PERU ESTUDIO OLAECHEA Gustavo Lazo Saponara INTRODUCTION The Peruvian Constitution states that taxes may be created, modified, or discharged only by Law (or Legislative Decree when the corresponding powers have been delegated by the Legislative to the Executive). This premise is also applicable to tax exemptions. The Peruvian Tax regime is regulated by several statutes. The Tax Code is the main legislative body and regulates the tax principles, the nature of taxes, the tax system, faculties of the Tax Administration, the Tax Court, the tax proceedings, the statute of limitations and the penalties that may be imposed to tax payers. INCOME TAXES AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS Business entities cover companies, partnerships and any other form used to conduct business. Resident partnerships, limited liability companies, taxable foundations and associations, as well as joint ventures keeping independent accounting from that of the venturers, will be subject to the same tax treatment. I. COMPANIES 1. Tax return filings Companies must file an Annual Income Tax Return during late March or early April, assessing the Income Tax corresponding to the prior tax year (which closes on December 31 st ). The filing dates will be published by the Tax Administration and will depend on the last digit of each taxpayer s Registry Number (RUC). Similarly, companies must make Income Tax advanced payments on a monthly basis. Said payments should be made in accordance to the schedule to be published by the Tax Administration (also based on the last digit of the RUC).
2. Calculation of income/profit taxes A. How is the taxable base determined? 1. What revenues are included? As a general rule, all revenues obtained by a company stemming from its business activities are considered income for taxation purposes. 2. What deductions are allowed? Companies may deduct from their gross income, all expenses incurred to produce income and/or maintain its source, provided they are not expressly forbidden by law and certain conditions are met. 3. What major expenses are not deductible? The following are some expenses that may not be deducted from the gross income: Personal expenses; Income Taxes; Fines and any other tax sanctions; Certain donations; Amounts invested in the acquisition of goods or permanent improvements; Provisions or reserves whose deduction is not admitted by Law; Amortization of intellectual property, except for those with a limited lifetime; Commissions originated abroad for the purchase or sale of goods, in the part that exceeds the amount normally paid in the country in which they originate; General Sales and Excise Taxes levying gratuitous transfer of property; Expenses supported by invoices that do not fulfill the formal requirements stated in the Invoices Regulations; Expenses incurred in some operations connected with tax havens; Payments that are not carried out through one of the authorized mechanisms of the Financial Transaction Tax Law.
4. What, if anything, is included concerning national investment abroad? Companies incorporated in Peru will be considered Peruvianresident for income tax purposes and, therefore, subject to taxation on their worldwide income. The results of their overseas transactions will be compensated and then added to their domestic source net income, provided they result in a net income (losses from tax havens cannot be compensated with foreign source income). Net losses from a foreign source, on the other hand, may not be offset with domestic source net income for Income Tax purposes. B. What are the applicable rates? Income tax is applied on a five-category basis. Companies income (i.e. Third Category income) is generally subject to a 30% tax. There are no states, federal, regional or local income taxes. Taxation is applied on a national basis. C. How are losses handled? Resident companies may compensate their Peruvian source net losses by using one of the following systems: Carrying forward the total Peruvian source net loss obtained in a tax year for four (4) years, by applying these losses on a year-by-year basis to income obtained during the aforementioned term. Once this period expires, the remaining losses may not be compensated with profits. Carrying forward the total Peruvian source net loss obtained in a tax year by applying it on a year-by-year basis to 50% of the income obtained during the immediately subsequent tax years. Under this system losses may be carried forward for an indefinite period. Under both systems, the exempt income will be considered in order to determine the compensable net loss. If the taxpayer does not choose one of the above-mentioned systems, the Tax Administration will apply the first system. No loss carry-backs are allowed.
