On July 11, 2022, the Executive Branch (the “Government”) issued Decree No. 7402/2022 (the “Decree”), which brings the following changes:
Regarding the transfer pricing control regulations, the Government finally eliminated the discussed subsection a) of Article 5 of Decree No. 4644/2020, which established as one of the three previous conditions to qualify a country, territory, jurisdiction, domain or associated state (all of these referred to as “jurisdiction”) as a low or no tax jurisdiction (“BONT” per its Spanish acronym), the fact that it is listed by international organizations such as the OECD, the European Union, the Tax Justice Network, among others, as well as that it has not satisfactorily complied with the peer review carried out by the Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD.
In this sense, the Government established the following two requirements, according to the new criteria, to be met for a jurisdiction to qualify as a BONT:
- Incomes from activities developed, assets located or rights economically used in the jurisdiction are subject of effective taxes or at a lower income tax rate than that would be applied in Paraguay in similar operations.
- There is no bilateral or multilateral agreement in force that would allow the effective exchange of information between Paraguay and such jurisdiction.
It is worth noting that these two requirements in some way follow the line of the previous items b) and c) of said article 5, however, the “new paragraph b)” already clarifies that the agreement, whether bilateral or multilateral, must allow the effective exchange of information with Paraguay, unlike the previous one that only established that the agreement should allow the exchange of information, without specifying that the same should take place with our country.
It should be noted that currently there are 5 bilateral agreements in force in Paraguay to avoid double taxation, in addition to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (“MAAC”), this last instrument allows the exchange of information with more than 140 countries that have signed and ratified it.
Thus, in practical terms, we could infer that all those jurisdictions that tax source income at a rate of less than 10% and do not have an instrument that allows the effective exchange of information with Paraguay would be considered BONT, and, therefore, linked to the effects of applying transfer pricing regulations (which implies the obligation to present the Transfer Pricing Technical Study).
In addition, the Decree establishes that the Tax Administration may prepare a list of those jurisdictions that are directly considered as BONT.
The item pending of analysis relates to whether, in order to determine if a jurisdiction is a BONT in a given fiscal year, the exchange of information would include years in which the MAAC was in force for both, Paraguay and the other jurisdiction.
Another change brought by the Decree concerns the fact that the criteria to determine if a jurisdiction is BONT is also applied to determine if the IDU exemption is applicable or not to investment projects that are intended to be carried out under Law No. 60/1990.
Finally, following the provisions of art. 24 of Law No. 6380/19, the Decree modifies how to calculate the advances on account of the IRE as of fiscal years 2023 and 2024 for taxpayers with closing on 12/31/2022, 04/30/2023 and 30/06/2023, respectively. In this sense, the Government ordered that the IRE taxpayer who settles the tax under the General Regime, as well as the one who does so under the Simple Regime, must pay advances on account of the IRE for the year as follows:
- based on the average income tax paid in the last 3 previous years; or
- if it does not have 3 closed fiscal years, then based on the tax settled in the previous fiscal year; and,
- determining 25% of said average as each of the four advance payments,
- in the event that the IRE paid to the tax administration in the previous year is equal to or less than PYG 10,000,000, no advances should be paid.
Should any assistance is required in this regard, please contact our specialists at mauro.mascareno@berke.com.py, carlos.vargas@berke.com.py, federico.valinotti@berke.com.py, or rodrigo.gomez@berke.com.py.
