Peru: Selected Issues

International Monetary Fund. Western Hemisphere Dept.

doi:10.5089/9781513526126.002.A001

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Peru: Selected Issues

Author: International Monetary Fund. Western Hemisphere Dept.

Publication Date:: 13 Jan 2020

eISBN:: 9781513526126

Language:: English

Keywords:: ISCR; CR; Peru; rate; policy rate gap; dollarization; inflation targeting framework; policy instrument; Policy rate decision; transmission mechanism; monetary policy rate; macro-prudential policies; Central bank policy rate; Reserve requirements; Real exchange rates; Value-added tax; Global; Caribbean; Asia and Pacific; VAT gap; tax collection; RER regime; income tax; tax authorities; Corporate income tax; Corporate taxes; Revenue mobilization; personal income

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Selected Issues

Abstract

Selected Issues

Tax Revenues in Peru—Recent Trends, Policies and Prospects¹

Peru’s efforts to improve tax collection in the last 20 years have not been successful as modest gains in revenue mobilization have been offset by the impact of commodity price declines. While VAT and corporate income tax rates compare favorably with other countries in the region, collection has remained low owing to reductions in tax rates and limited compliance, with multiple small business tax regimes creating opportunities for misreporting and evasion. Overall revenues from property taxes, personal income taxes and excises are also low. Recent reforms have targeted structural weaknesses of the tax system, including by raising excise rates, reducing tax expenditures, and adopting electronic invoicing to improve tax administration. However, given the historically strong co-movement between tax revenues and commodity prices, the uncertain external outlook poses a challenge for Peru’s ability to meet its fiscal needs. Reforms of the tax regimes for small businesses and continued strengthening of tax administration remain crucial to achieving Peru’s ambitious revenue mobilization targets of 1 percent of GDP over 2019–20.

A. Introduction

1. Despite strong macroeconomic performance and significant fiscal reforms, Peru’s gains in revenue mobilization were almost nil in 1999–2017. Public debt declined from around 50 percent of GDP in 1999 to less than 26 percent of GDP at end-2018, owing to strong economic growth, high commodity prices, and restrained government expenditures. However, progress on revenue mobilization has been insignificant. Peru’s tax revenues exceeded those of countries such as Mexico, Colombia and Ecuador in 1999. However, at end-2017, having seen no net gains in revenues as a percentage of GDP, Peru fell behind the overall regional average.²^,³ Closer analysis of this period reveals periods of strong revenue growth followed by sharp contractions deriving from a mix of external shocks and factors related to tax policy and administration.

2. Recent reforms hold promise for improved domestic resource mobilization, but needs are large and risks increasing. Reductions in exemptions and increases in excises have helped the recovery in tax revenue mobilization during 2018 and early 2019. The introduction of electronic invoicing can improve tax compliance, provided complementary tax administration strategies are developed. However, Peru’s plans to address its key spending priorities—including filling sizeable infrastructure gaps – require further efforts, while the uncertain global outlook presents additional risks to revenue mobilization in the short term. Tax policy reforms—including of small taxpayer regimes—and tax administration strengthening to combat tax leakages will be critical for the government to achieve its ambitious revenue targets. In the medium term, improving revenues from property taxes, further reform of excises, and enhancing coverage of personal income taxes will be necessary to address large spending needs.

3. This chapter evaluates features of the Peruvian tax system that may have contributed to weak revenue growth, as well as reforms to strengthen the tax system. Using data on domestic tax collection in conjunction with cross-country data on tax rates, collection and tax expenditures, we attempt to shed light on the factors that distinguish tax revenue mobilization in Peru from other countries in the region. We also reflect on recent reforms in tax policy and tax administration, and present advice for continued progress in these areas.

