Peru: Assessing the trail to economic recovery

As countries around the world entered lockdown amid the COVID-19 outbreak, national governments took different approaches to avoid economic collapse, releasing all sorts of financial, labour and tax relief measures.

The Peruvian government was no exception, and declared a state of emergency and ordered a strict lockdown on March 16 2020, only 10 days after the first case of COVID-19 was made public. The state of emergency was originally scheduled to last two weeks, though the nature of the pandemic meant that it was subsequently extended on numerous opportunities and remained in force until at least July 31, despite being partially lifted from July 1.

A first package of formal tax measures was issued ordering filing and payment extensions in relation to the annual 2019 income tax filing. Likewise, this also included the monthly income tax and VAT filing and payments corresponding to the tax period of February to June 2020. In addition, temporary net assets tax (TNAT) filing and payments were extended, while other formal obligations were postponed such as the obligation to file electronic books.

A second package was released later with the following tax measures:

• The possibility to suspend or modify corporate income tax (CIT) advance payments (April to July 2020)

• Specific rules to carry forward tax losses incurred in the fiscal year of 2020. In this case, companies that had chosen system 'A' would be able to carry forward tax losses generated in 2020 for five years instead of four.

• New depreciation rules by which companies can apply a 20% annual depreciation of buildings and constructions that started after January 1 2020, and that at least 80% of the progress of the construction is complete until December 31 2022.

• Assets acquired during 2020 and 2021 can apply higher percentages of depreciation, such as data processing equipment (50%); ground transportation vehicles except railways (33.3%); and hybrid or electric ground transportation vehicles except railways (50%).

• Higher depreciation rates during 2020 and 2021 applicable to hotels and lodgings, travel and tourism agencies, restaurants, building and constructions (20%), ground transportation vehicles except railways (33.3%).

• Flexibilisation of rules regarding deduction of inventory deterioration.

As Peru approached the end of the complete lockdown on June 30, the government began progressively working on re-opening the economy. Businesses including the mining, construction and commercial sectors were authorised to operate again, provided that they comply with health protocols and social distancing rules.

Several months into the pandemic, it is relevant to consider whether the tax measures given by the Peruvian government are sufficient to ensure a quick economic recovery, especially to industries that had been hit particularly hard by the lockdown, such as tourism, construction and exports, among others.

It can be argued that the answer would be negative. These measures were designed to fix short-term problems, instead of the deep-rooted issues of the Peruvian economy that prevent it from moving forward, such as informality, lack of tax-focused rules and ongoing problems related to the enforcement of digital taxation, among others.

In that sense, a further package of tax measures should potentially be issued targeting the following areas:

Digital economy, especially e-commerce, has been thriving during the pandemic. In recent years, Peru has seen major sharing economy and e-commerce players start its operations within the country (i.e. Amazon, Cabify, Netflix, Uber). However, existing tax rules do not allow the government to effectively tax the companies' activities, either because of their lack of physical presence, or because income earned or profits made by these companies do not fit properly in to what has been defined by the characterisation rules. Furthermore, effectively collecting taxes can seem impossible, due to the lack of enforcement mechanisms.

Peru taxes digital services provided through the internet when the service is economically used or consumed in the country. It is considered that the service is economically used in the country if it is used by a Peruvian legal entity, which allocates the expense for income tax purposes. Consequently, a service such as the one provided by a company like Netflix or Uber through a non-domiciled platform, would not be taxed in Peru, since the final users are mostly individuals. Therefore, it does not qualify as a Peruvian-sourced income subject to withholding tax.

Peruvian policymakers should explore how to collaborate better with sharing economy and e-commerce platforms for the exchange of information or in their potential as tax collectors. Also, tax administrations should be able to access data collected by platforms to identify taxable transactions and taxpayers.

It is time to reduce the burden on taxpayers by means of a reduction of tax rates or adjustment of tax basis. Many countries had already reduced VAT and income tax rates, making them more competitive. The VAT rate in Peru is 18% (a sum of 16% VAT and 2% of municipal promotion tax). A reduction of at least two or three points would have a positive impact on prices and encourage greater demand. This should be complemented with a widening of the tax base in order to reduce informality, which accounts for over 70% of Peru's economy.

The updated limits for deduction of net interests – 30% of company's last year tax earnings before interest, taxes, depreciation, and amortisation (EBITDA) – in force in 2021 should be postponed. Considering that tax EBITDA is defined as net income after tax losses, plus net interests, depreciation and amortisation, this limitation will prevent companies from deducting net interests based on 2020's results, which is a year where a large number of companies will have losses due to the pandemic.

Donations should not be limited to 10% of the company's net income, especially in a year where projections are grim for many sectors of the economy.

Depreciation rules should apply not only to constructions that started in 2020 and those with at least 80% of progress completed by December 31 2022, but also to large-scale projects that require a much longer period of construction. These sizable projects would not qualify for the depreciation rules, since most of them would not be completed in two years.

It appears that policymakers did not consider the amount of time that it takes to get construction licenses under normal circumstances, let alone during the course of a pandemic. The timeframe given was too short and should be extended to comprise sizable infrastructure projects that truly transform the landscape of the country.

Expenses incurred by companies to create adequate remote working spaces, such as renovations to build a suitable working environment, technological support and other similar activities, should be able to be deducted in a tax period or to be amortised over a period of five years.

Social security contributions should be temporarily reduced so that employers are encouraged to increase their labour force.

Social responsibility costs should be regulated to ensure deductibility. Tax administration treats this type of costs as donations, subject to certain limits (10% of the company's net income, also requiring certificates issued by institutions that were pre-approved to receive donations, among others), making it very hard for companies to deduct them for income tax purposes.

However, as the nature of social responsibility is much more than a simple donation, it involves a more active role of the company. Everyone involved in their activity (i.e. mining, construction, industry, tourism), should be considered when contemplating good policies that will generate benefits for all. A proper regulation will provide predictability for the investor, knowing beforehand that rules must be followed to secure deductibility.

Finally, there should be tax incentives for companies that reinvest their annual income (i.e. a lower corporate tax rate, or no income tax unless distributing income to shareholders).

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Miguel Mur

Partner Miguel Mur Abogados T: +51 1 421 9197 mmur@mur.pe Miguel Mur is the managing partner of Miguel Mur Abogados and Consultores, with more than 25 years of experience. Miguel has previously worked as a senior partner and a managing director of PwC Peru and Bolivia, and has also served as the lead partner of all PwC tax practices in South America. He has been a member of the tax advisory council of the Lima Bar Association, operated as the chairman of the Peruvian Institute of Tax Law and served as a member of the Board of the Latin American Tax Institute. He serves as the chairman of the National Society of Industries Tax Council. Miguel holds a bachelor's degree in law from Pontificia Universidad Catolica del Peru, a tax specialist degree from Universidad de Vigo in Spain and a MBA from the University of Québec in Canada.

Doris Nicho

Associate Miguel Mur Abogados T: +51 1 421 9197 dnicho@mur.pe Doris Nicho is a senior associate at Miguel Mur Abogados and Consultores. She has extensive experience providing tax advice to resident and non-resident companies through preventive consultancy, tax planning, tax compliance reviews, due diligence, and assistance in administrative and judicial proceedings with the tax authority. She also has experience advising on infrastructure and public services concessionaires. She holds a bachelor's degree in law from Pontificia Universidad Catolica del Peru.