At 16.3% of GDP in 2024, Peru’s tax-to-GDP ratio remains low compared to other countries in Latin America and the Caribbean (LAC). This persistently modest revenue performance is due to various tax-related factors, including high levels of labour and firm informality, weaknesses in tax compliance and enforcement and the increased use of tax expenditures (TEs) to achieve policy objectives that may be better realised through spending. In addition, certain tax design features contribute to this outcome, such as the highly schedular structure of the personal income tax (PIT), and specific provisions in simplified regimes that hinder formal business growth. Improving the design of Peru’s tax system is essential not only for increasing revenue and ensuring fiscal sustainability in the medium term, but also for supporting greater public investment and social spending.
Despite three decades of robust economic growth, Peru has not been able to generate a sustained increase in its tax-to-GDP ratio, which has fluctuated between 15 and 19%. Peru’s tax revenues remain highly volatile, mostly reflecting fluctuations in mineral prices. Mining-related tax revenues have not contributed to a persistently higher tax-to-GDP ratio over the medium term. Trends observed in 2023 and 2024 may suggest that revenues from the mineral sector can no longer be expected to rise, even in a period of high prices, which may highlight underlying vulnerabilities linked to non-compliance, tax avoidance and informal and illegal mining. Making sure other growth sectors besides mining, such as agro-exports and tourism, contribute adequately to increasing the tax-to-GDP ratio is key to improving long-term tax buoyancy.
There is scope for Peru to strengthen its tax system to better support growth, equity, and revenue mobilisation. Reforms should focus on restoring the link between economic growth and tax revenues by broadening the tax base and increasing the number of businesses and workers within the reach of the tax system, but also on improvements to tax design. Key priorities include rationalising widespread TEs such as the reduced corporate income tax (CIT) rate for the agriculture sector and the VAT reduced rate for hotels and restaurants, taxing capital income at slightly higher rates and reducing the high basic tax allowance that applies to labour income. Over time, Peru could move away from its overly schedular personal income tax system by introducing a dual progressive income tax system that taxes employment and capital income separately under their own progressive tax rate schedules.
Peru’s tax system is often used to address challenges that originate outside the tax domain. Income-based tax incentives are frequently used to offset structural issues such as inadequate infrastructure and skills shortages. While tax incentives may under certain circumstances incentivise investment, an overreliance on such measures risks eroding the tax base without addressing the underlying constraints on investment and growth. In line with the principles of Norm VII of Peru’s tax code, which restricts the use of tax expenditures, these challenges are generally more effectively addressed through targeted public spending. Special regimes and TEs intended to support small and medium taxpayers are often too generous and not effective at encouraging formalisation. Peru’s experience also highlights the difficulty of phasing out ineffective TEs, which are often extended despite indications of their limited effectiveness. Examples include the Special Development Zones regime and reduced VAT rates for restaurants and hotels.
There is significant scope to improve the design of the new Special Economic Zones (ZEEPs), which are managed by private operators. The ZEEPs regime must be carefully designed and effectively governed from the outset. The ZEEPs preferential tax regime should be evaluated in light of the Global Minimum Tax, in particular if the design of the ZEEP regime continues to include generous income-based tax incentives. Peru could consider using more detailed, industry-specific eligibility criteria to target additional investment that generates positive spillovers to the domestic economy and to prevent the ZEEPs from eroding the domestic tax base and/or creating unfair competition with domestic industries located outside these zones. However, the success of industry targeting is not guaranteed, also because deciding on the eligible industries is a challenging exercise. Furthermore, to enable this special regime to become a significant driver of economic growth, it should be implemented alongside broader reforms that address other key barriers to investment.
Expanding enforcement efforts to the informal sector is essential to broaden the tax base over time, even if it may not maximise revenue collection in the short term. Tax enforcement is an integral part of a whole-of-government approach to formalisation, aligned with efforts to address challenges at their source. For many informal entrepreneurs, the main reason for remaining informal is not an inability to pay taxes, but rather the lack of compelling reasons to register their business as the risk of detection might be low. Understandably, SUNAT, the tax administration, has prioritised short-term revenue mobilisation, which may result in insufficient resources being allocated to monitoring harder-to-tax segments, such as businesses and entrepreneurs in simplified regimes, despite their importance to the future tax base. A key priority must be to address the significant fraud linked to the issue of fabricated VAT invoices issued by inactive companies, including through the regulation governing the classification of entities lacking operational capacity. These schemes enable firms to claim undue refunds, undermining revenue collection, and facilitating the export of informal or illegal production in the mining sector.
Reducing labour informality requires a coordinated, whole-of-government approach that recognises the strong links between labour, social protection, and tax policies. A whole-of-government approach also requires addressing broader economic constraints such as low levels of education, skills and productivity, as well as weaknesses in institutional quality. Reducing non-wage labour costs alone is unlikely to significantly reduce informality if other underlying factors are not addressed. For instance, labour informality is widespread among microenterprises, which already benefit from reduced obligations, with the additional cost of formally employing a minimum wage worker under the microenterprise regime amounting to only 1.3% of the minimum wage. Therefore, reforms should combine reducing non-tax, non-wage labour costs with simplifying labour regulations, providing stronger incentives for formalisation, and enforcing the labour and tax rules more effectively. In this context, enhancing the labour inspection capacity of the National Superintendence of Labour Enforcement (SUNAFIL) is critical. This will require improved procedures and additional resources. There may be scope to reduce non-wage labour costs in the general labour regime where total mandatory employer payments can amount to 50% of the wage for a minimum-wage worker. In a context where the level and design of labour costs matter, it is particularly important to revise the design of profit-sharing rules to avoid the discrete shift that occurs when firms exceed 20 workers. Integrating RMT and RER regimes into one single, simplified regime for SMEs, with profits as the tax base, would incentivise companies to declare their workers. The reform measures recommended in this report should be evaluated over time to assess their effectiveness and, where necessary, complemented by additional measures, including tax policy adjustments.
Strengthening the financing of the social protection system, and ensuring that this leads to an improvement in the quality of the benefits provided, is integral to reducing informality in Peru. The quality and effectiveness of public spending and social protection are perceived to be poor, which undermines incentives for voluntary compliance. These dynamics reinforce each other: a lack of compliance reduces the tax revenues needed to strengthen social protection, creating a cycle that is difficult to break. A first step to improve the financing of the main contributory health insurance scheme, EsSalud, would be to broaden the base of health social security contributions. Aligning contribution rules across the public and private sector and transferring health contributions on bi-annual bonus payments to EsSalud would promote consistency. While these measures would reduce take‑home pay, incentives to formalise could be strengthened if the additional revenue is used successfully to improve the quality and perceived value of social protection. Furthermore, progress in formalisation is a key determinant of the sustainability and adequacy of the social protection system, not only by strengthening contributory schemes but also by supporting non-contributory programmes through increased general tax revenue.