The Government of Peru devised a public investment mechanism in 2008 that allowed private firms to prepay a portion of their income taxes in the form of public works. The Works for Taxes scheme encourages joint work between the public and private sectors to reduce Peru’s infrastructure gap. Through this mechanism, private companies assume the upfront costs and management of new infrastructure programs while the government accepts the infrastructure projects in lieu of future tax payments.
The mechanism could be applied to public investment in urban development, agriculture, irrigation, water and sanitation, tourism, public safety, transport, education, health, fishing, social development, culture, environment, and rural electrification. Because many of these sectors have clear links to climate change adaptation, there are many opportunities for adaptation considerations to be integrated into the instrument, such as by ensuring the climate resilience of new infrastructure. Slight revisions to project designs and the addition of adaptation impact metrics could improve adaptation outcomes.
Colombia replicated the program in 2017 to encourage social and economic development in the most affected zones of the previous armed conflict. Companies with an annual income of over COP 1 billion (about USD 250,000) can pay 50% of their tax obligations through the funding of social and development projects. Adaptation to climate change and climate risk management is one of the priority areas for project development in Colombia’s program.
Current or potential adaptation-relevant sector applications:
- crop and food production – including agroforestry;
- ecological services and management – forest management (including afforestation and reforestation);
- water supply (infrastructure) – water management;
- disaster risk reduction – early warning and observation systems;
- energy infrastructure – energy generation (including renewables);
- transport infrastructure;
- other built environment and infrastructure – urban development; and
- social infrastructure – education; health facilities.
Additional insights:
- This is an emerging instrument, developed in Peru in 2008 and replicated in Colombia in 2017.
Considerations for using a Works for Taxes scheme:
- This tool can be implemented by national and subnational governments.
- It has attracted the participation of larger corporations that have established social responsibility programs, are able to pay the transaction and management costs, and have the high degree of liquidity that is needed to fund major public works programs.
- It requires systems to prioritize and monitor public investment projects.
Adapted from the following sources:
Del Carpio Ponce, P. E. (2018). Peru’s works for taxes scheme: An innovative solution to accelerate private provision of infrastructure investment. EMCompass, Note 55. International Finance Corporation. https://openknowledge.worldbank.org/server/api/core/bitstreams/55282690-f795-50e2-87a2-0204d430d88b/content
Oxi Consultoria. (2023). What are tax works? https://www.obrasximpuestos.com/obras-por-impuestos/