## 1perea2022002

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### Mission, scope, and composition
- Mission purpose and scope:
  - Request by the Ministerio de Economía y Finanzas (MEF) of Peru.
  - Objective: analyze aspects of the tax regime: the mining sector’s fiscal regime, taxation of capital gains, and application of VAT (IGV) to digital services.
  - Modality: remote technical assistance mission by the Fiscal Affairs Department (FAD) of the IMF.
  - Mission dates: November 15 to 26, 2021.
- Mission composition:
  - FAD headquarters and lead: Roberto Schatan (FAD and head of mission), Eduardo Camero (FAD).
  - External advisors: Juan Carlos Guajardo, Victor Mylonas, Ricardo Villalobos.
- Principal Peruvian counterparts: Minister Pedro Francke; Deputy Minister Alex Contreras; MEF technical staff (Marco Camacho, Miryam Yepes, Zulema Calle, Irene Gonzales, Eduardo Sotelo); Ministry of Mining (Alfredo Rodriguez, Walter Sanchez); SUNAT (Palmer de la Cruz and others).
- External observers and stakeholders: IMF Western Hemisphere Department, World Bank staff, SNMPE representatives, Lima Stock Exchange executives, tax specialists from EY and PwC.

### Executive summary — overview and headline figures
- MEF initiative: delegation of powers to legislate on tax matters; around 40 specific measures (administrative and policy) intended to generate additional revenue.
- Estimated revenue impact for measures with calculations: a little over 1 percent of GDP.
- Given Peru’s low tax collections, the expected increase is modest; enhancing progressivity is recommended.
- IMF advisory focus: (i) mining sector regime; (ii) income tax on capital gains; (iii) IGV (VAT) on importation of digital services.
- Key statistics presented:
  - MEF estimated measures: a little over 1 percent of GDP.
  - Total, undiscounted tax pressure for a representative large-scale copper project in Peru: 41.7 percent of profit (cash flow).
  - Sample size for international comparison: 15 fiscal regimes.
  - Taxpayers with reported income > 40 UIT: < 1 percent of taxpayers and earn 75 percent of sum of first and second category income.
  - Historical contribution of first and second category income taxation: roughly 0.4 percent of GDP.
  - International withholding on distributed dividends: mainly between 7 and 10 percent.
  - Proposed government maximum rate for income and capital gains: 10 percent (as a maximum); without eliminating the 20-percent general deduction, a 10 percent nominal rate would be an 8 percent effective rate.
  - Mining contribution to public finances: ranging from 1 to 3 percent of GDP depending on year.
  - Foreign Direct Investment in mining: reached US$26 billion in 2018 (2005–2018 series referenced).
  - Total tax revenue of general government, 2019: Peru 14.6 percent of GDP; Average, excl. Peru 18.6 percent of GDP; OECD average 23.9 percent of GDP.
  - Central government tax revenue by category, 2014/2019/2020 (percent of GDP): Total: 16.6 / 14.4 / 13.1; Income tax: 7.0 / 5.7 / 5.4; General sales tax: 8.8 / 8.2 / 7.8; Selective consumption tax: 0.9 / 1.1 / 1.0; Import tax: 0.3 / 0.2 / 0.2; Other tax revenue: 1.5 / 1.5 / 1.2; Refunds: -1.9 / -2.3 / -2.4.

### Mining sector — findings
- Economic role and recent performance:
  - Mining accounted for 10 percent of GDP in the last decade.
  - Contribution to total GDP growth: 2015: 1.2 percentage points (total growth 3.3 percent); 2016: 1.8 percentage points (total 4 percent); 2017: 0.5 percentage points.
  - Mining accounted for 58 percent of total exports between 2011 and 2020; copper 46 percent of mining exports; gold 33 percent.
  - Employment: mining averaged close to 200,000 direct jobs over the past decade.
- Fiscal revenue from mining:
  - Revenue collections peaked close to 3.5 percent of GDP (2007); fell to less than 1 percent in 2015 and 2016; rebounded to 3 percent expected by MEF in 2021.
  - Main mining-specific collections: Mining Royalty (Regalía Minera) and Special Mining Tax (SMT).
  - Regulatory contributions (OSINERGMIN and OEFA): combined rate 0.24 percent of sales.
- FARI model findings (representative large-scale copper project):
  - Total, undiscounted tax burden (AETR): 41.7 percent of profit (cash flow).
  - PTU (employee profit sharing) generates 4.4 percentage points of the tax burden.
  - AETR with TSC (tax stability contract): 43.1 percent (1.4 percentage points higher).
  - Discounted AETR (10 percent) similar behavior; discounted AETR for Peru: 56.6 percent (without TSC) ranking 8th among 16 regimes.
  - Composition of collections: income tax 60–70 percent; Royalty and SMT 15–21 percent; PTU 18 percent.
  - Investor after-tax IRR: around 15 percent.
- Progressivity and sensitivity:
  - Peru’s regime shows good progressivity; AETR increases with profitability (example: tax burden increases from ~25 percent at US$2.10/lb copper, IRR 6 percent, to 44 percent at US$7.20/lb copper, IRR 39 percent).
  - Minimum Royalty floor (1 percent of sales) and regulatory contributions are regressive at low profitability.
  - Eliminating PTU does not substantially affect progressivity.
- International comparison:
  - Peru is mid-range in the sample; tax burden higher than Chile; regime competitive mainly due to use of profit-based taxes.
  - Without PTU, Peru’s AETR would be in the lower third of the sample.

### Mining sector — policy recommendations and modeled options
- General recommendations:
  - Limit changes to rates of levies based on operating profits (Royalty and SMT); do not change their bases.
  - Do not change base by limiting depreciation deduction or eliminating Royalty deductibility from the income tax base.
  - Maintain immediate deduction of exploration expenses in the income tax base.
  - If Royalty floor (percentage of gross income) is raised, increase should be moderate and, under no circumstances, more than 1 percentage point.
  - Consider slightly increasing marginal rates of SMT to increase progressivity.
  - Apply ring-fencing at the project level for Royalty and SMT; allow unsuccessful exploration expenses to be deducted from successful project base.
  - Grant tax stability only for parameters relating to mining taxes and changes targeting mining industry; do not protect against fiscal changes of general application.
  - Apply legislative criteria to asset deduction and amortization for calculation of Royalty and SMT base.
- Specific option outcomes (representative large-scale copper project):
  - Option 1 (depreciation over 10 years vs 5 years): raises discounted AETR from 56.6 to 61.3 percent; contractor’s IRR drops from 15 to 14.3 percent.
  - Option 2 (exclude PTU and depreciation/amortization from Royalty and SMT bases): undiscounted tax burden increases by 2.7 percentage points; investor IRR decreases 0.6 percentage points.
  - Option 3 (eliminate Royalty and SMT deductibility from income tax base): increases tax burden by ~2.5 percentage points (equivalent to raising those rates by 29.5 percent).
  - Option 4 (increase Royalty floor): floor currently 1 percent of sales; raising floor above 0.5–1 percentage point risks floor dominating and decreasing progressivity; current minimum Royalty level of 1 percent applies when operating margin < 37 percent.
  - Option 5 (package: Options 2–4 combined, with Royalty floor to 2 percent): tax burden increases by 6.5 percentage points including PTU (12.4 percentage points in discounted AETR); investor rate of return decreases by 1.4 percentage points; Peru moves into upper third of peer group and progressivity decreases.
  - Option 6 (modify Royalty and SMT parameters and raise dividend withholding): two parameter scenarios P1 (dividend withholding 7.5 percent) and P2 (10 percent). Dividend withholding increase alone: to 7.5 percent raises tax burden by 1.5 percentage points; to 10 percent raises by 2.9 percentage points. Undiscounted tax burden with suggested parameters: 45.5 percent (P1) and 46.2 percent (P2). These keep Peru mid-range and maintain investor returns at attractive levels while slightly increasing progressivity.
- Final recommended approach:
  - Do not modify Royalty and SMT base.
  - Limit reforms to Royalty and SMT parameters and consider reducing number of operating-margin tranches.
  - Weigh benefits of aligning mining depreciation with general regime against investor risk.
  - Maintain immediate depreciation for exploration expenses.
  - Limit Royalty floor increase to a maximum of 1 percentage point.

### Ring-fencing and other structural points
- Ring-fencing options: sector level; concession area level; individual project level.
- Current Peruvian practice: Royalty and SMT calculated company-wide (exception: projects under TSC).
- Recommendation: project-level ring-fencing for Royalty and SMT.
- Concession area (surface) payments: common internationally; provide early/stable income and discourage speculative accumulation; amounts vary widely (selected figures provided, e.g., South Australia production minimum 3,894.4 US$/km2; Mexico production minimum 83.5 US$/km2 and maximum 1,826.2 US$/km2).

### Fiscal instruments and international practices (summary)
- Corporate income tax general rate in Peru: 29.5 percent (projects with TSC: +2 percentage points relative to rate in effect at signing).
- Depreciation conventions vary across countries; many allow immediate deduction for exploration.
- Loss carryforward: Peru allows carryforward with an annual cap of 50 percent of profits (alternative regime: carryforward of 100 percent but only for four fiscal years).
- Deductibility of mining taxes from income tax base: nearly universal practice (Zambia exception).
- Withholding tax rates and treaty interactions: lowest available treaty rate used in FARI analysis; treaty rates can significantly lower withholding.

### Annex II — FARI production models and base price assumptions
- Production models built for four projects: Large-Scale Copper Project (Quellaveco), Medium-Scale Copper Project (Cotabambas), Silver/Zinc/Lead Project (Corani), Gold Project (La Arena).
- Financing assumption: development costs 70 percent financed through a structured loan at a LIBOR interest rate above 5 percent.
- Base scenario commodity price assumptions (constant U.S. dollars):
  - Copper US$3.50/lb
  - Gold US$1,550/troy oz
  - Zinc US$1.10/lb
  - Silver US$24/oz
  - Lead US$2,200/metric ton
  - Molybdenum US$22,000/metric ton

### Key mining-sector numerical indicators preserved
- Mining accounted for 10 percent of GDP (last decade).
- Mining exports share (2011–2020): 58 percent of total exports; copper 46 percent; gold 33 percent.
- Direct mining employment: close to 200,000.
- Mining revenue peaks: close to 3.5 percent of GDP (2007); <1 percent in 2015–2016; 3 percent expected in 2021.
- Regulatory/other charges: combined rate 0.24 percent of sales.
- FARI AETR undiscounted: Peru 41.7 percent; with TSC 43.1 percent.
- PTU contribution in AETR: 4.4 percentage points.
- Discounted AETR (10 percent): Peru 56.6 percent (without TSC).
- Investor after-tax IRR: around 15 percent.
- Royalty floor: current 1 percent of sales; applies when operating margin < 37 percent (reference 36.5 percent).
- Recommended maximum Royalty floor increase: 1 percentage point.
- General income tax rate: 29.5 percent.

