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Introduction to transfer pricing in Paraguay
Transfer pricing rules

Transfer Pricing regulations were recently introduced in Paraguay in the Tax Reform (Law 6.380) and are in force for fiscal years starting on 1 January 2021. Therefore, no filings nor audits have yet to take place so far.

More specific regulations for the implementation of the regime are still pending and are expected to be released shortly.

  • Paraguay transfer pricing (TP) legislation is in the Tax Reform Law (Law 6380), Book I (Income taxation), Title I (Corporate Income Tax), Chapter III (Special valuation rules), and is based on the arm’s length principle following, in general, the OECD Guidelines, with some differences.
  • The TP rules apply to Paraguay Corporate Income Tax taxpayers, including local branches of overseas companies and there is a self-assessment regime, ie the onus is on the taxpayer to confirm its transfer pricing meets the standard or to adjust its tax return accordingly.
  • The regime is a 'one-way street', ie upwards-only adjustments are permitted, and offsets between years and entities is not accepted.
  • Transactions subject to the regime are those performed by taxpayers with related parties resident abroad, or local related parties when one of the participants is exempted or not taxed by Income Tax for the operation.
  • Paraguayan TP legislation defines relationships between parties including the concept of a functional relationship, which is however still pending to be more precisely defined by an upcoming regulatory decree. Moreover, taxpayers undertaking operations with entities residing abroad in countries with low or nil taxation, including free trade zones or tolling manufacturers will also be subject to TP regulations for those transactions. The list of countries or jurisdictions considered of low or nil taxation is still pending to be published by the government.
  • Taxpayers subject to this regime will be enforced to prepare annual documentation, except in cases in which revenues of the prior fiscal year did not reach G 10.000.000.000 (approximately USD 1.5 million). This exemption does not apply to taxpayers with transactions performed with free trade zones users, tolling manufacturers or entities residing in low or nil taxation countries.
  • The Tax Office will state the mechanisms for the filing of documentation and will prepare a registry of professionals habilitated to perform and issue TP reports. Both of these matters are still pending.
OECD guidance
  • Paraguay’s transfer pricing rules do not explicitly refer to OECD Guidelines. However, in some aspects and conceptually, new regulations follow them.
  • With regulations pending, there is no information nor experience as to what extent the OECD Guidelines will be accepted and considered a reference by the Tax Authority.
Transfer pricing methods
  • The current OECD methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods are all included in current regulations.
  • The legislation specifically states a hierarchy in favor of the comparable uncontrolled price method. In this sense, other methods can only by applied after the consideration of the CUP and after the demonstration that it is not the most appropriate one.
  • As an exception to the above, there is a mandatory specific method for commodities trading operations, based on the CUP methodology. Specifications of this regime are still pending to be defined. So are the products that will be considered as commodities (it will be an exhaustive list).
Self-assessment
  • Paraguay regime will be mostly a self-assessment one, where the onus is on the taxpayer to ensure that transfer pricing regulations are adhered to.
  • Currently, this self-assessment regime would not provide penalty protection regarding potential questionings from the Tax Office during a Tax Audit.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • TP documentation minimum content is established in current law. It basically includes a functional and risk profile, and identification of transactions, related parties involved and comparable information/companies selected.
  • It is still open to regulation if some taxpayers will be enforced to file the TP Report to the Tax Office.
  • There is no specific language request in the law, but it is to be expected that further regulations will require documentation to be prepared and submitted in Spanish.
  • No Master File nor Country by Country Report regulations this far.
Some risk factors for challenge
  • Although there is no experience yet, it would be expected for the Tax Office to put certain focus in the commodities business, which was in fact the only industry with a regime that could be considered similar to transfer pricing.
  • It Is also to be expected that entities with persistent losses may be challenged as well.
Penalties
  • No specific penalties for TP obligations breach have been defined yet.
Economic analysis and how to demonstrate an arm’s length result
  • In the case of two or more comparable observations, whether they are profit margins of companies or uncontrolled prices, a market range will have to be determined according to certain statistical criteria that have yet to be defined.
  • In accordance with the law and aligned with OECD Guidelines, the comparability factors include, among others: characteristics of the transactions, functions or activities including assets engaged and risks assumed in the transactions of each of the parties involved, contractual terms, economic circumstances and business strategies.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • No regulations regarding APAs are included in the current regulations
  • As the regime is about to begin, there is no experience this far in Mutual Agreement Procedure (MAP) regarding transfer pricing disputes.
  • Secondary adjustments or recharacterisation where a TP adjustment is made is not included in current law.
Exemptions
  • Taxpayers with revenues in the prior fiscal year lower than G.10.000.000.000 (USD 1.5 million approx.) are not enforced to prepare a TP Report.
  • The aforementioned exemption does not apply to taxpayers that have performed transactions with entities residing in countries or jurisdictions of low or nil taxation, tolling manufacturers or free trade zone users.
Related developments
COVID-19
  • Given the economic fallout of COVID-19, companies business and operations will be affected and the usual international practice of considering financial information of comparable companies of last three years should be reviewed when necessary.
  • Financial operations such as loans are likely to increase and conditions agreed in them could be very different from what the exact same companies could have agreed prior to the pandemic.
  • Where supply chains have been disrupted or work brought to a halt due to lockdown measures, expected profits may not eventuate. Comparable companies will often have been affected in the exact same way as multinational groups, but evidence must be gathered and documented contemporaneously.
  • It will be a very singular first year to apply the regime and the global situation may not be the best to determine market conditions.

For further information on transfer pricing in Paraguay please contact:

Agustina Galeazzi.png

Agustina Galeazzi
T + 595 (21) 612 612 ext. 102
E agustina.galeazzi@py.gt.com