Paying their dues: An overview of the Peruvian tax regime

Corporate Income Tax

Companies incorporated in Peru are considered domiciled entities for income tax purposes and, therefore, subject to income tax at a rate of 30% on net taxable income determined on a worldwide basis. Branches, agencies and permanent establishments incorporated in Peru of non-domiciled companies or entities are subject to income tax at a rate of 30% on their Peruvian-sourced income only.

In order to comply with their annual income tax liability, the aforementioned entities should make monthly advanced tax payments by submitting either 1.5% of their net monthly income or the result of applying a coefficient to their net monthly income, whichever is higher. The coefficient is set by dividing the tax calculated for the previous fiscal year (or the year preceding the previous fiscal year in the case of January and February) by the total taxable income of the same year. If no tax is calculated in the prior fiscal year (or in the preceding year), the advance payments should be 1.5% of monthly net revenues. Any unpaid balance or excess payments are paid or credited, respectively, upon the filing of the annual income tax return, which should be filed no later than the first three months of the tax year following that to which the income tax liability relates (which is to say that a 2013 annual income tax return should be filed no later than March 2014). The fiscal year is the same time period as the calendar year.

For taxable income determination purposes, such entities are allowed to deduct expenses, to the extent that these are necessary to produce taxable income or to maintain its source. Requirements, limits and/or caps may be applicable for the deduction of certain expenses, such as financial expenses (thin capitalisation regulations apply), bad debt provisions, salaries, travel expenses and gifts, among others.

However, certain expenses are not tax deductible, such as those derived from transactions with (i) entities domiciled in tax havens included in the list attached to the Peruvian income tax law; (ii) permanent establishments located in tax havens; or (iii) entities that obtain revenues or income through tax havens. Notwithstanding, expenses derived from the following transactions are excluded from the above-mentioned limitation: (i) interest on loans; (ii) insurance premiums; (iii) lease of aircraft and ships; (iv) maritime freight; and (v) tolls for passing through the Panama Canal.

Depreciation is applied under the straight-line method. The limit for the depreciation expense allowed for tax purposes is the one recorded for accounting purposes (financial depreciation). However, in no case may the tax depreciation exceed the following rates: for buildings, 5%; for cattle (both labour and reproduction) and fishing nets, 25%; for vehicles (except railroads) and any kind of ovens, 20%; for machinery and equipment used for mining, petroleum and construction activities, except furniture, household and office goods, 20%; for equipment for data processing, 25%; for machines and equipment acquired after January 1, 1991, 10%; and for other fixed assets, 10%.

Withholding Taxes

Income paid to non-domiciled entities is subject to the following withholding tax rates: for loan interest received from non-related parties, provided certain requirements are met, 4.99%; for interest paid in consideration of loans with related parties, 30%; for interest paid by Peruvian financial entities or banks to foreign beneficiaries for credit lines used in Peru, 4.99%; for royalties, 30%; for dividends or profit distributions paid by Peruvian entities, 4.1%; for digital services, 30%, for technical assistance, provided certain formal requirements are met, 15%; for the lease of vessels or aircrafts, 10%, and for other income, 30%.

It should be noted that domiciled taxpayers cannot deduct the withholding tax of a third party, except in the case of loans provided by non-domiciled creditors, to the extent that the debtor has contractually assumed the obligation of bearing the withholding tax.

Capital gains derived from the sale of securities through the stock exchange that are received by non-domiciled entities or individuals are subject to income tax at a rate of 5%. If the security is not traded on the stock exchange, a 30% income tax rate is applicable. In the case of services in which activities are performed both in Peru and abroad, under the Peruvian tax laws and regulations, non-domiciled beneficiaries obtain Peruvian-sourced income at various rates depending on the activity in question (see table).

