Ruling 578
The CAN (Comunidad Andina de Naciones – Andean Community of Nations), formed by Bolivia, Ecuador, Colombia, and Peru, is a regional organization that discusses and reaches consensus on issues affecting its Member Countries.
On May 4, 2004, the CAN Commission issued Ruling 578 (hereinafter “Ruling”), which consists of an agreement to eliminate double taxation for taxpayers domiciled in Bolivia, Colombia, Ecuador, Peru, and Venezuela.
Income Tax Exemption in the Ruling
Article 3 of the Ruling establishes that, regardless of the nationality or domicile of the individuals, the income obtained by them shall only be taxable in the Member Country in which such income has its producing source, except for the exceptions provided in this Ruling.
In this regard, the other Member Countries, which, according to their domestic legislation, can tax such income, shall consider it exempted to determine the income tax or wealth tax.
Exemption Application in Peru
Article 6 of the Peruvian Income Tax Law determines that domiciled persons in the country are subject to income tax on the totality of their income. Thus, under Peruvian law, domiciled persons are subject to income tax on their Peruvian and foreign source income. Conversely, such foreign source income could also be taxed by the home jurisdiction, thus generating an assumption of double taxation.
In this context, according to Article 3 of the Ruling, the income allocation will be exclusive to the home jurisdiction of the business activity that generated the income (source criterion), and if Peru allocates the income under its domestic legislation, the taxpayer will be exempted from paying the tax. Thus, the Ruling application implies a limitation to the Peruvian taxation regarding foreign source income from any of the Member Countries of the Ruling.
Will the Exemption Always Apply?
The exemption will only apply to double taxation by the Member Countries that tax the income, given that the country of domicile of the taxpayer will have to exempt it.
TJCAN Opinion
In this regard, the TJCAN (Tribunal de Justicia de la Comunidad Andina – Court of Justice of the Andean Community) establishes that double taxation is established when there is the identity of i) subject, ii) nature, iii) object of the tax, and iv) tax period of the tax among the Member Countries adjudicating the jurisdiction thereof.
SUNAT Indications
The SUNAT (Superintendencia Nacional de Administración Tributaria – National Superintendence of Tax Administration) has stated in Report No. 0000098-2023-SUNAT/7T0000, expressing the following position:
“Regarding the income of a person domiciled in Peru, obtained in a foreign country member of the CAN, the income tax exemption, referred to in Article 3 of Ruling 578, depends on the verification of an assumption of double taxation understood as the identity of the subjects, nature, object of the tax, and tax period.”
Source: SUNAT