PERU: An Introduction to Tax

The Tax System in Peru: an Introduction

Peru is a representative democratic Republic with a unitary and decentralised government. It is organised pursuant to the principle of separation of powers: Executive, Legislative and Judiciary. As a general rule, the Congress has the legislative tax power, and the Executive has it only when there is an express delegation granted for certain matters.

The tax system in Peru is governed by the following constitutional principles: reservation of law, equality, respect for human rights and non-confiscatory nature of taxes. It also recognises the right of bank secrecy and tax reserve.

The National Superintendency of Customs and Tax Administration (SUNAT) is the entity in charge of the management and collection of most taxes, but there are other Tax Administrations.

Tax Controversies

Tax controversies are resolved first at the administrative level (Tax Administration and then the Tax Court). Afterwards judiciary actions can be initiated by taxpayers or the Tax Administration, which may end at the Supreme Court. At the judiciary, there are special judges in charge of tax matters. Arbitration in tax matters to discuss administrative acts is not regulated. However, there have been some national and international arbitral cases related to investment agreements that are related to tax matters.

The statute of limitations for assessing, collecting, sanctioning, and refunding can be four, six, or ten years, periods that can also be suspended or interrupted.

The Peruvian Tax Code

It is important to mention that the Peruvian Tax Code regulates the General Anti-Avoidance Rule and pursuant to it the Tax Administration can requalify operations in situations considered to be tax evasion or simulated transactions when two concurrent circumstances are met:

(i) they are contrived or improper acts (properness test), which implies analysing if the act or business performed results from its cause and

(ii) the use of such act results in legal or economic effects, other than tax savings or benefits, equal or similar to those that would have been obtained through the usual or proper acts (legal-economic relevance test).

Taxes are mainly levied on income, production, consumption, the circulation of money, and equity. According to their nature, they can be divided as following:

• Direct taxes: Income Tax, Temporary Net Asset Tax (ITAN), Tax on Financial Transactions (ITF)
• Indirect taxes: Value Added Tax (VAT) and Selective Consumption Tax (ISC)
• Municipal taxes: Property Tax (Predial), Property Transfer Tax (Alcabala) and Vehicle Property Tax. In addition, a new tax called “participation in the increase in land value” will be applied in the future (not in force yet as regulation is pending)
• Custom taxes

Some important considerations are described below:

Income Tax

It is governed by source and residence connection criteria, levied on net income (after deduction of expenses incurred in the generation of income or maintenance of the source or related to capital gains), and is determined annually, considering the tax year begins January 1 and ends on December 31, being the tax returns generally filed on the following year according to the schedule published by SUNAT and based on the tax ID number.

To determine the application of IT, first the domicile status and type of entity must be determined, and if a special regime applies. Now there are four regimes, but a recent bill proposes to reduce them to only two: a simplified and flexible regime (with fewer formal obligations) for small enterprises and the general regime. 

Regarding the domicile and connection criteria: Corporations established in Peru are considered domiciled entities and subject to a third IT bracket on a worldwide income basis (Tax rate of 29.5% generally applies). Non-domiciled corporations, branches established in Peru, and permanent establishments of non-domiciled legal entities located in Peru are only taxed on Peruvian-source income, which applies generally to services provided in Peru (Tax rate of 30% generally applies). However, there are some other connection criteria that apply for instance to digital services (used economically, used or consumed in Peru), loans (principal is placed or used economically in Peru or payer is a domiciled in Peru), technical assistance (service used economically in Peru), among others.

Other tax rates apply for non-domiciled entities regarding for instance technical assistance (15%), dividends (5%), interest from external credits (4.99%) when certain requirements are met.

Regarding deductions, among other expenses subject to certain conditions, pre-operating expenses can be deducted in one or ten years, as well as depreciation which applies depending on the type of good (eg Data processing equipment in four years and machinery/equipment used by mining, oil and construction activities in five years).

When income is generated by the alienation of assets, the gross income will be given by the difference between the total income (less returns, discounts or similar if applicable) from said operations and the cost basis of the assets sold, provided that said cost is duly supported by proof of payment. The cost basis can be the acquisition, production or construction cost, among others. Different rules apply to its determination, depending on the type of asset.

