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Peruvian Cooperative Law Becomes Reality

27 May 2011

The government of Peru earlier this May passed landmark legislation that recognizes the not-for-profit status of credit unions and other cooperatives and grants them tax exemption. La Federación Nacional de Cooperativas de Ahorro y Crédito del Perú (FENACREP), World Council of Credit Unions' (WOCCU) member there, worked with a coalition of cooperative advocacy groups from the time of the bill's introduction into the legislature in December 2009 to get the new law passed.

Manuel Rabines Ripalda, 1st vice chair of WOCCU’s board of directors and president and CEO of FENACREP, sees the enactment of the law, which limits or eliminates the application of sales tax to cooperative transactions, as an act of justice for the cooperative movement in Peru. The country’s cooperatives have long struggled to help lawmakers understand that cooperatives’ transactions with members are not designed to produce profit, thus should not be taxed.

"This is not just about a tax break for cooperatives," Rabines said. "This law is simply correcting the interpretation of existing cooperative legislation so that tax laws will be properly applied to cooperative acts."

The new law specifies the scope of two articles in Peru’s existing General Law of Cooperatives by recognizing that cooperatives are different from commercial enterprises in that their transactions with members are "cooperative acts." Since these cooperative acts are considered internal — carried out in accordance with the cooperatives’ social objectives — they have no motive for profit. Cooperative acts are not considered a "sale of goods" or "provision of services," so the sales tax associated with these activities is not applicable.

In addition to FENACREP, other cooperatives that assisted in the passage of this landmark legislation included the National Coffee Board, Serviperú and the National Confederation of Cooperatives (CONFENACOOP), which led the coalition to gain multiparty support for cooperatives and move the bill through congress.

The previously existing law allowed income tax exemption only for member transactions, while third-party transactions were still subject to taxation. While this still holds true, the sales tax relief is a significant victory. According to FENACREP, hundreds of cooperatives, mainly coffee cooperatives, would be on the path to bankruptcy without the tax relief from the new law.

"Credit unions and other cooperatives have historically had a strong presence in Peru and throughout Latin America," said Pete Crear, WOCCU president and CEO. "Earning and maintaining the support of government is vital to our global movement, and the enactment of this new law in Peru is a great achievement."

The Peruvian cooperative movement makes a significant contribution to Peru’s gross domestic product. Nearly 20% of the population, or 9 million people, are members of around 1,600 cooperatives of different kinds. Nearly 900,000 people are members of 160 credit unions throughout the country.

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