Indirect Sale Of Shares

Income obtained from the indirect sale of shares issued by entities incorporated in Peru is deemed Peru-sourced. A taxable indirect transfer of Peruvian shares is deemed to occur when shares of a foreign entity, which in turn owns, directly or indirectly through other entities, shares of a Peruvian entity, are transferred and both of the following conditions are met:

• During the 12 months prior to the transfer, the market value of the Peruvian entity’s shares owned by the foreign entity equals 50% or more of the market value of the foreign entity’s shares; and

• During any given 12-month period, shares representing 10% or more of the foreign entity’s share capital are transferred.

Market Value & Transfer Pricing

For tax purposes, the price assigned to any transaction should meet market value standards (“arm’s length” principle). If the price assigned to a transaction differs from its market ranges, be it either over- or under-estimated, the tax administration is entitled to adjust it on both the purchaser and the seller ends.

In the case of transactions between related parties or transactions with tax havens, the transfer price of the goods and services should be determined in accordance with transfer pricing regulations, subject to the mandatory requirement to substantiate such price with a transfer pricing study when accrued income exceeds PEN6m ($2.26m) and the amount for the transactions exceeds PEN1m ($376,600). An annual statement is required if transactions exceed PEN200,000 ($75,320) per year. Failure to comply with these requirements can result in monetary penalties.

Stability Agreements

Investors may enter into stability agreements with the government, either under the general regime or specific regimes (such as mining, oil and gas). Under the general regime, investors may enter into stability agreements that guarantee them, for a 10-year period, the following:

• Stability of the income tax regime with respect to dividends and profits distribution in force at the time the agreement is entered into;

• Stability of the monetary policy of the Peruvian government, according to which there is a total absence of exchange controls. Foreign currency can be freely acquired or sold at whatever exchange rate the market offers and funds can be remitted abroad without any prior authorisations;

• Right of non-discrimination in relation to local investors. On the other hand, under the mining regime, local mining companies may enter into stability agreements and investment promotion measures that guarantee them, for 10 or 15 years, among others, the following:

• Stability of the overall tax regime;

• Stability of the overall administrative regime;

• Free disposal of funds (foreign currency) arising from export operations;

• No exchange rate discrimination;

• Free trade of products;

• Stability of special regimes in relation to tax refunds, temporary imports and similar regimes. Oil and gas companies may enter into stability agreements that guarantee, for the term of the contract, among others, the following:

• Stability of the overall tax regime;

• Free disposal of funds (foreign currency) arising from export operations;

• Free convertibility of its funds;

• Free trade of products.

Individual Income Tax

Income tax on individuals is determined by the legal place of location rather than by residence. Foreign individuals are deemed to be domiciled in Peru for tax purposes if they have been physically present in Peru for more than 183 calendar days within a single 12-month period. Temporary absences of up to 183 days within a 12-month period do not interrupt the continuity of their legal presence for tax purposes. The tax status of the individual ( domiciled or non-domiciled) is determined at the beginning of each fiscal year. Changes regarding this condition that may occur during the fiscal year shall become effective from the start of the next fiscal year. This means that non-domiciled individuals who meet conditions to be considered Peruvian tax residents have to wait until the following year to effectively obtain the tax treatment of a domiciled legal entity.

Domiciled individuals are subject to income tax on their worldwide income, whereas non-domiciled individuals are only taxed on their Peruvian-sourced income. In this case, however, the individual is entitled to a foreign tax credit for the taxes paid on foreign income taxable in Peru, determined by his/her average Peruvian tax rate applied on his/her foreign income, with a limit of the tax actually paid abroad. Income tax on labour income and foreign income generated by domiciled individuals is imposed through a series of brackets. Those designated as “Level 1”, meaning they have up to seven tax units, are taxed at a rate of 0%; those at “Level 2” (from 7 to 37 tax units) are taxed at 15%; those at “Level 3” (from 34 to 61 tax units) are taxed at 21%; and those at “Level 4” (above 61 tax units) are taxed at a rate of 30%. It should be noted that for the fiscal year 2013, one tax unit is equal to PEN3700 ($1393).

