Interview: Humberto Astete
How can fiscal policy address economic informality?
HUMBERTO ASTETE: The changes in tax policy recently implemented by the government are the most ambitious measures taken in Peru in the last decade. Measures like these are the first steps to take in creating a system that effectively tackles both tax evasion and tax avoidance. As such, it obliges companies to disclose the final beneficiaries of all economic activities taking place in Peru, establishes regulations for the General Anti-Avoidance Rule, and includes significant changes to income tax law. Nonetheless, these measures have been too focused on formal corporations. Furthermore, these measures will not in and of themselves solve the many challenges posed by informality to both the economy and the tax system.
Informality is not exclusively fiscal, despite the enormous effect that it has on tax collection. There are many other negative externalities to take into account, including labour standards like social security and health contributions. Informality is transversal, and a large quotient of political goodwill and effective action will be needed to resolve the issues it poses.
What challenges were solved by the recent reforms?
ASTETE: Several positive results will be easy to observe in the short term. These reforms confirm the seriousness of the country’s bid to join the OECD, as well as to align its tax system with international standards and best practices, specifically with the OECD’s guidelines on base erosion and profit shifting (BEPS).
Peru has adopted plenty of measures in this regard. For instance, the country recently introduced a norm obliging all companies and legal entities to declare the final beneficiaries of their economic activities in Peru. This norm will not only help tax collection; it also marks a great step forwards in the global fight against money laundering, by extending the information-sharing procedures established between national tax authorities. Moreover, signing a multilateral OECD convention on mutual administrative assistance in tax matters has allowed Peru to share detailed information with tax agencies in over 100 jurisdictions worldwide.
The recently adopted general anti-avoidance norm will also allow Peruvian tax authorities to more effectively detect those companies and individuals that use legal tools and other subterfuges to avoid their taxes. Additionally, beginning in 2021, changes to the income tax regulations will help to align the country with OECD’s BEPS guidelines by incorporating its Action 4, which establishes norms concerning tax deduction for financial expenses on the basis of a company’s earnings before interest, taxes, depreciation and amortisation.
Since 2019 domestic enterprises that earn dividends from foreign entities will avoid double-taxation through a credit system that allows for the deduction of corporate taxes paid abroad by such foreign entities. Similarly, the definition of “fiscal haven” has been extended beyond jurisdictions with low or no taxation to include those where the tax system is either not transparent or where preferential regimes exist.
How can the system improve on the recent reforms?
ASTETE: A reform of the tax system should include changes in many economic areas, not just to fiscal and tax policies. This will involve a large degree of political collaboration, since social costs are to be included in the reform algorithm, along with tax earnings. The formula to improve the system should also include more meticulous control of illegal activities like informal mining and flexibilisation of labour laws.
Substantial reforms are vital if the state is to increase its expense power. Currently, low levels of tax collection are matched with one of the region’s lowest levels of state expenditure. Peru is nominally a middle-income economy, but in many areas its socio-economic indicators are similar to those of low-income nations. This hinders the state’s capacity to invest in economic activities that could help to improve social development.
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