B. Tax Policy and Revenue Mobilization

4. Peru’s domestic tax revenue mobilization has closely traced the commodity cycle. The largest increase in tax revenues coincided with a long period of increasing commodity prices, with price reversals in 2007 and 2011 leading to downturns in revenue mobilization. Of the two largest components of overall tax collections, IGV (Impuesto General a las Ventas—value added tax) has shown lower net growth resulting in IR (Impuesto a la Renta—tax on corporate and personal incomes) contributing a larger share over time. Since VAT is considered a regressive tax relative to IR, this shift may have had positive distributional implications. However, IR is also substantially more volatile than IGV. On net, however, the taxation system has evolved away from distortionary tariffs towards greater reliance on taxes from income and sales, with taxes on imports declining from 1.7 percent of GDP in 1999 to 0.2 percent of GDP in 2018 (page 16).

5. Lowering the VAT rate may have contributed to weak VAT revenue growth. Over the 1999–2017 period, Peru’s growth in VAT revenues was well below the Latin American average of 1.9 percentage points of GDP. One of the highest in the region (page 16), Peru’s VAT rate was lowered from 19 to 18 percent in 2011. This has likely weakened Peru’s gains in VAT collection relative to countries such as Chile, Argentina, and Uruguay which did not change their VAT rates.

6. VAT collections have also been weakened by VAT gaps driven by poor compliance. Peru has made marked progress in reducing the VAT gap⁴ from 50 percent in 2003 to below 35 percent in 2018. Moreover, Peru outperforms several peer countries with higher income levels in terms of its VAT c-efficiency⁵. The VAT policy gap⁶ for Peru is lower than in European countries, suggesting that the rate structure, base and exemptions are in line with best practices. Consequently, the key to improvements in VAT collections lies in improvement in VAT compliance by combating tax avoidance and evasion.

7. The VAT gap is countercyclical, suggesting that weaker commodity prices would further exacerbate low collection. The VAT gap appears to co-move with the commodity cycle, with the largest reduction occurring during the commodity boom of the mid 2000s, and the subsequent weakening of commodity prices resulting in a reversion to moderately higher gaps than were seen at the peak of the cycle. This relationship would suggest that a weaker external outlook may place greater stress on VAT revenues and some of the improvements in VAT efficiency may be short-lived. On the other hand, Peru may see enhanced compliance result from their introduction of electronic invoicing for VAT transactions, which can reduce tax evasion and avoidance by raising the probability of evasion detection and lowering compliance costs. However, IMF research indicates that, as of 2017, improved compliance from e-invoicing adoption has been limited to small firms, which contribute little to aggregate VAT collection (Box 1).

8. Recent elimination of inefficient tax expenditures should enable more revenue generation while reducing avenues for tax avoidance. Though broadly in line with international best practices, Peru had higher consumption tax expenditures (1.6 percent of GDP) than many other countries in the region.⁷^,⁸ Moreover, while the number of tax expenditures remained unchanged over 2013–2016, year-on-year increases in consumption tax expenditures were larger than increases in consumption tax collections, suggesting that taxpayers were exploiting them more intensively over time (page 16). A 2014 Asia Pacific Economic Cooperation (APEC) review of the preferential VAT and excise rates in Amazonia found these exemptions to be ineffective in promoting regional development and contributing to the creation of a black market in fossil fuels. In 2018 the authorities eliminated VAT exemptions in the Amazonia region and tax refunds for infrastructure development in the Loreto region, in exchange for annual transfers to the regional governments for financing infrastructure, education, and health initiatives. This is expected to improve revenue collections while increasing the efficiency of transfers to the regions.

Box 1.

Electronic Invoicing Adoption and VAT Revenues

In 2014, Peru initiated a reform mandating a switch from paper invoices to electronic invoices for the filing of VAT taxes. Over 10 countries in Latin America, and over 50 countries globally, have switched to electronic invoicing (e-invoicing), which allows for digital transfer of information between tax payers and tax authorities. From October 2014, successive waves of Peruvian firms were mandated to shift to the electronic invoicing system, starting with the largest firms who contributed the bulk of the VAT revenues, and gradually extending to medium and small firms.

