Grant Him Power? Castillo’s Tax Ask (Part 1)

November 9 ,2021

Three months after taking office, Peruvian President Castillo sent Congress a request for the delegation of powers to empower himself through decree in various arenas, but primarily in the area of taxes.  Although not unusual for a newly elected president, many doubt whether the Peruvian Congress will grant either full or partial powers.  The Executive has proposed a tax reform that could collect between 1% and 1.5% of GDP, although it has not specified how it would arrive at such figures. Although there is consensus that Peru’s tax burden of around 15% of GDP is low compared to its Latin American peers, criticisms abound.

For one, many have questioned the timing, considering that the economy has not yet recovered to its pre-pandemic dynamics and that a higher tax burden could interrupt this progress. In addition, the proposal’s ambition is extensive, ranging from tax administration measures to tax increases for the wealthiest and seeking a higher  take from mining activity. The issue of rate increases is the most questionable part, since it makes no progress in broadening the band of the roughly 20% to 30% of the population that currently supplies the bulk of revenues.

On mining, the proposal aims to modify the rates for mining activity, which historically has been one of Peru’s engines of growth and generation of foreign currency in the country. In this regard, it should be noted that in 2011, a new tax and royalty structure was approved for this sector to capture the benefits of the increase in commodities prices.  Thanks to the 2011 law, revenues from mining could triple in 2022 to reach about 15 billion soles. Thus, increasing marginal rates even more would cause either a loss of competitiveness in the sector if the new rates are very high, or a meager additional collection if the new rates did not increase that much.

All this said, certain aspects of the proposal appropriately address real challenges and could assist Castillo in winning at least a partial delegation of powers.  For example, some measures adhere to OECD recommendations by seeking to combat tax avoidance.  Others attempt to simplify business income tax regimes, as well as make adjustments to inefficient property tax collection. This last aspect is particularly relevant given that the collection of property taxes in the country is barely 0.3% of GDP, compared to rates closer to 1% of GDP in regional peers.