Download tax incentives in the peruvian amazon: net gain or net loss?

TAX INCENTIVES IN THE PERUVIAN AMAZON: NET GAIN OR NET LOSS?
By: Fabiola Caceres Paurinotto
Tax incentives in the Peruvian Amazon were introduced to address the difficulties faced by regions in
this area of the country to boost their economic and social development due to their geographical
location and isolation from the national economy. However, the effects of the incentives on the
observed economic development of the area are not clear and evidence suggests that they have not
been effective since i) the region’s percentage on national GDP has not been altered despite the
generous incentives; ii) other regions outside the target zone have experienced higher growth rates
than the beneficiary areas; and, iii) poverty rates remain high and, on average, one of every two
residents in the Amazon still lives with an income that falls below the poverty line. On the other hand,
the tax incentives have introduced high costs to the society in terms of equity and efficiency, since
Peruvians outside the Amazon region pay higher taxes in exchange for a benefit that only 9.4% 1 of the
population receives 2.
As a consequence, instead of a net gain, the tax incentives in the Peruvian Amazon currently represent
a net loss for the Peruvian society as a whole, and, therefore, I recommend their elimination.
Nevertheless, considering the moral obligation to compensate these regions in the Peruvian Amazon
historically forgotten and deprived of opportunities for development, and due to the expected political
and social resistance to the policy, I suggest replacing the existing benefits with a direct subsidy to
finance the Interoceanic Iquitos – Yurimaguas railway 3 that will allow to reconnect the Amazon with
the rest of the country and, therefore, eliminate the obstacles faced to attract productive investment in
a sustainable, and efficient and more equitable way.
Background information
1 Population data for 2009 obtained from the National Institute of Statistics and Information- INEI (Available in
www.inei.gob.pe)
Since Lima, the capital city concentrates, on average, 88% of the total tax collections in Peru, the National Tax Collection
Agency collects the resources and then the Ministry of Economy redistributes them to subnational governments considering
variables like population density, poverty, inequality, between others. Consequently, a tax cut for a determined area is paid by
all taxpayers on a national level.
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3 Given the high economic and environmental costs of building a highway in the forest, the Interoceanic Iquitos – Yurimaguas
railway represents a more efficient and low cost way to connect the Amazon with the rest of the country and provide a way
out to the Pacific Ocean to facilitate the movement of goods and flow of passengers and boost economic development.
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Tax incentives for the Peruvian Amazon region were first introduced in 1982, however, the number of
benefits and their complexity increased at the end of the 1990s. According to the Peruvian ministry of
Economy, 23 tax incentives are in place and benefit the Peruvian Amazon regions of Amazonas, Loreto,
San Martin, Madre de Dios and Ucayali 4.
The tax incentives provided to these specific regions were justified by the difficulties faced to attract
investment and employment to these areas due to a complex geographic location that isolates the
Peruvian Amazon from the rest of the country5. In that sense, the tax incentives were conceived as a
sort of compensation to these abandoned regions and intended to promote the creation of businesses
and employment in the area. As shown on figure 1 in the appendix, the five regions in the Peruvian
Amazon targeted with the tax incentives are geographically isolated between the Andes Mountains and
the Brazilian jungle, a situation that, combined with the poor and sometimes inexistent infrastructure,
affect the ability of these areas to develop their economies. In addition, these regions face high poverty
rates and scarce access to public services, arguments that build on to the necessity of providing some
sort of compensation to help this regions path to development.
The Amazon tax incentives and its effects
To December 2010, twenty three different tax incentives for the Amazon region were in place, offering
businesses in the region: i) a general tax exemption to the National Sales Tax (19% tax rate otherwise)
for producers, wholesalers and retailers located in the Amazon 6; ii) exemption from the Selective
Consumption Tax for gasoline producers, wholesalers and retailers for sales in the Amazon region
market; iii) Sales tax refunds for businesses importing inputs; and; iv) a tax rate reduction of the
National Corporate Income Tax from 30% to 5% or 10% 7, as shown in figure 2 in the appendix 8.
4 Selected
districts from other regions in the Andes benefit as well if they are located in the Amazon region but there is no
data available for those particular districts.
5
As an example, it is worth noting that the biggest city in the Peruvian Amazon, Iquitos, cannot be accessed by road and
requires either air or boat transportation. According to the National Institute of Statistics and Information – INEI, 1 million
people live in Loreto and close to 500,000 live in Iquitos, the capital city of Loreto.
6
7
Benefits are available for both activities that incentivize export jobs as well as local jobs.
The tax rate applicable is 5% for regions in the “lower Amazon” and 10% for the “high Amazon”.
