Tax incentives totaled S/160,000 million in the last decade

The debate on the recession in Peru has turned towards the identification of proposals that allow the economy to be reactivated. Among them is a project for a new Industries Law, which mainly includes the creation of tax incentives for specific sectors. Despite its good intentions, this initiative omits that measures of this nature have already been implemented in the past without success, generating counterproductive effects. Recent evidence shows clear indications that the economy’s weakness will not be resolved by implementing a list of tax incentives. If necessary, these require being part of a comprehensive, widely debated and agreed upon strategy, where the costs, deadlines, responsible parties and the actions to be taken in the event that the objectives are not met are also clearly established. And this bill lacks all of this.

Expensive incentives

Tax incentives have been used as part of Government policies that seek, for example, to attract investments, boost employment and promote strategic sectors. However, these types of measures not only represent a significant fiscal cost, but also generate distortions in the economy, so their use must be rigorously justified so that their application results in more benefits than losses. The revenue that the State no longer receives as a result of these incentives is called tax expenditure.

In the last decade, tax expenses have meant a total cost of S/160,000 million, representing on average 2.1% of GDP each year and a value very close to the entire tax collection of 2022. In particular, the amount incurred Tax spending has been increasing since 2021, when it amounted to just under S/16,000 million. By 2024, this figure will have increased by 50%, reaching almost S/24,000 million, according to Sunat estimates. Almost half of this amount corresponds to the exemption from VAT on agricultural inputs and products, and the incentives applied in the Amazon, including the exemption from payment of VAT and ISC on the sale of fuel and the differentiated rates of Income Tax. .

The continued rise in the costs of applying these tax incentives calls into question whether the lost resources could be put to better use. If the estimated tax expenditure for 2024 were only 10% lower, there would be an additional S/2,385 million for the public budget. With this sum, for example, the entire annual budget of the Qali Warma program could be financed.

Evidence

There are multiple examples that show the limited effectiveness of tax benefits as a tool to promote investment development, economic growth and poverty reduction. On the contrary, cases such as the tax exemption on fuel sales in jungle regions (Loreto, Madre de Dios and Ucayali) illustrate the negative distortions that this type of incentives can cause. In Madre de Dios, per capita fuel consumption was 7.4 times higher than the national average during 2022. This atypical result would be associated with the risks that VAT and ISC exemptions are improperly used to provide cheap inputs to activities. that are developed mainly in this area of ​​the country such as mining and illegal logging.

Other tax measures linked to exemptions and differentiated rates applied in certain geographical areas also do not offer evidence of favorable results. The last current incentive regime in the Amazon territory, for example, has been operational since 1998 and despite this, there are still gaps such as those in Loreto, where 40% of its population is poor, making it the sixth region with the highest poverty. national scale. Likewise, Javier Escobal and Carmen Armas, researchers at Grade, found that the exemptions in the high Andean areas – in force from 2010 to 2019 – did not have an impact on economic activity or poverty reduction. This is due to the lack of critical complementary investments that encourage the relocation of formal companies in these locations.

For its part, the case of San Martín is an example of the potential benefits of eliminating inefficient tax incentives in exchange for the transfer of greater resources to execute public investment projects. This modification became effective in 2006, and to date more than S/950 million have been transferred to the region through a trust, which was accompanied by an increase in its income per inhabitant at an annual rate of 3.4 %, triple what was recorded on average by the rest of the Amazon regions (1.1%) during this period.

Inopportune context

The current fiscal scenario indicates that it is not a good time to implement greater tax incentives. On the one hand, tax revenues have been reducing in recent months, accumulating an annual drop of 12%, in real terms, between January and September. Furthermore, Peru already incurs larger tax expenditures than other countries in the region. According to the Inter-American Development Bank, the cost of VAT exemption in manufacturing industries is equivalent to 1.2% of Peruvian GDP, one of the highest figures in Latin America. All of this, added to the high levels of evasion, has caused tax collection in Peru to be significantly lower than in other countries in the region. Thus, while tax revenues in Peru represent 20% of GDP, this figure rises to 30% for the average in Latin America, according to estimates by the International Monetary Fund.

There is no doubt that taking advantage of the country’s different potential is a priority task to reactivate the economy and return to the path of poverty reduction. However, it is unlikely that the implementation of a list of tax incentives will allow long-term development of the industry, and not just temporary benefits for a few at the expense of a tax expense borne by all citizens.