Peruvian government introduces measures to simplify tax and investment, and business formalisation

In October 2017 the World Bank published its “Doing Business 2018” report, which measures the ease of doing business and investing in various global economies. Peru ranked 58th out of 190 countries in the index, placing it third in Latin America, behind Mexico (49th) and Chile (55th), and just ahead of Colombia (59th). While this represented a four-place fall from 54th in the 2017 edition of the report, the country remained in the same relative position in Latin America – in 2017 it placed behind Mexico (47th) and Columbia (53rd) but ahead of Chile (55th).

Report Results

The World Bank found that – requiring five procedures and 7.5 days – Peru has the easiest property registration process in the region, and the country ranks highly in protecting minority investors, obtaining credit and enforcing contracts. Despite damage from the El Niño weather pattern in early 2017, Peru was the only economy in Latin America to record accelerating GDP growth – of 2.5% – that year.

However, in the report the country did not perform well in starting a business and paying taxes. Opening a business takes an average of 27 days and involves seven procedures, which contributed to the ranking of 114th in this category. Furthermore, the country placed 121st in paying taxes, as this process requires nine payments per year and an average of 260 hours to complete. Value-added tax, social security contributions and corporate income tax had the lengthiest procedures, at 111, 110 and 39 hours, respectively.

Formalising Business

The Ministry of Economy and Finance issued a press release following the report in October 2017, announcing that Peru was still in the top one-third of economies most attractive for doing business. The ministry also reiterated the government’s growth strategy of prioritising business formalisation by reducing costs and barriers to entry in the field.

Authorities are working to facilitate this through financial incentives, including the reduction of financing costs as well as an increase in the supply of loanable funds for micro-, small and medium-sized enterprises (MSMEs); fewer permits and procedures required for investment; and tax benefits, such as lowering the cost of tax compliance, electronic invoicing, and registering previously undeclared transactions and income.

The Fund for the Productive Strengthening of MSMEs (Fondo para el Fortalecimiento Productivo de las Micro y Pequeña Empresas, ForPro), effective from April 2017 to end-2018, serves to support smaller ventures – defined as those with annual income of less than PEN6.9m ($2.1m). ForPro finances the acquisition or renewal of fixed assets and working capital. Funds are channelled through financial system institutions under the supervision of the Superintendency of Banking, Insurance and Pension Funds, as well as the Pension Fund Administrators’ Association.

Recommendations

Further steps could be taken to improve performance. In talks with OBG, César Peñaranda, executive director at the Institute of Economics and Business Development of the Lima Chamber of Commerce, outlined five reforms that could improve Peru’s international standing in terms of ease of doing business, as well as ramp up economic production.

“First, Peru must eliminate bureaucratic barriers at all levels of government,” he told OBG. “More regulation is accompanied by more corruption, making it more expensive to invest, and part of the informality that exists in Peru is due to the excess of obstacles and bureaucratic barriers.” Second, labour reform would increase the flexibility and competitiveness of domestic companies, as the current framework is very rigid. Third, human development – particularly in education and health – must be prioritised. Fourth, private and public investment should be promoted in innovation, science and technology. Lastly, the infrastructure gap is estimated to be worth $160bn. This, Peñaranda told OBG, exceeds the capacity of the public sector, which highlights the need for greater private sector collaboration via public-private partnerships and tax works.