education.

Although still dominant in the market, the relative strength of the Big Four accounting firms (PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte & Touche) was perceptibly less in 2007 and 2008 than it had been in previous years.

Nonetheless, PricewaterhouseCoopers remains the island’s top accounting firm, according to the list, with 93 CPAs, six partners and a professional staff of 124, as it is still the main accounting firm of several large local financial institutions.

As of December 2008, R-G Financial Corp. and W Holding Co. were still not up-to-date with the filing of their financial statements.

In Puerto Rico as well as the U.S. mainland, the accounting and banking industries are still dealing with the fallout of the restructuring process and tighter regulatory compliance that started with the restriction on consulting practices applicable to publicly traded corporations under the Sarbanes-Oxley Act of 2002.

The financial crisis that ensued on the U.S. mainland and became evident with the collapse of Lehman Bros. in September 2008, which was followed by several other large stateside financial institutions and congressional approval of a $700 billion bailout for them, is calling for more regulation of the financial industry.

4,000 CPAs

There are approximately 4,000 CPAs registered with the Puerto Rico Society of CPAs. Of these, upwards of 300 are employed with Big Four accounting firms while a little less than 300 work for the other top-14 accounting firms.

Although private companies employ an estimated 1,600 CPAs, they may not necessarily work as CPAs. According to the Society of CPAs, some 70 CPAs work in academia and government—at both the central and municipal levels—employs another 260. Hundreds more CPAs are self-employed.

CPAs in Puerto Rico are required to renew their licenses every three years and take 120 credit hours of continuing education to ensure they keep up with frequent changes in laws, regulations and industry trends. The Society of CPAs is the industry’s main source of continuing education, although other institutions of higher learning offer courses as well.

IVU implementation, a roller-coaster ride

The implementation of the Sales & Use Tax certainly has been a roller-coaster ride for small business and taxpayers because of its many changes, even before it was implemented Nov. 15, 2006.

One challenges that surfaced before the IVU became effective involved autonomous municipalities that approved conflicting ordinances and different tax rates ahead of the Treasury Department. The result was a nonuniform IVU that varied among municipalities and created a logistical nightmare for businesses operating in different cities.

In addition, the mandatory business registration created a lot of confusion just before the IVU was implemented about who needed to register and which businesses or services were exempt from collecting the IVU and which weren’t. Furthermore, sales receipts were required to include a breakdown of the city tax and the state tax, which involved a reprogramming of cash registers. In addition, merchants had to fill out separate monthly IVU forms for municipal and Commonwealth tax collections.

Since Aug. 1, 2007, the municipal tax was made uniform at 1.5% across the board, so businesses once again had to reprogram their cash registers since they no longer had to break down the municipal and the state tax on the sales receipts. A single IVU tax form was also introduced, making the process a little less complicated for merchants.

As a result of the IVU, businesses are now required to keep documentation on all their business-to-business, sales and purchase-related transactions in case they are audited by the Treasury Department, even if the companies are exempt from collecting or paying the 7% IVU.

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Labor & Human Resources: Labor market continued to shrink as the economy worsened

Looking back at 2008, no one can help but think about the massive layoffs in every industry. Early in the year, Bristol-Myers Squibb let 225 of its employees go, Celestica of Puerto Rico cut 78 jobs and CompUSA reduced its in-store staff by half, to name a few.

It was definitely a tough year. Those who were employed were afraid of losing their jobs. Those who became unemployed faced the cruel reality of few (if any) jobs in the labor market.

Puerto Rico started 2008 with 62,000 fewer jobs than 2007. The situation worsened as the local economy entered its third year of recession. As of October (the most recent data available), the local unemployment rate was 12.7%, up 0.8% from October 2007 (11.9%).

In 2008, the U.S. economy lost 1.9 million jobs, most in construction, which was unaffected locally, according to data from the Puerto Rico Economic Bulletin. Commerce, on the other hand, had the highest rate of employment losses (5.8%) on the island.

A second increase in the federal minimum wage (to $6.55 an hour), as well as a larger Christmas bonus were added burdens on employers already facing difficult operating costs—on top of the local sales & use tax (IVU by its Spanish acronym) and increased energy costs.

To make matters worse, by year-end, the mainland U.S. officially entered an economic recession, joining a global economic crisis.

Talent emigration also continued to be a problem for the local workforce. “Puerto Rico must review its labor scenario. We have to increase our competitiveness in terms of retaining talent and even importing it,” said Angie Lugo, president of the Society for Human Resource Management.

As Puerto Rico moves into the knowledge economy, it will continue to educate an already highly skilled technical workforce, keeping up with the latest advancements in technology and manufacturing practices. Technology-focused education as well as years of practical high-technology experience have given Puerto Rico workers a value-added component, which has proven to be priceless for industries, such as pharmaceuticals, which have to be on the cutting edge in terms of technology and complex multimillion-dollar equipment.

On a positive note, the approval of a new incentives law in 2008—an important step in economic development—contributed to stabilizing the uncertainty experienced in the previous two years.

Where there’s crisis, opportunity exists

To deal with the complex economic scenario, companies in every industry have re-evaluated their employee benefits and compensation. “Employers are giving employees greater participation in their medical insurance, as well as more flexibility in terms of selecting the package that best suits their needs,” said Félix García, Ikon Group partner.

Companies are looking more carefully at productivity, compliance and corporate policies such as vacation time, sick days and recruitment. “Business models are changing. Many employers have stalled recruitment and there is more outsourcing of professional services. Leasing of these services, such as technology information, has increased significantly,” García said.

According to García, upcoming college graduates and existing workers must be trained in areas that allow them to work independently, so they can sell or lease their service hours.

Another area of opportunity is metrics. “There’s increased interest in measuring employees’ performance. With empirical data, employers can make better decisions. Perhaps, a certain employee is best suited for a different position; this type of management increases a business’ overall productivity,” García said.

Employers can implement many other measures to stay afloat during the recession, and industry experts recommend getting advice. “The tools exist. Employers must face adversity by implementing the measures with a winner’s attitude,” Lugo concluded.