A 14.9 percent tax revenue increase and the blessing of Fitch with a BBB rating on its sovereign debt has had Peruvians celebrating the most successful economic year in the country’s history.

Peru’s economy continues growing at a stellar rate. Despite North American and European economic troubles, Peruvians remain resilient and determined to succeed. The new administration that took power in July 2011 under the leadership of President Ollanta Humala has done wonders to maintain and improve the healthy policies set in motion by former President Alan García. Indeed, in November 2011, Fitch upgraded Peru’s sovereign debt rating to BBB, reflecting international confidence in the country’s economy for the long term.

Not surprisingly, Peruvian tax revenues have also increased considerably. The latest report issued by Peru’s National Tax Authority (SUNAT) shows that tax revenues during the period January-September 2011 were 14.9 percent higher than tax revenues collected during the same period in 2010. This tax windfall will allow Peru to implement important social programmes and to invest in education and infrastructure, two key components of its strategic growth plan.

SUNAT’s success is not accidental. Peru has a clear tax framework that makes SUNAT’s work easier and rewarding. Additionally, SUNAT is an extremely efficient and at times aggressive government agency that makes every effort at collecting taxes at the source and at the earliest opportunity. And when necessary, SUNAT litigates to achieve its mandate.

A basic understanding of Peru’s tax framework and procedures followed by SUNAT is key to foreign investors evaluating transactions in Peru, such as M&As and the establishment of subsidiaries. Peru has two basic taxes: income tax and general sales tax.

Income tax
Generally, Peru taxes all income derived from activities carried out in Peruvian territory.  Taxpayers domiciled in Peru pay Peruvian income tax on their worldwide income.  Taxpayers not domiciled in Peru (such as foreign companies and individuals) pay Peruvian income tax on their Peruvian source income only.

Corporations pay a flat tax rate of 30 percent. An additional 4.1 percent is levied on dividends upon distribution. Individuals pay an increasing tax rate capped at 30 percent. Peru’s income tax law requires Peruvian parties making payments to non-domiciled entities to withhold Peruvian income tax and pay it to SUNAT.

General sales tax
Peru imposes a general sales tax (‘IGV’) on all sales of goods and services. IGV is a value added tax. It operates by having each party in the chain of production collect the tax from its customer and pay to SUNAT the difference between the tax paid to its suppliers and the tax collected from its customers. Imports are also subject to IGV, which is assessed on the CIF value of the import plus the import duty, exclusive of IGV. Generally, importers are entitled to credit all IGV paid on imports against IGV collected from their customers.
IGV also applies to services rendered by non-domiciled entities, provided those services are utilised in Peru. Because non-domiciled entities are beyond SUNAT’s reach, Peru’s IGV Law requires the Peruvian entity to which non-domiciled entities provide services to pay to SUNAT any applicable IGV.

SUNAT tax assessment proceedings
Peru’s tax assessment proceedings have two phases: administrative and judicial. Phase one begins with the initial tax assessment. This assessment may be appealed at SUNAT. If SUNAT issues a final tax assessment, it can be appealed to Peru’s tax court (an administrative agency of Peru’s executive branch, not a part of the Peruvian judiciary). A decision by Peru’s tax court ends phase one.

Phase two – judicial review – commences with a complaint against the decision issued by the tax court, which is filed with a trial court (this time a court of law part of the Peruvian judiciary). The trial court’s decision may be appealed to the Superior Appellate Court. Finally, phase two ends with an appeal to Peru’s Supreme Court (a certiorari petition).

Phase two may take between three and five years to run its course, with a decision issued by Peru’s Supreme Court, the final appellate court in Peru. The Supreme Court has discretion under Peru’s Code of Civil Procedure to grant certiorari. A decision denying certiorari is final and cannot be appealed.