### Income and capital gains — findings
- Distribution:
  - UIT (Unidad Impositiva Tributaria) = S/. 4,300 (2020).
  - Less than 1 percent of taxpayers (natural persons) with reported income > 40 UIT earn close to 75 percent of total first and second category income.
  - Total taxpayers in sample: 7,392,593; First and second category income total (thousands of soles): 19,454,248.
- Revenue:
  - First and second category income tax collection: around 0.4 percent of GDP in recent years.
  - These categories contribute 6.4 percent to total income tax revenue in Peru.
- Design and regressivity:
  - Statutory schedular rates for capital income are low (generally 5 percent), creating regressive outcomes as income rises; AER decreases slightly for higher capital income.
  - Highest average effective rate paid by lowest income group (0–5 UIT).
- Rental income (first category):
  - Flat treatment: gross rental income taxed at 6.25 percent; 20-percent reduction reduces effective rate to 5 percent.
  - Minimum taxable rent: 6 percent of cadastral value.
  - Recommendation: align first category (rental) with progressive employment income rates (fourth- and fifth-category), allow general deduction of 20 percent of gross income or documented expenses, and reduce rent deduction to 15 percent of rent paid.
  - Estimated collection impact of aligning rental regime: could double collection from rental income to S/. 1.15 billion (2020) or 0.16 percent of GDP; estimated increase vs recorded 2020 collection S/. 640 million (S/. 1.15–0.51 billion).
  - Distributional effect: 80 percent of the increase concentrated among persons with income above 80 UIT ( < 0.5 percent of taxpayers).
  - Informality risks: Peru’s informal economy 45 percent of GDP in 2018; only 170,000 annual tax returns for first category income vs more than a million rental homes.
- Capital gains (second category) — issues and recommendations:
  - Legal framework: gains taxed as disposal of assets not intended to be marketed; gains of domiciled legal persons taxed at 29.5 percent; natural persons under schedular regime.
  - Real estate: occasional sale taxed as second category (5 percent on gain); exemptions exist for dwellings inhabited by seller ≥ 2 years.
  - Shares: computable acquisition cost not indexed to inflation; general statutory deduction reduces tax base by 20 percent of gross income for natural persons; BVL (Lima Stock Exchange) sales exempt under Law 30341 (renewable, valid until December 2022).
  - Asymmetry between dividends and share disposal can encourage avoidance through share sales instead of dividend distributions.
  - Recommendations for capital gains and shares:
    - Allow BVL exemption to expire in 2022.
    - Tax MILA market capital gains like other foreign source gains (progressive rate).
    - Eliminate 20-percent general deduction.
    - Keep flat capital gains rate low, not more than 10 percent (align with dividend rate).
    - Index acquisition cost of shares to inflation.
    - Exempt a relatively small annual amount of capital gains.
    - For legal persons, make losses from disposal of shares deductible only against gains of same kind (schedular treatment).
- Dividends:
  - Current withholding rate on dividend distributions: 5 percent (definitive rate).
  - Combined rate for profits in Peru: 33 percent.
  - Regional comparators: Honduras, Panama, Mexico, Costa Rica, Dominican Republic 10 percent; Argentina and Uruguay 7 percent.
  - Policy options:
    - Increase dividend withholding to 6.25 percent to align with disposal of shares and rentals (if 20-percent deduction eliminated).
    - Potential maximum rate up to 10 percent (upper limit), noting trade-offs with competitiveness and combined burden.
    - Alternatively integrate dividends into progressive taxation with corporate tax credit (more complex administratively).
  - Collection impact: static estimate raising dividend withholding to 10 percent could yield ~S/. 1.6 billion, or 0.18 percent of GDP in 2022.
- Presumptive dividends and avoidance:
  - Income tax should apply to “presumptive dividends” (dividendos fictos) such as non-deductible personal expenses, loans to shareholders, excess related-party rent, and transfer price manipulations.
  - Current law ambiguities: limited scope for loans to family members; SUNAT data (2017–2020) show loans to shareholders represented 24 percent of distributable profits while only 4 percent were classified as presumptive dividends.
  - Recommendations:
    - Clarify and broaden presumptive dividend definition to include transfer price adjustments and overpaid interest.
    - Treat loans to family members of partners/shareholders as profit distributions up to freely available profits.
    - Do not withhold on first dividend distribution between legal persons until a registration system for profits after corporate income tax and related records are adopted.
- Interest and debt instruments:
  - Interest taxation: natural persons 5 percent; legal persons 29.5 percent; non-domiciled persons 4.99 percent; payments to low-tax jurisdictions or back-to-back related-party arrangements: 30 percent withholding.
  - Large exemptions: interest on public debt, many deposit-type instruments (including insurance company instruments), and some fixed-income securities upon disposal.
  - Distortions:
    - Exemption on public debt interest can crowd out private investment.
    - Taxing nominal interest without inflation adjustment can be regressive and potentially confiscatory for small savers.
    - Current administration’s delegation request does not include interest regime reform.
  - Medium-term recommendations:
    - Extend treatment to debt derivatives and credit component in financial leases.
    - Eliminate exemptions on interest paid by the financial system, including insurance savings instruments.
    - Eliminate exemption on public debt interest obtained by residents.
    - Maintain exemption on investment interest below a certain average annual balance.
    - Match tax rate on interest to capital gains and dividends.

### IGV (VAT) on digital services — findings and recommendations
- Gap and problem:
  - Services generally taxed under IGV, including digital services provided remotely (General Sales Tax Law, Art. 1.b).
  - Lack of IGV collection mechanism for Business-to-Consumer (B2C) imported digital services; end consumer cannot practically withhold and remit IGV.
  - Business-to-Business (B2B) importers can reverse/credit IGV and act as withholders.
- SUNAT proposal (dual/hybrid model reflecting international consensus):
  - Voluntary electronic registration by non-resident digital providers (no permanent establishment created).
  - Providers pay tax electronically in foreign currency; payment definitive with no credits.
  - Simplified regime: no obligation to issue receipts or keep accounting books and records.
  - If providers do not register, financial intermediaries in Peru would be notified to withhold IGV on payments by consumers without RUC numbers.
  - No threshold for exempt digital transactions; withholding alternative to be implemented two months after registration portal availability.
  - SUNAT has a list of ~40 digital service companies operating from abroad expected to register.
- International practice examples:
  - OECD-recommended remote registration model implemented by >60 countries; EU since 2005.
  - Latin America: Chile, Colombia, Uruguay follow OECD model; Mexico uses representative/agent; Argentina/Brazil/Costa Rica/Ecuador/Paraguay use financial-intermediary withholding; hybrid models exist (Costa Rica, Ecuador, Chile, Colombia).
- Design challenges:
  - Precisely defining taxed digital services given diverse business models (pure digital goods, intermediation platforms, fees).
  - Need for regulation with a general definition plus explicit lists of taxed and untaxed services for legal certainty.
  - Ensure neutrality with equivalent domestic transactions (e.g., books and journals).
  - Current exemption on express shipments up to US$200 per shipment: changing this may be constrained by Free Trade Agreement interpretation with the United States; re-examine interpretation.
  - Withholding via financial intermediaries has operational limits (updating provider lists, providers operating under different names, card issuers abroad).
- Recommendations:
  - Include in regulation a clear general definition of taxable digital services plus explicit examples of included and excluded services.
  - Standardize treatment of digital services with equivalent physical transactions unless materially different.
  - Explore eliminating IGV exemption on express delivery shipments (parcels) and replace with IGV collection/remittance by the digital seller or platform.
  - Re-examine Free Trade Agreement interpretation that may protect the US–Peru express-delivery IGV exemption.
  - Use simplified remote registration to close avoidance and informality gaps rather than merely reducing exempt amount thresholds.

*Source: IMF mission material and FAD analysis as presented in the supplied PDF content.*

### PREFACE____________________________________________________________________________________________________7

### PREFACE

### Mission purpose and scope
- The mission was carried out in response to a request by the Ministerio de Economía y Finanzas (MEF) of Peru.
- Objective: analyze certain aspects of the country’s tax regime, notably the mining sector’s fiscal regime, the taxation of capital gains, and the application of VAT to digital services.
- Modality: remote technical assistance mission by the Fiscal Affairs Department (FAD) of the International Monetary Fund (IMF).
- Mission dates: November 15 to 26, 2021.

### Mission composition
- FAD headquarters and lead:
  - Roberto Schatan (FAD and head of mission)
  - Eduardo Camero (FAD)
- External advisors:
  - Juan Carlos Guajardo
  - Victor Mylonas
  - Ricardo Villalobos

### Principal meetings and Peruvian counterparts
- Senior MEF leadership:
  - Minister of Economy and Finance Pedro Francke
  - Deputy Minister of Economy Alex Contreras
- MEF technical team leaders and participants:
  - Marco Camacho, Director General of Government Revenue Policy
  - Miryam Yepes, Director of Economic Intelligence and Tax Optimization
  - Zulema Calle, Director of Income and Assets
  - Irene Gonzales, Director of Consumption and Taxation of Foreign Trade
  - Eduardo Sotelo, MEF Advisor
- Additional MEF participants for mining fiscal regime discussions:
  - Minister’s advisors: Jose de Echave, Armando Mendoza, Victor Torres
- SUNAT participation:
  - Palmer de la Cruz, National Strategies and Risks Intendant
  - Officials from various SUNAT departments
- Other government counterparts:
  - Ministry of Mining: Alfredo Rodriguez, Director General of Mining; Walter Sanchez, Director of Promotion

### External observers and stakeholders
- Observers:
  - Luisa Charry, Senior Economist, IMF Western Hemisphere Department
  - World Bank staff
- Private sector and professional stakeholders:
  - Representatives of the National Society of Mining, Petroleum, and Energy (Sociedad Nacional de Minería, Petróleo y Energía – SNMPE)
  - Lima Stock Exchange executives
  - Tax specialists from EY and PwC

### Acknowledgement
- The mission expresses gratitude to the authorities for their extensive and kind cooperation.

*Source: PREFACE, 1perea2022002 - PREFACE*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview
- In October 2021, the MEF asked Congress for the delegation of powers to legislate on tax matters with the aim of increasing tax collections and adding progressivity to the Peruvian tax system.
- The initiative being developed by the MEF contains (tentatively, to date) around 40 specific measures—some administrative, others related to tax policy—that the MEF hopes will, as a whole, generate additional revenue for the treasury.
- The tax collection impact of quite a few of the measures (including those pertaining to the mining sector) has not been estimated, whereas the measures for which there is a calculation are estimated to bring in a little over 1 percent of GDP in revenues.
- Given Peru’s low level of tax collections, both relative to its own historical trends as well as those of other countries in the region, the amount expected to be collected with the proposed reform is modest. However, increasing tax collections by enhancing progressivity would appear to be the right approach.
- The MEF sought advice from the IMF on three important aspects of the tax reform plan: (i) the mining sector regime; (ii) the income tax on capital gains; and (iii) VAT (IGV) on the importation of digital services.

### Mining sector: findings
- Mining contributes to public finances ranging from 1 to 3 percent of GDP depending on the year.
- The first chapter examines how the tax burden on profits of a representative mining project in Peru compares with the same project in other countries with a developed copper mining industry, and models effects of contemplated fiscal regime changes on Peru’s relative position.
- One key finding: Peru’s current fiscal regime is competitive mainly due to the use of specific profit-based taxes.
- The total, undiscounted tax pressure (or the effective tax burden), considering profit sharing payments to workers for a representative large-scale copper project, is 41.7 percent of the profit (cash flow).
- This 41.7 percent comprises contributions such as income tax, dividend withholding taxes, royalties, the special mining tax, and employee profit sharing (which creates a wedge between the company’s tax burden and the tax collections that reach the treasury).
- The 41.7 percent is in the mid-range of the sample of 15 fiscal regimes in the group of comparable countries.
- The tax burden in Peru is higher than the one in Chile (its closest competitor in copper projects).
- The regime permits some (moderate) space for increasing the sector’s tax burden without losing international competitiveness, but the manner of increase is crucial and reforms should not change Peru’s ranking relative to competitors.

### Mining sector: policy recommendations
- Only the rates of levies based on operating profits (royalties and the special mining tax) should be (moderately) changed.
- Do not change the base of these levies, either by limiting the deduction for the depreciation of fixed assets or eliminating the Royalty deduction from the income tax base.
- Maintain the immediate deduction of exploration expenses in the income tax base.
- If the decision is made to raise the Royalty floor (calculated as a percentage of gross income), the increase should be moderate and, under no circumstances, more than 1 percentage point.
- Consider slightly increasing the marginal rates of the special mining tax to make the system more progressive. The report provides various scenarios in that regard.

