Imagine a country trying to build better schools, hospitals, and roads, but finding its wallet half empty. This is the reality faced by the Peruvian tax administration – the Superintendencia Nacional de Aduanas y de Administración Tributaria, also known as SUNAT – whose main objective is to ensure the sustainability of resources needed to finance public spending and the country's development process. However, tax evasion represents one of the most significant challenges for the Peruvian government.

What is tax evasion?

Tax evasion is the illegal practice where taxpayers deliberately conceal their assets to avoid paying taxes to the government. This occurs when individuals or companies intentionally misrepresent their income, inflate expenses, or hide wealth from tax authorities. It represents a criminal offense that can result in severe penalties and even imprisonment when significant amounts are involved. While tax avoidance involves using legal loopholes to minimise tax obligations, tax evasion is a direct violation of the law that undermines the government's ability to fund essential public services.

Legal tax framework in Peru

In Peru, tax fraud is regulated through Legislative Decree No. 813, which combines tax and criminal law provisions to combat tax evasion. The law establishes clear penalties for those who use deceptive means or schemes to avoid tax payments: offenders face prison sentences of 5 to 8 years. More severe cases, such as simulating insolvency to evade tax collection or obtaining tax benefits through fraudulent means, carry heavier sentences of 8 to 12 years.

Beyond imprisonment, the law implements additional sanctions designed to ensure compliance. These include professional disqualification, temporary or permanent closure of business establishments, licence revocation, and in the most serious cases, the dissolution of the legal entity.

Detection methods used by tax authorities

Peruvian tax authorities use special tools and databases to spot suspicious tax patterns. They look closely at company transactions that seem unusual or don't make business sense. SUNAT has created a catalogue of 24 common tax avoidance schemes to help identify red flags. For example, when a Peruvian company suddenly starts routing its mineral sales through a newly created intermediary in a tax-advantaged jurisdiction, or when companies segment their operations artificially to apply different transfer pricing methods, these transactions are flagged for further investigation.

Tax authorities also work together across different countries to share information about suspicious activities. This cooperation helps them see the complete picture when companies operate in multiple countries.

Double taxation agreements and tax evasion

As part of its international tax framework, Peru has signed double taxation agreements (DTAs), preventing taxpayers from paying duplicate taxes. Currently there are 8 agreements signed, and Peru is expected to sign one with China shortly. However, DTAs could be misused by some taxpayers to pay less tax, as has happened in other countries.

It is crucial that the taxpayers that apply the DTA operate with total transparency and with a clear record of their activities. The significance of this compliance is highlighted by the fact that entities from countries with DTAs generate approximately PEN 4,270 million (Peruvian soles) in annual income within Peru, making any misuse potentially devastating for tax revenue collection.

Foreign taxpayers

Foreign taxpayers often make the mistake of overlooking the fact that when they become tax residents in Peru, they are obliged to declare and pay taxes on their worldwide income, not only on income generated within Peru. To not do so constitutes tax evasion.

Another common mistake is not to include in annual tax returns foreign-source income such as dividends from foreign companies, rentals of properties abroad, or investment income, even when these have already been taxed in the taxpayer’s country of origin.

Administrative mechanisms for regularisation

To reduce tax evasion, SUNAT has been significantly evolving its detection system, making it easier to identify operations prone to tax evasion, especially for income tax (IR) and value-added tax (VAT).

At the administrative level, however, there are mechanisms to help the taxpayer to avoid the commission of infractions. To help taxpayers avoid infractions, SUNAT issues “inductive letters” – friendly notices outside the audit process that encourage voluntary tax regularisation without imposing penalties.

If taxpayers find errors after filing, they can submit corrections. Peru offers a tax regularisation program that allows taxpayers to resolve outstanding obligations under three conditions:

The taxpayer must voluntarily declare unpaid taxes before any investigation;
The entire debt must be paid in full, including taxes, fines, and interest; and
This must be done before SUNAT reports potential tax crimes to prosecutors.

This regularisation process is particularly relevant for corporations with complex structures and it represents an opportunity to correct errors while avoiding major complications.

Benefits and consequences of voluntary disclosure

Tax rectification declarations represent a valuable opportunity offered by the Peruvian tax system. This tool, based on Article 88 of the Tax Code, is particularly relevant for companies with complex structures that may face challenges in their initial declarations.

The process works in two main ways: when a taxpayer acknowledges a higher tax payment, the rectification is accepted immediately, rewarding transparency and facilitating voluntary regularisation. In contrast, if a lower tax is declared, SUNAT has 45 business days to verify the information, establishing a balance between flexibility and control.

It's important to note that while SUNAT facilitates these corrections, it maintains its authority for subsequent auditing, especially in cases where a previous review existed. This supervision ensures the integrity of the tax system while promoting transparency and voluntary compliance.

In view of these situations, taxpayers who have incurred tax evasion are advised to immediately regularise their obligations through a voluntary declaration before SUNAT. This implies preparing complete documentation of all undeclared income, including foreign source income, to determine the correct tax obligation, including the applicable penalties.

Abigail Alayo is a Tax & Legal Partner with VAG Global. She's a Certified Public Accountant and Administrator graduated from the Universidad Peruana de Ciencias Aplicadas with Postgraduate in Corporate Finance, Tax Law, Business Taxation and Postgraduate Specialised in Prices of Transfer by CIAT. Experience of more than 10 years in the area of accounting, taxation and legal.

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Tax evasion in Peru