Orlando Marchesi, Lead Partner, Tax and Legal, PwC Peru: Interview

Interview: Orlando Marchesi

What are the most important aspects of the removal of the capital gains tax and the fiscal incentives recently introduced to increase liquidity?

ORLANDO MARCHESI: The capital gains tax began to be questioned once Peru entered the Latin American Integrated Market. Our partners at the stock exchanges in Bogota, Santiago and Mexico City don’t have this tax, which put Peru at a disadvantage. However, the reason why the tax was quickly removed is that the MSCI global equity index announced that it was considering demoting Peru from emerging market to frontier market status. The most important part of this reform is the fact that it applies only to companies that meet certain requirements regarding tradability and the liquidity of equities.

Which incentives can be introduced to encourage informal players in the economy to enter the formal sector, thereby increasing the tax base?

MARCHESI: There are several measures that need to be applied in parallel. If we look at the reforms that have been accomplished in the past 20 years in terms of simplifying the tax code and implementing reduced tax rates for small and medium-sized enterprises, we observe that this has not led to an increase in formalisation. Perhaps one reason for this is a lack of proper law enforcement. As a result, small companies that work with larger companies are the only ones who have incentives to formalise, since large companies are closely monitored and are required to work only with formal players. On the other hand, since 2004 Peru has implemented tax collection through retention for some corporate taxes, which has definitely helped increase collection. The main challenge now is to increase tax collection from independent workers.

The receipt lottery programme organised by the Tax Authority has not worked, in part because of a lack of adequate information and partly because the incentive (the prize) is too small compared to the cost of paying taxes and the probability of actually winning the prize. Future reforms should focus on implementing direct incentives that allow taxpayers, for example, to deduct certain expenses from their retained taxes. This way, individuals would be incentivised to fill out tax forms where they provide the details of such expenses, including the receipts. This would turn into information for the state regarding transactions in small-scale commercial activities, which would go a long way in facilitating law enforcement and increasing formalisation.

Which measures can be put in place to increase the progressiveness of the Peruvian tax system, and thus assist in reducing inequality?

MARCHESI: The main problem in tackling inequality does not come from low tax rates or a lack of progressiveness in the system, but from the fact that more than half of the Peruvian workforce is not on a formal payroll. A consequence of this informality is that they are excluded from the responsibility of paying taxes as well as from all the benefits of health insurance, social security and the guarantee of being paid at least the necessary legal minimum wage. This is why tackling inequality goes hand in hand with the need to deal with the problem of economic informality. Many regional governments lack the sufficient qualified personnel for collecting taxes. Furthermore, as long as the personnel issue is not correctly addressed, all public spending will continue to be financed by only those Peruvians who are included in the formal economy. This doesn’t only puts extra weight on the shoulders of formal workers; it also limits the resources that the state can access to implement social policies. The central issue is to increase compliance by together combining more incentives for individuals to pay their taxes with the implementation of sanctions for those who do not.