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.
Likewise, on January 5, 2021, the Regulations of Chapter III “Normas Especiales de Valoración de Operaciones” or “Special Rules for Valuation of Transactions” were enacted by Decree No. 4644, which in turn will apply to performed as of January 1, 2021, except for export transactions in accordance with numeral 7 of Article 38 of the Law.
Pursuant to Article 3 of the Regulations of the Law, taxpayers domiciled in Paraguay who perform the following transactions will be subject to the Transfer Pricing rules in Paraguay:
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:
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.
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:
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:
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.
According to Article 36 of the Law, in order to perform the analysis of comparability among transactions, the following should be taken into consideration:
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.
Taxpayers whose gross income in the immediately preceding fiscal year exceeded G. 10,000,000,000,000 (Ten billion guaranies) are required. In case transactions have been made with parties domiciled in jurisdictions considered low or no taxation, even if it does not exceed such threshold, taxpayers are obliged.
Taxpayers are required, even if the transactions have been made with parties domiciled in jurisdictions considered low or no taxation and whose gross income does not exceed such threshold.
The technical study must include at least the following data:
Likewise, in accordance with Article 27 of the Regulations, the Technical Study must contain the following information:
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.
According to Article 29 of the Regulations, the infraction established in Law N°125/91 may be applied for not filing documentation when requested in a control process by the Tax Administration, which may lead to a fine ranging Gs. 50,000 (Fifty thousand guaranies) and Gs.1,000,000 (one million guaranies).