General Tax Treatment In Peru
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By: Juan Prado
Llona & Bustamante Abogados
Peru
I. Informative part
According to the Peruvian tax regime, all legal entities domiciled and/or doing business in Peru are levied with the following taxes:
1. Income Tax
Peruvian Income Tax, is a tax applicable to legal entities domiciled in Peru over the income obtained in the fulfilment of its business activities, in and out of the Peruvian territory(worldwide source of income system).
Notwithstanding Peruvian Income tax contemplates four types of tax regimes (Special Income Tax, Unique Simplified Regime and the Micro and Small Business Regime, all of them based on the amount of annual income, sales and assets and oriented to small entities and the General Income Tax for all other types of entities), Niagara’s activities in Peru and the magnitude of the business and annual income will be under the General Income Tax Regime, regardless of the corporate form to be adopted[1].
In general terms, companies doing business in Peru are levied with the Income tax with the rate of 29.5% calculated over the annual net taxable revenue.
1.1 Fulfillment of the regime:
Once the company is incorporated and registered in the Public Registry, it shall sign up before the local tax authorities and adopt the General Income Tax Regime and obtain the corresponding the Single Taxpayer Record or Tax Payer Number
1.2 Tax Payment and Filings
Monthly Advance Payments and Filings
Companies established and operating in the country are subject to monthly advance payments for the annual income tax. These monthly payments are determined based on 1.5% of the company’s monthly income, up to the month of March or April of the following year, depending on the due date for the filing of the annual income tax return before the Peruvian tax authority.
Subsequently, monthly advance payments will be equivalent to 1.5% of the monthly net income, or the amount resulting by multiplying the net income obtained in the corresponding month by the coefficient resulting from dividing the tax of the previous year by the total net income of the same fiscal year, whichever is greater. For the advance payments for months of January and February, said comparison will be made considering the data of the previous year.
Taxpayers are obliged to submit to the Peruvian Tax Authority monthly tax returns for the monthly advance payments.
Annual Income Tax Payments and Filings
Likewise, taxpayers are obliged to file the annual tax returns for the regularization of the income tax, which will include all the income obtained in the given year, the corresponding deductions, as well as the credits and tax benefits to which the taxpayer is entitled, where the advance monthly payments are deducted from the annual income tax determined in the annual tax return.
In order to determine the taxable net income, all the expenses that are necessary to produce the income or to maintain its source of production will be deducted from the Annual Gross Income, with special treatments under certain circumstances, provided they are not expressly prohibited or excluded by income tax law and its regulation.
On the other hand, if there are tax losses, these can also be deducted from the taxable net income under one of the following systems:
- Compensate the total net loss of the third category of Peruvian source of income that they record in a taxable year, attributing it year after year to the net income of the third category that they obtain within the four subsequent fiscal years. The balance that is not compensated after this term period cannot be applied in the following years.
- Compensate the total net loss of the third category of Peruvian source of income that they record in a taxable year, attributing it year after year, until the amount is extinguished, to fifty percent of the net income of the third category obtained in the subsequent immediate exercises. The balance that is not compensated in a fiscal year can be applied in the following years in the percentage above mentioned.
1.3 Books and Accounting Records that must carry:
Taxpayers who start operations must have at least one Sales Record, one Purchase Record, and the Simplified Format Daily Book.
In the future, they are obliged to have the following books:
- Those who have gross income from the previous year of up to 300 UIT, must have a Purchasing, Sales and Daily Book Registry, Simplified Format;
- Those with 300 to 500 UIT, Daily Book and Ledger, Purchase and Sales and Income Registry;
- Those with 500 to 1700 UIT, Book of Inventories and Balances, Daily Book and Ledger, Purchase Register and Sales Record;
- Those who have more than 1700 UIT, should keep complete accounting, which includes Cash and Bank Book, Inventory Book and Balance Sheet, Daily Book, Ledger, Purchase and Sales and Income Record, as well as Withholding Book, Registration Fixed Assets, Registration of Costs, Permanent Inventory Registration in Physical Units, and Permanent Valorized Inventory Register, provided that the taxpayer is obliged to take them.
2. Value Added Tax - VAT
The Value Added Tax levies the sale of movables in Peru, the provision or use of services in Peru, construction contracts, the first sale of real estate by builders, and the importation of goods.