### Income and capital gains: findings
- The second chapter discusses options for strengthening the capital gains tax regime (first and second category of income).
- Income and capital gains in Peru are highly concentrated among top earners. A broad SUNAT sample shows that taxpayers who are natural persons with reported income greater than 40 units of taxation (Unidades Impositivas Tributarias – UIT), accounting for less than 1 percent of the total number of taxpayers, earn 75 percent of the sum of first and second category income.
- The tax on these income categories is regressive by design because the rate is the same (and modest) as income rises. The average effective tax rate decreases slightly for those with higher capital income.
- Historically, taxation of first and second category income has contributed roughly 0.4 percent of GDP.
- Internationally, withholding tax rate on distributed dividends in the sample fluctuates mainly between 7 and 10 percent, whereas capital gains from the disposal of assets are often subject to a tax rate above 10 percent.
- Some countries subject income and capital gains to the general income tax regime for natural persons (progressive marginal rates and income brackets); some grant considerable exemptions (for example, gains from sale of shares in the domestic stock market).
- The government’s intention to raise (and standardize) to 10 percent (as a maximum) the rate applicable to income and capital gains could be justified on equity and (albeit marginally) revenue-raising grounds, though additional contribution to government revenue is relatively minor.

### Income and capital gains: design issues and recommendations
- Leases:
  - Even if the rate is raised to 10 percent, the regime would still disproportionately favor legal persons as lessees, since they would be able to deduct the rental expense at 29.5 percent.
  - Recommendation: subject rental income to the progressive rate under the general income tax regime for natural persons.
  - Recommendation: reduce the 30-percent deduction available to lessees, which is largely a regressive component.
- Sale of real estate:
  - To achieve an effective 10-percent rate increase, the 20-percent general deduction (a statutory rate cut) must be eliminated; without it, the 10 percent nominal rate would only be an 8 percent effective rate.
  - The broad exemption on the sale of residential housing undermines collection potential. A more progressive system would consider a limit on the exempted gain (for example, approximately US$200,000 in Mexico or US$250,000 for an individual in the United States, or double for a married couple).
- Sale of shares:
  - Important decision: whether the exemption on the Lima Stock Exchange (Bolsa de Valores de Lima – BVL) will be preserved. The current benefit expires in 2022.
  - One option: allow the benefit to expire and apply the same flat 10-percent rate to the gain.
  - Correct the tax base determination by eliminating the 20-percent general deduction and allowing adjustment of acquisition cost for inflation.
  - Consider taxing fixed-income instruments currently exempt, which compete advantageously against variable-income market instruments.
- Dividends:
  - The rate applicable to dividend distribution should be the same as for capital gains.
  - Close loopholes conducive to tax evasion: correct profit transfers via manipulating transfer prices or overpaying interest by imposing corporate income tax on the difference (with market value) and characterizing this difference as a presumptive dividend distribution taxed at the dividend rate.
  - Apply the same treatment to loans to family members of partners or shareholders.
- Taxing intra-group dividend distributions:
  - Option: tax distribution of dividends between legal persons as a tax advance with credit along the intragroup chain until the dividend to the ultimate shareholder is paid.
  - Note: This is not common internationally because it restricts resource flows for financing new investments within the group and would require special administrative control to track credits. Peru does not currently have a control system requiring any dividend distribution (or advance) to have paid corporate income tax first.
- Interest:
  - The reform does not envisage measures to modify the regime applicable to interest, which grants individuals a broad exemption, adding a regressive component.
  - Not all interest paid by the financial sector is taxable, including savings instruments offered by insurance companies; public debt interest is not taxed either.
  - Taxing interest is complicated because of its inflationary component; taxing without adjustment for inflation could tax the wealth of small savers with negative real returns.
  - Possible partial solution: exempt deposits below a certain threshold, though this has problems.
  - Recommendation: consider a reform of the interest regime focused on limiting existing exemptions in the medium term.

### IGV on digital services imports: findings
- The third chapter discusses application of the general sales tax (Impuesto General a las Ventas – IGV) on digital services imports.
- The proposal being developed by Peru’s tax authority reflects international consensus: voluntary registration and simplified remote access for providers without a physical presence in the country so they can withhold and remit IGV from abroad.
- The proposal includes a withholding mechanism for payments made by consumers of such services through the financial system in cases where the provider fails to pay the tax directly.
- The initiative broadens the tax base and injects greater neutrality into the IGV regime, insofar as equivalent domestic services are normally taxed (and when they are exempt, efforts will have to be made to maintain neutrality).
- A major technical difficulty: precisely defining the universe of digital services subject to the tax collection mechanism given the variety of business models.
- Recommendation: accompany the general definition of “taxed digital service” in the law with, potentially in a regulation, an explicit list of taxed services and another list of untaxed services to provide operators with legal certainty.
- The initiative does not intend to substitute the current IGV exemption on expedited shipments (up to US$200 per shipment) with a similar mechanism where the shipping service provider withholds the tax.
- An obstacle to changing the exemption is the interpretation of the Free Trade Agreement with the United States, which would protect the IGV exemption on parcel imports from that country; it is recommended to re-examine this interpretation.
- Recommendation: take advantage of the simplified remote IGV payment compliance regime to close potentially large gaps in tax avoidance and informality. This measure is preferable to simply reducing the exempt amount, which will lead to higher customs administration costs.

### Key statistics and figures (as presented)
- The MEF’s calculated measures are estimated to bring in a little over 1 percent of GDP in revenues.
- Total, undiscounted tax pressure for a representative large-scale copper project in Peru: 41.7 percent of the profit (cash flow).
- Sample of 15 fiscal regimes used for international comparison.
- Taxpayers with reported income greater than 40 units of taxation (UIT) account for less than 1 percent of taxpayers and earn 75 percent of the sum of first and second category income.
- Historical contribution of taxation of first and second category income: roughly 0.4 percent of GDP.
- International sample: withholding tax on distributed dividends fluctuates mainly between 7 and 10 percent.
- Government’s proposed maximum rate for income and capital gains: 10 percent (as a maximum); note that without eliminating the 20-percent general deduction, a 10 percent nominal rate would be an 8 percent effective rate.
- Mining contribution to public finances: ranging from 1 to over 3 percent of GDP depending on the year.
- Foreign Direct Investment in mining: reached US$26 billion in 2018 (2005–2018 series referenced).
- Total tax revenue of the general government, 2019: Peru 14.6 percent of GDP; Average, excl. Peru 18.6 percent of GDP; OECD average 23.9 percent of GDP.
- Central government tax revenue by category, 2014/2019/2020 (In percent of GDP):
  - Total: 16.6 / 14.4 / 13.1
  - Income tax: 7.0 / 5.7 / 5.4
  - General sales tax: 8.8 / 8.2 / 7.8
  - Selective consumption tax: 0.9 / 1.1 / 1.0
  - Import tax: 0.3 / 0.2 / 0.2
  - Other tax revenue: 1.5 / 1.5 / 1.2
  - Refunds: -1.9 / -2.3 / -2.4

*Source: IMF mission executive summary and report text as provided.*

### 8.      The mining sector  is one of the country’s main economic drivers, accounting  for

### 8.      The mining sector  is one of the country’s main economic drivers, accounting  for

### Overview and recent performance
- Mining accounted for 10 percent of GDP in the last decade.
- Contribution to total GDP growth:
  - 2015: 1.2 percentage points of total growth (3.3 percent).
  - 2016: 1.8 percentage points of a total of 4 percent.
  - 2017: 0.5 percentage points.
- These results are mainly due to higher copper production in the Cerro Verde and Las Bambas mines.

### Exports and employment
- Mining accounted for 58 percent of total exports between 2011 and 2020.
- Composition of mining exports:
  - Copper: 46 percent of total mining exports.
  - Gold: 33 percent of total mining exports.
- Employment:
  - Mining averaged close to 200,000 direct jobs over the past decade.

### Fiscal revenue from mining
- Revenue collections from mining amount to close to 3.5 percent of GDP (peak levels).
- Historical variation in mining revenue as percent of GDP:
  - Levels close to 3.5 percent of GDP in 2007.
  - Fell to less than 1 percent of GDP in 2015 and 2016.
  - Rebounded and returned to 3 percent expected by the MEF in 2021.
- Main mining-specific collections (presently dominated by):
  - Mining Royalty (Regalía Minera).
  - Special mining tax (Impuesto Especial a la Minería – SMT).
- Regulatory and other small charges included in analyses amount to a combined rate of 0.24 percent (charges to finance OSINERGMIN and OEFA).

### Recent history of the mining fiscal regime (summary)
- Pre-2004: tax system based on corporate income tax and dividend distribution tax.
- 2004: introduction of an increasing royalty (1 to 3 percent) calculated on sales; small producers and artisanal miners had a rate of 0 percent.
  - 2004 Royalty tax base: Gross sales value less transportation, storage, loading, and stowage costs and other exporter-assumed costs.
  - 2004 Royalty rates: increasing between 1 and 3 percent depending on sales by concession holders.
- 2007–2011: voluntary, extraordinary, and temporary economic contribution on net profits:
  - Tax base: companies’ taxable income from the previous year; payment only if international prices higher than the average for the last 15 years.
  - 40 mining companies signed agreements.
  - Effective rate: 1.75 percent for companies that paid royalties and 3.75 percent for companies that did not (due to tax stability agreements).
- September 2011 reform (current regime elements):
  - Mining Royalty calculated on operating profit, with increasing rates according to operating margin and a floor equivalent to 1 percent of gross sales.
  - Creation of the SML (Gravamen Especial Minero) calculated on operating profit with increasing rates according to operating margin, applicable to companies with projects under tax stability contracts.
  - Creation of the SMT calculated on operating profit with increasing rates according to operating margin, applicable to companies without tax stability contracts.

### Key tax parameters and treatment
- General income tax rate: 29.5 percent.
- For projects with a tax stability agreement (TSC), income tax rate is two percentage points higher than the rate in effect at the time of signing.
- Depreciation:
  - For FARI analysis simplification: entire investment depreciated over five years for income tax purposes.
  - For Royalty and SMT base in FARI: accounting depreciation assumed over 10 years.
- Employee profit sharing (PTU):
  - Share percentage: 8 percent (modeled as 8.5 percent in FARI for simplicity in one case).
  - Calculated on taxable income for the year after offsetting prior year losses.
  - PTU limited to a maximum of 18 months of salary; excess deposited in Fondoempleo.
  - PTU is deductible from income tax and, as part of sales cost, from the Royalty and SMT base.
  - Additional mining retirement fund contribution: 0.50 percent of taxable income (presented as part of the PTU).
- Other contributions:
  - Regulatory contributions to finance technical regulator and environmental authority: combined rate of 0.24 percent of sales.
- Stability agreements modalities:
  - Stability under foreign and private investment legislation: valid for 10 years; requires minimum investment of US$10 million for two years after contract signing; freezes income tax rate at signing level.
  - Stability under the General Mining Law: valid for 10, 12, or 15 years depending on investment and production; freezes tax rates and calculation methods; raises income tax rate by 2 percentage points; projects stabilized prior to 2012 apply SML instead of Royalty and SMT.

### FARI methodology and modeling assumptions
- Fiscal Analysis of Resource Industries (FARI) uses a discounted cash flow model to analyze fiscal regimes.
- Main indicators from government perspective: average effective tax rate (AETR), marginal effective tax rate (METR), and progressivity.
- Investor indicators: net present value (NPV), post-tax internal rate of return (IRR), payback period.
- Representative projects analyzed:
  - Large-scale copper extraction project (results typically presented).
  - Medium-sized gold extraction project.
  - Medium-sized silver, lead, and zinc project.
- For FARI:
  - Operating profit defined as income from sale of minerals less cost of sales and operating expenses, including sales and administrative expenses, calculated based on accounting standards.
  - Royalty and SMT marginal rates increase with operating margin; marginal rates applied to operating margin tranches; effective rates calculated by applying marginal rates to respective tranches.
  - FARI presents cases with and without PTU.

