AGREEMENT BETWEEN PERU AND JAPAN TO AVOID DOUBLE TAXATION ENTERED INTO FORCE: WHAT DOES THIS IMPLY?

January 28, 2022 - Lima.- Specialists pointed out that the agreement between the two countries establishes a limit to tax the passive income obtained by a Japanese company in Peru.

On January 1 of this year, the agreement between Peru and Japan came into force to avoid double taxation with respect to the tax on income obtained and for the amounts paid, those that are credited to an account or are accounted for as an expense.

What does the agreement signed between the two countries imply? According to the specialists consulted by this newspaper, these agreements seek to avoid that tax costs are doubly applied to companies from a certain country that conduct business in the other nation, in this case between Peru and Japan. That is, it seeks to mitigate or reduce the taxes generated by these companies in the other country.

"What these types of agreements do is try to reduce or avoid generating duplicate taxes, that the same fact is taxed in a duplicate way in two or more countries, and that is why such treaties are concluded," explained Fernando Núñez, lawyer and partner of Estudio Hernández. 

In that sense, Roberto Cores, Partner of International Tax and Transaction Services of EY Peru, said that agreements to avoid double taxation distinguish the types of active or business income and passive income. It is in the latter where the benefits are obtained for Peruvian and Japanese companies that have business in the other country.

"With regard to active income, if there is a Japanese company that operates in Peru directly, obviously Peru has the right to tax income without limitation, but it happens that when a Japanese company obtains some type of passive income, essentially interest, dividends, royalties or capital gains, a maximum limit is established with respect to which Peru can apply the tax," he indicated.

Reduction
According to the agreement, maximum percentages are established to tax passive income in the case of royalties, dividends and interest.

In the case of royalties, the agreement between the two countries indicates that the withholding tax for this payment is up to 15%. This figure is half of what Peru currently retains for royalties (30%), according to specialists.

"In ordinary situations, a royalty, which is this payment that is made for the use of an intellectual property, Peru can withhold, according to Peruvian law, up to 30%. But, under the agreement, Peru decides to tax up to 15%, so that Japan could tax that differential. Japan could establish a higher tax," Cores explained.

On dividends and interest, the payment of taxes made by foreign companies in Peru will be up to 10%. "If I receive a loan from a Japanese company, from my parent or shareholder, I will have to pay interest taxes of 30% as well, but according to the treaty, that rate of 30% is reduced to 10%, precisely to avoid generating very high taxes in Peru that cannot be offset in Japan,"  núñez points out.

In addition, capital gains will not be taxed in Peru, Cores explained, except in the case where the value of shares within a national company that is sold by a Japanese company is greater than 20% or if they derive from real estate.

"If one has less than 20% or the value of the company does not derive essentially from real estate, [capital gains] would not be taxed in Peru. [...] By setting it at 20%, what it says is that, if a Japanese company is going to sell the total of its investment in Peru, it will probably not have any profit," he said.

In that sense, Cores specifies that the benefit of the agreement will be notorious for royalty taxation. For dividends, he explained that national legislation allows taxation of a %, while, for interest, the legislation allows to withhold between 4.99% and 30%.

Competitiveness
Both Core and Núñez pointed out that the country does not have a large number of agreements to avoid double taxation.

And it is that Peru, explains the EY specialist, has agreements of this type under two models. Under the OECD model, in which the power of taxation is distributed, Peru has agreements with Brazil and Chile in South America, Mexico and Canada in North America, Portugal and Switzerland in Europe, and with Korea and Japan in Asia. In addition, under decision model 578 -of exclusive taxation where it is only taxed in the country of the source-, Peru has an agreement to avoid double taxation with the governments of the Andean pact, which are Bolivia, Colombia and Ecuador.

That is why both specialists considered that, in this aspect of agreements to avoid double taxation, Peru is at a disadvantage compared to countries such as Colombia, Chile, Mexico or Ecuador.

"Peru should return to the path of concluding this type of agreement, because in the end they are beneficial for the country. They generate legal certainty, greater private investment, and so on. It should be a Government policy to sign these types of treaties with our main trading partners," Núñez said.

"The agreements give series of guarantees in terms of tax treatment and put certain limits on what can be taxed. Although certain limits are imposed on what Peru can tax on certain incomes, the benefit is greater when establishing this limitation because greater foreign investment can be generated," Cores added.

More information
The agreement to avoid double taxation between Peru and Japan was signed in November 2019 and entered into force on January 29, 2021. According to the agreement, the entry into force was stipulated to take place on the first day of January, of the following year of implementation of the treaty.

Source: El Comercio