Tax revenue 2024: between raising taxes or putting the country into debt

The intrinsically extractive nature of the Peruvian economy took its toll on it in 2023, with revenue that plummeted at the rate of lower copper prices and a recession scenario that, at the discretion of different specialists, will not be able to be reversed this year.

In 2023, the country’s income fell 12.3% after going from S/157,776 million in 2022 to S/147,246 million, largely due to a drop in income tax collections (-15.8%) and VAT (-11.1%), according to a recent evaluation by the CooperAcción group, which reveals a close drop of two percentage points to 15.2% in the tax burden.

It should be considered that, in 2023, mining ceased to be the sector that generated the most income for the country (S/12,650 million compared to S/19,766 million a year ago) due to returns, lack of new large projects and the withdrawal global metal prices. In the case of copper, Cochilco has already anticipated a weak rebound towards US$3.85 per pound this new year.

But a recovery of the economy to 3%, as announced by the Ministry of Economy and Finance (MEF) and an improvement in Chinese demand for copper will not necessarily lead to collections at the levels of five years ago. Juan Carlos Odar, director of Phase Consultores, explains that there are still cards on the table, such as the increase in the ISC (whose schedule has not been confirmed) and the regularization of the IR, which will be postponed until the middle of the year.

“The declaration usually has a devolution effect as well; “So, the refund of the IR of people who have paid in advance above what they should have paid will play in favor of the net balance you have at the end of the year, basically because the regularization will occur two months later than usual,” he highlighted. .

For a sustained improvement, the effect of the exchange rate will also play a role, which is above last year’s levels, something that, in terms of prices, moves the needle of the fiscal coffers. When the dollar rises, collection improves, because it is collected in soles.

“Suppose an imported product costs US$100 with fixed tariffs. In one year the rate is S/3.50 and, in another, S/3.80; then, the collection will be greater only due to the effect of the dollar, even if the same amount is traded,” Odar clarifies.

There are no options left

In 2021, a record collection was recorded (S/139,952 million, tax pressure rose more than 3 pp to 16%) due, in large part, to companies such as Cerro Verde and Buenaventura paying joint debts to the State for more than S/3,164 million as a protest.

However, at the beginning of last year, the administration (Sunat) and the Peruvians lost their battle against the Constitutional Court, which forgave millions in interest generated by companies that have kept their debts in court for years.

To all this, other factors must be added, such as the fiscal farce promoted by Congress (something that, at the time, the Fiscal Council warned) through laws with the theoretical purpose of benefiting the most vulnerable, and exemptions for sectors, such as reduction of VAT to 8% until December 31, 2024, left by former Minister Contreras.

Carlos Oliva, also former head of the portfolio, highlights in this line the position of the new minister Arista, of ending these tax cuts. There is also Law 31903, which allows the free disposal of funds from the withdrawal accounts of micro and small businesses (mype).

“There are structural issues where other types of measures come into play that involve improvements in the work of Sunat and formalization of the economy. But this whole package of reforms generally does not give you effects in the short term, but rather in three or four years. If you want to get out of the recession in the short term,” Oliva portrays.

However, with a fiscal deficit of 2.8% in 2023 (above the goal of 2.4% of GDP), Oliva warns that, if the recession is not exited and copper does not rise, the only thing left to do is put the country into debt. or increase taxes even more on an already quite lean tax base.

However, the low collection also represents a challenge for the objectives set by the previous MEF, of reaching the OECD in 2026, a group in which the tax pressure exceeds 33%. We are not even at the average level of other countries in the region, a reality that a better copper price will not change.

CooperAcción explains that Peru continues to lag behind in terms of tax collection in Latin America: it is one of the few countries that in recent years has not implemented a single tax reform of a structural nature.

“According to the OECD report of September 2023, Peru needs to implement a comprehensive tax reform, which allows public revenue to be increased progressively to improve public services, eliminate regional disparities and provide better opportunities to Peruvians,” he points out.

Reactions

Carlos Oliva, former Minister of Economy

“There is a risk this year regarding the endless populism of Congress and I note that they will try to reduce the exonerations. Therefore, it is important that Minister Arista has the cabinet and president on his side.”

Juan Carlos Odar, director Phase Consultores

“The MEF had promised its macro projection update report in March, even though it normally comes out in April-May. That can also influence the honesty of the fiscal perspective, including collection.”