### FARI results for Peru (large-scale copper project)
- Average undiscounted tax burden (AETR) of the current regime in Peru: 41.7 percent.
- PTU generates 4.4 percentage points of the tax burden.
- Tax burden for a project with a TSC is 1.4 percentage points higher than the current one.
- Discounted AETRs (at 10 percent) show similar behavior to undiscounted AETRs.
- Composition of collection (shares of total collections):
  - Income tax: between 60 and 70 percent of the total.
  - Royalty and SMT: 15 to 21 percent.
  - PTU: 18 percent.
- Investor after-tax internal rate of return (IRR): around 15 percent.

### Progressivity and sensitivity to profitability
- A well-designed fiscal regime should adapt to changes in project profitability (progressivity).
- Peru’s regime shows a good degree of progressivity; tax burden in the general regime stabilizes around 43 percent at higher profitability.
- Effect of price on tax burden (current regime, large-scale copper project):
  - Tax burden increases from around 25 percent for a copper price of US$2.10/lb (IRR of 6 percent) to 44 percent for a price of US$7.20/lb (IRR of 39 percent).
- The minimum Royalty floor (1 percent of sales) and regulatory contributions are regressive; as profitability increases, operating margin effects dominate and raise the tax burden.
- Eliminating the PTU does not substantially affect the regime’s progressivity.

### Comparative FARI analysis with other copper-producing countries
- Comparative FARI exercises apply the same representative project and price assumptions across countries to compare fiscal regimes, without adjusting for cost structure, mine productivity, or country risk.
- Group of comparable copper-producing countries selected, favoring Latin American peers (production and reserves table provided for comparative context).

*Source: IMF staff report chapter on "The mining sector" (excerpts from the provided content).*

### 30.      The tax burden of a representative investment project in Peru, measured as the AETR

### 30.      The tax burden of a representative investment project in Peru, measured as the AETR

### Key findings on current tax burden and competitiveness
- The AETR discounted to present value (at 10 percent) for a representative investment project in Peru is 56.6 percent (without TSC) and ranks 8th among the 16 regimes listed (not counting the TSC regime in Peru).
- Undiscounted, the AETR for Peru is 41.7 percent and increases to 43.1 percent if the company opts to sign a TSC.
- The 43.1 percent (with TSC) is 5 percentage points less than the regime in the next step up in the table (Brazil).
- The United States (Arizona) and Panama have lower tax burdens, slightly above 30 percent, undiscounted.
- Without considering the PTU, Peru’s AETR would be in the lower third of the sample.
- The current (discounted) regime in Peru is slightly higher than that of Chile.

### Progressivity of the Peruvian fiscal regime
- Peru’s fiscal regime is one of the most progressive in the peer group: the AETR increases more as a project becomes more profitable.
- The current regime, even considering the PTU, has the lowest AETR at low profitability.
- Regimes based on royalties according to gross income, or with limits on deductions or on amortizable cumulative losses, tend to be regressive at low and moderate profitability.
- Chile’s regime is one of the few progressive counterparts; its structure is similar to Peru’s with taxes having progressive rates on operating profit.
- Report emphasis: maintaining mid-range tax burden and high progressivity is important to keep Peru competitive for new mining investment.

### Sensitivity: role of PTU
- The tax burden estimation is very sensitive to the incidence of PTU.
- Recommendation: take PTU into account when considering space for modifications in the tax burden.

### Option 1 — Modification of asset depreciation rates
- Three depreciation assumptions compared: (i) 5 years (current regime), (ii) 10 years (MEF proposal), (iii) immediate depreciation (extreme illustrative case).
- Depreciation rates modify the income tax payment profile over time but not the undiscounted total.
- Shifting from depreciation over 5 years to 10 years:
  - Raises discounted AETR (10 percent discount) from 56.6 to 61.3 percent.
  - Contractor’s IRR drops from 15 to 14.3 percent.
- Observation: effects on collection are limited and temporary; changes mainly affect new or recently started production projects and can increase perceived project risk by delaying returns.
- Peru-specific rule: indefinite carryforward of tax losses is allowed only up to a 50 percent reduction in taxable income (an alternative regime allows carryforward of 100 percent of losses, but only for four fiscal years).

### Option 2 — New Royalty and SMT bases (exclude PTU and depreciation/amortization)
- Excluding PTU and depreciation/amortization from Royalty and SMT bases moves bases away from operating profit and significantly increases tax burden.
- Effect on undiscounted tax burden: increase of 2.7 percentage points (slightly less without PTU).
- Investor IRR decreases 0.6 percentage points in both cases (from 15 to 14.4 percent with PTU; from 15.5 to 14.9 percent without PTU).
- Increase in discounted AETR is around 5.5 percentage points.

### Option 3 — Elimination of Royalty and SMT deductibility from income tax base
- Eliminating deductibility of Royalty and SMT from the income tax base is equivalent to raising those rates by 29.5 percent (the income tax rate).
- This leads to a significant increase in the tax burden of around 2.5 percentage points.
- Note: deductibility of specific mining taxes from the income tax base is a virtually universal practice; in the sample only Zambia disallows it.

### Option 4 — Increased Royalty floor
- Current Royalty floor: 1 percent of the value of sales.
- Increasing the Royalty floor makes the Royalty a hybrid instrument (progressive structure plus a floor guaranteeing minimum collection at low operating margin levels).
- Non-linear effect: as the floor increases, progressive tranches apply less frequently; a floor increase above 0.5 to 1 percentage point would cause the floor to dominate and decrease progressivity.
- For the current Royalty structure, the minimum Royalty level of 1 percent applies when the operating margin is below 37 percent.
- Complementary proposal: raise Royalty floor only for larger companies — risks: may distort nature of the floor, cause collection jumps year-to-year for same producer, and add complexity.

### Option 5 — Package of measures (Options 2–4 combined)
- Package components: exclude PTU and depreciation/amortization from Royalty and SMT bases; eliminate Royalty and SMT deductibility from income tax base; raise Royalty floor to 2 percent. Structure of rates and tranches remain unchanged.
- Tax burden impacts:
  - Increase by 6.5 percentage points including the PTU (12.4 percentage points in the discounted AETR).
  - Increase by 5.4 percentage points not including the PTU.
- Investor rate of return would decrease by 1.4 percentage points.
- Competitiveness effects:
  - Peru would move into the upper third of the peer group and surpass Brazil in undiscounted tax burden.
  - Progressivity would decrease: at low profitability levels, Peru would no longer have the lowest rates in the sample; the system would be flatter.

### Option 6 — Changes to Royalty and SMT parameters (with higher dividend withholding)
- Maintain tax bases but modify Royalty and SMT rates and tranches; raise Royalty floor to 2 percent.
- Consider increasing dividend withholding rate from 5 percent to 7.5 or 10 percent.
- Two parameter-setting scenarios presented:
  - P1 corresponds to dividend withholding rate of 7.5 percent.
  - P2 corresponds to dividend withholding rate of 10 percent.
- Application of new Royalty floor to operating margin levels:
  - In P1, the 2-percent Royalty floor would apply to operating margins below 37 percent.
  - In P2, the 2-percent Royalty floor would apply to operating margins below 39 percent.
  - Reference (current) parameter: 36.5 percent.
- Tax burden effects:
  - Increase in dividend withholding rate alone to 7.5 percent raises tax burden by 1.5 percentage points.
  - Increase to 10 percent raises tax burden by 2.9 percentage points.
  - With the suggested Royalty and SMT parameters, the undiscounted tax burden would be 45.5 percent (P1) and 46.2 percent (P2).
  - Investor return would be maintained at fairly attractive levels.
- Competitiveness: these parameter changes would keep Peru in the mid-range of mining countries; relative position not substantially modified.
- Progressivity: modifying Royalty and SMT parameters together with higher dividend withholding would slightly increase progressivity, with more marked progressivity at lower profitability levels and high progressivity at higher profitability levels.

### Recommendations (as stated)
- Modifying the Royalty and SMT base is not considered appropriate.
- Changes to the fiscal regime should be limited to the Royalty and SMT parameters, taking into account the increase in the tax burden due to a higher dividend withholding rate under consideration.
- As part of setting new Royalty and SMT parameters, consideration could be given to reducing the number of tranches in the operating margin for the calculation of the effective rates. The report includes parameter-setting that could serve as a starting point.
- The benefits of equating mining depreciation rates to the general regime must be weighed against the increased risk to investors.
- In any scenario, maintain immediate depreciation of exploration expenses.
- The increase in the Royalty floor should be limited to a maximum of 1 percentage point.

*Source: FAD, FARI analysis (as presented in the supplied IMF content).*

### 49.      Ring-fencing defines the scope that a mining company has in order to consolidate

### Ring-fencing defines the scope that a mining company has in order to consolidate income and expenses so as to calculate mining taxes.

### Ring-fencing: purpose, levels, and Peruvian practice
- Finding: Consolidation of income and deductions across activities normally allows a loss in one activity to be deducted from income from other activities; in extractive industries this can:
  - significantly delay government collection because exploration expenses for a new project can be deducted from income of an established project;
  - act as a barrier for new participants who have no current income from which to deduct exploration expenses;
  - distort the measure of a mining project’s profitability.
- Ring-fencing options with increasing constraint:
  - (i) sector level: a company cannot consolidate mining and non-mining activities;
  - (ii) concession area level: tax treatment aligns with mining regulatory treatment;
  - (iii) individual project level.
- Trade-off: Tight ring-fencing can discourage investment, especially in exploration; some countries (example given: Canada) relax ring-fencing to allow deduction of failed exploration expenses from the base of a successful project.
- Peruvian practice:
  - The Royalty and SMT are calculated company wide, not by mining project, with the exception of projects developed under a TSC.
  - Mining taxpayers can consolidate their economic mining activities at the corporate level for both the income tax and the Royalty and SMT.
  - Mining units with a TSC require individual treatment because fiscal parameters applied to them differ from those of other projects.
- Recommendation:
  - Apply ring-fencing at the project level for the Royalty and SMT, allowing unsuccessful exploration expenses to be deducted from the base of successful projects.

### Tax Stability Agreements (TSC)
- Finding: Peru offers mining companies a tax stability arrangement that:
  - imposes a higher income tax rate and is less generous than what is available to taxpayers outside the mining sector;
  - is a means of offsetting perceived country risk for long-term, large-investment mining projects.
- Mechanics in Peru:
  - Tax stability is granted by freezing the application of the tax provisions in effect at the time of signing.
  - The arrangement is symmetrical: companies are not affected by increases in fiscal parameters, but also do not benefit from decreases.
  - Tax stability carries a cost for the investor: the income tax rate under stability is "2 percentage points higher than the rate in effect at the time of signing."
- Administrative complication:
  - Freezing fiscal provisions can be complicated to administer because fiscal laws may be amended multiple times during the tax stability period, leading to contracts signed at different times being governed by different fiscal laws.
  - Options to manage complexity:
    - outline all parameters to be stabilized in the TSC so all information necessary for administering the tax burden is contained in a single document;
    - limit the scope of stability to mining-specific taxes, eliminating stabilization contracts for other taxpayers with respect to tax conditions of general application.
- Recommendation:
  - Grant stability only for parameters relating to mining taxes and changes targeting the mining industry, with no protection afforded against fiscal changes of general application.

