The Peruvian government has wrapped up a sweeping reform of its tax system, under which a swathe of tax breaks has been eliminated, and taxes on financial transactions and assets cut.
The new batch of laws, finalised on Friday, will lead to a streamlining of payments and other processes.
An economics and finance ministry spokesperson told Emerging Markets the new batch of laws – the third since the government was granted 90-day legislative power to reform the tax code – reduces the number of traps and loopholes that that has complicated the relationship between the tax agency, SUNAT, and taxpayers.
“They are doing the right thing with tax reform and eliminating red tape”, economist Hernando de Soto said.
In a nod to the business community, rates of both the Financial Transactions Tax (ITF) and the Temporary Tax on Net Assets (ITAN) will also be dropped. Both taxes were created in 2004 and were only supposed to be applied for three years.
Finance minister Luis Carranza said both laws, initially tabled in 2004 for a three year period, will nevertheless remain until the government generates new sources of income. The ITF – which brings in an average of around $24.4 million monthly – would stay in place throughout president Alan Garcia’s five-year term, which ends in 2011.
Under the new changes, the ITF will fall from the current 0.08% to 0.05% by 2010. The ITAN will fall just slightly, to 0.4% in 2009 from the current 0.5%. Carranza said the reduction on ITF will cost the treasury approximately $35 million next year.
The new laws will also abolish tax breaks in the jungle region that have been in place for more than three decades.
To compensate for this higher tax burden, which will increase gradually over the coming three years, the Ministry of Economy and Finance will transfer $66.5 million to four jungle departments. The exemptions will remain only in the city of Iquitos , which is accessible only by air or river.
The government had announced in early March that it will levy a 5% capital gains tax on earnings from bank accounts and the Peruvian Stock Exchange, which has been one of the fastest growing bourses in the world over the past three years. The business community, which has initially warned against this tax, has accepted it because of the low rate and that fact that it does not kick in until January 1, 2009.
Opposition politicians, however, have been critical and pledged to modify the law. The Peruvian Nationalist Party (PNP) has proposed legislation that would move the start date back to April 2008. PNP lawmakers also stated that if the MEM were serious it would have reduced the 19% value added tax (VAT), which hurts the poor, and not just taxes that affect the wealthy.