D. Any special transfer pricing rules? The Tax Administration may adjust the price agreed to by the parties so that it reflects the market price (i.e. meets the arm s length standard), regardless of whether the parties are related or located in tax haven countries. However, special transfer pricing rules are applicable in the case of transactions involving related parties or executed toward or from tax haven countries, where values assigned by the parties caused a lesser tax to be paid in Peru. In any case, transfer pricing rules are applicable in the following situations: international transactions where two or more other jurisdictions are involved; domestic transactions where at least one of the parties is not levied or exempt to taxation, is subject to a beneficial tax regime or has executed a tax stabilization agreement; and domestic transactions in which at least two of the parties suffered losses in the last 6 years. According to Peruvian legislation the market price shall be determined by one of the following methods: the compared uncontrolled price method (CUP), resale price method, cost plus method, profit split method, residual profit split method or the transactional net margin method; whichever is considered the most appropriate to reflect the arm s length value. The Income Tax Law Regulations established the rules for the execution of Advance Price Agreements (APA) with the Tax Administration. Taxpayers subject to the Peruvian transfer pricing regulations must file an annual affidavit regarding the transactions executed with related parties and/or tax haven residents, and keep all the documentation supporting, among other things, the assessment of the transfer price as well as the method used. They must also have a Technical Report supporting the assessment of the transfer price. E. Consolidated returns for affiliated companies Each company must file its own Income Tax return.
3. Territorial Rules A. Company s residence For taxation purposes, companies will be deemed resident in Peru if they have been incorporated in the country. B. Is worldwide income taxed? Resident companies are subject to income taxation on their worldwide income. However, non-resident companies are levied only on their Peruvian source income. C. How is branch income handled? Permanent establishments of non-resident entities (including branches) are taxed on their Peruvian source income only. Branch income of resident entities must be compensated with the latter's income (a consolidated tax return must be filed). If said income is obtained abroad, our comments in point 2. A. 4 above will apply. D. How is controlled foreign company handled? There is no special regime for controlled foreign companies. E. Tax Credits In order to avoid international double taxation, resident companies may credit against the Peruvian Income Tax the amounts levied by the source country. However, the amount that may be credited is subject to certain statutory limitations. 4. Withholding Taxes A. Rates on Dividends Dividends are subject to a 4.1% withholding tax. Dividends payable to resident entities are tax-exempt until they are subsequently distributed to individuals (either resident or non resident) or non-resident entities. B. Rates on royalties The withholding tax rate on royalties is 30%.
C. Rates on interests Interests from financing granted by non-resident entities are subject to a withholding tax rate of 4.99% provided several requirements are met; otherwise, a withholding tax rate of 30% will apply. In order to benefit from the 4.99% rate parties may not be related. On the other hand, interest payable by resident banks and financial entities to non resident entities as a result of the utilization in the country of their credit lines abroad will be subject to a withholding tax rate of 1%. Finally, interests generated from promotional loans provided directly by international organisms or foreign intermediaries are exempt from the Income Tax until December 31, 2006. D. Technical Assistance Income obtained by non resident entities as consideration of services that qualify as technical assistance economically used in Peru will be levied with a withholding tax rate of 15%, provided certain conditions are met. E. Rates of withholding tax on profits realized by a foreign company As a general rule, Peruvian source income obtained by nonresident entities is subject to a withholding tax of 30%. Notwithstanding, in order to determine the Peruvian source net income regarding the transfer of goods or rights, non resident persons may deduct the cost incurred in their acquisition, provided certain requirements are complied with. Likewise, in regard to the exploitation of goods that may be depreciated, non resident persons may deduct up to 20% of the amount paid or credited. Due to their international nature, several activities performed by nonresident companies (and their permanent establishments) are deemed to generate different percentages of Peruvian source net income. The effective tax rate is obtained in those cases by applying the corresponding withholding tax rate to the percentage of said income considered of a Peruvian source.
