Group taxation is not permitted in Paraguay.
On 25 September 2019, the Paraguayan government issued Law 6380/2019 of Modernisation and Simplification of the National Tax System on Fiscal Reform. Such law includes important changes, such as the transfer pricing rules.
In this sense, in December 2020, the Paraguayan government issued Decree 4644/2020, which regulates the implementation of the transfer pricing rules provided by Law 6380/2019.
The transfer pricing rules entered into full force on 1 January 2021, except for the exportation of certain commodities, which will be subject to these rules from 1 July 2021 and will apply to companies carrying out inter-company transactions with both domestic and foreign related parties.
The transfer pricing provision in Article 35 of Law 6380/2019 established that IRE payers that perform inter-company transactions with both foreign and domestic related parties are obligated to determine their income and deductions, taking into account prices that would have been used in or with comparable third parties transactions, in similar conditions.
Domestic inter-company transactions will be subject to transfer pricing analysis when one of the parties is exonerated, exempt, or not subject to IRE.
Related parties assumptions
As mentioned above, the transfer pricing law applies to companies who carried out inter-company transaction with Paraguayan and foreign related parties according to Article 37 of Law 6380/2019.
Article 37 of Law 6380/2019 establishes that two or more persons are related parties when a person or group of people participates directly or indirectly in:
- The management or control of the other entity.
- The capital, as long as it owns more than 50% of the share capital of the other entity.
The Paraguayan transfer pricing provisions also establish that transactions carried out between a domestic party and a party located in countries or jurisdictions with low or null taxation regimes, maquila entities, or Free Trade Zones users are deemed to be related parties.
Obligation to submit a transfer pricing study
Article 27 establishes that taxpayers must submit a transfer pricing study to the tax authority when their gross income in the previous fiscal year is greater than PYG 10 billion. Taxpayers who perform transactions with parties located in countries or jurisdictions with low or null taxation regimes, maquila entities, or Free Trade Zones users must submit a transfer pricing study regardless of the amount of their gross income.
According to Article 39 of Law 6380/2019, the transfer pricing study must include, among others:
- Legal name and tax address of related parties, as well as documentation that proves the participation between related parties.
- Functions carried out, assets used, and risks assumed by the taxpayer within the related transaction.
- Description of the transactions carried out with related parties, including the amount of each transaction.
- Transfer pricing method applied, including comparable transactions or comparables used for each transaction.
Article 37 of Decree 4644/2020 establishes that the transfer pricing study must also include the following information:
- Analysis and backup transactions and related parties documentation.
- Inter-company with or between related parties.
- Multinational group and its structure.
- Multinational group financial and tax overview in the different jurisdictions in which it operates.
The tax authority will establish the documents, the information, deadlines, and conditions for the presentation of the transfer pricing study.
Comparability analysis and use of inter-quartile range
In order to use a comparable transaction to analyse a controlled transaction, this one must be carried out in the same fiscal year as the analysed transaction.
Nonetheless, in cases where there is no comparable information for the fiscal year, where the transaction was carried out, previous or future years’ information can be used, but justifications shall be presented.
If there are internal and external comparable, the taxpayer must prioritise the internal comparable in the analysis or, if not, justify its non-use.
Transfer pricing regulation specifies, where two or more comparable transactions are identified, the statistical method to be applied will be the inter-quartile range.
If the price, amount, or profit margin set by the taxpayer is within the inter-quartile range, it will be considered arm’s length; otherwise, the value of the transactions between independent parties must be the median of the range if this affects the taxable base.
Transfer pricing methods
Article 38 of Law 6380/2019 describes each of the seven methods (seventh method must be used for export of commodities) to determine the value of a commercial and/or financial transaction carried out with related parties as follows:
- Comparable uncontrolled price.
- Resale price method.
- Cost plus method.
- Profit split method.
- Residual profit split method.
- Transactional net margin method.
- Export of commodities.
The seventh method must be used for export commodities, such as soy or soy products, corn, rice, and wheat.
In the case of intra-group services transactions, before proceeding to the analysis of compliance with the arm’s-length principle, one must consider if the service was actually provided, if the services provide benefits that improve the recipient’s business, and if the paid price for the service is consistent to the arm’s length for comparable services.
Controlled foreign companies (CFCs)
There are no provisions in Paraguay for CFCs.