Income from leases is subject to an effective 5% income tax rate. Losses can be offset against capital gains obtained in the same fiscal year. They cannot be carried forward. When there is no withholding obligation, income tax must be paid upon the filing of the annual income tax return. Income tax on non-domiciled individuals is imposed at a flat rate of 30% on their Peruvian-sourced income. No tax deductions or fiscal credits are allowed for non-domiciled individuals. Capital gains derived from the sale of stock are levied at a 5% rate, as long as the shares are listed in the Stock Public Registry and are traded through the Lima Stock Exchange. Otherwise, a 30% rate is applicable.

Withholding Obligation

The acquirer has the obligation to withhold the corresponding income tax. This obligation is not applicable when the sale transaction is carried out through the Lima Stock Exchange. In this case, the Peruvian Clearing House has the obligation to withhold the corresponding income tax.

Tax Exemptions

There are three tax exemptions: capital gains obtained from the direct or indirect sale of securities underlying an exchange-traded fund (ETF) when such sale or conveyance is performed for the constitution of the ETF, the sale of the ETF unit or the management of its investment portfolio; capital gains obtained from the sale of treasury bonds to the extent they meet certain conditions; and interest from bank deposits obtained by individuals. CONTROLLED FOREIGN CORPORATIONS (CFC) REGULATIONS: As of January 1, 2013, CFC regulations came into effect in order to avoid the deferral of Peruvian income tax liabilities derived from passive income received by foreign entities controlled by domiciled taxpayers. Passive income includes dividends, interest, royalties and capital gains, among others.

Pursuant to the CFC regulations, when a domiciled taxpayer owns (either directly or indirectly) more than a 50% interest in a foreign entity located in a tax haven or jurisdiction with reduced tax rates (such as where the applicable tax rate on similar income is less than 75% of the rate applicable in Peru), the passive income obtained by the foreign entity would be directly allocated to the domiciled taxpayer.

Therefore, the shareholder will pay income tax on foreign passive income obtained by the foreign entity in the fiscal year when said entity receives it, and not when a dividend is distributed to the shareholder.

Tax Treaties

Tax treaties, based on the OECD Model Tax Convention, are currently in force with Canada, Chile and Brazil. Peru has also entered into tax treaties with Spain, Mexico, Switzerland, South Korea and Portugal – also based on the OECD model – but these are not yet in force. Additionally, Peru is a member of the Andean Community, along with Bolivia, Colombia and Ecuador. These countries have a tax treaty in force which has been prepared under the UN model.

Payroll Taxes-Health Contribution

Employers shall make mandatory monthly payments equal to 9% of the remuneration paid to employees. Employees shall be affiliated either with the National Health System or the Private Health System. If the latter is chosen, 6.75% is distributed to the national system and 2.25% goes privately, this last amount may be used as credit by the employer against the public contribution.

Insurance For High-Risk Work

Employees who perform high-risk activities established in Law 26790, such as mineral extraction and iron and steel smelting, among others, must have a complementary insurance for high-risk work, which provides coverage such as health care, temporary or permanent disability pensions and burial expenses relating to work accidents or professional diseases. This insurance is compulsory and must be paid for by the employer.

Employees hired through worker cooperatives; special, temporary or complementary services companies; contractors and/or subcontractors; as well as any other institution that deploys/assigns personnel to a company where high-risk activities are performed, are obliged to contract the complementary insurance for high-risk work. In addition, employers that hire work services or labour through the abovementioned companies are obliged to verify that all the employees assigned to its offices have been duly insured according to the corresponding legal provisions. Otherwise, they will have to contract the insurance (on their own), in order to provide to those employees; if not, they could be jointly liable with such intermediate companies for the obligations established by law.

Pension Fund Contributions

Employers shall apply monthly withholdings for pension fund contributions equal to 13% of the remuneration received by the employee, in case he/she is affiliated with the National Pension System, or 12.4%, approximately, in case he/she is affiliated with the Private Pension System (in this case, 10% corresponds to the personal pension account and almost 2.4% to insurance and commissions for managing the fund). Should the foreign individual leave Peru upon termination of his/her labour contract, the respective pension funds credited with the Private Pension System may be wired to an account belonging to the employee at a foreign bank (the aforementioned 10%).