Electronic invoicing holds the promise of reducing VAT noncompliance, a persistent problem in Peru and the region. By reducing the cost and complexity of aggregating and cross-checking large quantities of transactions data in real time, e-invoicing enhances the ‘self-enforcing’ feature of VAT by allowing quicker detection of misreporting of tax liabilities from anomalous sale and purchase declarations. In addition, by lowering administrative costs, it reduces the cost of compliance for taxpaying firms while encouraging their digital transformation. Lower costs of tax compliance and increased probability of evasion detection can also encourage formalization.

E-invoicing adoption has increased reported sales, purchases, and value added in small firms in the first year after adoption. A joint research study conducted by the IMF and SUNAT¹, using administrative taxpayer data comprising all large, medium and small VAT paying firms in Peru, finds that the mandated switch to e-invoicing resulted in small firms² reporting higher sales, purchases and taxable value added one year after adoption. These firms also demonstrate over 5 percent higher VAT payments in the first year after adoption. However, no such results are found among larger taxpayers, which constitute over 80 percent of VAT collections in Peru. Sectoral analysis reveals that effects are larger where compliance has historically been difficult to enforce, such as in retail, services, and construction.

The effect of e-invoicing has been less significant for firms with outstanding VAT credits. For these firms, which represent 40 percent of the total, no increase in VAT liabilities or VAT payments is observed after the introduction of e-invoicing. With larger increases in reported taxable purchases than sales among these firms, there is a sizeable increase in their stock of VAT credits during this time period, which can be used to offset future VAT obligations. This points to the need for effective control of VAT credits to ensure that the benefits of e-invoicing are fully realized.

The results of this study present a lower bound of the potential benefits of e-invoicing. As the e-invoicing is on-going, more small firms are being inducted into the system, potentially creating larger effects on aggregate. Moreover, over the period examined, SUNAT has made no significant change to its risk management strategy to incorporate the wealth of new data provided by the e-invoicing system to enhance control procedures. Consequently, with the complementary use of audit strategies based on e-invoicing data, larger reductions in noncompliance may be anticipated.

¹ “Digitalization to Improve Tax Compliance: Evidence from VAT e-Invoicing in Peru”, by M. Bellon, J. Chang, E. Dabla-Norris, S. Khalid, F. Lima, E. Rojas and P. Villena, IMF Working Paper No. 19/231² Firms with sales under 1700 UIT (Unidad Impositiva Tributaria—equivalent to S/4,200 in 2019).

9. Reforms of tax rates on fuel, vehicles, alcohol, tobacco, and other beverages will provide a much-needed boost to excise revenues. While the average rate of excise taxes has risen in the Latin American and Caribbean region between 1999 and 2017, Peru has seen one of the most significant declines in revenue from excise taxes. This decline reflects the reduction in taxes on fuels in 2004/2005 in response to high oil prices, which was not reversed subsequently. In May 2018, however, the ISC on fuel, vehicles, alcoholic beverages, other beverages and tobacco were all raised, with an anticipated annual impact on revenue of 0.3 percent of GDP. As of September 2019, excise revenues have increased by 30 percent year-on-year, relative to 1.8 percent in 2017–18, contributing 0.1 percent of additional revenue. The reform underperformed in 2019 owing to avoidance measures undertaken by the alcoholic beverage sectors, but authorities expect the reform to perform at full potential in 2020 as a result of successful legal actions to combat this tax avoidance.

10. Corporate tax revenues have been weakened by tax policy changes. Peru’s current maximum corporate tax rate was reduced in 2015 to 28 percent (page 16) and now falls in the middle of the spectrum of comparator countries. This policy reform was intended as a countercyclical measure to offset the reversal of the commodity cycle. This led to a decline in revenues from corporate taxes from an average of 4 percent of GDP in 2013–14 to an average of 3 percent of GDP in 2015–2017, which was not reversed as commodity prices began to recover. The reduction in corporate tax rates was intended to be balanced by an increase in tax on dividends, which however was not approved by Congress. Consequently, while corporate tax revenues have increased between 1999–2017, the gains are not as large as in comparator economies such as Chile, Mexico, and Colombia. The rate was increased once again to 29.5 percent in 2017, but the impact on collections has been limited so far, partly owing to the presence of tax stability agreements.⁹

