By Horacio Sánchez Pangrazio, Senior Associate at FERRERE, Asunción – Paraguay
The executive branch of Paraguay has issued further regulations on the transfer pricing rules established in Law No. 6,380/2019 through Decree No. 6,105/2021, released October 14, and General Resolution No. 96/2021, released September 15.
As of fiscal year 2021, most of the provisions regarding transfer pricing contained in the 2019 tax law have come into full force. The Paraguayan tax authority is now issuing regulatory norms to clarify the implementation of those rules.
Paraguay was one of the last countries in the region to adopt transfer pricing rules into its legal system, and the rules mainly adhere to the recommendations contained in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organization for Economic Cooperation and Development (OECD).
The decree
The decree issued on October 14 by the executive branch of Paraguay provides further regulation regarding the application of the special method contained in the 2019 tax law, through which the quoted price obtained in an international commodity exchange market must be used to establish the market value of the exported goods.
The special method is inspired by the so-called Latin American “sixth method,” and it applies exclusively to the exportation of certain commodities from Paraguay (soybean and its derivatives, corn, rice, and wheat). Nonetheless, it is important to note that the special method is not introduced as an anti-avoidance norm in the context of the comparable uncontrolled price method, as its application is mandatory for the export of the aforementioned commodities.
In this context, as a general rule in the application of the special method, the quoted price from an international commodity exchange market must correspond to the date of the certificate of embarkation. In this regard, the decree provides that as an alternative to the general rule, the quoted price from an international commodity exchange market can correspond to the date of the conclusion of the agreement through which the absolute value of the exported commodities is settled, under the condition that the agreement is properly registered before the Paraguayan tax authority within the term of 15 business days of the next month following the conclusion of the agreement. Once the agreement is registered, it is mandatory to register any update in the terms of the agreement, such as addendums, or any other document through which the price or the terms of the original agreement are modified.
If the updates are not registered, or if the Paraguayan tax authority detects that the information declared is not in accordance with the operation (identification of parties involved, goods exported, or date of the agreement), the quoted price from the date of the certificate of embarkation will be considered for transfer pricing purposes.
Lastly, the decree provides that a fiscal adjustment in the price of the commodities exported will be conducted when the price stated in the exportation invoice is inferior to the quoted price of international markets considering the date of the certificate of embarkation or the date of the agreement, properly registered as previously described. In this regard, if any adjustment in the price is necessary, the difference will represent the taxable base for the assessment of the Paraguayan corporate income tax (“IRE” per its Spanish acronym). The Paraguayan tax authority will create the aforementioned public registry by November 1, in accordance with the decree, and all the agreements concluded from July 1 can be registered until December 31.
The general resolution
The general resolution issued by the Paraguayan tax authority on September 15 further regulates various aspects of the application of transfer pricing rules contained in the 2019 tax law. Many paragraphs contained in the OECD transfer pricing guidelines are incorporated into this regulatory norm to guide taxpayers in the application of transfer pricing methods contained in the 2019 tax law.
One of the main aspects introduced by the general resolution is the definition of related entities. The term now includes sister companies, control based on agreements that would not have been accepted by independent entities, and the participation of one company in the conducting of the other company’s policies, decisions regarding the purchase of raw materials, production, or commercialization. These situations establishing relatedness complement the provisions of the 2019 tax law on the matter.
In addition, the general resolution establishes the documentation requirements that a taxpayer must submit to the Paraguayan tax authority to prove that it is not related to an entity located in a territory of low or null taxation, a user of the free trade zone, or a company which is operating under the maquila regime, with which it is conducting operations. This is important because the 2019 tax law established a legal presumption that a taxpayer is related to entities under these circumstances. Thus, if the proper documents are submitted and the effects of the legal presumption are canceled, transfer pricing rules do not apply to the transaction.
Furthermore, the general resolution also outlines the strengths and weaknesses of each transfer pricing method, by providing the differences in a chart that offers a simplified comparison. The objective of this chart is to guide taxpayers in the selection of the most appropriate transfer pricing method, in view of the controlled transaction and the related circumstances.
The general resolution also incorporates a provision that follows paragraph 2.82 of the OECD transfer pricing guidelines to guide taxpayers in the selection of the most appropriate net profit indicator when applying the transactional net margin method. In the same manner, paragraph 1.60 of the OECD guidelines is also embodied in the general resolution, which establishes the six-step process to analyze the allocation of risks in a controlled transaction.
Also, the standard nine-step process to conduct a comparability analysis contained in paragraph 3.4 of the OECD guidelines is fully incorporated in the general resolution, following the same language as the guidelines, which implies that this nine-step process is not compulsory to determine the arm’s length value of a controlled transaction, and an alternative process can be devised by IRE taxpayers to tackle their particular challenges.
In addition, the general resolution also provides, as a general rule, that it is not possible to consider transactions or companies as comparable if they have operational losses, whether before or after the comparability adjustments. The exception to this general rule provides that these types of transactions or entities can be considered as comparable, only if the need to include the losses is justified in the technical transfer pricing report, due to the characteristics of the economic sector or business circumstances.
To conclude, the general resolution establishes a substance-over-form rule inspired in paragraph 1.122 of the OECD guidelines. Through this rule, agreements concluded between related entities can be disregarded by the Paraguayan tax administration if the terms differ from those that would have been adopted by independent entities, considering the economic reality of the transaction. Based on this provision, the Paraguayan tax administration can replace the disregarded transaction with an alternative one that is more adjusted to the economic reality of the operation. It is important to point out that a substance-over-form rule is already contained in article 247 of Law No. 125/1991 as a general anti-avoidance rule applied in regard to the triggering event.
A transfers tax burden should not be applied to minors amounts transfers made through telephone companies as they are being already charged with an average of 4/5 percent on amount transfered.