Transfer Pricing in Paraguay

Concept and Regulation in Paraguay

Paraguay has been part of the Development Center of the Organization for Economic Cooperation and Development (OECD) since 2017. Nonetheless there was not any regulation, which could represent a possible advance in order to raise certain tax reforms in the country, until September 2019 that is enacted a special one for Transfer Pricing
 
Through Law 6380 on “Modernización y Simplificación del Sistema Tributario Nacional” or “Modernization and Simplification of the National Tax System” (Law) introduces a tax reform, which contemplates, among other provisions, certain special valuation rules for transactions performed among related parties
 
These rules can be found in Chapter III of the Law, which consists of 5 articles, which define and regulate the principle of independence, comparability criteria, related parties, valuation methods and the technical study. 
 
The aforementioned rule came into force as of January 1, 2021, in accordance with Decree No. 2787/19, enacted on October 31, 2019. 
 
On December 30, 2020, the Regulation of Chapter III “Special Valuation Rules for Transactions” was enacted through Decree No. 4644, which will govern operations conducted from January 1, 2021, according to the methods established in items 1) to 6) of Article 38 of the Law. For the export of goods, in accordance with item 7), it will apply from July 1, 2021.
 
 

Full Competition Principle: Definition

This is also known as the “Arm’s Length Principle” that seeks the prices established among related parties are in accordance with objective market prices, such like an agreement among independent parties in comparable operations.
 
The Law has adopted such definition in its article 35, so the pricing agreement with their related parties must be taken into consideration by the taxpayers of the Impuesto a la Renta Empresarial or Corporate Income Tax (IRE).
 
 

Application Scope of Transfer Pricing in Paraguay

Pursuant to Article 3 of the Regulations of the Law promulgated in Decree No. 4644, taxpayers domiciled in Paraguay who perform the following transactions will be subject to the Transfer Pricing rules in Paraguay:

  • Transactions with related parties residing abroad or in the country, if the transactions result for one of the two parties as exempt in the latter case.
  • Transactions with individuals residing in countries or jurisdictions with low or no taxation or related to free trade zones.

 

 
According to Article 37 of the Law, two or more persons are considered related or linked parties when a person or group of persons participates directly or indirectly in:
 
  • The management or control of the other, i.e. when one company has the ability to influence the business decisions of another.
  • The capital, provided that it owns more than 50% of the capital stock of the other.
 
It should be noted that the term person includes individuals, legal entities, permanent establishments and domestic or foreign trusts.
 
It should also be mentioned that related parties of a resident entity in Paraguay will also be considered to be those resident subjects located in low or zero tax jurisdictions, including free trade zones and companies where labor intensive manufacturing is employed.
 
 

Definition of Low or No Taxation Countries or Jurisdictions

According to Article 5 of the Regulations of the Law, a country or jurisdiction shall be considered a low or no taxation country or jurisdiction when two or more of the following conditions are met:

  1. They are considered within a list of non-cooperative countries or jurisdictions of organizations such as the OECD, the European Union, the Tax Justice Network, among others, provided that they have not complied with the peer review of the OECD Forum.
  2. Activities are taxed at an effective taxing or at an income tax rate lower than the rate that would apply in Paraguay.
  3. There is no bilateral or multilateral agreement in force for the exchange of information or there are procedures limiting the exchange of information.

 

 

Valuation Methods in Paraguay

Article 38 of the Law stipulates 7 transfer pricing methodologies in accordance with the guidelines indicated by the OECD in its Transfer Pricing Guidelines, which are listed below:
 
  1. Uncontrolled Comparable Price Method.
  2. Resale Price Method.
  3. Added Cost Method.
  4. Profit Splitting Method.
  5. Residual Profit Splitting Method.
  6. Transactional Operating Profit Margin Method.
  7. Method for Internationally Traded Goods.
 
Likewise, according the aforementioned guidelines, the Paraguayan Transfer Pricing Standard establishes an order of priority for the use of such methodologies.
 
Thus, with the exception of internationally traded goods, which must be analyzed under the methodology of item 7, the method indicated in item 1 must be used first for all other transactions.
 
 

Comparability Criteria in Paraguay

According to Article 36 of the Law and considering what is indicated in Article 10 of the Regulation, to perform the comparability analysis between transactions, the following should be taken into account:

  1. Contractual terms that may influence the price or margin involved.
  2. The functions or activities.
  3. The characteristics of the goods or services.
  4. Economic circumstances.
  5. Business strategies.
  6. Any other circumstance that is relevant that the taxpayer could have reasonably accessed information on, including aspects such as economic losses, effects of governmental decisions, location advantages, the existence of collaborative teams, or the generation of synergies.

 

 

Formal Transfer Pricing Requirements in Paraguay

Article 39 of Law 6380, as well as Article 27 of the Regulations have indicated that taxpayers performing transactions among related parties must obtain and keep a Technical Study. This should include supporting documentation to demonstrate that the amount of their income and deductions are in accordance with the Arm’s Length principle. On April 7, 2022, the Subsecretariat of State for Taxation (SET) issued General Resolution No. 115/2022, which regulates the Transfer Pricing Technical Study (ETPT) regarding the form, deadlines, and conditions for its submission.