### Determining the Operating Profit for the Royalty and SMT
- Finding: The taxable base of the Royalty and SMT is calculated by subtracting operating costs and expenses from the income reported by the taxpayer.
- Treatment of assets and exploration:
  - Investment in tangible and intangible assets is included in costs in accordance with the accounting standards applied by the company, with the exception of exploration expenses, which are depreciated for tax purposes in a straight line over the expected life of the mine.
  - SUNAT must review and, where applicable, audit two different taxable bases: the income tax base and the Royalty and SMT base.
  - Using accounting standards criteria to calculate depreciation of assets reflected in costs makes calculations less transparent; income tax rules establish deductions for assets via tax regulations.
- Recommendation:
  - Apply criteria that are to be defined in legislation to asset deduction and amortization for the calculation of the Royalty and SMT base.

### Fiscal parameters in other mining countries — overview
- Finding: Majority of mining fiscal regimes consist of corporate income tax and a mining-specific tax based on either gross income or a measure of net profit (as in Peru).
- Caution: Differences in tax parameters alone do not determine competitiveness; total tax burden and interactions between fiscal instruments must be considered.

### Corporate income tax — cross-country features
- Finding:
  - Corporate income tax is charged in all mining countries, generally at the same rate as other activities.
  - Most countries apply a fixed rate ranging from 25 to 30 percent.
  - Brazil applies 34.0 percent; Indonesia and Russia apply 20.0 percent.
- Depreciation and amortization:
  - Important due to large initial investments; FARI analysis uses depreciation rates closest to asset types, including accelerated depreciation where applicable.
  - Many countries depreciate assets using straight-line method, typically ranging from 5 to 10 years; some allow depreciation over 2 years (Russia, Democratic Republic of the Congo).
  - Many countries (Australia, Canada, United States, Russia, Zambia) permit immediate deduction of investment in exploration.
  - In most countries, tax depreciation of assets begins when production commences.
- Loss carryforward:
  - Some countries permit unlimited loss carryforward periods (examples: Australia, Brazil, Chile, United States, Mongolia, Russia).
  - Peru: loss carryforward with an annual cap of "50 percent of profits."
  - Canada example: 20 years for mining companies.
- Deductibility of mining taxes:
  - Almost universal practice to allow payment of mining taxes to be deducted from the income tax base, except in Zambia.

- Table 8 (excerpted features preserved):
  - Country tax rates and depreciation rules listed; examples include:
    - Australia (South Australia, Western Australia): 30.0%; Exploration: Immediate; Development: SL (10 years); Use of tax losses: Unlimited; Deductibility of mining taxes: Yes.
    - Brazil: 34.0%; Exploration: SL (5 years); Development: SL (5 years); Use of tax losses: Unlimited; Deductibility: Yes.
    - Canada (British Columbia): 27.0%; Exploration: Immediate; Development: DB (30%); Use of tax losses: 20 years; Deductibility: Yes.
    - Chile: 27.0%; Exploration: SL (6 years); Development: SL (6 years); Use of tax losses: Unlimited; Deductibility: Yes.
    - China: 25.0%; Exploration: SL (10 years); Development: SL (10 years); Use of tax losses: 5 years; Deductibility: Yes.
    - United States: 26.0%; Exp. & Dev. (70%): Immediate; Exp. & Dev. (30%): SL (5 years); Use of tax losses: Unlimited; Deductibility: Yes.
    - DRC: 30.0%; Exploration: SL (2 years); Development: SL (2 years); Use of tax losses: 5 years; Deductibility: Yes.
    - Indonesia: 20.0%; Exploration: SL (4 years); Development: SL (4 years); Use of tax losses: 10 years; Deductibility: Yes.
    - Mexico: 30.0%; Exploration: SL (8 years); Development: SL (8 years); Use of tax losses: 10 years; Deductibility: Yes.
    - Mongolia: 25.0%; Exploration: SL (10 years); Development: SL (10 years); Use of tax losses: Unlimited; Deductibility: Yes.
    - Russia: 20.0%; Exploration: Immediate; Development: SL (2 years); Use of tax losses: Unlimited; Deductibility: Yes.
    - Zambia: 30.0%; Exploration: Immediate; Use of tax losses: 10 years; Deductibility: No.
  - Note: SL means straight line; DB means declining balance.

### Profit-based mining taxes — intentions and examples
- Finding: Profit-based mining-specific taxes aim to tax windfall profits and ideally should not distort investment/production because they are based on profits; they increase tax collection and administration complexity.
- Examples (Box 3) — structures preserved:
  - Chile: Specific Tax on Mining Activities applied to Taxable Mining Operating Income (RIOM); progressive rate ranging from 5 to 34.5 percent based on operating margin for projects with production greater than 50,000 metric tons of fine copper equivalent; ring-fencing at company level.
  - Canada (British Columbia): Fixed rate of 13 percent applied to net income; alternative minimum tax of 2 percent of the difference between current operating costs and income; ring-fencing at mine level.
  - Canada (Quebec): Progressive marginal rate ranging from 16 to 28 percent as operating margin increases; alternative minimum tax of 1 percent on value of sales below Can$80 million and 4 percent above Can$80 million; delimited at mine level.
  - Mexico: Fixed rate of 7.5 percent on taxable income for income tax purposes, less operating costs and exploration investments; until 2020 companies could deduct surface payments; ring-fencing at company level.
  - Papua New Guinea: 30-percent tax on positive cash flows with a 15-percent adjustment on cumulative negative cash flows.
  - United States (Arizona): Rate of 2.5 percent of net operating profits, calculated as 50 percent of the difference between gross production value and production costs; includes depreciation and property taxes.

### Withholding taxes, deductibility limits, and safeguards
- Finding: For FARI analysis, the lowest available withholding rate under double taxation treaties is used.
- Example: In Canada, withholding rate on dividends for non-residents is 25 percent; treaty rates can drop to 5 percent for residents of Australia, Austria, Colombia, France, and Germany, and to 10 percent for residents of Chile, China, and Indonesia.
- Safeguards on deductibility of interest/financial expenses:
  - Common measures: cap on debt-to-capital ratio (treat excess interest as dividend income) or limit deductibility to a proportion of income.
  - Limitations are imperfect: defining capital base is difficult; hybrid instruments and volatility render measures potentially procyclical.
- Table 9 (rules excerpt):
  - Examples of debt:capital ratios and deduction limits:
    - Australia (South Australia, Western Australia): 1.5:1 (applies to total debt).
    - Brazil: 2:1 (applies to both).
    - Canada (British Columbia, Quebec): 1.5:1 (applies to related parties).
    - Chile: 3:1 (applies to total).
    - China: 2:1 (applies to related parties).
    - DRC: 3:1 (applies to total).
    - Indonesia: 4:1 (applies to total).
    - Mexico: 3:1 / 3 and 30% EBITDA (applies to related parties).
    - Mongolia: 3:1 and 30% EBITDA (applies to related parties).
    - Russia: 3:1.
    - Zambia: 30% EBITDA.

### Concession area (surface) payments
- Finding: All countries with available information charge periodic payments for concession areas; amounts vary significantly and provide early/stable income and discourage speculative accumulation of concessions.
- Characteristics:
  - Surface payments are not generally a significant source of government revenue.
  - In many countries (Brazil, China, DRC, Mexico, Western Australia), surface payments increase over time.
  - Example multipliers: increase is "22 times in Mexico" and "5 times in China."
  - Some rates automatically adjust to inflation (Mexico) or are denominated in dollars (DRC).
- Table 10 (selected figures, in U.S. dollars per square kilometer):
  - South Australia: Exploration minimum 9.2; maximum 15.6. Production minimum 3,894.4; maximum 4,694.1.
  - Western Australia: Exploration minimum 41.4; maximum 137.7. Production minimum 1,390.8; maximum 1,390.8.
  - Brazil: Exploration minimum 90.0; maximum 135.1.
  - Canada (British Columbia): Exploration and production 1,507.4 (minimum and maximum identical).
  - Canada (Quebec): Exploration and production minimum 1,756.1; maximum 3,674.3.
  - China: Exploration minimum 2.8; maximum 14.2.
  - Chile: Exploration minimum 147.1; maximum 147.1. Production minimum 735.5; maximum 735.5.
  - United States: Exploration minimum 0; maximum 200. Production: "5% of land value."
  - DRC: Exploration minimum 20.0; maximum 40.0. Production minimum 40.0; maximum 80.0.
  - Indonesia: Exploration minimum 200.0; maximum 200.0. Production minimum 400.0; maximum 400.0.
  - Mexico: Exploration minimum 83.5; maximum 1,826.2. Production minimum 83.5; maximum 1,826.2.
  - Mongolia, Panama, Russia, Zambia: listed as N/A.
  - Source of table: Baker McKenzie Global Mining Guide 2020 and domestic sources.

### Capital Gains Tax — introduction (Peru)
- Finding: The executive informed Congress of intention to amend capital gains tax regime (Draft Law PL583 of October 27, 2021).
- The initiative requests delegation to legislate on reform of:
  - first and second category income tax; and
  - income tax on dividends received by domiciled legal persons (third category income).
- Box 4: Income subject to income tax in Peru (domiciled persons) — categories and rates:
  - First category: Natural persons – rental, sublease, temporary transfer of assets.
    - Rate: 6.25 percent on net income or 5 percent on gross income.
  - Second category: Natural persons – proceeds from sale of shares, securities, and real estate, plus dividends, interest, royalties, benefits from endowment life insurance, earnings from derivative financial operations.
    - 5 percent on dividends; 6.25 percent on net income or 5 percent on gross income for disposal of securities and real estate.
    - 4.99 percent on interest.
  - Third category: Legal persons – income from business activity, including all capital gains, except dividends (exempt).
    - General rate of 29.5 percent.
  - Fourth category: Independent personal and professional services and managerial activities in companies. General deduction of 20 percent of gross income is permitted, up to 24 UIT.
  - Fifth category: Natural persons – dependent employment wages, subject to progressive marginal rates, starting from 7 UIT (ceiling of the income tax-free bracket; also applies to fourth category). Personal deductions capped at 3 UIT.
    - Marginal rates for fourth and fifth categories: 8 percent (0–5 UIT); 14 percent (5–20 UIT); 17 percent (20–35 UIT); 20 percent (35–45 UIT); 30 percent (45+ UIT).
  - Foreign source income (without category) — taxed according to the regime of the recipient: legal person general regime, and natural person at rate applicable to employment income, except proceeds from disposal of shares taxed at the second category rate.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1perea2022002.pdf*

### 66.      The purpose of the initiative is to increase revenue from the taxation of these income

### 1perea2022002 - 66.      The purpose of the initiative is to increase revenue from the taxation of these income

### Overview
- Purpose of the initiative: increase revenue from taxation of capital income categories and improve the system’s progressivity.
- Capital gains and dividends receive preferential treatment compared to employment income.
- UIT: Unit of taxation = S/. 4,300 (2020).

### Distribution and incidence of capital income (2020)
- Less than 1 percent of taxpayers (natural persons) with higher (reported) income above 40 UIT earn close to 75 percent of total first and second category income.
- For taxpayers whose income exceeds 350 UIT, capital income constitutes over 50 percent of total income (Figure 23).
- Taxpayers with annual income up to 5 UIT:
  - Account for 66 percent of all taxpayers.
  - Earn less than 4 percent of total reported first- and second-category income.
  - Capital gains component in their total income is small.
- Table 11 (selected rows, values preserved exactly as in source):
  - UIT income range 0-5: Persons % Total = 66.0; Income (*) = 741,360; % Total = 3.8; Cumulative (**) = 100.0
  - UIT income range 5-10: Persons % Total = 21.0; Income (*) = 843,537; % Total = 4.3; Cumulative (**) = 96.2
  - UIT income range 10-20: Persons % Total = 8.6; Income (*) = 1,309,416; % Total = 6.7; Cumulative (**) = 91.9
  - UIT income range 20-40: Persons % Total = 3.7; Income (*) = 1,831,585; % Total = 9.4; Cumulative (**) = 85.1
  - UIT income range 40-80: Persons % Total = 0.3; Income (*) = 356,823; % Total = 1.8; Cumulative (**) = 75.7
  - UIT income range 80-150: Persons % Total = 0.3; Income (*) = 2,022,336; % Total = 10.4; Cumulative (**) = 73.9
  - UIT income range 150-300: Persons % Total = 0.1; Income (*) = 2,272,336; % Total = 11.7; Cumulative (**) = 63.5
  - UIT income range 300-600: Persons % Total = 0.0; Income (*) = 2,094,920; % Total = 10.8; Cumulative (**) = 51.8
  - UIT income range 600-1500: Persons % Total = 0.0; Income (*) = 2,186,295; % Total = 11.2; Cumulative (**) = 41.0
  - UIT income range 1500+: Persons % Total = 0.0; Income (*) = 5,795,641; % Total = 29.8; Cumulative (**) = 29.8
  - Total: Persons = 7,392,593; Income (*) = 19,454,248; % Total = 100.0
  - (*) First and second category income + second category dividends; thousands of soles. (**) In ascending order.
- Source of Table 11: Prepared by the IMF mission with SUNAT data (tax returns).