11. The creation of multiple tax regimes has contributed to the deterioration of corporate tax revenues. Until 2017, businesses in Peru could register to pay corporate taxes under two simplified schemes for micro and mid-sized businesses and one general scheme (Box 2). With the 2017 reform, a new regime (RMT, Regimen MYPE Tributario) introduced a bracket of lower marginal tax rates for smaller quantities of sales. While the stated goal was to encourage the transition between the simplified regimes and the GR (Regimen General) by offering a region of lower marginal tax rates, the creation of the RMT caused the opposite effect with a large outflow from the GR and a fall in revenues owing to the lower effective tax rate paid under the RMT. Meanwhile, the proportion of firms under the simplified regimes did not contract significantly, suggesting that the reform failed to achieve its target. Consequently, the authorities should consider following technical advice to eliminate the multiple regimes and replace them with a new simplified regime which has the same marginal tax rates as the GR, to prevent tax arbitration, but has simplified accounting procedures to lower the cost of tax compliance for the smaller firms that choose to file in this regime.

Box 2.

Tax Regimes for Small Businesses in Peru

Special regimes for taxation of small business must be designed with a view to increasing formalization while discouraging tax evasion and avoidance. Empirical studies have concluded that taxation policy (marginal tax rates, average tax rates and the complexity of the taxation system) is one of the key factors discouraging the formalization of firms, resulting in direct relationship between ease of paying taxes and the size of the informal sector. As a result, the design of taxation regimes for small firms must balance the mandate of reducing tax compliance costs for taxpayers—by, for instance, reducing accounting requirements—–with limiting the use of special regimes for tax evasion and tax avoidance in the larger economy.

Peru has multiple regimes under which small businesses can file their taxes. Until 2017, small businesses had the option of two regimes, the NRUS (Nuevo Regimen Unico Simplificado) and the RER (Regimen Especial del Impuesto a la Renta). The NRUS for microbusinesses allows firms to pay corporate tax and VAT as a single fee based on sales and purchases. Firms filing under this regime are ineligible to provide invoices to their buyers for VAT refunds¹. Firms in the RER regimes pay taxes on their gross sales and can generate purchase invoices for larger firms in the general regime. The low rate at which their sales are taxed creates the opportunity for firms in the RER to generate false invoices for firms in the general regime thus enabling tax evasion. In 2017, the government of Peru added a third regime, the RMT (Regimen MYPE Tributario), with a view to creating an intermediate regime to ease transition from the NRUS into the general regime². Hence, for eligible firms under a sales threshold, the corporate tax rate was made progressive with sales under 15 UIT being taxed at 10 percent relative to the higher rate of 29.5 percent for sales above 15 UIT and all sales of firms in the general regime³.

By encouraging firms to exit the general regime, the introduction of the RMT regime created a loss in corporate tax revenues. 2017’s reform resulted in the outflux of firms from the general regime into the RMT, resulting in an overall loss in corporate tax revenues owing to the lower marginal rates in RMT. Meanwhile, the effect on the number of firms under NRUS was minimal, suggesting that the progressivity of the RMT failed to convince firms to switch from either the RER or the NRUS. The introduction of a fourth regime also increased the number of thresholds in the tax system susceptible to arbitration by firms through misreporting

Peru needs to reduce the number of regimes for small businesses with a view to ensuring that small businesses are not able to facilitate greater leakage of taxes from the general regime. A review of the small business tax regime has ascertained the need to eliminate the RMT and RER regimes, replacing them with a new simplified regime with the same marginal tax rate as the general regime to prevent arbitrage at the threshold but with simplified accounting to lower the cost of compliance. This is particularly well suited to Peru where the burden of taxes is not cited as a major reason for not formalizing.

¹ They can provide payment slips, and firms in the General Regime can deduct up to 6 percent of their purchase with payments slips instead of invoices.² Simultaneously, the threshold of eligibility for firms in the NRUS was lowered.³ Unidad Impositiva Tributaria – equivalent to S/4,200 in 2019.