8Information
available in the Peruvian Ministry of Economy (Available at: www.mef.gob.pe)
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Assessing the benefits
According to INEI data shown in figure 4, the beneficiary regions observed economic growth in the
years following the implementation of the incentives, being San Martin and Ucayali the regions with
better performance in the target area. However, when comparing the growth figures for the target
regions with those observed in non -target areas, it becomes evident that the positive results in the
Amazon cannot be attributed to the effect of the tax incentives alone since the country grew at an
average annual rate of 6.4% between 2001 and 2008 and all regions experienced economic growth as
well 9. In addition, as it can be observed in figure 4, regions lacking of tax incentives like Ica, Cusco, La
Libertad and Arequipa experienced higher growth rates than those in the Peruvian Amazon 10.
On the other hand, the evidence available suggests that the Amazon region has not performed better
than non-targeted areas since the share of these regions on the national GDP has remained unchanged.
According to the Ministry of Economy11, in 1997, before the tax incentives, Loreto represented 2.5%,
San Martin 1.1%, Ucayali 0.9%, Amazonas 0.5% and Madre de Dios 0.4% of national GDP, and in 2009,
Loreto and Madre de Dios reduced their contribution to national GDP to 1.91% and 0.38%
respectively, while Amazonas, San Martin and Ucayali experienced slight improvements in its
contributions to Peruvian GDP that grew to 0.65%, 1.29% and 1.06%, respectively. However, when
considering the size of each Amazon regions and its contribution to GDP before and after the
incentives, the region as a whole does not evidence significant effects and the situation observed in the
Amazon relative to the rest of the country seems unchanged despite the tax incentives implemented.
Finally, while poverty rates in beneficiary zones have declined, they remain high and even above the
national poverty rate (on average 40% of population in the Amazon lived in poverty in 2009 and 34%
on a national level 12), suggesting, at least that the policy has not been able to deliver the expected
results in target zones.
9
Regional GDP 2008. Institute of Statistics and Information.
10
11
Regional GDP 2008. Institute of Statistics and Information.
Ministry of Economy - Apoyo Consultoria (2003).
12 Poverty rates per region in 2010 obtained from the National Institute of Statistics and Information (Available at:
www.inei.gob.pe)
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In addition, it is worth noticing that despite the generous tax incentives, the beneficiary regions are
still ranked between those with less attractiveness to investment13. As shown in figure 3, the Amazon
still face obstacles such as poor infrastructure, education and low quality of institutions, factors that
might explain the limited ability of the current tax incentives to attract investment and influence
businesses decisions.
Therefore, even when data availability does not allow to fully evaluate the impact of this policy, the
evidence suggest that this economic development promotion tool has at least not been able to make
significant reductions in poverty rates nor to compensate for the lack of infrastructure, absence of
inputs in the region, low levels of education in their work force, health concerns, between other factors
equally or more important for business development than tax rates As a consequence, the incentives
have failed to provide the expected benefits to the Amazon regions..
Measuring the costs
The current tax incentives have imposed costs to the society in terms of efficiency and equity and have
increased the administrative costs of the National Tax Collection Agency. In the first place, tax
incentives have narrowed the tax base and reduced the potential tax collections, therefore, forcing
taxpayers outside the target zone (over 90% of the total population14) to pay indefinitely for the
subsidy to the Amazon regions through higher tax rates or less public services. This situation is
exceptionally unequal since all taxpayers on a national level and even in regions with higher poverty
rates than those observed in the Peruvian Amazon have to pay the price of the tax incentives provided
to this area. In addition, this unfair situation violates the “benefit principle” since taxpayers on a
national level have to pay for a benefit they do not receive and directly subsidize a small share of
businesses and Peruvian citizens.
In addition, the tax incentives have created opportunities for evasion and fraud, particularly in the case
of the tax exemptions for gasoline sales in the region. In that sense, in absence of adequate controls,
businesses that benefit from the tax cuts illegally transport and sell gasoline in areas outside the
Amazon without paying taxes. This situation has resulted not only in less collected taxes but also in a
black market of gasoline in regions close to the Peruvian Amazon. Proof of that is the fact that the per
13
Regional Competitiveness Index 2009. Peruvian National Council of Competitiveness.
14 Population data for 2009 obtained from the National Institute of Statistics and Information- INEI (Available in
www.inei.gob.pe)
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capita consumption of gasoline in the Amazon region duplicated after the implementation of the
benefit and remains high, a situation that is inconsistent with the size of the market, the share of
population and the economic activity in the region 15.
Finally, the tax incentives in the Peruvian Amazon represent an average annual cost of 0.43% of the
Peruvian GDP in uncollected taxes that could be used more efficiently in the provision of public
services on a national level after the deficit of infrastructure in the Amazon has been covered. On the
other hand, the tax incentives have placed an administrative burden to the Peruvian National Tax
Collection Agency given that despite the potential savings from not collecting taxes to a share of the
taxpayers, the complexity of the current benefits and different provisions for determined industries
and locations has resulted in greater resources required to enforce and audit tax payments.