Entities Required to have the Technical Study

Taxpayers that engage in transactions with related parties, either resident abroad or in Paraguay, when the operation for one of the parties is exempt, exempted, or not reached by the IRE and whose gross income in the immediately preceding year exceeded G.10,000,000,000 (Ten billion Guarani), are required to have the Technical Study. Should transactions have been conducted with parties domiciled in jurisdictions considered to be of low or null taxation or with users of free zones or maquiladora companies, even if this threshold is not exceeded, taxpayers are obligated.

Exempt from having the Technical Study

Taxpayers that settle the IRE under the Simplified Regime for Medium-Sized Companies (SIMPLE) or the Simplified Regime for Small Companies (RESIMPLE) are exempt from the obligation to have the Transfer Pricing Technical Study.

Minimum Content of the Technical Study

The technical study must include at least the following data:
 
  1. The fiscal year corresponding to the Technical Study.
  2. Name, denomination or business name, address, and tax residence of the companies in the Group that carry out intercompany transactions.
  3. Description of the background of the national or multinational group.
  4. Description of the background of the local entity.
  5. Information related to transactions with related parties and amounts.
  6. Analysis and selection of the analyzed party (local entity or foreign entity). Information on functions, assets, and risks.
  7. Description of contractual terms.
  8. Characteristics of transactions with related parties.
  9. Economic circumstances of the transactions.
  10. Commercial or business strategies of the transactions of the analyzed entity (local or foreign).
  11. Detail of the valued facts, documentation, and others considered for the Technical Study.
  12. Detail and quantification of operations within the regime of Special Valuation Rules for Transactions.
  13. Method used including comparable operations and companies and the profitability indicator applicable to that method.
  14. Adjustments made to improve comparability and their quantification and methodology.
  15. Identification of the sources of information from which the comparables were obtained.
  16. Detail of the comparables discarded with the reason.
  17. Determination of the median and the interquartile range.
  18. Detail of the financial information used for the analysis and identification of the information source.
  19. The conclusion of the analysis for each valuation method applied.
  20. Additional information including annexes.
 

Filing Date of the Technical Study

According to Article 7 of Resolution No. 115/2022, the Technical Study must be submitted in Portable Document Format (PDF), and the working papers must be presented in electronic spreadsheet format.
 
Obligated subjects must submit their Technical Study annually along with the supporting working papers through the “Marangatu” System using their user access key according to the following deadlines:
 
Fiscal Year-End of the Obligated Subject Month of Submission
December 31 July of the fiscal year being declared
April 30 November of the fiscal year being declared
June 30 January of the following fiscal year being declared
 
Currently, after the validity of the Resolution, obligated subjects must submit the Technical Study according to the DJI expiration calendar established in General Resolution No. 38/2020 as follows:
 
Last Digit of RUC (Without considering the verification digit) Expiration Day (fixed date of each month)
0 8
1 10
2 12
3 14
4 16
5 18
6 20
7 22
8 24
9 26
 
For those taxpayers required to prove the lack of a relationship between them andthe part residing abroad when it is located in a low or null taxation country or is a user of a free zone or a maquiladora company, the taxpayer must make a communication attaching a series of documents established in Art. 4 of General Resolution No. 96/2021 within the following deadlines:
 
Fiscal Year-End of the IRE Taxpayer Month of Submission
December 31 March of the following fiscal year being declared
April 30 July of the fiscal year being declared
June 30 September of the fiscal year being declared
 
Exceptionally, according to Article 2 of General Resolution No. 134/2023, the proof documents that refute the presumptive linkage with foreign residents corresponding to transactions carried out in the 2022 and 2023 fiscal years by taxpayers with a fiscal year-end of December 31, 2022, April 30, 2023, and June 30, 2023, must be submitted to the Entry Desk of the SET in Portable Document Format (PDF) as established in Article 12 of the Resolution on the following dates:
 
Fiscal Year-End of the IRE Taxpayer Month of Submission
December 31 March of the following fiscal year being declared
April 30 July of the fiscal year being declared
June 30 September of the fiscal year being declared
 
 

SET Verification Power

The penultimate paragraph of Article 39 of the Law states that the exercise of the Verification Power with respect to the Technical Study may only be carried out for each completed fiscal year.
 
Considering that the transfer pricing rules will come into force on January 1, 2021, the Subsecretaría de Estado y Tributación or Undersecretariat of State and Taxation (SET) will only have the possibility to perform such verification as of January 1, 2022.
 
 

Transfer Pricing Non-Compliance and Penalties in Paraguay

Failure to comply with the formal obligations related to the submission of the Transfer Pricing Technical Study, additional reports, and the Informative Sworn Statement-Num 7, which is considered an infraction according to article 176 of Law No. 125/1991, will result in the imposition of a fine as specified below:
 
 
Non-Compliance Amount of the Fine
Submission after the expiration deadline of the proof documents that refute the presumptive linkage with foreign residents. G. 900,000.
Submission of the DJI-Num7 after the expiration deadline. G. 900,000.
Technical study with inaccurate data. Maximum fine established by the Executive Power for the contraventions in force at the expiration of the presentation deadline.
Submission of the Transfer Pricing Technical Study after the expiration deadline.
Failure to preserve for the statute of limitations period the supporting documents justifying the information indicated in the Transfer Pricing Technical Study and additional reports.
 
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