Tax breaks simply mean Peru foregoes what another country will collect
Tax incentives cost Peru S/ 24 billion in 2024 (2.19% of GDP), with agricultural exemptions and Amazon benefits comprising the largest portions. These incentives disproportionately benefit large companies; the top 20% of restaurants received 160x more benefits than smallest firms in 2023.
- Tax incentives cost Peru S/ 24 billion in 2024 (2.19% of GDP)
- Over five years, total tax expenditures exceeded S/ 100 billion
- Top 20% of restaurants received 160 times more benefits than smallest firms
- Peru's special economic zones generated only 0.1% of national exports in 2022
- San Martín's shift to infrastructure investment raised per capita GDP 1.4x above other Amazon regions
Peru's tax expenditures reached over S/ 100 billion in the last five years, with 2024 alone costing S/ 24 billion in foregone revenue. These incentives are costly, regressive, and often perpetuate indefinitely without proper technical justification.
Peru is about to open a new port in Chancay, and with it comes a familiar temptation: create a special economic zone with sharply reduced tax rates. The conversation has already begun in government circles about lowering value-added tax for restaurants and tourism businesses, and about delaying reforms to a tariff restitution program called drawback. These are not small gestures. They are expensive ones, and Peru can no longer afford them.
Over the past five years, tax incentives have cost the country more than 100 billion soles in foregone revenue. This year alone, 2024, the government will collect nearly 24 billion soles less than it otherwise would because of existing exemptions and tax breaks. That figure represents 2.19 percent of gross domestic product, or nearly 15 percent of the year's projected tax collection. The largest share comes from exemptions on value-added tax for agricultural inputs and products, followed by benefits granted to the Amazon region. A smaller but still significant portion flows through drawback, a program that refunds tariffs paid on imported materials used to make exported goods.
The problem is not just the size of these costs. It is whom they benefit. Tax incentives in Peru are regressive by design. They concentrate wealth upward. When the government reduced the value-added tax rate for restaurants and tourism companies from 18 percent to 10 percent in 2022, the top 20 percent of firms by revenue received 160 times more in benefits than the smallest operators. By 2023, these largest companies were capturing 76 percent of all the benefits from that single program. Research from the Economic and Social Research Consortium found similar patterns in drawback: between 1996 and 2013, just 13 percent of the largest companies received nearly 70 percent of all tariff refunds.
Once created, these incentives rarely disappear. They calcify into permanent features of the tax code, defended by their beneficiaries and rarely subjected to rigorous review. When the finance ministry tried to reduce tariffs on certain imported inputs in 2014, the companies receiving drawback benefits protested—even though lower input costs should have helped them. The ministry backed down. More recently, when officials attempted to reduce the simplified restitution rate, which the tax authority says exceeds what was actually paid, the change was suspended before it took effect. Without proper oversight, these exemptions also leak into the informal economy. Fuel consumption in Madre de Dios, the jungle region where illegal gold mining thrives, has grown 50 percent faster over the past two decades than the national average. Fuel is exempt from value-added tax and excise tax in the Amazon. This year, those exemptions cost more than 800 million soles.
International evidence suggests Peru is pursuing the wrong strategy. The International Monetary Fund and the Organization for Economic Cooperation and Development have found that multinational companies care far more about the overall stability and predictability of a tax system than about whether specific rates are low. They want certainty. They want to know the rules will not change. Tax incentives, by their nature, create exceptions to the rules. They distort resource allocation and generate artificial profitability. The World Bank notes that special economic zones can work—but only when they rest on solid infrastructure, a trained workforce, and a comprehensive policy framework. Peru's existing zones are failing by this standard. More than 90 percent of the foreign trade activity in Peru's special economic zones in 2022 consisted of imports. Exports from these zones represent just 0.1 percent of the national total, far below comparable figures in Colombia (4.8 percent) and Chile (3.9 percent).
San Martín, a region in the Amazon, offers a different path. In 2005, it voluntarily reduced its tax exemptions and instead created a trust fund to finance infrastructure projects. The result has been stronger economic growth and a significant decline in poverty. By 2023, San Martín's per capita GDP was 1.4 times higher than the average for other Amazon regions. The lesson is clear: direct investment in infrastructure and human development produces better outcomes than blanket tax breaks.
Peru faces a fiscal crisis. The Instituto Peruano de Economía projects the budget deficit will reach 3.6 percent of GDP by the end of 2024, the highest level in 31 years outside the pandemic. In this environment, the government must resist the urge to create new tax incentives and instead undertake a thorough review of existing ones. The Chancay port may indeed become a hub for regional trade. But it will do so because of its location and its infrastructure, not because Peru offers a 0 percent tax rate. A zero rate simply means Peru foregoes revenue that the investor's home country will collect instead.
Citações Notáveis
Tax incentives are costly, regressive, and tend to perpetuate indefinitely without adequate technical justification— Analysis of Peru's fiscal policy
The most important factor for multinational companies is the overall tax system and certainty of its application, far more than the existence of specific incentives— IMF and OECD research cited in the analysis
A Conversa do Hearth Outra perspectiva sobre a história
Why does Peru keep creating these tax breaks if they don't work?
Because they're politically easy. A company asks for relief, Congress votes yes, and everyone claims credit for attracting investment. The cost is hidden in foregone revenue, spread across the entire budget. No one sees it as a line item.
But the data shows they concentrate benefits among large firms. Doesn't that bother policymakers?
It should. The top restaurants got 160 times more than the smallest ones. But the large firms are organized, vocal, and politically connected. The small ones are not. So the system works in their favor.
What about the Amazon exemptions? Those seem to have a development purpose.
They did, in theory. But without controls, they've become a subsidy for illegal mining. Fuel consumption in Madre de Dios grew 50 percent faster than the national average. The exemption meant to help the region is actually financing criminal activity.
San Martín did something different. What changed?
They gave up some of the exemptions and used the money for infrastructure instead. Ports, roads, schools. The result was faster growth and less poverty than other Amazon regions. It's proof that tax breaks aren't the only tool.
So what should Peru do with Chancay?
Build real infrastructure. Train workers. Create stable rules. The port will succeed because it's well-located and well-built, not because the tax rate is zero. A zero rate just means Peru loses money that the investor's home country gains.