II. PARTNERSHIPS AND LIMITED LIABILITY COMPANIES 1. Tax return filings Partners and Limited Liability Companies must file an Annual Income Tax Return during late March or early April, assessing the Income Tax corresponding to the prior tax year (which closes on December 31 st ). The filing dates will be published by the Tax Administration and will depend on the last digit of each taxpayer s Registry Number (RUC). Similarly, Partners and Limited Liability Companies must make Income Tax advanced payments in a monthly basis. Said payments should be made in accordance to the schedule to be published by the Tax Administration (also based on the last digit of the RUC). 2. Calculation of income for Income Tax purposes See point I.2 and I.3 above. III. OTHER ENTITIES SUCH AS JOINT VENTURES, ASSOCIATIONS AND FOUNDATIONS The investor s tax consequences will depend on the type of joint venture adopted. As a general rule, a joint venture that keeps independent accounting is considered by the Peruvian Income Tax Law as taxpayer and, therefore, is levied as an independent corporation (i.e. it is not considered a see-through entity). If the joint venture does not keep independent accounting, or if it is deemed to last less than one year, the contracting parties (not the joint venture) will be levied directly on their income related to the joint venture. The joint ventures are subject to the tax regulations applicable to resident and non-resident companies in Peru mentioned above. IV. INDIVIDUALS Resident individuals are taxed on their worldwide income. Nonresident individuals are subject to taxation only on their Peruvian source income. Foreign individuals will be regarded as non-resident unless they stay in the country for 2 or more years or in case of expatriate workers- if they request to their Peruvian employer a change in their condition after six months of being in the country.
1. What tax return must be filed? A. The filing dates Resident individuals must file an Annual Income Tax Return during late March or early April, assessing the Income Tax corresponding to the prior tax year (which closes on December 31 st ). The filing dates will be published by the Tax Administration and will depend on the last digit of each taxpayer s Registry Number (RUC). Individuals obtaining only Fifth Category income (see point IV.2.A.1 below) are not required to file an Annual Tax Return. B. Where and with whom filed If possible, all taxpayers (individuals and legal entities) shall file their Tax Returns online, by using a special program prepared by the Tax Administration. C. When must taxes be paid? Taxes must be paid upon the filing of the tax return. Notwithstanding, individuals earning income that classifies into the first category (i.e. from lease operations) must make Income Tax monthly advance payments and file the corresponding tax return according to a given schedule. Individuals earning income that classifies into the fourth category (i.e. from independent work) must also make monthly advance payments provided their payers do not withhold the tax. Those who pay to the individual second category income (i.e. income from capital) or fifth category income (i.e. from dependant work) must withhold the corresponding taxes. 2. Calculation of Income Taxes A. How is the taxable base determined? (1) What revenue is included? Peruvian source revenues may fall into the following categories: - First category: income produced by leasing operations - Second category: income from other capitals - Fourth category: income from independent work
- Fifth category: income from dependent work and income from independent work expressly stated by law. The taxable base is determined by deducting, from the gross income of each of the above mentioned categories, the fixed percentages established by the Income Tax Law (see below). If income from more than one category is obtained, all income from the different categories must be added in order to determine the global annual net income. (2) What deductions allowed? Resident individuals are only allowed the following flat deductions: First category: 20% of total gross income Second category: 10% of the total gross income Fourth category: 20% of total gross income, with a limit of 24 UIT (Tax Reference Unit). For year 2006, 1 UIT equals to S/. 3,400 (US$1,000.00, approximately). (3) What exemptions are allowed? A 7 UIT exemption can be applied to the sum of fourth and fifth category incomes. (4) What major expenses are not deductible? No other deductions are allowed. B. What are the applicable rates? The global annual net income of resident individuals is subject to the following progressive cumulative scale: Global Net Income Rate Up to 27 UIT 15% More than 27 and up to 54 UIT 21% Over 54 UIT 30% Income obtained by non-resident individuals is subject to a 30% withholding tax. Dividends paid to resident and non resident individuals will be subject to a 4.1% withholding tax rate.
