Exporting services from the Island

What “exporting a service” means

In everyday speech, to export is to sell abroad. In Puerto Rico tax language the word has a precise content, and the Incentives Code describes which services qualify as exported when rendered from the Island to people outside it. A graphic design job for a Texas company, a software consultancy for a client in Madrid or a translation for a New York publisher are common examples.

Two different questions are often confused. The first is where the client is, which matters to decide whether the service counts as exported for a decree. The second is where the work was done, which bears on the source of the income. A service physically performed on the Island is generally Puerto Rico-source even if the client is in Chicago, and your CPA confirms that reading from the facts.

So it is not enough to say “my clients are from elsewhere.” You must be able to show it with documents for each transaction: contract, invoice, client domicile and service description.

The invoice as evidence

An export-services invoice should let a third party, months or years later, understand what was done, for whom and when. Include the client’s full legal name, its domicile with country and state, the service period, a description of the work, the amount in dollars and the payment terms. Add the client’s contract or purchase order number, if one exists.

Clients on the mainland often ask suppliers for tax identification details for their own records, for instance a form published by the IRS. Ask your CPA which one fits your situation and keep it current in the client’s file.

With 4invoices you produce the PDF and archive it by client and date. The wording and any tax figures are yours to set. The program does not decide whether a service is subject to some tax or classify the transaction as an export; it only keeps the document you issue.

A good test: hand the invoice to a colleague who has never heard of the project and ask what was sold, to whom, where the client is and when. If the answers come from the page without a phone call, the invoice is doing its job as evidence.

The service contract

A service contract with an outside client covers more than price. It defines scope, ownership of what is produced, confidentiality, payment terms, governing law and where disputes are resolved. For a Puerto Rico business with clients in several states, a well-thought governing-law clause avoids litigating far from the Island.

Stating where the service is performed is especially useful. A clause saying the work is carried out from the provider’s offices in Puerto Rico, with its own equipment and staff, supports decree documentation and the source of the income. Have your lawyer review that wording.

In 4mycontracts the contract is signed electronically and kept with its version history. If the client asks for changes, each version is recorded, and the signed one is the one that counts. Confirm with your lawyer that electronic signature is valid for contracts in your sector.

Client records and commercial follow-up

Each export client should have a record with its legal name, domicile, contact, current contract, rate and renewal date. In 4softcrm the record brings together the data and the emails or SMS sent from the contact. That record is also the source for knowing, at year end, how many clients and what share of income sit off the Island.

An example: a marketing agency has 18 clients, 11 in Puerto Rico and 7 on the US mainland. At year end the 7 account for 61% of billing. If every invoice shows the client’s state, the CPA gets that figure in minutes. If not, it has to be rebuilt client by client from old emails.

Keep the record updated when a client moves or changes its legal name. A client that relocates to Puerto Rico, for example, changes the analysis of the service, and it is better for your CPA to know as soon as it happens.

Add two fields to every record that are easy to forget: the date the contract expires and the name of the person at the client who approves invoices. The second one alone shortens many collection delays, because it tells you whom to call when an invoice sits unapproved.

A complete case: software consulting for a client in Austin

A San Juan consultancy signs a development contract with an Austin company for $8,000 a month over six months. Before starting, it collects the client’s legal name, domicile, the tax identification form the client requests, the signed contract with a clause stating the work is performed from the consultancy’s Puerto Rico offices, and the annex with the monthly scope.

Each month it issues an invoice stating the period, the deliverables, the $8,000 amount and the destination state. The client pays by transfer within 30 days. At year end the consultancy gives its CPA a file with six invoices, six payment records, the contract and the client record. With those documents the CPA classifies the income and, if there is a decree, includes it in the compliance report.

What makes the case work is no sophisticated software but the habit of capturing the same five details on every transaction. When a new client arrives, the consultancy repeats the process without reinventing it.

Collecting from outside the Island

Collecting from clients off the Island can be slower, especially if internal approval processes are long. Ask for the accounts payable department’s details at the start, give clear transfer instructions and require that the invoice number be cited in the payment.

For new clients, an advance on the first project reduces risk. Reminders by email or SMS are written and sent by you from 4notify. Reconcile each payment against your bank statement before marking an invoice as collected.

For export-services decrees, the test is that the service be rendered to people outside Puerto Rico, which includes clients in the states. How it applies to your case depends on the terms of your decree and the facts. Confirm with your advisor before classifying any income as eligible, and keep that confirmation in writing.

In general, a service you carry out physically on the Island is considered performed there, even if the client is elsewhere. That feature influences the source of the income and should be documented. If you work part of the time outside Puerto Rico, keep a log of those days and discuss it with your CPA.

The treatment of IVU on services rendered to clients outside the Island depends on the type of service and the client’s location. Do not assume: ask your CPA to tell you the treatment by service type and write it on the invoice. 4invoices does not decide whether the tax applies or calculate it for you.

The signed contract, the invoices, the tax identification the client provided, its domicile with country and state, the service description and the proof of payments. Keep the file for the period your CPA indicates, which can be long if you hold a decree with annual reports, and do not delete it when the commercial relationship ends.

Invoices and contracts per client

PDF invoices, CRM and e-signed contracts.