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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 audits have yet to take place so far, and the first filings of local files are due in October 31, 2022.
- Last regulations were issued in August 2022.
- 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 has been very vaguely defined by the regulations and therefore makes the definition very wide and open. 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 definition of low or nil taxation jurisdiction is those who meet both 2 conditions: 1) have an income tax rate lower than 10% and 2) do not have an exchange of information agreement in place with Paraguay (in this sense, the list of countries or jurisdictions considered as not having an agreement in force for years 2022 and ahead has been published by the government in RG 118/22).
- Taxpayers subject to this regime are 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, unless they can prove that they are not related parties by exhibiting shareholders documents of the third party and organizational charts.
- The mechanisms for the filing of documentation are through the tax authority platform “Marangatu” and there is a registry of professionals habilitated to perform and issue TP reports.
- 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 export operations (only for soy, corn, wheat, rice and soy derivatives), based on the CUP methodology. Specifications of this regime are included in the regulatory decree and in RG 86/2021, 110/2021, 115/2022 and 118/2022.Regulations define what are the comparable markets and the admitted adjustments that may be done to the prices, and in order to make the comparison at the date of the contract, companies have to register the export contracts before the tax authority.
- 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 and in RG 115/2022. It basically includes a functional and risk profile, identification of transactions, related parties involved and comparable information/companies selected, as well as some Group information.
- Documentation must be prepared and submitted in Spanish.
- No Master File nor Country by Country Report regulations this far, but some information that is usually contained in such reports must be included in the local file.
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.
- Specific penalties for TP obligations breach have been defined. Monetary penalties are not high (less than USD 300), but there are other penalties (like suspending the certificate of being up today with taxes) that may leave the company not able to import or export.
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 statistical criteria.
- 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.
- 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, unless they can prove the non-relationship.
- 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.