This article briefly describes the transfer pricing regime in Paraguay, addressing its application scope, linkage rules, methodology, formal obligations and penalties for non-compliance.
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.
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. 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, 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.
Definition of Related Party 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:
- 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:
- 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.
- Activities are taxed at an effective taxing or at an income tax rate lower than the rate that would apply in Paraguay.
- 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:
- Uncontrolled Comparable Price Method.
- Resale Price Method.
- Added Cost Method.
- Profit Splitting Method.
- Residual Profit Splitting Method.
- Transactional Operating Profit Margin Method.
- 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, in order to perform the analysis of comparability among transactions, the following should be taken into consideration:
- The characteristics of the transaction.
- The functions or activities, assets used and risks.
- Contractual terms.
- Economic circumstances.
- Business strategies.
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.
Entities Required to have the Technical Study
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.
Minimum Content of the Technical Study
The technical study must include at least the following data:
- Name, company name or corporate name, domicile and tax residence of the Group companies that carry out intercompany transactions.
- Information on functions, assets and risks.
- Information regarding related party transactions and amounts.
- Method used, including comparable transactions and companies.
Likewise, in accordance with Article 27 of the Regulations, the Technical Study must contain the following information:
- Analysis and documentation supporting transactions among related parties.
- Information about the multinational group and its structure.
- Financial and tax situation of the multinational group in which the group members operate, provided that this information cannot be obtained from an exchange of tax information.
Filing Date of the Technical Study
Although there is not any regulation stating the filing date of the Technical Study for taxpayers, these latter must have it in case the Tax Administration requires it under its verification power.
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
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).
Offices in Paraguay
- Yegros 947, Asunción, Paraguay
- contacto@tpcgroup-int.com
- +595 21 448 808
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