Financial System, Informality, and Tax Evasion in Peru

According to the National Institute of Statistics and Informatics, a business is considered informal if it is not registered with the tax authorities. Using data from Peru’s tax authorities and information on loans granted by the Peruvian financial system, this study identifies informal workers who have taken out at least one loan from the financial system, describes their distribution by financial institution and type of loan, and estimates the corresponding amount of tax evasion. The results show that, as of December 2014, there were approximately 1.8 million informal sector workers who had at least one loan from a financial institution, indicating that there is significant room for expanding the tax base. It also finds that rural credit unions, small and medium-sized enterprise (SME) banks, and finance companies were the institutions with the highest rates of informality, while the largest amounts of loans obtained by the informal sector corresponded to loans for micro and small enterprises (Mype), consumer loans, and credit cards. In terms of financial stability, the results suggest that it would be prudent to monitor and quantify the risk exposure due to informality in the financial system. Finally, it is estimated that tax evasion by informal clients of the financial system amounted to approximately 0.7 percent of GDP in 2014.