By January 2017, after six months in office, the government of President Pedro Pablo Kuczynski had put into effect the main components of a tax reform package designed to support and accelerate economic growth. Among the key aims of the changes were to unblock and stimulate public and private investment, simplify tax payment processes and help smaller enterprises.

Vat Rates

The core change to the tax system was a decision to cut the rate of value-added tax (VAT) by one percentage point to 17%, while reversing the previous government’s phased programme of corporate income tax reductions. The VAT cut was set to take effect on July 1, 2017. The new government’s original aim had been a three-percentage point cut to 15%, but in the end it was more cautious, due to fears over weak tax revenues and a larger-than-hoped fiscal deficit. Even the one-point cut to 17% was made conditional on total VAT revenues for the year to the end of May 2017 being equal to at least 7.2% of GDP.

Corporate Rates

The corporate income tax rate was raised to 29.5%, starting in January 2017. This reversed the effects of an earlier 2014 tax reform that had set the rate to decline to 27% in 2017 and 2018, and to 26% in 2019. At the same time, the tax on dividends was reduced to 5%. The government said the objective was to encourage investment and strengthen the revenues of local and regional governments, as many of them receive royalty payments from extractive industry companies that are linked to their total corporate income tax payments.

The government also said it was considering further adjustments to the corporate income tax rate, in particular the possibility of introducing a progressive tax system for companies. This system already applies for small and micro firms, which pay a lower 10% corporate tax rate on income of up to 1700 indexed tax units of account (unidades impositivas tributarias, UITs). The UIT is worth PEN4050 ($1200) in 2017, so that 1700 represents income of PEN6.88m ($2m). Above this level, small companies pay the standard 29% corporate rate. A similar approach might be extended to medium-sized and larger enterprises. Alfredo Thorne, minister of economy and finance, has previously announced that a potential future reform could entail extending accelerated capital write-down periods, which is currently only applicable to mining companies.

Personal Rates

There were also changes to personal income tax rates. Individuals are now allowed to submit housing, medical, professional services, and, in the case of home workers, health insurance costs as tax-deductible expenses up to 10 UITs, where previously the maximum was 7 UITs. The new limit is equivalent to PEN40,500 ($12,000) per annum. The net effect of this change will be to increase after-tax disposable income. There have also been changes to an innovative tax scheme known as Obras por Impuestos (Works for Taxes). The programme was introduced in 2008 through Law No. 29230 as a way of accelerating the delivery of public works and bypassing bureaucracy. In essence, it allows private companies to directly fund and execute public works projects approved by regional and local governments and public universities. The value of this work is then offset against future tax liabilities over a period of up to 10 years. The scheme has been used to develop public infrastructure such as water supply and drainage, roads and health care centres.

The new government has enhanced Works for Taxes by removing limits on the total value of these projects and expanding admissible projects to include public works agreed on with the central government in rural electrification, fisheries, urban renewal, social development, transport and communications, among other sectors. According to Prime Minister Fernando Zavala, the total value of Works for Taxes schemes approved in 2017 is expected to reach $1.6bn, more than double the $700m for 2016. Zavala told local press that Works for Taxes ventures could be implemented much faster than traditional public works and public-private partnerships.

Until the end of 2016, Peru’s Works for Taxes scheme was considered the only one of its kind in operation anywhere in the world; however, the Colombian government has announced its intention to implement a similar scheme. Speaking at a policy seminar in Colombia in February 2017, Daniel Córdova, chief executive at Grupo Invertir, said the scheme was proving particularly effective in two key respects: closing infrastructure gaps and combating corruption. Córdova said, “Just as the AFP private pension funds are a Chilean invention that has been imitated throughout the world, so the [Works for Taxes] are a Peruvian creation that are beginning to be emulated elsewhere. Colombia is the first.”

In The Balance

As in other countries, Peru has been trying to strike the right balance between incentivising new investment and maximising tax revenues. According to the National Superintendency of Customs and Tax Administration (Superintendencia Nacional de Aduanas y Administración Tributaria, SUNAT), in 2016 gross tax revenues represented 16.5% of GDP, but PEN15.53bn ($4.6bn), or 2.5% of GDP, was refunded, mainly to exporters and companies benefitting from various incentive schemes. This meant that net tax collection actually only totalled 14% of GDP. Over half the refunds related to VAT were repayments to exporters. The second-most-important category involved refunds to companies that had initially overpaid their tax instalments. The third category, totalling almost PEN2bn ($592.8m), related to a scheme introduced in 1996 under Law No. 818, allowing mining and oil and gas companies to recover VAT paid on exploration costs at the point at which production starts up. The same law also extended the capital depreciation period from four to eight years, in effect postponing the point at which extractive sector firms are likely to begin earning profits and paying income tax.


There has been some criticism of the effectiveness of this tax package, however. In an October 2016 column published in local daily El Comercio, Alonso Segura Vasi, former minister of economy and finance, drew attention to the fact that Peru and Colombia, both facing a fiscal squeeze due to lower commodity prices and fiscal revenues, had almost simultaneously announced rather different tax reforms. Peru had reduced VAT, increased corporate tax rates, reduced dividend taxes and increased personal income tax deductible expenses. Colombia had done almost exactly the opposite, raising VAT to 19%, reducing the combined corporate rate by 10 percentage points to 32% and increasing tax on dividends to 10%.

In Colombia’s case the authorities were betting that there would be an immediate increase in tax revenue because of the higher VAT rate, with a more gradual improvement coming about as the workforce becomes more formalised. Segura said that Peru, in contrast, was making a riskier bet with a lower VAT rate, and was expecting an increase in the size of the taxpaying workforce to drive revenue growth.

Good Sign

Early signs of tax revenue trends in Peru were nevertheless moderately positive. SUNAT reported in February 2017 that net revenues grew by 0.5%. Despite a nominal increase of PEN62m ($18.4m) to PEN4.19bn ($1.2bn), VAT revenues were down by 1.7% in real terms. Income tax receipts also decreased, but other tax receipts, such as those from the selective consumer taxes that are applied to alcoholic drinks, tobacco, soft drinks and fuel, showed growth.

Opinion poll research continued to show that Peruvians are unhappy with the tax burden they face and are unimpressed with how tax revenues are used. A survey by Datum published in March 2017 showed that 88% of respondents felt tax resources were “badly utilised”. Half the respondents said that services offered by their municipalities were fair, while 37% said they were poor. A total of 58% said public health care clinics were either poor or very poor. Another poll conducted by Pulso Perú suggested that these attitudes might be obstacles to increasing tax revenue, with 65% of respondents saying that paying taxes in Peru was overly complex and 55% reporting SUNAT made it difficult to pay. While the majority of those surveyed agreed with the need for taxes, 34% admitted to trying to avoid payments.