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Like many developing countries, Peru needs to increase tax collection to provide public goods and services for its people.

In the agricultural sector, out of a total of 2.2 million farmers only 42,000 pay taxes; 1.8 million work on less than five hectares of land, most in the informal sector.

As competition in markets that demand formality in their supply chains becomes central to policy and development interventions, formalising the very significant sector of small-scale farmers is key. But if smallholders are to join the formal economy, the benefits must outweigh the costs of compliance.

This paper reviews the government’s formalisation efforts to date, focusing on a specific programme and tax mechanism designed to support farmers’ voluntary transition to formalisation.

Applicable in Peru and beyond, the lessons learnt can contribute to a revised approach to formalisation that is ‘win–win’ — acting both as a lever for tax collection and as a tool for economic and social inclusion.