The tax base of the VAT is constituted in practical terms, by the difference between the value of the operations included in the scope of application of the tax made by the taxpayer, and the value of its acquisitions.
The VAT applicable rate, including the 2% rate corresponding to the Municipal Promotion Tax, results in a total rate of 18% over the sale of goods or the provision or use of services in Peru.
Import of Goods
As for the importation of merchandise, it is taxed with the payment of certain taxes. Considering the type of goods that will be subject to import, the applicable taxes could be the following: VAT, customs duties, and Selective Consumption Tax, if applicable; likewise, imports will be subject to the Perception System, which will be commented further on.
Regarding the VAT, as indicated, the base of calculation will be the sum of the customs value plus the customs duties of the products to be imported.
With regard to customs duties, we must point out that the type of tariff to be applied will vary depending on the tariff sub-item corresponding to the imported merchandise. The current rates are 0%, 6% and 11%.
Customs duties are calculated on the basis of the customs value determined according to the customs valuation rules of the WTO.
Tariff rates may be reduced, in whole or in part, based on the invocation of tariff preferences granted under International Agreements signed by Peru with certain countries. For this purpose, the rules of origin established in each of these Agreements must be complied with.
The customs duties and other taxes applicable to imports are expressed in dollars of the United States of America and are paid in local currency considering the exchange rate of sale of the date of the effective payment.
2.1 Detraction Regime
The Detraction System is a mechanism implemented by the Government that contributes to the collection of some taxes, and consists of the discount made by the buyer or user of a good or service affected by the system, of a percentage of the amount to be paid for these operations, then deposit it in the Special Bank Account in the name of the seller or service provider, who, for his part, will use the funds deposited exclusively to make tax payments, fines and/or tax debts.
2.2 Perceptions Regime
The Perceptions System constitutes a system of advance payment of the Value Added Tax, by which the seller previously qualified as a collection agent, or Tax Authority receive from the amount of a sale or definitive importation, an additional percentage that will have to be canceled by the customer or importer who cannot oppose such collection.
The customer or importer to whom the collection is made may deduct from the VAT that determines monthly, the perceptions that they had made up to the last day of the period to which the declaration corresponds. If you have a balance in favor, you can drag them to subsequent periods, or request a refund if you have kept an amount not applied for a period of no less than 3 consecutive periods.
The basis of calculation in this case, is made up of the customs value plus all taxes levied on imports.
Finally, it is important to mention that the taxpayers that are designated by Tax Authority as VAT Withholding Agents are exempt from the payment of the collection of the aforementioned tax.
2.3 Withholding System
The Withholding System also a payment system through which the withholding agents previously designated by Tax Authority as such, must retain in the operations of sale of goods, first sale of real estate, rendering of services and construction contracts whose amount of operation exceeds S/ 700.00 Soles, part of the VAT that corresponds to pay its suppliers (3% of the amount of the operation), for its subsequent delivery to the Treasury according to the due date of its tax obligations.
Sellers, service providers or builders are obliged to support the retention, being able to deduct the amounts that had been withheld against the VAT that corresponds to pay, or request their return if they had maintained an amount not applied for a period not less than 3 consecutive periods.
It is important to highlight that such withholdings will not be made when: i) they are made with suppliers that have the quality of good taxpayers; ii) are made with other subjects that have the status of Withholding Agent; iii) are operations in which the abovementioned Detraction Regime operates; and iv) are operations carried out with suppliers that have the status of Perception Agents of the VAT.
3. Excise Tax (Selective Consumption Tax)
The Excise Tax is an indirect tax that, unlike the VAT, only taxes certain goods.
Within its purposes are those of discouraging the consumption of products that generate negative externalities in the individual, social and environmental order, such as: alcoholic beverages, cigarettes and fuels by requiring greater tax burden to those consumers who objectively demonstrate a greater ability to pay for the acquisition of sumptuous or luxury goods, such as the acquisition of new motor vehicles, bottled water, rehydration drinks, energy, among others.
The Selective Consumption Tax levies among others: the sale in the country at the producer level and the importation of the goods specified in Appendices III and IV of the VAT Regulations; and the sale in the country by the importer of the goods specified in letter A of Appendix IV of the VAT Regulations.
Depending on the nature of the good, the tax is determined on the basis of different systems: i) to the Value, for the goods contained in letter A of Appendix I; specific, for the goods contained in Appendix III, letter B of Appendix IV of the VAT Regulations; and ii) to the value according to the sale price to the Public, for the goods contained in Paragraph C of Appendix IV of the VAT Regulations.
