The role of taxes in reducing informality and tax evasion in Peru

As we know, constitutionally, taxes are a fundamental tool for the economic and social development of any country, as their main function is to collect public revenues. In the case of Peru, taxes represent an important source of resources for the state; therefore, their conception and management are fundamental pillars to achieve formalization of the economy, reduce tax evasion, and promote general well-being.

The relevance of taxes

Taxes, among which the Income Tax and the General Sales Tax stand out, are necessary for the functioning of the State, which first collects revenues to then allocate resources (public spending) to meet the demands (goods and services) of the population. Additionally, the tax spectrum, as an exclusive tool of the State, plays a key role in wealth redistribution and the promotion of social equity.

In Peru, the tax system consists of direct and indirect taxes. Direct taxes, such as the aforementioned Income Tax, are paid by individuals and companies (of any type) based on their tax income level. On the other hand, indirect taxes, such as the General Sales Tax, are applied to the consumption of goods and services in general.

It should be noted that there are currently some special regimes in both taxes, depending on the quality of the taxpayer and the economic sector in which they operate.

Informality and tax evasion in Peru

Having exposed the above and despite the importance of taxes, Peru faces a problem of informality and tax evasion. According to a recent study by the Peruvian Institute of Economics, only one in ten workers in the country effectively contributes by paying an Income Tax at the end of each taxable year. This is mainly due to informality in the labor market, which prevents the identification of workers’ income and their subsequent taxation.

According to the same IPE study, Income Tax evasion reaches 57% in the business sector. This means that more than half of the companies do not pay all the taxes they owe.

How to promote tax payment in Peru

It is important to specify that the causes of tax informality are diverse; however, it is relevant to understand that the State has not had the capacity to satisfy the most basic aspirations of the productive force, and its main response over time has been the continuous issuance of confusing regulations that do not tend to encourage the informal population (despite the fact that the informal sector has penalties).

One key to promoting tax payment is the simplification of the tax system. This implies reducing bureaucratic burdens and facilitating compliance with tax obligations. Another important measure, in our opinion, is the continuous investment in education and awareness about the

importance of taxes and their impact on the country’s development. It is also necessary to strengthen oversight, provide greater tools to the Tax Administration, and firmly sanction tax evaders.

In conclusion, taxes are fundamental to the development of Peru. Their correct collection and management are key to reducing informality and tax evasion. To achieve this, it is necessary to simplify the tax system, educate and raise awareness about the importance of taxes, and strengthen oversight and sanctions for tax evaders.