Financial Transactions Tax (FTT)

Obligations that are fulfilled through cash payments, the amount of which exceeds PEN3500 or $1000, must be performed through a bank account or deposit, wire transfers, payment orders, credit cards, non-negotiable cheques, among other means of payment provided by entities of the Peruvian financial system.

Any obligation that is not honoured using such methods (such as payments in cash) allows neither deduction of the expense, recognition of the cost for tax purposes, nor recognition of tax credits.

According to Law 28194, for transactions subject to the FTT such as credits or debits to bank accounts, the accountholder is the designated taxpayer. However, credits, debits or transfers made between the accounts of the same accountholder are not subject to the FTT, nor are purchases of certified cheques, bank certificates, traveller’s cheques or other financial instruments in which the bank accounts mentioned are not used. In these cases the designated taxpayer is the purchaser of the mentioned instruments.

The FTT rate is 0.005% and may be expensed for income tax purposes according to rules applicable to this tax. Among others, the following transactions are exempt from the FTT: credits or debits to bank accounts opened at the employer’s request exclusively in order to credit salaries to employees; credits or debits in bank accounts of severance indemnities (employee compensation for time of service); and credits.

Temporary Tax On Net Assests (TNAT)

Companies subject to corporate income tax must also pay the TNAT, except for those that are in a pre-operative stage or have begun operating as from January 1 of the fiscal year for which the TNAT must be paid.

The taxable basis is the value of the net assets set forth in the taxpayer’s balance sheet as of December 31 of the year prior to the one that corresponds to the tax payment, adjusted with the deductions and amortisations accepted by the Peruvian income tax law.

Thus, the amount of the TNAT is determined by the application of the following rates on the taxable income: for net assets up to PEN1m ($376,600) a rate of 0%; and for net assets in excess of that amount, a rate of 0.4%. It should be noted that the amount paid for the TNAT is a credit to be offset against the taxpayer’s income tax obligations. If not totally offset, the remaining tax may be refunded.

Value Added Tax (VAT)

The transactions subject to VAT are the sales of movable goods made within Peru; services rendered within Peru; importation of services (services economically used within Peru by a domiciled entity); importation of goods; construction agreements; and the first sale of real estate performed by constructors. The VAT rate is 18% and the VAT law is based on a debit/credit system in which input VAT (paid on purchases of goods and services) may be offset with output VAT (originated by taxable operations).

Any VAT credit that is not offset in a certain month can be carried forward (at historical values) to be offset with any future output VAT. It should be noted that VAT credit cash refunds are only available for exporters and some entities in a pre-operative stage, provided certain conditions are met. OBLIGATORY TAX PAYMENT SYSTEM (SISTEMA DE PAGO DE OBLIGACIONES TRIBUTARIAS, SPOT):The SPOT was created by Resolution 183-2004/SUNAT and is applicable to the sale of certain goods and the rendering of certain services subject to Peruvian VAT.

The main purpose of the SPOT is to generate funds to enable the payment of tax obligations by the VAT taxpayer. According to the SPOT, all the sales of goods and services listed in the appendices of the resolution, on which VAT is levied, will be subject to withholding, applying the rates established for each kind of good and service. Regarding services, Appendix 3 of the resolution establishes that the services subject to the SPOT are: labour intermediation (12%); lease of goods (12%); maintenance and repair of movable goods (9%); cargo movement (12%); other entrepreneurial services (12%); business commission (12%); fabrication of goods by order (12%); people transport services (12%); construction contracts (5%); and all services subject to VAT (there are some exceptions), which have not been mentioned above (9%).