Another aspect to highlight is that in case of non-domiciled companies, to determine the net income and amount to be withhold, the cost basis of the transferred asset (e.g. shares) will be considered as deductible only if the entity has followed previously a cost basis certification procedure before SUNAT which takes 30 days and said certificate will be valid for 45 days. Note that the deduction of the certified cost basis will not apply to payments made prior to the issuance of said certification by SUNAT.

Regarding tax loss in the case of domiciled companies, two carry forward systems are regulated to offset losses recorded in a fiscal year with profits obtained in future periods. In System A losses can be carried forward for four consecutive years and System, which has no time limit but a deduction limit equivalent to 50% of the taxpayer's income for each fiscal year.

ITAN

This annual wealth tax must be declared generally in April of each year and is determined by applying 0.4% on net assets owned over S/1 million determined as of December 31 of the previous year. It can be paid when submitting the return or up to nine instalments. It is important to mention that it can be used as credit for IT (advance payments or in the annual tax return). If not used, a refund may be requested.

ITF

It applies on deposits and withdrawals in national or foreign currency made using Peruvian bank accounts (0.005% rate applies on the amount of operation).

The same law regulated another obligation: the obligatory use of “Means of Payment” starting at PEN2,000 or USD500, which are: bank deposits, drafts, transfer of funds, payment orders, debit and credit cards issued in Peru, checks, remittances and letters of credit. If recognised “Means of payment” are not used, the expense will not be deductible and no tax credit for VAT will apply.

VAT and ISC

VAT: is a consumption tax which is levied on the sale of goods, the delivery and use of services and the import of goods in Peru with an 16% tax rate (additional 2% is paid for Municipal Promotion Tax). As it taxes economically the final consumer and not the investor, to maintain its neutrality. The tax paid by a company that is not the final consumer must be returned. For this purpose, mechanisms such as the Tax Credit system (VAT paid on sales is offset against the VAT paid on purchases), the Balance in Favor of the Exporter, and special VAT refund regimes may apply.

ISC: Excise tax that applies only to certain goods, which are selected for their capacity to generate negative externalities as a result of their consumption (e.g.: fuels, cigarettes,liquors, among others).

Special Tax Refund Regimes

Early VAT Recovery: applies to investments in any sector of the economic activity that generate a third IT bracket and develop projects that have a minimum of two-year or longer pre-operational stage and a minimum investment commitment of USD 5million (Exceptionally USD 2million until December 31, 2024). To access this regime, a Ministerial Resolution - approved by the Ministry of the corresponding sector and the Private Investment Promotion Agency (Proinversión) - qualifying the applicant as a beneficiary of the system is required, which will also include the list of expenses approved for VAT recovery.

Definitive VAT Refund: it applies to specific expenses related to the exploration stage of mining and hydrocarbons projects. In the case of holders of mining concessions, an exploration investment agreement with a minimum investment of USD 500,000 must be signed. This regime is in force until December 31, 2027, and is important to promote the number and amounts of investment projects, considering for instance that in mining the exploration stage can last from 1-20 years in average in Peru.

Other Relevant Matters

Mining Taxation: Additional taxes and levies apply such as Special Mining Tax (IEM), Supplementary Mining Metallurgy and Steelworkers Retirement Fund, Special Mining Encumbrance (GEM), Mining Royalty.

Stability Agreements

Legal Stability Agreements, which are signed with Proinversión and require capital contributions of at least USD10 million (mining and hydrocarbons sector) or USD5 million (any other). Among its benefits for investors and companies receiving the investments are: Stability of IT (2% more is added) – On dividends for investors, free currency disposal, free remittance of profits and capital abroad, right to use the most favourable ER, Non-discrimination of ER, prices, fees or non-customs duties, form of business incorporation. Term of the agreement: ten years or term of the concession.

Tax Stability Agreements (Mining), for 10, 12, or 15 years. In the last case, a minimum investment of USD500 million and an initial capacity of 15,000 T/day is required. Its benefits include: Stability of all taxes for the specific project (2% more is added to the IT rate), export regimes, VAT – ISC (only transferable nature), tax refund regimes, temporary admission and similar, good standing fee, mining royalty. In addition, there is an overall depreciation rate (20%, except constructions and buildings -5%), the possibility of accounting in foreign currency, and other benefits.

Double Taxation Avoidance Agreement Signed with: Chile, Canada, the Andean Community (CAN – Bolivia, Colombia, and Ecuador), Brazil, Mexico, South Korea, Switzerland, Portugal, and Japan.