1.1. Introduction

The Peruvian Tax Court 1 (PTC) addressed whether the Financial Transactions Tax (FTT), 2 in accordance with Peruvian domestic law, constitutes a property tax and, therefore, is within the scope of the Chile-Peru Tax Treaty (2003). 3

In February 2019, the Peruvian Tax Court decided against a taxpayer seeking reimbursement of FTT paid in Peru because it considered that taxes on property or capital apply to wealth or assets owned and not to wealth intake or expenditure. Basically, the Court stated that the nature of the FTT does not take into account the ownership of the funds. Moreover, the court indicated that it is important to notice that the mere presence of an asset in a taxable operation does not mean that the tax applied qualifies as a tax on assets. In fact, the FTT subjects certain operations to tax that are (or should have been) carried out in national or foreign currency through the financial banking system, but not the money that is passed through the banking system.

4The importance of this case goes beyond Peru, as it had a transnational impact in the region, 4 given the widespread use of this kind of tax. Governments have found an easy way to collect additional tax revenue in the FTT; however, it has raised a lot of controversy regarding its actual effects on the economy. In this sense, those who criticize the FTT have basically pointed out that it has a regressive effect on levels of bank penetration and, to the same extent, on the informal economy. It is argued that it is economically inefficient to tax the same activity multiple times along the different phases of the commercial cycle, generating a cascading effect and distorting prices related to financial intermediation in relation to the productive part of the economy. 5

1.2. Facts of the case

The taxpayer filed an appeal before the Peruvian Tax Court against the resolution of the tax administration declaring the requests for reimbursement of undue and/or excess FTT payments for the period of 2009-2012 inadmissible.

The dispute was based on the fact that the taxpayer was a permanent establishment of a Chilean company, Lan Cargo, and was subject to FTT. In the taxpayer’s view, FTT constituted a property tax or tax on capital and, therefore, was within the scope of article 2 of the Chile-Peru Tax Treaty (2003).

The taxpayer argued that the FTT did not tax income or consumption, but rather the money used in the transactions. Therefore, what was subject to tax were assets in bank accounts. Considering that taxes on capital or property are covered by the Chile-Peru Tax Treaty (2003), the taxpayer argued that the FTT fell within the scope of article 2 of the treaty and, therefore, that Peru had no taxing rights on capital under article 22 (either 22(2) or 22(4)).

In addition, the taxpayer stated that the Peruvian Constitutional Court already established that the FTT was a tax on capital or assets, and it further5 argues that if the FTT did not tax income or consumption, it must be considered a tax on capital or assets.

Regarding the jurisdiction to tax, the taxpayer argued that money is not movable property, in accordance with the legislation on the Peruvian General Sales Tax. 6 Thus, article 22(4) of the Chile-Peru Tax Treaty (2003), which attributes the power to tax only to the country of residence (in this case, Chile), would be applicable.

Additionally, the taxpayer affirmed that the tax administration misinterpreted the prerequisite of double taxation for the application of the treaty as a prerequisite of the same tax in both contracting states and the double taxation of income or assets.

Conversely, the tax administration sustained that the FTT did not qualify as a tax on capital or assets per se. In fact, it qualified it as a different tax that subjected the circulation of money to tax, which, despite having equity content, did not necessarily imply that the FTT constituted a tax on capital or assets.

Furthermore, the tax administration argued that, even if the FTT were treated as a tax on assets, the application of the Chile-Peru Tax Treaty (2003) required the subject to be taxed in both contracting states, since its objective was to eliminate double taxation. Moreover, it argued that money is a movable asset according to the Peruvian Civil Code 7 and, therefore, that article 22(2) of the Chile-Peru Tax Treaty (2003) (on the attribution of profits to permanent establishments) was applicable, not article 22(3) or (4). Therefore, Peru had the right to tax.

Finally, the tax administration asserted that the Constitutional Court did not affirm that the FTT constituted a tax on either capital or assets ( section 1.4.2.). 8

The case was brought before the Peruvian Tax Court.

61.3. The Court’s decision

The Tax Court ruled in favour of the tax administration. Basically, the Court asserted that the FTT was not a tax levied on assets or property and, therefore, that the Chile-Peru Tax Treaty (2003) was not applicable. The Court’s main reason for this was the nature of the FTT and the type of wealth manifestation that the FTT intended to tax. 9

The Tax Court argued that in order to analyse the nature of the FTT, it should be considered that taxes are based on the principle of the ability to pay, 10 which can be verified in certain manifestations of wealth: (i) wealth or assets acquired (wealth intake); (ii) wealth or assets owned (amassed wealth); or (iii) consumption (wealth expenditure).It added that income taxes, like direct taxes, most accurately reflect the ability-to-pay principle. The ability-to-pay principle holds that those who have a greater ability to pay taxes, measured by income and wealth, should pay more. It is due to this intrinsic relationship with the ability to pay that FTT is classified as a direct tax, since it directly affects the wealth of a taxpayer.

In relation to taxes on wealth or assets, which were the subject of the case at hand, it should be noted that these taxes apply to accumulated equity and not the inflows or outflows of equity, unlike income tax or consumption tax do, respectively. Therefore, taxes on assets are applied to subjects who hold the ownership of a good or an economically quantifiable right at a given time, as is the case with real estate, vehicles, jewels and works of art, among others. As a matter of fact, these taxes are also considered direct taxes, since they directly affect the wealth of the individual who owns such assets.

Conversely, in the case of consumption taxes, wealth is affected indirectly through the taxation of equity outflow. Therefore, the ownership of goods or services at a given time is not a relevant criterion.

7Moreover, the Court argued that, in the case of indirect taxes, the theory of tax incidence does not directly affect the ability to pay of the taxpayer, since two taxpayers with different abilities to pay will be taxed the same for similar transactions. 11 Therefore, the ability to pay of the taxpayer is only considered in the long run, 12 i.e. to the extent...