The buyer or service recipient must withhold a percentage of the transaction price and deposit said amount within the seller’s or service provider’s state bank account. It is important to note that the right of the buyer or user of the service to offset input VAT related to such goods and services may be exercised only after the deposit has been made. The amount deposited is applied towards the payment of the seller or service provider’s Peruvian tax obligations (not just VAT). If after four consecutive months this amount is not used, the seller or service provider may apply for a refund or use the amount to pay withholding applicable to purchasers or service recipients.

Early Recovery Of VAT

Companies at the preoperative stage with large projects that require at least two years for maturity may apply for the early recovery of VAT, which allows for a VAT credit refund prior to starting operations. An investment agreement with the government is required and a minimum investment requirement must be met. RECOVERY OF VAT ON EXPLORATION ACTIVITIES FOR MINING, OIL & GAS: Holders of mining concessions are entitled to recover the VAT paid in connection with their activities during the exploration stage. To access this regime, mining companies must comply with certain conditions, such as being entirely at the pre-operative stage and performing exploration activities of minerals within the country, and entering into an exploration investment contract with the government for a minimum investment of the amount in national currency equivalent to $500,000.

Likewise, entities that enter into oil and gas agreements with the government have the right to recover any VAT paid in connection with their activities during the exploration stage.

Exporter's Positive VAT Balance

Export of goods (including the sale of goods in international zones of ports and airports) as well as some services performed for foreign entities are taxable at a rate of 0%. VAT paid upon the acquisition of goods, services, construction contracts and import of goods related to the exported goods or services, grants the exporter a positive balance which may be refunded by the tax administration.

The positive balance may be offset with output VAT, income tax or any other outstanding tax debt in favour of the central government. In case the positive balance is not completely offset, as the amount of the aforementioned tax obligations does not fully absorb the balance, the taxpayer may apply for a refund (which may be made in cash or by cheque).

Excise Tax

The sale of some specific goods, such as fuel and vehicles, among others, is subject to excise tax. Tax rates are determined according to the type of goods. For example, in the case of fuel, the taxpayer must pay a determined amount per gallon from PEN0.50 ($0.19) to PEN2.30 ($0.87), depending on the type of fuel. In the case of vehicles, the tax rate is 0%, 10% or 30%, depending on the type of vehicle.

Free Trade Agreements

Peru has entered into bilateral trade deals with the US, Canada, Singapore, China, the European Union and Thailand, and has begun trade talks with other countries.

Custom Duties

Customs duties are charged to the cost, insurance and freight (CIF) value of the imported goods, at rates of 0%, 6% and 11%. There are no restrictions on imports and exports, although there is a limited list of products which cannot be imported or exported. Exports are not subject to any taxes, and the import of most capital goods is subject to a 0% rate. Peru is a member of the World Trade Organisation and various bilateral trade agreements that provide for most-favoured-nation treatment on a reciprocal basis. Peru is also a member of the Andean Community and the Latin American Integration Association. The government is able to grant duty exemptions under certain circumstances and also to suspend temporarily the assessment of duties on certain products. Customs duties are imposed on an ad-valorem basis – the CIF value of the imported goods. Goods are classified for Customs duty purposes under the harmonised system.

Drawback Regime

Pursuant to the drawback regime, the exporter may apply for a refund of Customs duties paid upon: (i) the importation of the goods contained in the exported goods; or, (ii) the importation of the goods that are consumed during the production of the exported goods.

The refund rate is currently 5% of the free on-board value of the exported goods, provided that the amount does not exceed 50% of the goods’ production cost. The refund will be applicable for each kind of goods exported by the exporter and for the first $20m worth of goods exported per year (the excess will not be subject to refund). For this purpose, the Supreme Decree No.104-95-EF establishes that the beneficiaries of the drawback regime are the manufacturers – export companies whose cost of production has been increased by the Custom duties paid upon importation of: raw materials, intermediate products or parts incorporated or consumed in the production of the exported good. However, fuel or any other energy source that is used to generate the energy required to produce the exported good is not considered to be a raw material. OBG would like to thank PwC Peru for their contribution to THE REPORT Peru 2014