C. How are losses handled? No losses may be deducted or carried forward by individuals. 3. Territorial Rules Resident individuals are levied on their worldwide source income, while non-resident individuals will be subject to taxation on their Peruvian source income. 4. Withholding Taxes Non resident individuals will be subject to withholding taxes on their Peruvian source income. ALL OTHER TAKES, CONTRIBUTIONS OR TRANSFER REGIMES OTHER THAN INHERITANCE AND GIFT TAXES AND LEVIES A. General Sales Tax The General Sales Tax Law (IGV Law) regulates the value added tax (VAT) that levies (1) the sale of goods in the country; (2) the rendering or utilization of services in the country; (3) construction contracts; (4) the first sale of real estate property performed by the constructor; and (5) the importation of goods. The current IGV rate is 19%. Although the tax will be applied on each level of the commercialization chain, it is designed to transfer to the final consumer its economic burden. In order to asses the corresponding IGV Tax due, the taxpayer will have to deduct from the monthly gross tax the IGV Tax credit. The gross tax of each levied transaction will be the amount resulting from the application of the IGV Tax rate (19%) on the amounts received by the taxpayer for any transaction subject to this tax. The addition of all the gross taxes corresponding to the levied transactions on a monthly tax period will be the gross tax of said tax period. The tax credit is the tax separately assigned in the invoices that supports the acquisition of goods, services and construction contracts, or the payment for the importation of goods or for the utilization in the country of services rendered by non residents.
To have the right to the tax credit, the transactions (1) should be allowed as costs or expenses of the company in accordance to the Income Tax legislation, even if the taxpayer is not levied by said tax; and (2) should be destined to transactions for which the IGV Tax should be paid. In addition, certain formal requisites should also be complied. Anticipated Recovery Regime The IGV Law establishes the possibility of obtaining an anticipated recovery through negotiable notes of credit- of the IGV paid in the import or local acquisitions of certain capital goods (basically machinery and new equipment registered as net asset, if certain conditions are complied), provided it has not been deducted as Tax Credit during the 6 months following the date in which they were registered in the Purchase Registry. Individuals and legal entities that import or acquire in our local market capital goods destined to the production of goods and services to be exported or levied with the IGV, may request the anticipated recovery of the IGV under said regime if they have not started their production activities. The taxpayers must accumulate a minimum of 4 UIT in order to request the refund. They may only request the refund twice a year, for which they must file with the Tax Administration a special request form; and enclose an affidavit, a detailed relationship of the invoices and other documentation supporting the acquisitions of the capital goods subject to the benefit, and any other information the Tax Administration might require. There is a special and more beneficial anticipated recovery regime applicable to companies involved in public works of infrastructure and public services, as well as mining and oil activities. B. Excise Tax Excise tax is applied on fuels (gas, gas-oils, diesel), alcoholic beverages, cigarettes and tobacco, vehicles, gassed drinks including mineral water, gambling, chance and lottery games, raffles and other related activities. Tax rates are variable and for some items this tax is applied by charging a fix amount per unit sold.
C. Financial Transactions Tax (ITF) In order to maintain the right to deduct the corresponding expenses, credits, etc, taxpayers must use certain authorized payment mechanisms (basically instruments pertaining to the Peruvian banking system) in financial transactions above US$1,500.00. In addition, a temporary Financial Transactions Tax (ITF) has been created to levy a series of financial transactions made through the Peruvian banking system, irrespective of the amount. The ITF paid may be credited against the IT. During the year 2006 the ITF rate is 0.08% (the tax is expected to expire on December 31, 2006). D. Temporary Tax on Net Assets (ITAN) This is a temporary tax (in force until December 31, 2006) that levies the value of a company s Net Assets as of December 31 of the foregoing year. Certain assets may be deducted in order to determine the taxable base. The tax applies to taxpayers generating corporate income (Third category income) that are subject to the General Income Tax Regime (which also include branches, agencies and other permanent establishments of foreign entities). The statute establishes certain cases in which the taxpayer will be exempt. The following progressive scale will be applicable to the tax base in order to determine the tax due: Net Assets Rate Up to S/.5 000,000 0% Over S/. 5 000,000 0.6% The tax paid may be credited against the income tax. The taxpayer may request its refund in case of tax losses or a minor tax assessed under the general regime rules, provided certain conditions are complied. E. Real Estate Property Tax The Real Estate Property Tax is a local tax applied on the total value of real estate property owned by a person within a local jurisdiction. The tax base is determined on the value of the real estate property declared by the owner. The corresponding rates are applied according to a cumulative progressive scale.