The proposed alternative
Given the fact that the current tax incentives have not delivered the expected benefits and confronted
with the costs of this particular policy, I propose eliminating the incentives and replacing them with
investment in basic infrastructure such as the Iquitos – Yurimaguas railway that will reconnect the
Amazon with the rest of the country and provide a way out to the Pacific Ocean. This proposed path
represents a better option than the current policy since will address the most important obstacle for
the region’s development, since, in absence of basic transportation systems, no firms will be attracted
or jobs created, regardless of the incentives.
In addition, this alternative represents a less inequitable way to support the Amazon region’s
development since, i) financing infrastructure projects like the Iquitos – Yurimaguas railway that will
connect the Amazon to both the Andes region and the Coast will increase trade and tourism benefiting
not only the Amazon but neighbor regions as well; ii) paying for the development of the infrastructure
will eliminate the indefinite time nature of the subsidy implied in the current tax incentives and will
limit the size of the subsidy as well; and, iii) if we consider that taxpayers on a national level have
subsidized infrastructure for other regions through the years but not for the Amazon, investing in this
region’s basic transportation system will imply moving from an already inequitable situation to a less
inequitable one.
15
Ministry of Economy - Apoyo Consultoria (2003).
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Finally, the proposed alternative eliminates the costs derived from the tax evasion in gasoline and the
incentives for fraud created by the policy and will reduce as well the administrative burden to the
National Collection Agency.
Conclusion
The implementation of tax incentives in the Peruvian Amazon region was expected to boost economic
development in an impoverished and isolated area. However, this policy seems to have limited effect
on the development of the beneficiary regions in the presence of other factors important for business
development that hinder their attractiveness to investment.
On the other hand, the tax incentives in the Peruvian Amazon have imposed high costs for the Peruvian
society as a whole, since they have eroded the tax base and reduced tax collections, while introducing
efficiency and equity implications as well as higher administrative costs.
Therefore, the current tax incentives have resulted in a policy that creates a net loss for society rather
than a net gain, and, therefore, the best option available is to eliminate them and replace them with
investment in infrastructure that will break this regions isolation from the national economy and will
set the basis for sustainable economic development. While this alternative still implies a temporary
subsidy from taxpayer outside the Amazon to those in the area, it represents a more efficient and less
inequitable way to address the problem since the investment in a basic transportation system for the
Amazon will not only eliminate the current administrative cost and reduce the size of the subsidy in
time but will boost economic development in the Amazon and surrounding areas as well.
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Appendix
Figure 1: Regions that benefit from the Peruvian Amazon tax incentives
Source: Peruvian Institute of Statistics and Information – INEI (www.inei.gob.pe)
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Figure 2: Tax incentives in the Peruvian Amazon region
Tax incentive
Beneficiaries
• Producers and wholesalers in the region
• Retailers in the region
• Consumers of gasolines and transportation services in the region
Exemption on the Sales Tax
• Producers in the region
• Wholesalers in the region
• Retailers in the region
• Consumers in the regin
• Businesses outside the region that buy inputs in the Amazon
Sales tax refund for goods imported • Businesses in the region that import inputs
without tariffs according to the Peru- • Exporters in the region
• Businesses in determined economic activities in the region
Reduction of the Corporate Income • Businesses that reinvest at least 30% of their profits in the
tax from 30% to 5% and 10%
region.
Exemption from the Selective
Consumption Tax for gasolines
Source: Ministry of Economy of Peru
Figure 3: Regions in the Peruvian Amazon and Regional Competitiveness Index 2009
Region
Components
Quality of institutions
Infrastructure
Economic development
Health
Education
Business climate
Innovation
Natural Resources
Overall position in the ranking
(Out of 24 regions)
Amazonas
8
23
22
10
22
24
20
21
Loreto
24
15
15
20
18
17
11
19
22
20
Madre de Dios
15
16
2
12
10
6
19
22
14
San Martin
5
12
19
15
21
16
13
15
15
Ucayali
1
14
8
18
16
7
7
23
12
Source: Peruvian National Competitiveness Council
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Figure 4: Average annual growth rate by region (2001-2009)
Amazonas
Ancash
Apurimac
Arequipa
Ayacucho
Cajamarca
Cusco
Huancavelica
Huanuco
Ica
Junin
La Libertad
Lambayeque
Lima
Loreto
Madre de Dios
Moquegua
Pasco
Piura
Puno
San Martin
Tacna
Tumbes
Ucayali
Average
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Source: National Institute of Statistics and Infromation (INEI).
Figure 5: Amazon GDP by region as a share of national GDP (2001-2009)
2.50%
2.00%
Amazonas
1.50%
Loreto
Madre de Dios
1.00%
San Martin
Ucayali
0.50%
0.00%
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: National Institute of Statistics and Information (INEI).
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