### Revenue from first and second category income
- First and second category income tax collection has been around 0.4 percent of GDP in recent years.
- These categories contribute 6.4 percent to total income tax revenue in Peru (Table 12).
- The first percentage (collection as share of GDP) has remained stable; second has risen mainly due to the decrease in third category income tax collection (business income).
- OECD countries that record income tax on capital gains typically collect amounts below 1 percent of GDP (exceptions: United States and Sweden).
- Significant revenue-enhancing reform would need to examine other aspects of Peru’s tax system beyond capital gains treatment.

### Progressivity and effective rates
- The collection structure for income tax on capital income is regressive.
- The statutory income tax rate for capital income is normally 5 percent, considerably lower than the average income tax rate.
- The income tax design is constant by design even if income increases; the average effective rate (AER) by income range decreases slightly for higher brackets.
- The highest average effective rate is paid by people with the lowest income (0 to 5 UIT) (Figure 24).

### Rental income (First category)
- Rental income is the vast majority of first category income and has a specific schedular treatment.
- Tax base for natural persons: gross rental income, subject to a flat rate of 6.25 percent.
- Regime allows a 20-percent reduction of the base, effectively reducing the rate to 5 percent (Income Tax Law, Art. 84).
- The base cannot be decreased due to losses in other types of capital transactions; other deductions are not permitted.
- The regime was introduced in 2009; collection dropped significantly from that year and recovered as a proportion of GDP in 2014.
- Minimum taxable rent: rent amount cannot be less than 6 percent of the (self-assessed) cadastral value of the property (Income Tax Law, Art. 23).
- Related-party rental agreements must comply with the principle of independence (market value) (Income Tax Law, Art. 32-A). Effectiveness depends on updated cadastral values; Peru has a major gap in cadastral valuation.

### Interaction with employment income and fiscal impact of reform
- Employment income (fourth and fifth category):
  - Subject to a progressive rate that maxes out at 30 percent for annual income above 45 UIT, counted from the tax-exempt bracket of 7 UIT.
  - Persons with total income above 300 UIT paid an AER of 24 percent on their fifth category income (Annex I, Table A2).
- Policy option: align rental income regime with employment income (apply same progressive rates).
  - Estimated collection effect: could double collection from rental income to potentially S/. 1.15 billion (2020) or 0.16 percent of GDP (see Annex I, Table A3).
  - This doubles the average annual collection for the period from 2015 to 2019.
  - Estimated increase in collection after changing first category income regime to a progressive system is S/. 640 million (S/. 1.15–0.51 billion – collection recorded in 2020; Table 12).
  - Scenario example: if 55 percent of rental income (persons with income above 45 UIT) is subject to the highest marginal income tax rate (30 percent), collection could reach 0.22 percent GDP, over 0.15 percent extra (close to MEF estimate of 0.14 percent of GDP in 2022).
  - Calculations are conservative and do not account for potential change in marginal rate by adding rental income to employment income.
- Distributional effect of aligning regimes:
  - Increase in collection would come from 15–20 UIT and higher income brackets, with 80 percent of the increase concentrated among persons with income above 80 UIT (who account for less than 0.5 percent of all taxpayers).
  - Below the 15–20 UIT bracket, the tax burden would be reduced, including incomes up to 7 UIT that would remain exempt.
  - Aligning regimes would be equivalent to increasing the current rental income rate to 14 percent (Annex I, Table A3).

### Compliance and informality risks
- Peru’s informal economy is one of the largest proportionally in the world: 45 percent of GDP in 2018, ranked 147th out of 156 countries.
- Only 170,000 annual tax returns are filed for first category income, while there could be more than a million rental homes in Peru (Population and Housing Census, 2017).
- Risk: higher tax pressure could increase lessees' or lessors' opting for informality.
- Since 2017, law permits deducting up to 30 percent of rent from fourth and fifth category income (Income Tax Law, Art. 46); this deduction plus other personal deductions has a total cap of 3 UIT.
  - The rent deduction’s purpose is to generate information for SUNAT oversight but may be regressive (no benefit for incomes up to 7 UIT).
  - If first category were reformed into a global regime exempt up to 7 UIT, the benefit could be cut in half and still be sufficient for lessees.

### Rental income international practice and design choices
- Mexico and Chile add rental income to total income and apply general progressive rates (Chile: Global Complementary Tax). Activity-related expenses can be deducted.
- Mexico allows a general blind deduction of 35 percent of gross income plus specific deductions (e.g., property tax).
- Policy design choices:
  - Allow general deduction of 20 percent of gross income or deductions for documented individualized expenses (to accommodate current practice).
  - Be mindful that larger deductions or exemptions can affect informality and distributional outcomes.

### Recommendations (from source)
- Amend the current flat rate regime for first category (rental) income to make it progressive, applying the same tax rate as for employment income (fourth- and fifth-income categories).
- Allow for a general deduction of 20 percent of gross income or deductions for documented individualized expenses.
- Reduce the rent deduction to 15 percent of the rent amount paid.

### Capital gains (Second category) — legal framework and treatment
- Definition (Article 2, Income Tax Law): capital gains = income from disposal of “assets that are not intended to be marketed in the course of business.” Includes sale of shares (including redemption), certificates, securities, bonds, commercial paper, shares in mutual investment funds, bearer obligations, transferable securities, immovable property, and disposal of businesses or companies.
- Taxpayers liable: natural or legal persons domiciled in the country (residents) and non-domiciled persons obtaining capital gains from a Peruvian source.
- Indirect disposals by non-domiciled persons of securities or shares issued by persons domiciled in Peru or of real estate located in the country are also taxed.
- Capital gains of legal persons:
  - Subject to general corporate income tax regime.
  - Tax base: gain from disposal = sale proceeds less computable (demonstrable) acquisition cost.
  - Taxed at the general tax rate (29.5 percent).
  - Exception: exemption on disposal of shares on the stock market applies to legal persons.
  - One potentially generous aspect: option for legal persons to reduce business profits by losses incurred from disposal of shares outside the stock market (may enable aggressive tax planning).
- Capital gains of natural persons are taxed under a schedular regime with particularities (second category); these are analyzed separately in the report.

### Disposal of real estate (capital gains vs business income)
- Income from disposal of real estate:
  - Classified as second category (capital gain) if sale is occasional.
  - Classified as third category (business profit) if sale is regular; sale becomes “regular” after a third disposal in a single fiscal year.
  - Rate for non-regular sale: 5 percent of the gain.
- Broad exemptions:
  - Disposal of immovable property acquired prior to 2004 by natural persons is exempt.
  - Sale of a dwelling inhabited by the seller (domiciled natural person) for at least two years at time of sale is exempt (Income Tax Law, Art. 4), regardless of dwelling value or gain; exemption does not apply if dwelling generates income from trade or business activity.
- Gain calculation:
  - Inflationary component excluded by indexing acquisition cost using the “monetary correction index” developed by the MEF; only the actual gain is taxed.

*Source: Prepared by the IMF mission with SUNAT data, extracted from the provided chapter content.*

### 85.      The intent of the current  administration is to increase the tax burden  on capital gains.

### 1perea2022002 - 85.      The intent of the current  administration is to increase the tax burden  on capital gains.

### Real estate capital gains
- Intent: increase the tax burden on capital gains.
- If rates are increased, neutrality of the regime must be preserved.
- The rate applicable to the sale of real estate should be in line with that the income tax on other capital gains or income.
- Consider limiting the exemption to the sale of dwellings that yield profits above a certain amount reflecting a very high accumulation of wealth (examples cited: United States and Mexico).
Recommendations:
- Raise the rate for gains from the sale of real estate in line with the income tax rate for other capital gains or income.
- Explore the possibility of setting a cap on exempt income from the sale of residential housing.

### Disposal of shares — domiciled natural persons
Findings:
- Tax base: gain from the disposal = income from sale less computable (and demonstrable) acquisition cost in each case.
- No computable cost when the share is acquired free of charge.
- Natural persons can offset the loss only against capital gains in the same fiscal year.
- Special rules exist for establishing acquisition cost when the share was not obtained through a purchase/sale operation.
- The computable cost of securities is not indexed to inflation; tax base therefore includes an inflationary component for the holding period (unlike immovable property, which is indexed).
- Legislation grants a general deduction that reduces the tax base by 20 percent of gross income (sale price) for natural persons; this is additional to the computable acquisition cost.
- General income tax rate applicable to gains from the disposal of shares is 6.25 percent for Peruvian source gains.
- Foreign source capital gains are taxed at the progressive marginal rate scale from 8 to 30 percent, except those marketed in the Latin American Integrated Market (MILA), which are taxed at a rate of 6.25 percent; in the MILA case, the permitted 20-percent reduction of the tax base does not apply.
- Capital gains from the disposal of foreign source shares are added to employment income and taxed at the progressive rate.

Policy implications:
- Index acquisition cost of securities to inflation to avoid taxing inflationary nominal gains, especially if rates are increased.
- Consider eliminating the 20-percent general deduction to make the regime more equitable relative to employment income.

### Exemption from sale in the stock market (BVL)
Findings:
- Sale of shares in the BVL is exempt (Law 30341); purpose: encourage capital market growth.
- Exemption benefits resident and non-resident natural persons when issuer is domiciled or constituted in Peru, security is liquid, and not more than 10 percent of issuer’s value is transferred.
- Exemption introduced in 2016 for a renewable period of three years and valid until December 2022.
- Stock market operations had been taxed since 2010.
- Despite the exemption, the BVL has not shown outstanding performance.

Box (sequence of events and observations):
- A tax on capital gains from stocks traded on the BVL was introduced in 2010 (rate = 6.25 percent net gain).
- In 2015, market liquidity had decreased substantially.
- MSCI announced in 2015 it intended to review the “Peru Index” for possible reclassification as a “frontier market” (downgrade from “emerging market”).
- Exemption reintroduced in 2016; downgrade was avoided (announced in June 2016).
- Exemption renewed in 2019 and continues to be in effect.
- BVL was reclassified as a “frontier market” in March 2020 by FTSE Russell.
Notes on trading amounts:
- In 2010–2012, during the first three years the tax was in force, the traded value on the BVL (“variable income traded amount”) increased.
- The average value traded in 2010–2012 was higher than in any years prior to 2010, except for 2007.
- MSCI announcement of possible reclassification in 2015 could partly explain the stock market’s worst annual performance since 2006.
- Reduction in number of securities meeting MSCI investment grade criteria began in 2013.
- BVL activity recovered significantly in 2017, the year after the exemption was reintroduced.
- Average traded securities in 2016–2020 was lower than in 2010–2015.
Conclusion from box:
- It is unclear whether a direct connection exists between the tax on capital gains from stock market transactions and the BVL’s downgrade to “frontier market.”

