New Economy Minister: will he pursue tax reform?

10 June 2018

Carlos Oliva was sworn in on 7 June to replace David Tuesta as minister of economy and finance. Tuesta had incurred the wrath of Prime Minister Cesar Villanueva for coming out with plans to raise tax revenues.

Peru urgently needs to raise the threshold of taxation since the tax take is one of the lowest anywhere in Latin America. Moreover, it is one where the majority of government income comes from indirect taxes, mainly taxes on consumption.

The problem with Tuesta’s suggested changes was that they were going to fall not on the richest sectors of society but on those with relatively low incomes. He wanted to widen the threshold of income tax to take in social sectors that currently are exonerated because their incomes are so low.

The Vizcarra administration, whose popularity appears to be ebbing fast according to a recent Datum poll, is concerned to avoid steps that would hasten this decline. Its approval rating is, arguably, the only defence it has against the Fujimorista majority in Congress which will surely turn its back on Vizcarra when it is no longer politically advantageous to be seen supporting him.

Whether or not Oliva will seek to follow through with reforms to the tax system remains to be seen. Peru has a substantial fiscal deficit which needs to be financed. The tax administration, SUNAT – once feared by taxpayers because of its ruthless efficiency – is but a shadow of its former self. And, perhaps even more importantly, Peru’s tax system, with its dependence on indirect taxes for the bulk of the income generated, is inherently unfair.

In a previously published article, Oliva made clear that he favours correcting this and raising tax income from those best-placed to pay. He advocated tougher measures against tax evasion, which is widespread in Peru. Currently, the SUNAT is seeking to recover the equivalent of 1% of GDP which is the subject of litigation with a handful of large companies.

For its part, the Catholic Bishops’ Conference has issued a statement in which it said “we cannot increase the tax burden for workers (...) whilst there continue to be companies that remain exempt from the payment of taxes for decades and which continue to enjoy large privileges”. Many foreign investors in the 1990s benefited from deals which exempted them from the payment of tax. 

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