F. Health Care The employer determines the 9% rate on the monthly wage of its employees and pays it as a contribution to the National Health Service (ESSALUD) or the Private Health Services (EPS). G. Pension contributions Affiliates to the National Pension System must pay a 13% contribution to the National Pension System. On the other hand, those individuals affiliated to the Private Pension System must pay a contribution that will depend on the Private Pension Entity (AFP) elected (the current average is 13%). REGISTRATION DUTIES FOR BUSINESS ENTITIES AND, IF RELATING TO THEIR INFORMATION, IDENTIFY WHETHER IT IS A LOCAL OR NATIONAL REGIME OR BOTH FOR THE INFORMATION A. Are there registration duties due upon the incorporation of a company? Companies must be registered before the Tax Administration (SUNAT) to obtain their taxpayer registry number (RUC). According to the RUC rules, it is necessary to be registered before the Tax Administration 30 days before performing any activity that has tax consequences. This is a national regime. No payment is required. B. Are there registration duties due upon an increase in capital? Yes, if the capital increase implies an issuance of shares. In that case the issuance of shares must be informed to the Tax Administration within the first 10 workdays of the following month. No payment is required. C. Are there registration duties due upon the transfer of the company's shares? Any transfer of the company s shares has to be informed to the Tax administration within the first 10 workdays of the following month. No payment is required. D. Are there registration duties due upon a transfer of corporate assets? There are no registration duties upon a transfer of corporate assets, unless the parties are related or one of them is resident in a tax
haven jurisdiction. In said cases the transaction should be included in the Annual Transfer Pricing Affidavit to be filed with the Tax Administration. The transfer of corporate assets through reorganization processes (i.e. mergers, spin-offs, etc.) must also comply with several formal requirements. No payments are required. E. Is there any other registration duty due? No. F. If there are registration duties due on any of the above, set out the method of determining the duty, the returns which must be filed and when, where and to whom the duties must be paid. All applicable documentation must be filed with the Tax Administration by the deadlines stated above. No payments are required. Inheritance and Gift Taxes I. Is there an inheritance or gift tax? There are no special taxes regarding inheritance or gifts. However, donations might generate tax liabilities since they imply the gratuitous transfer of goods, assets or property. OTHER MATTERS I. Are there any tax incentives granted for various matters such as research and development, investment in certain areas, etc. Peruvian tax regulations have established special regimes for investment and industries in specific regions of the country. The zones called CETICOS where it is possible to import goods taxfree in order to transform them. However, the sale of those goods to other zones is levied with normal taxes. There is a special tax regime for companies located in the Peruvian Amazon region, which includes lower tax rates for special activities in that area. The acquisition and importation of capital goods as well as investment in dry lands are also subject to a special tax regime.
Companies entering into agreements with the Government for the exploration and exploitation of natural resources as well as mining and hydrocarbon exploration are also subject to a special tax regime. Income tax stability agreements may be executed with the State. Said agreements help investors to reduce political risk by freezing the basic rules and regulations (including certain tax rules) in force at the moment of its execution. They may not be unilaterally modified by the State, thus allowing the investors to foresee the rules that will govern their investment during a reasonable term. II. Are there exchange control regimes? There are no limitations on profit remittances abroad by foreign investors (though, as explained above, dividends will be subject to a 4.1% withholding tax). Similarly, there are no limitations to the free possession of foreign currency by residents. III. Are there any anti-deferral regimes? There are no anti-deferral regimes. IV. Tax Treaties Peru has signed bilateral conventions to avoid international double taxation with the Kingdom of Sweden (in force since 1969), Canada (in force since 2004) and Chile (also in force since 2004). Peru has also signed a convention to avoid international double taxation with the other member countries of the Andean Community (Venezuela, Colombia, Ecuador and Bolivia). Future conventions: The Executive branches of Brazil and Spain have signed conventions to avoid double taxation with Peru, still being pending their ratification by the Congresses of these countries. Negotiations for the execution of similar conventions are currently undergoing with the technical commissions of Switzerland, Italy, Thailand and France.
V. Who should be contacted to determine the information? For more information regarding any of these matters, please contact Mr. Gustavo Lazo Saponara, Mr. Ignacio Lopez de Romaña or Mr. Ramón Bueno-Tizón.