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, no regulation could represent a possible advance to raise certain tax reforms in the country until September 2019, enacted a special one for Transfer Pricing.

Law 6380 on Modernización y Simplificación del Sistema Tributario Nacional (Modernization and Simplification of the National Tax System) introduces a tax reform that contemplates, among other provisions, certain special valuation rules for transactions performed among related parties.

These rules are stipulated in Chapter III of the Law, which consists of 5 articles that define and regulate the principle of independence, comparability criteria, related parties, valuation methods, and technical study.

The aforementioned rule came into force as of January 1, 2021, under 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, according to item 7), it will apply from July 1, 2021.

Arm’s Length Principle: Definition

The Arm’s Length Principle stipulates that prices established among related parties are at objective market prices, such as an agreement among independent parties in comparable transactions.

The Law has adopted this definition in its Article 35, thus considering the taxpayers of the Corporate Income Tax the pricing agreement with their related parties.

Application Scope of Transfer Pricing in Paraguay

According 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 tax havens or related to free trade zones.

Definition of Related Parties in Paraguay

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

• The management or control of the other, i.e., when one company can influence the business decisions of another.
• The capital, when 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.

In addition, related parties of a resident entity in Paraguay will also be considered those resident subjects located in low or zero-tax jurisdictions, including free trade zones and companies whose 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 is 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, and 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 procedures limiting the exchange of information.

Valuation Methods in Paraguay

Article 38 of the Law stipulates seven Transfer Pricing methodologies under the OECD Transfer Pricing Guidelines, which are listed below:

1. Comparable Uncontrolled Price Method.
2. Resale Price Method.
3. Cost Plus Method.
4. Profit Split Method.
5. Residual Profit Split Method.
6. Transactional Net Margin Method.
7. Method for Internationally Traded Goods.

Likewise, according to the aforementioned guidelines, the Paraguayan Transfer Pricing Standard establishes an order of priority to employ such methodologies.

Thus, except for internationally traded goods to 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

Article 36 of the Law and the indications in Article 10 of the Regulation stipulate the following to perform the comparability analysis among transactions:

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 relevant circumstances the taxpayer could have reasonably accessed information about, such as economic losses, effects of governmental decisions, locational advantages, the existence of collaborative teams, or the generation of synergies.

Formal Transfer Pricing Requirements in Paraguay

Article 39 of Law 6380 and Article 27 of the Regulations have indicated that taxpayers performing transactions among related parties must obtain and keep a Technical Study. It should include documentation supporting the amount of their income and deductions under the Arm’s Length principle. On April 7, 2022, the SET (Subsecretaría de Estado de Tributación – Subsecretariat of State for Taxation) 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 or not reached by the Corporate Income Tax 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.

Likewise, taxpayers are subject to obligations if transactions have been carried out with parties domiciled in tax havens, users of free trade zones, or maquiladora companies, regardless of not exceeding the threshold.

Exempt from having the Technical Study

Taxpayers that settle the Corporate Income Tax 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 Technical Transfer Pricing Study.

Minimum Content of the Technical Study

The technical study must include at least the following data:

1. 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 on related party transactions and amounts.
6. Analysis and selection of the tested party (local or foreign entity). Information on functions, assets, and risks.
7. Description of contractual terms.
8. Characteristics of related party transactions.
9. Economic circumstances of the transactions.
10. Business strategies of the transactions of the tested party (local or foreign).
11. Detailed 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. The method employed, including comparable operations and companies and the profitability indicator applicable to that method.
14. Adjustments 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 to analyze and identify 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 filed in Portable Document Format (PDF), and the working papers in electronic spreadsheet format.

Obligated subjects must file their Technical Study annually along with the supporting working papers through the Marangatu System using their user access key according to the following deadlines:

Currently, after the validity of the Resolution, obligated subjects must submit the Technical Study according to the Informative Affidavit expiration calendar established in General Resolution No. 38/2020 as follows:

For those taxpayers required to prove the lack of a relationship between them and the party 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:

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:

SET Verification Power

The penultimate paragraph of Article 39 of the Law states that the exercise of the Verification Power concerning 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: