Paraguay

Transfer Pricing in Paraguay: a look at the reform

Although Paraguay, since 2017, is part of the Development Center of the Organization for Economic Cooperation and Development (OECD), which could represent a possible advance in order to propose certain tax reforms in the country, it is not until September 2019, that it promulgates a special regulation for transfer pricing.

Through Law 6380 of “Modernization and Simplification of the National Tax System” (Law) a tax reform is introduced, which contemplates, among other provisions, certain special valuation rules for transactions carried out between related parties.

Such 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 technical study.

However, the above-mentioned law will come into force on January 1, 2021, as provided in Decree No. 2787/19, issued on October 31, 2019.

Principle of independence: Definition

The Principle of Independence or also known as the “Arm’s Length Principle” seeks to ensure that prices established between related parties are in line with objective market prices, just as if they had been agreed between independent parties.

The Law has adopted such definition in its Article 35, so that taxpayers of the Corporate Income Tax (IRE) should take it into consideration when agreeing prices with their related parties.

Definition of related party in Paraguay

According to Article 37 of the Law, two or more persons are considered to be related or connected parties, when a person or group of persons participates directly or indirectly in:

1. The management or control of the other, that is when a company has the capacity to influence the business decisions of another.
2. The capital, as long as it owns more than 50% of the share capital of the other.

It should be noted that the term person includes individuals, legal entities, permanent establishments and national or foreign trusts.

Likewise, it should be mentioned that related parties of a resident in Paraguay will also be considered to be those resident subjects located in low or zero tax jurisdictions, including free zones and maquiladora companies.

Valuation methods in Paraguay

Article 38 of the Law stipulates 7 transfer pricing methodologies according to the guidelines set forth by the OECD, in its Transfer Pricing Guidelines, which are listed below:

1. Comparable Non-Controlled Price Method.
2. Resale Price Method.
3. Added Cost Method.
4. Profit Sharing Method.
5. Residual Profit Sharing Method
6. Transactional Margin Method of Operating Profit.
7. International Quoted Assets Method.

Also, following the guidelines indicated above, the Paraguayan standard on transfer pricing establishes an order of priority for the use of such methodologies.

Thus, with the exception of internationally traded assets, which must be analyzed under the methodology of paragraph 7, the method indicated in paragraph 1 must be used first for all other operations.

The methods set forth in paragraphs 2, 3, 4, 5 and 6 may be used when the method set forth in paragraph 1 is not appropriate to determine that the operations carried out are at market prices.

Comparability criteria in Paraguay

According to Article 36 of the Law, in order to perform the analysis of comparability between transactions, the following must be taken into consideration:

1. The characteristics of the transaction.
2. The functions or activities, assets used and risks.
3. The contractual terms.
4. The economic circumstances.
5. The business strategies.

Formal transfer pricing obligations in Paraguay

Although Paraguayan legislation on the subject has not yet regulated the filing of any Informative Affidavit, Article 39 of Law 6380 has indicated that taxpayers who carry out transactions between related parties must obtain and keep a Technical Study.

This study must include the supporting documentation to demonstrate that the amount of their income and deductions are in accordance with the principle of independence.

Obligated to have the technical study

Those taxpayers whose gross income in the immediately preceding fiscal year exceeded G. 10,000,000,000 (Ten billion Guaranies) are liable. In case transactions have been carried out with parties domiciled in jurisdictions considered as low or null taxable, even if they do not exceed such threshold, the taxpayers are bound.

Minimum content of the technical study

The technical study must have at least the following data:

1. Name, denomination or company name, address and tax residence, of the companies of the Group that carry out intercompany transactions.
2. Information on the functions, assets and risks.
3. Information regarding operations with related parties and amounts.
4. Method used, including operations and comparable companies.

Date of provision of the technical study

Although the norm indicates that the Technical Study must be available, it does not regulate any date of presentation, so the taxpayer must have it, in case the Tax Administration requires it under its power of verification.

Faculty of verification of the SET

The penultimate paragraph of Article 39 of the Law states that the exercise of the power of verification with respect to the Technical Study may only be carried out for each completed exercise.

Taking into account that the transfer pricing rules will come into force on January 1, 2021, the Undersecretariat of State and Taxation (SET) would only have the possibility of performing such verification as from January 1, 2022.

Transfer Pricing violations and penalties in Paraguay

Currently, the Paraguayan standard on transfer pricing has not regulated a specific penalty for the lack of a Technical Study.

However, the infraction established in Law N°125/91 could be applied, for not presenting documentation when it is requested in a control process by the Tax Administration, which could lead to a fine of between Gs. 50,000 (Fifty thousand Guaraníes) and Gs.1,000,000 (One million Guaraníes).