A few notes on the fiscal situation in Peru

Humberto Astete, Tax Partner – EY Peru, outlines the amendments to the tax laws in Peru in 2020 in light of the difficult economic situation and falling tax revenues.

LIKE IN MANY AREAS, 2020 has also been a challenging year in terms of tax collection policies. The pandemic spread into Peru in March, and was followed by a strict lockdown that brought an important part of the economic activity to a halt for months. This event wreaked havoc, creating a situation that would have been inconceivable in the past.

Taxes were no exception. Government tax collections are estimated to have fallen by slightly more than 17% compared to 2019. The decrease is directly related to the negative economic growth that the country recorded during the fiscal year. Due to the grim economic outlook, the government passed some legislative measures to mitigate the impact of the pandemic on businesses and on individuals.

Some of the measures were: i) a threemonth moratorium for lower income taxpayers on the submission of tax returns and on monthly tax payments; ii) a reduction on default interests in tax payments; iii) a no-sanction period on tax offenses committed during the first months of the state of emergency; iv) the possibility to suspend advance payments on monthly income taxes for certain months and under certain circumstances; v) new regimes on accelerated depreciation for fixed assets; and vi) the possibility of compensating the tax loss incurred in 2020 for a five-year period, instead of four; among others.

Certainly, the private sector expected higher profits and more tax payment options in addition to those already mentioned. The government could not take more aggressive steps on that direction due to the sharp drop in collections since the month of April and the pressing need to have tax revenues to attend the situation. Additionally, the three-month mandatory lockdown, in effect between mid-March and June, impacted the operations of the revenue service agency and the generation of higher tax revenues.

The Peruvian Treasury could not implement its oversight functions during that period. But it came back strong. Digital tax audits had already started to gain ground over face-to-face audits, but the pandemic accelerated the implementation of electronic processes and the use of online platforms. That’s another of the big changes that the situation has brought, an increasingly online interaction with the tax revenue agency. There is no turning back in this area.

By the end of 2020 (typically in Peru, relevant legislative changes on taxes take place in the month of December), it was expected that the government would pass some tax amendments aligned with the situation that businesses face in Peru and in the world due to the pandemic. In order to achieve that, it was needed to certainly reach a delicate balance between protecting tax revenues and providing options for taxpayers to overcome the difficult economic situation.

Unfortunately, that has not happened. The adjustments to tax laws have been limited. At least, there have not been relevant amendments that were for every economic sector. Some specific rules were approved to support the tourism sector, for instance, through a special tax regime to postpone and fraction tax payments, and a special deduction for tourism workers. The agriculture industry faced some relevant changes to its fiscal regime, but it was not a measure that supported or promoted the sector, but it was passed because the previous tax regime, which had certain labor and

fiscal benefits, was repealed.

By the close of 2020, it was also expected regulation to delay the effective date of a new rule on the tax deduction of financial spending (interests). That rule, in effect since 2021, establishes that interests on financing are only tax deductible for businesses to a maximum of 30% of the company’s EBITDA as of December 31 of the corresponding previous fiscal year. The interests that were non-deductible for surpassing the aforementioned threshold, can be deductible for the next four years. But always depending on the 30% of EBITDA limit as of December 31 of the prior fiscal year.

As expected, many businesses will report lower 2020 EBITDA than originally projected, while also record negative EBITDA by the close of 2020 because of the impact of the pandemic. As a result, businesses will generate non-deductible interests in their income tax report corresponding to the year 2021. And the economic recovery will not be immediate, so its impact will be also present in 2022 and the following years.

In my view, the situation required to postpone the effective date of the 30% EBITDA rule. Unfortunately, that has not been the case, and since January 1, 2021 interests on business loans face the aforementioned limit.

Other news by the end of the year has been the mandatory instruction imposed on banks and financial institutions to report the Treasury every month on every account that has a balance, average balance, accrued balance, or yielding more than PEN 10,000 (almost USD 2,800), having to submit the data on the account holders. Without a doubt, this creates a powerful tool for the Treasury to access financial information on individuals and has generated concern on the appropriate use and confidentiality on which the information will be managed.

Another important news by the end of the year on tax matters was the ratification by the Peruvian government of a double taxation agreement with Japan. This agreement follows the OECD model and, with that one, Peru already has eight double taxation agreements. The others are with Chile, Canada, Brazil, South Korea, Portugal, Mexico, and Sweden. The agreement with Japan comes into force on January 1, 2022.