Peru’s Segura banks on tax cuts for long-term growth
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Emerging Markets

Peru’s Segura banks on tax cuts for long-term growth

Peru’s finance minister, Alonso Segura, has told Emerging Markets at the IDB annual meeting in Busan, Korea, that he is bullish about the year and the rest of the decade, despite the country’s economic performance disappointing over the last 15 months.

“We are doing our homework not only to recover GDP but to lift it,” he said. “We will grow this year and are on the way to expand above 5% in 2016 and 2017.”

The economy expanded by 2.4% last year, below expectations, and was 1.7% in January.

Segura’s confidence stems from a series of tax reforms put into effect on January 1 this year. Bucking the trend in South America, with governments in neighbouring Chile and Colombia pushing increases through their respective legislatures, Peru has cut the corporate tax rate to 28% from 30%. It will fall another two points, to 26%, by 2019. The reform also added two new categories to the personal income tax regime, lowering to 8% from 15% the rate paid by the lowest wage earners. The tax on income earned by independent professionals fell to 8% from 10%.

While there will be a short-term impact on revenues and, hopefully, a boost in corporate investment and consumer spending, the reform was conceived as a long-term measure.

“The main objective was to lay a path for a more competitive country in terms of taxes so that we will be able to attract more investment. It is part of the counter-cyclical plan, but it goes beyond that as part of our competitiveness agenda,” said Segu

OECD ambition

The tax reduction also fits into the ambitious goal of achieving entrance into the 34-member Organization for Economic Cooperation and Development (OECD) by the end of the decade. Peru would join Chile and Mexico from Latin America.

It became the first country to join the OECD’s new Country Programme mechanism last December and has just embarked on an 18-month plan broken down in increments of six months to assess changes, make proposals and figure out how to implement them.

OECD Secretary-General Angel Gurría listed three big challenges during the December country programme presentation, including reform of the tax system. The other two were education, where Peru lags woefully behind OECD members, and reducing the informal economy.

“We had the OECD in mind when we lowered taxes. The average corporate income tax rate in OECD countries is 26%, and this is where we are headed,” said Segura.

The vision may be long term, but there is also hope that the tax reform will give a boost to the economy. Segura is forecasting growth for 2015 at 4.2%. Growth will get a boost from tax reform and other stimulus measures, as well as pumped up government investment in infrastructure and a recovery in mining.

The minister’s forecast is roughly in line with the projections of multilaterals, such as the IADB, which have Peru growing around 4% this year, well above the 2.2% average expected for the region as a whole. “We are comfortable that we are broadly on track in delivering the stimulus. GDP will increase as the year moves along, with the second half of the year doing much better,” Segura said.

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