### Asymmetry between disposal of shares and dividends
Findings:
- Asymmetrical treatment of disposal of shares and dividends creates a distortion: share price reflects retained earnings and expectations of future dividends; sale of a share partly realizes retained earnings.
- If tax burden on dividend distribution is greater than tax burden on disposal of shares, companies may refrain from distributing dividends and shareholders may realize returns by selling shares — allowing avoidance of dividend distribution tax.
Recommendation:
- If burden is not excessive, eliminate the exemption on capital gains from the stock market and make the tax equal to the dividend tax.

### International comparison
Findings:
- No standardized international practice; regimes vary significantly.
- Few countries exempt capital gains entirely; majority are low-tax territories.
- Examples cited exactly:
  - Netherlands: exempts them but taxes a presumed yield of 4 percent on assets at a fixed rate of 30 percent.
  - Germany: fairly high flat rate (26.375 percent).
  - Peru: cited as quite low (5 percent) in sample.
  - Spain: applies general income tax regime applicable to natural or legal persons.
  - Mexico: reduced fixed rate for stock market transactions (10 percent).
  - Chile: full stock market exemption (under review).
  - Canada: 50-percent reduction on the base.
  - United Kingdom: special simplified but progressive rate.
  - Korea: rates vary by transaction amount or shareholding percentage or company size.
  - United States and Colombia: rates vary by short- or long-term holding.
  - Colombia and Argentina: exempt disposals on the stock market like Peru.
- Majority of countries have a (fairly low) threshold below which annual capital gains are exempt.
- Peruvian regime (5 percent fixed rate and stock market exemption) appears remarkably generous by comparison.

Recommendations (capital gains and shares):
- Allow the exemption on the disposal of shares in the BVL to expire in 2022.
- Tax capital gains realized in stock markets associated with the MILA like all other foreign source gains (apply the progressive rate).
- Eliminate the blind general deduction of 20 percent of gross income to determine the taxable gain.
- Keep the flat tax rate low, like the one applicable to dividends, at not more than 10 percent.
- Index the acquisition cost of shares to inflation and avoid taxing net nominal profits.
- Exempt a relatively small amount of annual capital gains.
- For legal persons, apply a schedular treatment to losses from the disposal of shares so that they are deductible only against gains of the same kind.

### Dividends — natural persons
Findings:
- Tax on dividends taxes the same income subject to income tax on business profits; it increases investment cost but can add progressivity.
- Three types of regimes:
  1. Fully integrated where corporate tax is fully credited against natural person tax (examples: Chile and Ecuador).
  2. Dividend distribution to ultimate shareholders is exempt (example: Brazil).
  3. Dividend distribution taxed by a final withholding at a relatively lower fixed rate, in addition to corporate income tax (examples: Peru, Argentina, Uruguay).
- Dividend distribution in Peru is taxed at the definitive rate of 5 percent.
- Domiciled legal persons distributing dividends to natural persons must withhold and remit this tax.
- This is a schedular tax on income of natural persons without effect on progressive rate scale.
- In Peru, the combined rate for profits is 33 percent.
- Progressive income tax rate for natural persons applies to dividends received abroad.
- If a non-resident corporation distributes dividends to domiciled natural persons, dividends are added to other foreign source income and taxed under progressive marginal rate regime.
- The 5 percent rate on dividends is equal to or lower than that of other countries in the region (examples: Honduras, Panama, Mexico, Costa Rica, Dominican Republic — 10 percent; Argentina and Uruguay — 7 percent).

Policy options for dividends:
- Raise the withholding rate on dividends to 6.25 percent so the statutory rate would be consistent with the rate applicable to the disposal of shares and to rentals; if the 20-percent general deduction is eliminated, effective rates would be consistent. The tax rate would remain below prevailing rates in many regional countries, with the combined rate rising to 34 percent. There would be room to raise the rate further; a rate of 10 percent could be the limit, as it would bring the combined rate to a high relative position in the region.
- Another option: add dividends to the person’s other income and apply the progressive rate after crediting corporate income tax. Trade-offs: greater compliance and control difficulty, requirement for tax authority to inspect a broader universe of natural persons, and marginal change in combined burden because the higher marginal rate for natural persons is barely higher than corporate income tax rate. Allowing refund of excess credit could negatively affect collection.

Final recommendations summary (from chapter sections covered):
- Raise the rate for gains from the sale of real estate in line with the income tax rate for other capital gains or income.
- Explore setting a cap on exempt income from sale of residential housing.
- Allow BVL stock sale exemption to expire in 2022.
- Tax MILA market capital gains at progressive rates like other foreign source gains.
- Eliminate the 20-percent general deduction for capital gains.
- Keep flat capital gains tax rate low, not more than 10 percent (align with dividend rate discussions).
- Index acquisition cost of shares to inflation.
- Exempt a relatively small annual amount of capital gains.
- For legal persons, make losses from disposal of shares deductible only against gains of same kind (schedular treatment).
- Consider raising the dividend withholding rate to 6.25 percent (or up to 10 percent as an upper limit) or integrate dividends into progressive income taxation with credit for corporate tax.

*Source: 1perea2022002 - 85.      The intent of the current  administration is to increase the tax burden  on capital gains.*

### 101.      One weakness of this tax is that it depends on the company’s decision to distribute

### 1perea2022002 - 101.

### Weaknesses of dividend tax and avoidance channels
- Dividend tax depends on the company’s decision to distribute dividends to its ultimate shareholders, creating incentives for shareholders to dispose of company profits without formal distributions.
- Common avoidance channels described:
  - Incurring personal expenses through the company and (unduly) deducting them from business expenses.
  - Companies granting loans to their shareholders under potentially highly favorable conditions.
  - Transnational companies manipulating transfer prices in operations with foreign affiliates to transfer profits and avoid withholding on dividend payments.
- Recommendation summary: income tax should also apply to distributions of “presumptive dividends” (dividendos fictos).

### Definition and taxation of presumptive dividends in Peru
- The Income Tax Law in Peru establishes the concept of “presumptive dividend,” taxing it at 5 percent.
- A presumptive dividend is a non-deductible expense because it is unnecessary for business achievement and when its destination is not subject to subsequent control by the tax authority.
- Examples where the presumption applies:
  - Withdrawal of merchandise or other goods for the benefit of the owner (or his or her family).
  - Use for non-taxed activities.
  - Remuneration to a partner (or family members) in excess of the market value.
  - Loans to partners or shareholders (limited to amount of profits available to the partner; surplus retains its nature as a credit).

### Ambiguities and gaps in the presumptive dividend definition
- The definition is unclear on whether it covers:
  - Profits transferred to a related party through manipulation of transfer prices.
  - Overpayment of interest above the deductible established by the specific anti-abuse rule (30 percent of EBITDA).
- Unclear whether:
  - Such cases are assumed to escape SUNAT’s control, or
  - The concept of presumptive dividend applies to transfer price adjustments that do not affect deductible expenses.
- Suggested treatment: adjustments to profits due to changes in transfer prices in operations with related parties or due to a reduction in the interest deduction should expressly have the same treatment as presumptive dividends under the law.
- Specific example: rental of a property owned by the shareholder, for the amount that exceeds the market value, can be used to transfer resources to the lessee partner, taxed at 5 percent (withholding on first category income), while being recorded as a deductible expense for the company at 29.5 percent.

### Loans to partners/shareholders and legislative limitations
- Loans to partners or shareholders are reclassified as presumptive dividends up to the limit of freely available profits (Income Tax Act, Art. 24-A).
- The rule does not apply to loans granted to related parties (family members) of partners or shareholders — a major limitation.
- For loans treated as loans for tax purposes (not presumptive dividends), the regulation requires they earn interest not less than the “monthly average market lending rate in national currency” (Income Tax Law, Art. 26).
- SUNAT data (2017–2020): close to a quarter of distributable Peruvian company profits were distributed to shareholders as loans, and of that amount, only 15 percent were treated as a distribution of presumptive dividends (Table 15). This is symptomatic of a tax avoidance problem.
- Recommendation: amend the standard to broaden the universe of such loans, clarify them as presumptive dividends, and give equal treatment to loans to family members of company partners and shareholders, according to the definition of “related” in the Income Tax Law.

### Empirical distribution of company dividends, 2017–2020 (millions of soles)
- Earnings freely available to shareholders: 65,279; 70,584; 81,828; 65,642; 2017–2020 = 100%
- Distributed with withholding: 21,725; 23,479; 34,350; 24,378; 2017–2020 = 37%
- Dividends to domiciled LPs: 8,025; 9,425; 12,425; 9,120; 2017–2020 = 14%
- Loans to shareholders: 15,708; 16,626; 18,417; 18,124; 2017–2020 = 24%
- Classified as presumptive dividends: 2,726; 2,428; 2,893; 2,143; 2017–2020 = 4%
- Source: Prepared by the IMF mission with SUNAT data.

### Tax regime for dividends between legal persons
- No tax when the dividend is distributed between resident companies; tax is incurred only when the dividend is paid to the ultimate shareholder or to a resident abroad.
- For dividends paid by non-domiciled companies that are received by domiciled legal persons, the rate applicable is the general corporate income tax rate (29.5 percent).
- This permits free flow of profits between companies in the same group, maximizing funds available for reinvestment inside the group.
- The exemption from withholding on dividends distributed between domiciled companies is common practice to avoid cascading taxation as long as the dividend does not leave the group.

### Oversight and record-keeping gaps for intragroup distributions
- Peru does not require companies to keep a specific control account for profits on which corporate income tax has already been paid, or the dividends received — necessary to administer a system that taxes the first dividend distribution.
- There is no obligation that a dividend be distributed only once corporate income tax has been paid — this should be required regardless of withholding modality.

### Non-domiciled persons and treaty interaction
- General withholding rate for dividends paid to residents abroad is 5 percent.
- This 5-percent rate is lower than the one Peru has negotiated in treaties to avoid double taxation; treaties with 11 countries have rates of 10 or 15 percent, except the treaty with the Andean Community.
- Peru’s law effectively provides a unilateral concession decreasing the tax agreed in the treaties; Peru can domestically increase the withholding rate for dividends up to 10 percent without violating treaties, including the treaty with the Andean Community.
- Peru’s policy: law provides a withholding rate for dividends that is lower than treaty rates, meaning Peru has unilaterally ceded the tax base compared to what contracting countries recognize.

### Collection impact of raising dividend withholding rates
- MEF projections: income tax collection for second category income (Multiyear Macro Framework) will add S/. 2.275 billion in 2022 if the current withholding rate of 5 percent is maintained.
- SUNAT data: dividends represent around 70 percent of second category income.
- In an entirely static scenario, increasing the rate on dividends to 10 percent would lead to collection of around S/. 1.6 billion, or 0.18 percent of GDP, in 2022.

### Recommendations on dividends
- Maintain the tax on dividends as a flat, moderate rate, withheld as a final tax by the company at the time of distribution.
- Increase the tax rate on dividends received by individuals and non-domiciled persons up to a maximum of 10 percent (the minimum rate agreed in the treaties).
- Keep the rate consistent with the rate applicable to capital gains in general.
- Clarify the definition of presumptive dividends to include transfer price adjustments involving a non-deductible expense in favor of a related party, including the excess rent paid for the lease of a property owned by a partner or family member.
- Characterize loans to family members of partners and shareholders as profit distributions, subject to dividend withholding, up to the limit of freely available profits.
- Do not withhold on the first dividend distribution between legal persons until a registration system for profits after corporate income tax and another record related to withholdings that allows tracking of the corresponding credit in intragroup distributions are adopted.