12. The proportion of the working population exempt from personal income taxes is very high. While personal income tax collection in Latin America lags far behind the OECD average, Peru also lags the Latin American average. Analysis by the authorities has found that collection of the personal income tax has increased steadily, but most workers do not pay any income tax since they declare incomes in the lowest bracket where marginal tax rate is zero. Hence, in 2017, 78.2 percent of taxpayers were declaring income subject to zero marginal tax and an additional 14 percent of taxpayers were in the lowest marginal tax bracket, resulting in an effective tax rate of 5.6 percent across all taxpayers¹⁰. This highlights the need to improve coverage of the tax net and for improved control of personal income declarations to ensure that individuals are fully reporting their incomes.

13. Property tax collections have not kept pace with increases in property values. Not only does Peru collect very little in property taxes relative to some peer economies, the revenue from property taxes has also grown very little since 2011, while average residential property prices increased by 15 percent. Studies by the central bank indicate that property valuations being used to establish tax obligations are up to 200–300 percent below market valuations.¹¹ The World Bank has provided technical support to selected municipalities in six cities with the largest tax generation potential to improve their urban cadasters. This should lay the groundwork for municipalities to capture market valuations of taxable properties, expanding their tax base and generating significant revenue potential.

C. Tax Administration

14. The performance of the tax administration authority (SUNAT) compares favorably with international best practices. A TADAT (Tax Administration Diagnostic Assessment Tool) evaluation was carried out for SUNAT in May 2017 to assess its performance on the administration of major taxes including VAT, personal income tax and corporate income tax. In 15 out of the 28 indicators assessed, Peru meets or exceeds international standards for best practices, with only three indicators inadequate and four indicators weaker than international practices.¹² The report also highlights the modernization efforts of the organization and its high level of competence, which allows it to provide technical assistance to tax administrations of neighboring countries.

15. As fiscal demands for fulfilling infrastructure needs rise, SUNAT must continue to advance in its reform agenda to bring its tax collections to the level of its peers. In the past few years, SUNAT has implemented important changes to improve general management and control procedures under the guidance of Fund TA Improvements in IT systems have allowed increases in the number of control actions as well as the yield from these actions, which will have beneficial effects on overall collection and future voluntary compliance.¹³ Other reforms have been implemented to enhance the tax payer registry, ensure control of VAT withholding and refunds, and improve information systems to maximize the potential of electronic data on business transactions (Box 3).

16. SUNAT’s functional autonomy is integral to the efficiency of its operations and its continued progress. SUNAT enjoys the status of a specialized technical body attached to the Ministry of Finance. In line with best practices, SUNAT has autonomy over the organization of its internal structure and exercises discretion over its operating budget to account for changing priorities and to respond flexibly to changes in the external environment. In addition, it exercises autonomy over human resource management with the authority to determine hiring, promotion, and salaries of its staff. Given its specialized status and the technical nature of its work, the personnel in SUNAT have been provided a higher level of remuneration than the rest of the state’s institutions.¹⁴ Authorities should therefore be cognizant that including SUNAT in the Law of the Civil Service (Law 30057, of June 2013) will result in a decline in remunerations of staff and will weaken its ability to attract and retain qualified staff.

Box 3.

Tax Administration Reform Priorities and Progress

SUNAT has made commendable progress in recent years on the tax administration reform agendas. As a recipient of technical assistance from the IMF, SUNAT has implemented reforms in the areas of general management, control procedures, and IT systems. Improvements in IT systems have generated increases in the number of control actions as well as the yield from these actions,¹ which will have beneficial effects on total collection and future voluntary compliance. Areas where the continuation of the reform process is critical include:

