Paraguay requires new transfer pricing section on income tax return
Paraguay requires new transfer pricing section on income tax return
By Francisco Arballo, Partner, Grupo Consultor EFE, Tijuana, Mexico
On December 30, 2021, Paraguayan tax authorities published a new income tax return format, including a new section to disclose transfer pricing adjustments taxpayers made to reflect arm’s length results.
The new section differentiates the transfer pricing adjustments made to intercompany transactions based on the sixth method, which is mandatory for those involving commodities, from transactions analyzed using other transfer pricing methods.
Paraguay first introduced transfer pricing regulations to its income tax law in 2019. Later on, the tax authorities clarified these regulations and their applications through a series of decrees and resolutions. As of January 1, 2022, Paraguayan taxpayers that carried out operations with related parties (foreign or domestic) during the 2021 fiscal year, must obtain and safeguard supporting documentation that proves the prices were calculated at arm’s length.
Taxpayers must prepare the local transfer pricing report for intercompany transactions carried out during fiscal year 2021 and internally evaluate if related-party transactions that represent taxable income and/or deductions comply with the arm’s length principle. They should also decide if there a need to adjust prices so that they are within arm’s length range.
Below is a practical guide to managing these new transfer pricing obligations:
Identification of related parties under domestic law
According to Article 37 of Chapter III of the Law of Modernization and Simplification of the National Tax System, two entities will be related parties when a person or group of persons participates directly or indirectly in the administration, control, or capital of the other. One must take into consideration the following:
A related party by capital will be considered liable to transfer pricing regulations when there is direct or indirect participation in more than 50% of the capital stock; a “person” should be understood to be individuals and legal entities, permanent establishments, and national or foreign trusts; residents located in jurisdictions with low or no taxation—including national free-trade zones and maquiladora (toll manufacturing) companies—will be considered related parties of residence in Paraguay; the link between two companies will not only be through direct or indirect participation in the capital but also through participation in the management, which does not require participation in the capital—either directly or indirectly. Therefore, two entities will be considered to be related if they share officers in directive positions and/or management positions and have decision-making capabilities in both entities.
Intercompany transactions subject to transfer pricing regulations will consist of any type of intercompany transactions that have a direct effect as taxable income or tax deduction for the taxpayer in Paraguay. The most common operations may include (but are not limited to): the rendering of professional services, purchase or sale of goods and/or supplies, lease of real estate, royalty transactions (use of trademark, etc.), interest on intercompany loans, and expense reimbursement transactions.
It is necessary to review whether the operations with related parties are in line with supporting documentation, such as intercompany agreements, invoices, and covenants; and also if there are clear policies regarding the methodology used in each operation for the determination of the intercompany price (example: costs and expenses + mark-up, etc.).
Local transfer pricing report
This step includes drafting a local transfer pricing report, where the taxpayer should have active participation. As of today, there is no official local guidance on the content requirements of the required local transfer pricing report. However, the local tax law refers to the OECD transfer pricing guidelines for such purposes.
Article 39 of the Law of Modernization and Simplification of the National Tax System Law states that “taxpayers that enter into transactions with foreign and/or domestic related parties must obtain and keep a technical study that includes the supporting documentation with which they demonstrate that the amount of their income and deductions were made under the prices or considerations that would have been used by independent parties in comparable transactions.” Likewise, it is important to consider that the local report must contain a minimum of the following information: Name, denomination or corporate name, domicile, and tax residence of the group’s companies that carry out intercompany transactions; functional analysis by type of operation; identification of the intercompany transactions; and method selected to analyze each intercompany transaction.
It is important to mention that the taxpayers obliged to make this document will be those that exceed the gross income of PYG 10 billion in the immediately preceding fiscal year (approx. USD 1.5 million at the exchange rate obtained on 31/03/2020).
Transfer pricing disclosures (informative returns)
Taxpayers will be able to file the corresponding transfer pricing declarations through the means and forms provided by the tax authority. . Publications of details and guidance regarding any informative statement were still pending at the time this article was written.
Authorized transfer pricing advisors
On December 30, 2021, the local tax authorities issued the minimum requirements for professionals who wish to be credited as authorized advisors in transfer pricing. These requirements include: to be registered as an individual for tax purposes in Paraguay (the advisor must obtain a tax ID); to comply with all tax obligations in Paraguay; to present to the tax authorities the following documentation: Updated curriculum vitae; valid ID; a copy of a diploma proving one is an economist, accountant, business administrator, commercial engineer, lawyer, or any other similar position within the legal or economic sciences.
The law degree or any other similar diploma in the legal, economic, financial, or business sciences fields must be issued by a higher educational institution in the country, which must be duly accredited by the competent authority. In cases where a foreign institution of higher education issued the degree, it must be approved by the Ministry of Education and Science.
There also must be a copy of at least one certificate of participation or proof of having taught national or international courses on transfer pricing, transfer pricing standards, transfer pricing auditing, or something similar, issued by higher education, technical higher education, or technical institutions in the country, duly accredited by the competent authority, or issued by foreign institutions. There must also be a minimum hourly load of 100 hours, carried out in at least the last five years prior to registration.
A certificate of judicial record is required, as well, with the date of issue 30 calendar days prior to the date of the application or of its renewal.
A labor certificate is also required, stating that one has at least four years of general experience in taxation, or three years of specific experience in international taxation or transfer pricing, as an independent or sole proprietorship, in law firms, consulting firms, or public or private sector firms.
Francisco Arballo is a partner with Grupo Consultor EFE, Tijuana, Mexico