New Paraguay law extends withholding tax to digital services

By Valeria Saavedra, Senior Associate, Basefirma Venezuela, Caracas

Paraguay has enacted an innovative law, effective January 1, which imposes income tax withholding on payments made to nonresidents that provide digital services.

Paraguay’s General Resolution No. 76, in December 2020, follows developed economies such as Norway, the United Kingdom, and France, among others, in their fight against tax avoidance, requiring large international companies of the digital age to pay taxes corresponding to digital services provided in their territory, regardless of their fiscal residence.

The categories of digital services subject to withholding under the new law include: distribution of multimedia content through digital means (Netflix, Spotify); processing and storing of information (Google drive); supply, development, or update of software or applications (ERP, CRM); cable and satellite television (Directv); marketing and advertising (Cubicle ninjas); gambling games, betting games and similar (Rushbet) and provision of educational services through technological platforms (Open English).

The law specifies that, as of January 1, resident taxpayers who provide digital services are subject to income tax and VAT. In the same way, any digital service acquired related to a VAT-paying-user’s taxed activity will constitute a VAT credit for the same user.

Additionally, foreign taxpayers who provide digital services in Paraguayan territory must pay the corresponding taxes (VAT and INR) from the date they begin operating in the country, depending on the number of commissions received and the amount charged by each service.

To accomplish this goal, the Generic RUC N ° 80031900-1 “General Directorate of Collection” requires companies to submit a monthly Form N ° 90 and an electronic form showing the calculation of commissions.

Regarding the documentation and its content, the taxpayer’s agent will pay Treasury the INR and the VAT through a withholding receipt and perception receipt, respectively. However, this last voucher will be temporarily replaced by a virtual withholding voucher until the tax administration makes a perception voucher available through Tesakã Software or web services.

Considering that most companies that provide digital services used in Paraguay are nonresidents, this measure would help reduce the economic impact caused by COVID-19, where tax collection, which is the primary source of government income, has been declining.

In contrast, digital companies’ income has increased significantly due to social isolation and the substitution of face-to-face services and sales.

Nevertheless, Paraguay’s tax system’s modernization is still being defined.  To apply these taxes, it is necessary to refine its details to achieve a balance of fiscal sustainability, through efficient implementation and safeguarding of users’ rights, supplier companies, and the government.

Is Paraguay ready to deal with the challenges of implementing this law? Is it designed to tax where the value of the digital services is being created?

— Valeria Saavedra is a  Senior Associate at Basefirma Venezuela, Caracas.