Improving the quality of the Tax Payer Registry (RUC). While SUNAT has made significant progress in promoting the use of the RUC as the single fiscal identifier, it must develop plans to improve risk analysis for compliance risk management by updating the registry, removing duplicates, enacting control procedures at the moment of incorporation into the RUC, and classifying tax payers according to economic sectors. While SUNAT has begun to pilot the identification of tax non compliers based on cross-checking of multiple sources of data, this work must be expanded greatly to generate significant impact on collections.
Developing integrated control strategy and closing cycles of control procedures Given that audits are expensive, control of VAT and IR should be integrated, and the decisions regarding the type of control activity should be coordinated by technical personnel using the breadth of information being collected by SUNAT. Moreover, SUNAT should ensure that all control files that are started should be closed through appropriate action, whether by the taxpayer responding to the control action or by initiating more severe control actions or penalties. Failure to close the cycle of control increases noncompliance by weakening the probability of being sanctioned.
Ensure control of VAT withholding and refunds. SUNAT has acknowledged the need to improve control processes surrounding the declaration and refunds of VAT. Until now, there was no process of automatic control of all declarations and only deep control of a few cases identified as critical. SUNAT should adhere to its calendar to initiate automatic control of VAT declarations by cross-checking them against payment vouchers given the potentially large amount of tax leakage that may occur through the VAT payment system. SUNAT has also identified legal regulations requiring modification to improve the application of the VAT and should proceed with these changes.
Continue improving the information system to reap maximum gains from new technologies and the availability of data. With the digitalization of tax filing in Peru, SUNAT is in possession of large volumes of data. It should continue its efforts to ensure good data management, quality and accessibility, while developing processes for integrating new sources of data and utilizing this data to improve its functions. Hence, the development of alert systems against unwanted taxpayer behavior is an important step.

¹ The number of control orders has increased by 43 percent in 2018 with respect to 2017 and the total amount has reached 2,408 million soles with a growth of 31 percent. The induced actions have increased their impact by 75 percent yoy.

D. Expenditure Assessment

17. The share of capital spending has increased, but gaps in infrastructure remain a challenge. Between 2000 and 2018, Peru has maintained a relatively stable ratio of government expenditure to GDP while spending in most of its LAC countries and other emerging economies has increased. This has been accomplished through compression of current spending, while capital spending has increased significantly more than in its regional comparators. Consequently, further rationalization of current expenditures may prove difficult from an already low base. Moreover, despite high capital spending, Peru’s public capital stock remains well below the LAC average and quality of infrastructure lags the LAC region in areas of air transport, ports, and very markedly in the quality of roads (page 16).

18. Improving public sector efficiency provides scope for greater infrastructure development with fewer resources. Peru lags behind the efficiency frontier both in terms of the coverage of physical infrastructure and its quality. Peru’s 2017 Public Investment Management Assessment finds that Peru’s efficiency gap is significantly larger than the regional average. The evaluation also finds scope for reducing the efficiency gap by two-thirds by improving the efficiency of investment management institutions with respect to their processes for project preparation and selection, stability of financial flows, and execution times.

E. Conclusions

19. Improving compliance is key to expand VAT revenues mobilization. Peru’s largest source of internal revenue remains the VAT. Given its high c-efficiency, which implies an efficient structure, base and exemptions, weak growth of VAT revenues must be addressed by reducing compliance gaps. SUNAT’s policies in the near term appropriately focus on improving tax controls, with the promulgation of laws to allow SUNAT to sanction tax avoidance and tax evasion; enhancing control of tax defaulters; stronger risk profiling of taxpayers; and extending the use of electronic invoicing.

20. Reductions in the VAT gap can make sizeable contributions to revenue targets. Historically, the lowest observed VAT gap was 29 percent in 2014. Based on reasonable assumptions, VAT collections could increase by 0.17 percent of nominal GDP in 2019.¹⁵ Reduction in VAT noncompliance will have spillover benefits on collections of corporate income taxes, suggesting that the direct estimate is a lower bound for the full effect of a reduction in noncompliance. By SUNAT’s estimations, the VAT gap narrowed by 3.8 percent to 32.9 percent in 2018. Hence, while such a large reduction in the VAT gap is not unprecedented, whether this momentum of improved compliance can be maintained remains to be seen.

