Interview: Esteban Chong
Is Peru’s tax regime attractive to foreign investors?
ESTEBAN CHONG: Peru’s taxation regulations are frequently amended and investors may lack confidence in tax costs. For example, since 2011 mining companies have been subject to additional taxes, such as royalties and the special mining tax, as well as corporate income tax. Recently, tax exemptions have been limited to three years from the moment they enter in force and firms that were in a pre-operative stage have lost their exemption from the Temporary Tax on Net Assets.
However, there are already measures to grant new investors a more predictable environment, such as double taxation treaties and tax stability agreements. Peru has double taxation treaties with Canada, Chile, Brazil and the Andean Community (Bolivia, Colombia and Ecuador), and treaties with Mexico, Portugal, Switzerland and South Korea will come into force on January 1, 2015. There are other concessions, such as tax stability agreements, under which foreign investors obtain a deal with the Peruvian government that future modifications to income tax rates will not affect rate of return. Changes to the General Mining Law have extended tax stability to additional activities performed after the investment programme has been implemented. The amendment allows mining companies to expand a project, provided that certain conditions are met, without having to go through a tedious approval process.
How much can investors rely on the country’s tax regulation for long-term investments?
CHONG: This is where tax stability agreements are important. Investors may enter into deals that guarantee: income tax stability for 10 or 15 years; freedom to buy or sell foreign currency at market rates; the right to remit funds abroad without prior authorisation; nondiscrimination in favour of local investors; and accelerated depreciation on mining projects. However, the applicable rate for a mining company with a stability agreement will be the general income tax rate plus two points, so the investor would have to evaluate the return considering this higher rate. Despite this, all major mining companies in Peru have tax stability agreements.
Tax revenue to GDP is well below the regional average. What measures should be taken?
CHONG: First, the government must reduce the large scope for geographic exemptions granted under the current system. Several studies show that most of these exemptions are inefficient and erode the tax base. For political reasons, such efforts have failed. Another pending reform is set to increase the tax base. There is a large group of potential taxpayers in the informal sector that, until now, have not been targeted. We need to incorporate taxpayers through mechanisms that encourage economic operators to enter the formal economy, while also raising the penalties for evasion, undervaluation and smuggling. The tax administration targets the top and medium tiers of taxpayers, but provides no incentives to broaden the level of compliance.
What do different types of companies offer foreign investors in terms of tax efficiencies?
CHONG: In general, all kinds of companies are subject to similar income tax treatment. A subsidiary has no tax advantage over a branch and both are subject to 30% tax on net income. However, the net income of a corporation is determined on a worldwide basis, while in a branch it is based only on income earned in Peru.
Due to recent tax administration rulings, a subsidiary may be a more tax efficient vehicle for foreign firms for two reasons. Firstly, it is presumed that the profits of a branch are distributed on the annual income tax filing date, assuming there is no possibility to defer the additional 4.1% income tax payment. Secondly, this 4.1% is determined on a tax rather than a financial basis. Thus, a branch with losses and no transfer to its head office would have to pay the 4.1% because the net tax basis is positive. The decision between branch, limited liability company or corporation depends more on tax rules in an investor’s home country rather in Peru.
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