At presidential debate CADE Electoral, the presidential candidate for the Purple Party, Julio Guzmán, presented different government proposals. One of them is the execution of an immediate tax reform, which would imply canceling tax exemptions. The candidate’s words were:
“Immediate tax reform that is simple and fair. Rationalize the exemptions, we need to cancel the exemptions that do not make sense, such as universities, maintain those that do, such as those that promote science and technology.
Thursday, February 18, 2021 CADE Electoral presidential debate, YouTube channel El Comercio.
This statement is imprecise.
The Purple Party government plan indicates changes in the tax regime, one of them consists of the “elimination and / or significant reduction of existing tax benefits”. Likewise, in order to promote investment, it would grant tax benefits, but to new and strictly temporary companies.
Luis Duran, a specialist in tax matters for the Purple Party, pointed out that they have three steps to make the reform possible. First, they want to reform the National Superintendency of Customs and Tax Administration (Sunat) giving it constitutional autonomy.
Second, they want to simplify tax regimes by preventing them from limiting the growth of productive units. Finally, they propose to lead a frontal and serious fight against tax avoidance and evasion.
In how much time? Duran explained that this is a long-term plan that they will “cement” during the five years of government if they come to power. “In the first year we will start with the institutional changes. The change in tax regimes will take place over the first three years ”, he declared.
The Ministry of Economy and Finance presented, at the Multiannual Economic Framework 2021-2024 August 2020, that by the end of that year an increase in the fiscal deficit (expenses greater than fiscal income consisting of taxes and contributions) of 10.7% of GDP was expected.
The report stated that permanent tax revenues are expected to increase, which implies correcting ineffective tax exemptions. Thus, by 2021, the 2020 fiscal impulse will be withdrawn, as the effects of the pandemic diminish. In this way, the reduction in the fiscal deficit from 10.7% of GDP in 2020 would go down to 6.2% in 2021.
Luis Castilla, former Minister of Economy and Finance, explained that tax exemptions are basically applied to the VAT of certain products and are granted to promote a certain activity that does not exist or that requires momentum.
In addition, Castilla indicated that the problem with the exemptions is that it is difficult to corroborate their effectiveness. “It would be more transparent if instead of having a VAT exemption, there were direct subsidies or public spending where it is clear who is the recipient of this benefit, but if one takes away the VAT from agricultural products, it will probably affect people of lower income ”, he specified.
For this reason, the former minister said, some exemptions should be eliminated. “In the case of universities, keeping the exemptions may not make sense, but the problem is that this tax will probably result in higher pensions, it is likely that this will happen,” he said.
Fernando Loayza, a law professor at the Pontificia Universidad Católica del Perú and Universidad Pacífico, clarified that in a context of crisis, the impact of fiscal policy must be taken into account. While it is true, a simple way to inject money into an economy is to cut taxes, also, in micro, the distributive effect has to be seen. “It is not the same to inject money through companies than through family bonds,” he said.
Luis Castilla explained that it would be desirable to gradually eliminate these exemptions in the same way as has been done with the agro-export sector. “But whoever wants to increase tax revenues in this way is unaware of the difficulty they have (…). It is not consistent with the political viability of carrying it out ”, he indicated.
For his part, Loayza said that he is always in the field of making reductions in tax exemptions possible. “In the legal framework it is legitimate, it can be done”; however, “as long as it passes through Congress or is approved by the Executive by a delegation of powers,” he said.
What do they mean? These modifications in the tax exemptions must be approved by the Congress of the Republic, that is, the Parliament that joins the president must reach a consensus so that it can proceed.
The procedure to be carried out, explained in Proposals for the Bicentennial, indicates that there are several steps to take. In the first place, the legal norms for the formation of working groups must be given. Then, bills must be submitted requesting the delegation of powers in tax and customs matters, as well as one related to fiscal anchors.
Later, legislative decrees must be issued to modify taxes and present another project for the rationalization of tax expenditures. Finally, the legal norms for the collection of taxes will be given.
Likewise, Loayza indicated that, although it is possible, it may or may not be positive depending on which exemptions are withdrawn: “The big problem is in the details because the candidates’ proposals are quite general. When you say the proposal on the air, you are not really saying much, you have to say which ones and why, ”he explained.
In addition, the teacher assured that taxation is a political issue, since there is no single way to address it. He also specified that “in any case, not everything has to be black or white, conditions could be set for exonerations, in this way they would only benefit those who need it.”
Conclution
It is imprecise that an “immediate” tax reform can be guaranteed because there are political difficulties to achieve it. As indicated in the text, it is necessary to give legal norms and to reach a consensus in Congress to approve various bills.
Despite the fact that, as indicated by the former Minister of Economy and Finance Luis Castilla, what is desirable is a gradual reduction of tax exemptions, the required approvals can represent a problem, since it is very difficult for the banks to reach an agreement.
Luis Duran, a specialist in tax matters for the Purple Party, also indicated that this was a long-term plan that they will develop in the five years of government if they come to power.
Likewise, the details about which exemptions you want to withdraw should be taken into account. If the most efficient way would be, instead of eliminating them, to put conditions to benefit only the people who need it most, as indicated by Loayza, a law professor at the Pontificia Universidad Católica del Perú and Universidad Pacífico.
In addition, the MEF currently encourages the reduction of exemptions to reduce the fiscal deficit from 10.7% in 2020 to 6.2% in 2021.
Fact-checking prepared by Lucía Tumes from Verificador de La República for the PeruCheck alliance.
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