4. Temporary Net Assets Tax - TNAT
This tax is levied on the value of the net assets of the companies, as reflected in their balance sheets as of December 31 of the previous year and applicable to taxpayers of the Third Category Income that are included in the General Income Tax Regime.
• Applicable rate
After making the corresponding deductions, the rate of 0.4% will be applied for the excess of the first S / 1,000,000.00
• Declaration and Payment
The declaration of said tax will be made within the first twelve business days of the month of April of the year to which the payment corresponds and may be made in two forms of payment: Cash at the time of submitting the corresponding statement; or fractionated up to 9 successive monthly installments, corresponding to one-ninth of the total tax payable.
Taxpayers have the possibility to consider the TNAT payments as a credit against monthly advance payments of the Income Tax from March to December of the fiscal year for which the tax was paid; and against the annual income tax regularization payment of the Income Tax for the fiscal year to which it corresponds. If at the end of the fiscal year the TNAT paid is higher than the annual Income Tax, taxpayers have the possibility of request the return of said excess to the Tax Authority.
5. Financial Transactions Tax - FTT
The Financial Transactions Tax applies, among others, to any transfer, movement, debit or credit made in bank accounts of individuals and companies in the Peruvian banking system. It also applies to the acquisition of management checks, bank certificates and other similar instruments without the need to use the funds deposited in a local bank account.
The tax rate is 0.005% of the value of the operation, and the tax must be withheld by the corresponding local bank. The amount of FTT tax paid will considered as a credit for the annual income tax regularization payment of the Income Tax for the fiscal year to which it corresponds.
6. Others
6.1 Capital gains
Capital gains are revenues that come from the sale of goods that are not intended to be marketed are treated as ordinary income with the General Income tax rate (29.5%).
6.2 Dividends
The distribution of dividends or any other form of distribution of profits, made by legal entities are levied with a rate of 5% when the distribution is made to natural persons or non-domiciled legal entities.
The indicated retention must be made on the date of adoption of the distribution agreement, or when the dividends and other forms of distributed profits are made available, in cash or in kind, whichever occurs first.
6.3 Interests
Interest paid by a domiciled person or entity to a non-domiciled person or entity is generally subject to a tax withholding of 30%.
The rate may be reduced to a rate of 4.99% when the following conditions are met: i) the interest is paid to non-domiciled legal entities which is not a related entity; ii) that the entry of the foreign currency into the country is accredited; and iii) that the credit does not accrue an annual interest higher than the prevailing preferential rate in the market origin plus 3 points.
6.4 Transfer Prices
The Transfer Pricing Rules were created with the purpose of controlling that transactions among economically related parties (domiciled or not), comply with the principle of free concurrent or market value, meaning that transactions with related parties are made under similar conditions to non-related counterparties, eliminating those distortions in prices, which in certain cases reduce the taxable base of these companies and, therefore, the collection of taxes.
The regulation consider that two or more persons, companies or entities are related parties when one of them participates directly or indirectly in the administration, control or capital of the other, or when the same person or group of persons participate directly or indirectly in the management, control or capital of several persons, companies or entities, or when the transaction is made using interposed persons whose purpose is to conceal a transaction between related parties.
Taxpayers who are within the scope of application of the aforementioned rules, have some obligations:
- Taxpayers whose income accrued in the taxable year exceeds the 2 300 Tax Units (UIT[2]) must present, annually, the informative Local Report, in connection to transactions which generate taxable income and/or deductible costs or expenses for the determination of the tax.
- Taxpayers who are part of an economic group whose income accrued in the taxable year exceeds 20,000 Tax Units (UIT) must present, annually, the informative Master Report that Contains, among others, the organizational structure, the description of the business or businesses and the transfer pricing policies on intangibles and financing of the group and its financial and fiscal position.
- Also, taxpayers who are part of a multinational group must present annually, the informative Country-by-Country Report, which must include, among others, information related to the global distribution of income, paid taxes and the business activities of each of the entities belonging to the multinational group that carry out their activity in a particular country or territory.
[1] It should be specified that the corporate form adopted may have different treatment in the United States, so this should be part of your analysis according to external legislation.
[2] UIT or Tax Unit is equal to S/ 4,200 soles equal to US$ 1,265 dollars