Effective January 1, 2013, our Income Tax legislation includes controlled foreign companies rules, pursuant to which passive income received abroad through offshore vehicles is subject to Income Tax in the same year they are received.

Controlled foreign companies are not new in other countries (in fact, they exist since 1962 in the United States); on the contrary, they are usually included in the laws of capital exporting countries. They are aimed at combating tax elusion resulting from the use of investment platforms (companies, corporations, etc.) located in countries or territories where very little or no taxes are paid, for the carrying out of investments that generate passive income (dividends, interest, royalties, etc.),. In the absence of this type of rules, passive income could only be taxed in Peru in the year it is paid to a taxpayer domiciled in our country, with which the payment of taxes is being deferred.

Irrespective of the arguments in favor or against the decision to include these rules in our legislation, and despite the fact that the current regulations have not clarified the doubts, in fact quite a lot, created by the lack of clarity of these rules, we believe that it is necessary to start discussing the following topics:

a) The need to equal the tax burden borne by income obtained abroad with the tax burden borne by income obtained in Peru. One of the characteristics that a tax system that promotes economic efficiency should have is that it should be neutral in order to not impose conditions on the taxpayers’ investment decisions. Thus, while individuals domiciled in Peru are subject to the payment of a 5% rate on their Peruvian-source passive income –first and second category income, their foreign-source passive income is subject to a rate that is frequently equivalent to 30%, which discourages making investments abroad and encourages, against any economic logic, adding a higher local risk to the taxpayers’ investments.

b) Extending the application of the controlled foreign companies rules to include income obtained in territories other than those where very little or no taxes are paid in order to fully credit the taxes levied thereon. In this way, double taxation currently faced by people investing in companies located in other countries would be avoided.