Peru digital services tax and income taxation: Legal controversies and implications

The Peruvian National Superintendence of Customs and Tax Administration (SUNAT) is interpreting the criteria for determining when services are considered digital very narrowly. This contradicts a Supreme Court ruling. The Ecovis consultants explain the controversy surrounding digital services and the impact of the ruling on taxpayers and tax authorities.

The taxation of digital services has become a critical issue in Peru’s regulatory landscape. The Supreme Court’s ruling in Cassation No. 2705-2024-LIMA clarifies the interpretation of digital services under the Income Tax Law (LIR), contradicting the SUNAT position.

Background: The case of the foreign parent company and its Peruvian subsidiary

A foreign parent company entered into a contract with its Peruvian subsidiary to provide business services. These services did not qualify as digital, as they were not conducted via the internet. Instead, specialised professionals remotely performed intellectual tasks, delivering specific responses to the subsidiary’s various departments without relying on the internet. SUNAT, however, asserted that these services should be considered digital as defined by the regulations of the income tax law. According to SUNAT, it is unnecessary for the service to meet the general requirements set forth in the law to be classified as digital.

The controversy: Do the regulatory provisions supersede the legal requirements?

The core issue is whether the specific list of operations outlined in the regulations of the income tax law is sufficient to classify a service as digital or if such services must also meet the general legal criteria of digital services. The law stipulates that for a service to be considered digital, it must depend on information technology and be essentially automatic by nature. The taxpayer argued that the business services provided by the foreign parent company did not meet these criteria and, therefore, should not be subject to the 30% withholding tax applicable to digital services. SUNAT, on the other hand, maintained that the classification outlined in the regulations was sufficient to consider the service as digital, even if it lacked the essential automation and technological dependency required by law.

We support taxpayers in defending their positions against aggressive tax assessments that lack a solid legal basis.

Octavio Salazar Mesias, Partner, ECOVIS Peru, Lima, Peru

The Supreme Court ruling: Cassation No. 2705-2024-LIMA

The Supreme Court sided with the taxpayer, ruling that the list of digital services in the regulations must always be subject to the legal requirements established in the income tax law. Specifically:

1. A service must depend on information technology: The service must require technology as an intrinsic part of its execution.
2. The service must be essentially automatic: The process must be executed automatically, with minimal human intervention.

Since the services provided by the foreign parent company were intellectual in nature and performed by professionals without reliance on technology, they did not meet the legal criteria for digital services. Consequently, they were not subject to the 30% withholding tax.

Implications of the ruling

• For taxpayers: This ruling provides greater legal certainty for multinational companies operating in Peru. Businesses that receive services from foreign entities should assess whether those services meet the legal definition of digital services before applying withholding tax.
• For tax authorities: While this decision clarifies the interpretation of digital services, it does not necessarily change SUNAT’s approach. The tax authority has emphasised in Report No. 000039-2024-SUNAT that digital services are subject to income tax withholding if they are included in the regulations, even if they do not meet the legal criteria of essential automation and technological dependence.
• Potential increase in tax litigation: SUNAT’s strict approach to digital service taxation aligns with its ambitious revenue collection targets. However, enforcing tax obligations on services that do not meet the legal definition of digital services may lead to unnecessary litigation, increasing compliance costs for businesses and burdening the judicial system.

Conclusion

The Supreme Court’s ruling in Cassation No. 2705-2024-LIMA reinforces the principle that regulations cannot override the legal requirements set forth in income tax law. While SUNAT continues to assert its broad interpretation of digital services, businesses must carefully analyse their service agreements to determine whether they meet the criteria established by law.

For further information please contact:

Octavio Salazar Mesias, Partner, ECOVIS Peru, Lima, Peru
Email: octavio.salazar@ecovis.com.pe