Earlier this week, the Peruvian government passed a comprehensive anti-tax avoidance law aimed at eliminating loopholes used by companies to avoid their tax obligations.
Government officials believe this regulation will allow the country to accrue close to 1 percent of the country’s GDP in taxes or approximately $1.8 billion on an annual basis.
Keep in mind that part of the rationale to pass this law was to slash the country’s fiscal deficit to 2.2 percent of GDP in 2019 and 1 percent by 2021.
As reported by Reuters, this regulation specifically “targets tax schemes including corporate reorganizations and contracts that defer earnings or bring forward spending in order to avoid taxes.”
More specifically, Peru’s La República breaks down the cases in which the anti-tax avoidance would kick in:
- Activities, situations or economic relations in which there is no relationship between benefits and associated risks, or have low or scarce profitability, or do not adjust to the market value, or that lack economic rationality;
- Activities, situations or economic relations that do not relate to the type of ordinary operations used to achieve the desired legal, economic or financial effects;
- Carrying out similar or equivalent activities to those carried out via business figures using non-business figures instead;
- Business reorganizations or restructurings with the appearance of little economic substance;
- Activities or operations with subjects resident in non-cooperative countries or territories or those with low or no taxation, or with subjects that qualify as permanent establishments located or established in non-cooperative countries or territories or those with low or no taxation, or with subjects who obtain income, rents or earnings via a non-cooperative country or territory or one with low or no taxation, or subject to a preferential tax regime for their operations;
- Transactions at zero or low cost, or manipulating figures that end up minimizing or canceling costs and non-tax profits for the parties involved, and;
- Use of activities, contracts, or unusual legal and business schemes that contribute to the deferral of income or rents or the anticipation of expenses, costs or losses.
After waiting for several months for Congress to discuss the proposed rule, the Peruvian government moved to make it official via an executive decree.
Speaking about this decision to skip Congress’ discussion, Economy Minister Carlos Oliva said, “We cannot wait for Congress to debate the law and for that reason, considering the time given for the debate and the fact that it has still not taken place, we decided to publish the executive decree.” In terms of the law’s retroactivity, Oliva reiterated that the “anti-tax avoidance law is dissuasive in nature and wants companies to stop avoiding their tax obligations and using avoidance mechanisms. Its purpose is not to chase after anyone, it is to set a change in behavior and banish tax avoidance for the group of companies that could have used it.”
Oliva also stated that the oversight committee in charge of deciding whether or not the anti-tax avoidance regulation should be applied to a specific case will consist of three individuals who are part of Sunat, Peru’s tax authority, and are currently being trained to best perform their duties.
Peruvian Tax Analysts Comment on Anti-Tax Avoidance Regulation
A few analysts criticized the law’s vagueness, while others have lauded a few of its details.
Giorgio Balza, who manages PwC’s tax practice in Peru, commented that the law is “super comprehensive and does not set the rules of the game as one expected. From that perspective, the government could practically oversee everything.”
On the other hand, José Ruiz Huidobro, a tax associate with law firm Rodrigo, Elías & Medrano, praised the law for its definition of tax mitigation (economía de opción), so that “the taxpayer who makes a decision based on corporate benefits will not be subject to the anti-avoidance rule.”
Huidobro said, “When a taxpayer is making use of tax mitigation (economía de opción), he is choosing, for example, not to buy a car for the company but to rent it, and these are options that are given within the framework of tax mitigation (economía de opción), and now that type of business decision will not lead to the application of a general anti-avoidance rule.”
With the passing of this law, Peru joins Argentina, Brazil, Chile, Colombia, Mexico and Uruguay as yet another Latin American country with a strict anti-tax avoidance regulation.
What are your thoughts on Peru’s anti-tax avoidance law? Will it ultimately prove to be efficient? All translations from Spanish are the author’s.