### Interest and debt instruments — Regime description
- Interest income is taxable under the income tax: second category income for domiciled natural persons, income and permitted deductions in the third category for legal persons, and Peruvian source income for non-domiciled persons.
- Applicable rates: 5 percent for natural persons; 29.5 percent for legal persons; 4.99 percent for non-domiciled persons.
- When payment is made to low-tax jurisdictions (jurisdicciones de baja imposición – JBI), the withholding rate is 30 percent. The same 30 percent rate applies when related parties carry out the operation through a third party (back-to-back loans).
- Definition of “Peruvian source” is broad and includes various concepts of interest; all consideration agreed for loans, credits, or any financial obligation is taxed, including premiums and fees, factoring operations, and income from participation in funds or life insurance contracts with a savings component (except when the insurance is contracted by the employer).

### Gaps and ambiguities in interest treatment
- Some items remain outside taxation, for example, foreign exchange gains (or losses) or financial leases are not considered.
- The law is unclear about financial operations derived from debt having treatment equivalent to the listed concepts of interest.
- There is a minimum presumed interest rate for all money loans equivalent to the “monthly average market lending rate in national currency” or the London interbank market six-month average deposit rate (LIBOR) for loans in foreign currency.
- In operations between related parties, the presumption does not apply and the market value will always be used; compliance with the principle of independence is required for deducting interest paid.

### Exemptions on interest and consequences
- Extensive exemptions: interest from public debt (Treasury bills, bonds, Central Reserve Bank obligations) are exempt for both natural and legal persons.
- Interest from development credits granted by international organizations or government institutions abroad is “unaffected,” but only until 2023.
- Broad exemptions for natural persons: interest on deposits (or certificates) from financial system institutions, including insurance companies, and interest paid by savings and loan cooperatives to their members is exempt.
- Tax exemption also applies to fixed-income securities (debt) that bear interest until maturity (zero-coupon bond), which upon disposal transfer the effect of a capital gain exemption to accrued interest.

### Distortions and policy considerations for interest taxation
- Large pool of untaxed interest income is both a collection loss and a source of inequality and distortion; majority of interest income is assumed to be earned by higher-income natural persons, generating a regressive element.
- Current taxation is on nominal interest, meaning inflationary gain is taxed rather than only the real gain, which can be:
  - Distortionary when nominal interest rates for savers remain low or negative in real terms.
  - Regressive and potentially confiscatory for small savers.
- Policy options:
  - Tax only real interest (nominal less the inflationary component).
  - Alternatively, maintain exemption on deposits up to a threshold below which evidence shows the rate of return does not exceed inflation.

*Source: IMF mission analysis prepared with SUNAT and MEF data as presented in the provided PDF content.*

### 121.      Exempting public debt interest creates another distortion that potentially inhibits

### Exempting public debt interest creates another distortion that potentially inhibits private investment

### Distortions from exempting public debt interest
- Exempting public debt interest gives the public sector a competitive advantage for funds from savers, crowding out private investors because public bonds must pay a higher nominal rate to cover the tax component and match the net rate obtained by the saver.
- Economic efficiency is affected because there is less private investment than there would have been otherwise, and the future corporate income tax base potentially decreases (Noregaard, 1997).
- Normally, public debt interest acquired by non-resident investors is exempt since, for a relatively small country, the interest rate on its external debt is perfectly elastic.

### Rate asymmetry and behavioral responses
- Natural persons pay 5-percent income tax on Peruvian source interest, whereas legal persons are taxed at 29.5 percent.
- This creates an incentive for partners and shareholders to grant credits to their companies so that interest is taxed at 5 percent (for the lender) and is deductible for companies at 29.5 percent.

### Tax neutrality and policy direction
- The tax regime must aim towards neutrality in the capital market.
- The delegation of legislative powers sought by the current administration does not include initiatives to reform the fiscal regime applicable to interest, even though some shortcomings are significant.
- Correcting the shortcomings is complicated and warrants further study, especially as concerns inflation correction.
- Raising the income tax rate on capital gains and leaving the tax on interest income at 5 percent would be an additional distortion.
- Maintaining the exemption on some debt instruments that compete for savers’ funds with other securities whose gains are proposed to be taxed would further widen the tax gap between one type of investment and others, affecting the system’s neutrality.
- Recommendation: the income tax rate applicable to interest should be the same as that which applies to capital gains and steer the reform toward decreasing the scope of exemptions for financial returns.

### Recommendations: medium-term agenda for income tax on interest
- Incorporate into the medium-term agenda reforms to income tax on interest that seek to:
  - Extend the treatment of interest to debt derivatives and to the credit component in financial leases.
  - Eliminate exemptions on interest paid by the financial system, including savings instruments issued by insurance companies.
  - Eliminate the exemption on public debt interest obtained by residents.
  - Maintain the exemption on investment interest below a certain average annual balance.
  - Match the tax rate to that established for capital gains and dividends.
- Note on foreign-source interest: Interest received from a foreign source is taxed at a progressive scale from 8 to 30 percent and is added to employment income.

---

### IGV on digital services

### Introduction and existing gap
- In Peru, services are generally taxed under the IGV, which includes digital services provided remotely from outside the country (General Sales Tax Law, Art. 1.b).
- There is no mechanism for collecting tax on imported remote services when dealing with direct sales to the end consumer (Business to Consumer – B2C).
- The end consumer neither has the incentive nor the feasibility to withhold VAT from the non-resident provider and remit it to the treasury.
- Peru lacks a VAT collection mechanism for B2C digital services from abroad.

### Current treatment of B2B vs B2C
- IGV taxpayer companies importing digital services (Business to Business – B2B) can reverse the tax charge, acting as withholders at the time of “importation” and crediting it back; they have an incentive to fulfill IGV obligations.
- The reform required is to operationalize IGV collection in B2C situations. SUNAT is preparing an initiative to broaden the tax base and eliminate the advantage for non-resident versus national providers.

### International practice
- OECD guidelines recommend charging non-resident providers this tax for B2C supplies and designing a simplified remote and digital system so providers register, charge, and remit VAT in the consumer’s jurisdiction. This model has been implemented by over 60 countries for imported digital services and has been used in the European Union since 2005.
- Latin American practice varies:
  - Chile, Colombia, and Uruguay follow the OECD remote registration and payment model.
  - Mexico requires non-resident providers to register through a representative or legal agent in the country who assumes responsibility for collecting and remitting the tax; this representative does not give rise to permanent establishment.
  - Argentina, Brazil, Costa Rica, Ecuador, and Paraguay require financial institutions through which payments abroad are made to withhold the tax.
- Some countries use “hybrid” systems (e.g., Costa Rica, Ecuador, Chile, Colombia), where providers can register to avoid withholding or withholding applies if the provider is not registered.
- In Mexico, the penalty for failing to meet tax obligations can be cancellation of the Internet service.

### SUNAT proposal: core elements
- SUNAT proposes a “dual” or “hybrid” model reflecting international consensus:
  - Voluntary (electronic) registration by non-resident digital service providers with SUNAT; registration would not lead to permanent establishment.
  - Providers would pay tax electronically in foreign currency, with the payment being definitive (no entitlement to credits).
  - The system would be simple (no obligation to issue receipts or keep accounting books and records).
  - Option to charge tax via financial institutions when the provider does not register.
- SUNAT has a list of approximately 40 digital service companies operating in the country from abroad that it would expect to register.
- If providers fail to register, SUNAT would notify financial intermediaries in Peru to withhold the IGV; withholding would be limited to payments made by persons without a business Unique Taxpayer Registry (Registro Único de Contribuyentes – RUC) number.
- There is no threshold for IGV-exempt digital transactions.
- The withholding alternative is slated to be implemented two months after the possibility of registering on the SUNAT portal is made available to digital services providers.

### Limitations and design challenges
- Variety of provider business models complicates defining the taxed service; examples include:
  - Purely digital products (access to video games, music, books, games of chance) where the entire payment is normally subject to IGV.
  - Platforms acting as intermediaries where the digital service is intermediation and the price may be a fee not clearly attributable to the end consumer or the underlying service provider.
- Regulation should contain a general definition of included services plus two explicit lists: taxed and untaxed digital services, to give taxpayers certainty.
- Tax neutrality must be safeguarded: transactions expressly exempt under law (e.g., sale of books — Law 31053, Art. 29 — and scientific and educational journals) should generally receive the same treatment in digital form unless the digital version is materially different.
- The proposal leaves importation of movable property (B2C) purchased online out of the tax: tax in principle charged at customs if the good does not benefit from being an “expedited delivery” (parcel) with a maximum value of US$200 per shipment (Law 29774, Art. 1).
  - Eliminating the exemption and requiring the digital platform to withhold and remit IGV could decrease informality without raising customs administration costs, but the MEF initiative to reduce the deductible (“streamline the scope”) per shipment would entail an additional administrative cost.
- Free Trade Agreement interpretation issue: The Free Trade Agreement between Peru and the United States has been interpreted as protecting the IGV exemption under the terms of the law in force at the time of signing of the treaty (applicable only to trade with the United States), which could constrain changes to the express delivery exemption.
- Withholding through financial intermediaries presents operational limitations:
  - Tax administration must periodically update the list of providers subject to withholding; providers may operate under different branch or subsidiary names.
  - Consumers with credit cards issued by non-resident institutions can more easily evade withholding.
  - The withholding provision is intended to be dissuasive and to encourage voluntary registration, but it may need to be applied in multiple cases because some large digital companies have a policy not to register where they have no physical presence.

### Recommendations on IGV for digital services
- Introduce in the regulation a clear, general definition of the digital services included in the IGV collection mechanism, plus a list of examples of included and excluded services.
- Standardize the treatment of the digital service with the equivalent physical transaction (e.g., books), except if the digital consumption is considered a materially different good.
- Explore eliminating the IGV exemption on express delivery shipments (parcels) and replace it with an IGV collection and remittance system for which the digital service provider (direct seller or intermediation platform) would be responsible.
- Re-examine the interpretation that the Free Trade Agreement with the United States protects the IGV exemption on imports of “express delivery” (parcel) goods with a maximum value of US$200 per shipment.

*Source: IMF mission material as presented in the supplied chapter content.*

### Annex II. Mineral Price, Cost, and Production Assumptions

### Annex II. Mineral Price, Cost, and Production Assumptions

### Methodology for building production models
- The IMF mission used public information on mining investment projects in Peru to build production models in the FARI analysis.
- Investors listed on public securities markets are typically required to publish detailed feasibility studies on their investment projects; these studies normally include information on production and capital and operating expenses throughout the life of the project.
- Feasibility-study information was used to calibrate production models that serve as inputs for cash flow analysis, which is the basis of the FARI analysis.
- These projects are not intended to be a faithful reflection of fiscal performance expected for any of the projects.

### Production models and project selection
- Four production models were built, taking into account three recent feasibility studies and one presentation to investors.
- Models include:
  - Large-Scale Copper Project (Quellaveco)
  - Medium-Scale Copper Project (Cotabambas)
  - Silver, Zinc, and Lead Project (Corani)
  - Gold Project (La Arena)
- Project selection criteria:
  - 1) availability of detailed production and cost information,
  - 2) representativeness in Peru’s mining sector in terms of cost structure and scale and extracted products (to reflect the significance of copper and gold mining in Peru).

### Financing and cost assumptions
- Common debt financing parameters representing current undercapitalization rules in Peru are used.
- For all projects, the assumption is that development costs are 70 percent financed through a structured loan at a LIBOR interest rate above 5 percent.

### Base scenario commodity price assumptions (constant prices, U.S. dollars)
- Copper US$3.50/lb
- Gold US$1,550/troy oz
- Zinc US$1.10/lb
- Silver US$24/oz
- Lead US$2,200/metric ton
- Molybdenum US$22,000/metric ton
- The base scenario uses commodity prices that reflect official projections in the most recent macroeconomic framework and current market conditions.

*Source: Annex II. Mineral Price, Cost, and Production Assumptions*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1perea2022002.pdf_