What U.S. Expats Living in Peru Should Know (Regarding Taxes)

Peru is well-known for its Inca archaeological sites – Machu Picchu located 8,000 feet above sea level. It is also a surfer’s paradise. Chicama has the world’s longest left-handed wave at 4km’s long, and Mancora (close by) has the world’s largest left-handed point-break. Two-thirds of Peru is covered by prime Amazon rain forest. So there’s lots to see and do in this South American country.

If you are planning to become a U.S. expat in Peru, or have been one for a while, it’s important to know the tax laws of Peru and the potential impact on your U.S. tax return. Expat taxes can be complicated. Fortunately, we have outlined the key points below.

Photo by: yoTuT

Taxation in Peru

Let’s start by understanding who is required to pay taxes in Peru. Residents are taxed on worldwide income while non-residents are only taxed on Peruvian-source income only. Foreigners who are in the country for more than 183 days in a 12-month period are considered residents for tax purposes.

The tax system in the Peru is progressive. The rates are as follows:

• Employment Income for Residents: Progressive from 15% to 30%;
• Employment Income for Non-Residents: flat 30%;
• Interest Income: Generally none;
• Dividends: 4.1% withholding tax;
• Capital Gains: Generally, 6.25%.

Peru and the U.S. do not have a social security tax agreement in-place. Therefore, certain U.S. expats will be required to pay into both social security programs.

How Living in Peru Impacts U.S. Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in Peru. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in Peru with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

FATCA and Peru

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 80 countries have either signed intergovernmental agreements with the United States or are in discussions. It is important to know that Peru does have a FATCA agreement in-place with the U.S.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.