21. Elimination of multiple tax regimes for small businesses can provide a boost to revenues from corporate taxes. An IMF technical evaluation of the small business tax regimes (Box 2) finds that a rationalization of the two existing regimes (the RER¹⁶ and RMT) into one with the same marginal rate as the general regime will result in revenue gains of around 0.14 percent of GDP. Perhaps equally important will be the effect of the new regime on evasion and formality. Using cash flow as the tax base would simplify accounting and increase incentives to register sales and purchase invoices, improving information reporting for the VAT regime for firms and their customers. Additionally, firms will have an incentive to formalize their workers so they can deduct their cost from their cash flow.

22. There is ample room to increase the contribution of excises and property taxes to overall tax revenues. Relative to the regional average, Peru will continue to lag peer economies even if the current reform performs at full potential. This suggests room for further policy reforms to bring excise taxes in line with the levels of comparable economies. It is similarly critical that the authorities capitalize on the information provided by updated urban cadasters to enhance revenue mobilization from property taxes.

23. Improving spending efficiency, particularly on public investment efficiency, is also key. The authorities’ target of 15 percent increase in central government revenues over 2019–20 through administrative measures alone appears optimistic when measured against historical trends and in the context of declining growth rates, weaker commodity prices, and on the heels of the significant results already obtained in 2017–18. The outturn for January-September 2019 is exceeding expectations, allowing for cautious optimism, but downside risks prevail. Making strides in improving public investment efficiency and reducing cost overruns in public infrastructure projects would contribute to speeding up investment execution and attaining overall fiscal targets.

Prepared by Salma Khalid.

Owing to differences in payroll tax obligations across LAC countries, we exclude social security contributions from total tax collection for comparability purposes.

The 1999–2017 period is chosen based on cross-country data availability. While Peru’s revenues were atypically low in 2017 owing to El Niño events, the net gain in the 1999–2018 period remains lower than in the comparator countries presented in the figure above.

The VAT gap is the overall difference between VAT revenues expected and the VAT revenues actually collected

The ratio of the actual VAT revenue to the theoretical revenue, widely used as an indicator of the overall efficiency and effectiveness of the VAT system.

The policy gap is a measure of the lost revenues relative to a theoretical maximum where the VAT rate is applied uniformly and without exemptions

According to the RA-GAP report for Peru, during 2007–14 VAT expenditures compared favorably with European countries who provide more exemptions on average.

In nominal terms, the two largest VAT tax expenditure are attributed to the agricultural sector (6.4 percent of total VAT collections and 2.4 percent of overall tax revenues in 2016) and the Amazonia region (5 percent of total VAT collections in 2016).

Tax stability agreements stabilize the income tax regime in force at the time of signing, such that stability agreements signed during the period of lower corporate tax rates will shield the taxpayers from changes in income tax rates while the agreement is in place

Analisis del Rendimiento de los Tributos 2018, Ministerio de Economia y Finanzas.

Inflation Report March 2019, Central Reserve Bank of Peru.

Weakness are found in the management of institutional risk, timeliness of VAT payments, stocks of tax arrears, scope of the audit process, time taken to resolve administrative reviews, and timeliness of refunds.

The number of control orders has increased by 43 percent in 2018 (reaching 84,316 cases) and the amount of tax revenues subject to control under these cases has reached 2,408 million soles, with a growth of 31 percent. SUNAT’s tax recovery from these control procedures has increased by 75 percent between 2017 and 2018.

This is in line with the practices of tax administrations in comparator countries. Hence, according to OECD’s Tax Administration Series Database, pay scales for the tax administration in Chile, Mexico, Brazil, Costa Rica, Argentina, and Colombia are unique.

Assuming growth of potential VAT in line with the growth of nominal GDP and a similar reduction of the VAT gap to 29 percent.

Regimen Especial del Impuesto a la Renta, which taxes firms based on their sales, hence creating no incentive to register purchase invoices, critical for control of VAT

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