Before September 2015, all share transactions on the Lima Stock Exchange (Bolsa de Valores de Lima, BVL) attracted a 5% tax on capital gains. The tax was disliked by market players, who suggested that it be repealed. But the authorities did not take action until low liquidity levels threatened to have the BLV downgraded from emerging market to frontier status.
Critics of the tax had argued that it offered a “perverse incentive” to reduce liquidity levels on the BVL. They pointed out that an investor wishing to acquire a stake in a Peruvian listed company such as Graña y Montero could do so by buying US depositary receipts in New York at a given price, or buy the company shares in Lima at that price plus 5%. This was taken as a strong message to investors, in effect encouraging them to shift liquidity overseas.
The argument against the tax was strengthened by the fact that none of the other stock exchanges in the Integrated Latin American Stock Market – those in Chile, Colombia or Mexico – applied a similar levy. Chile repealed its capital gains tax on stock market operations in 2001, and according to a study by the Central Reserve Bank of Peru (BCRP) this led to a sharp increase in liquidity levels. The study found that the total volume of annual Chilean share transactions rose from 5% of GDP in 2002 to 23% in 2009. The BCRP study also said the move helped place the Chilean stock exchange on an equal footing with the banking system, meaning that neither one nor the other would be given a tax advantage in its role as a home for savings and investment.
On the government’s initiative, on September 3, 2015, the Peruvian capital gains tax was waived by Congress for a three-year period (effective from January 2016), with the stated aim of boosting liquidity on the market. However, some analysts say that its real impact is somewhat limited because of two specific requirements. The first is that to qualify for capital gains exemption, a transaction must involve less than 10% of the total shares owned by a given company. The second is that qualifying shares must have a “liquidity index”, also known as the “stock market presence” threshold, of at least 35%. The index is determined by calculating the number of days out of the last 180 that transaction volumes exceeded a specified minimum level. The problem is that, while blue-chip stocks such as Volcan, Credicorp and Banco Continental have liquidity indices of over 90%, more than 200 of the 298 companies listed on the BVL fall well below the 35% liquidity threshold. On calculations made by some analysts, this means that only 12% of BVL-listed shares will qualify for the new capital gains tax exemption.
A Vital Step
Javier Tovar Gil, a partner at Estudio Echecopar, told the Peruvian newspaper El Comercio that by putting these two requirements together the net result has been to send a “tepid” message to the markets. He argues that a complete repeal of capital gains tax liability for all stock market transactions would have sent a clearer and more positive message. But Francis Stenning, general manager of BVL, has been more upbeat, stressing that the changes show a positive desire to tackle the liquidity question, put Lima on an equal footing with the Chilean, Mexican and Colombian stock exchanges and simplify some tax procedures. He points out that the way brokers and market makers pay tax on account has now been made significantly easier. Others echo his comments, pointing out that while the legislation could still be improved, lifting the capital gains liability has been above all a move in the right direction.
General elections, which are due in April 2016, introduce an element of political uncertainty. However, none of the major parties have expressed a desire to re-impose the capital gains tax. At BVL, Rafael Gómez de la Torre suggests that the elections may be another factor ultimately encouraging more dynamic action to develop Peru’s capital markets.
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