Recent reform steps
Recent reform steps in Paraguay include legislative changes, participation in international initiatives, and administrative measures.
With regard to changes in legislation, the rules on income tax and value added tax (VAT) in the agricultural sector have been changed in order to encourage formalisation and increase tax collection in this sector. The introduction of the new agricultural income tax (IRAGRO) has been a success, recording in the first 2.5 years (2014-2016) a tax-levy increase of 134.5%. In order to promote free competition and ensure tax compliance, a price adjustment mechanism has been established for export transactions involving goods with publicly known international prices. Moreover, a three-track processing mechanism has been introduced through which tax credit refund claims are instantly allocated to one of three tracks (green, yellow or red) in the computerised tax management system, depending on the taxpayer’s classification in the taxpayer risk index (IRC). This makes prompt tax credit refunds possible. Progress has also been made in achieving beneficial ownership transparency to modernise and strengthen the rules governing the operation of Paraguay’s financial system, by creating a register of shareholders of financial institutions set up in the country and providing the disclosure of transfers of shares exceeding a percentage to be determined by the Central Bank of Paraguay.
In addition to the legislative measures taken, Paraguay is also participating in several international initiatives. In January 2017, Paraguay became a member of the OECD Development Centre. In April 2016, Paraguay announced its intention to join the Inclusive Framework on BEPS for the implementation of measures to combat base erosion and profit shifting. As a result, Paraguay actively participates in regional seminars with the aim of analysing and incorporating minimum standards into domestic legislation. Paraguay has also expressed its interest in becoming a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes. An inter-institutional group was therefore set up, including representatives of the Central Bank of Paraguay, the Treasury’s Legal Service and the Finance Ministry’s State Undersecretariat of Economy and State Undersecretariat of Taxation. The group was tasked with preparing a survey report on the country’s current situation from a legislative and administrative perspective in order to address the challenges involved in making the exchange of information for tax purposes operational.
The Paraguayan tax authority also implemented substantial improvements in customer service and assistance mechanisms for taxpayers, which aimed at promoting voluntary tax compliance. Examples of administrative measures include a technical overhaul of the computerised tax management system “Marangatu”, as well as significant process improvements, e.g. online filing. Extensive efforts were made to enhance taxpayer customer service. To improve scrutiny procedures, a national annual tax scrutiny plan (PNACT) was formulated and implemented. In cooperation with the United States Department of the Treasury’s Office of Technical Assistance (OTA), the SET Audit Manual was prepared and basic/specialised audits for certain economic sectors and corruption detection and prevention capacities were strengthened.
In 2014, a TADAT assessment was piloted in the Finance Ministry’s State Undersecretariat of Taxation (SET). Opportunities for improvement included the risk assessment process, which was in an early stage of development; (automated) cross-checking of personal income tax data; and the lack of a requirement for employers to withhold part of employees’ income tax from their wages. The SET has made substantial improvements in these areas over the last year.
Progress achieved & good practices
The progress achieved through Paraguay’s recent reform measures has translated into significant increases in tax revenues (Figure 1). The sustained increase in tax revenue has been largely due to the head-on attack on tax evasion and the new technological resources introduced by the SET, which facilitate tax compliance by taxpayers and have significantly improved the effectiveness of tax compliance checks. Moreover, the number of tax compliance checks has been increased substantially in the last two years. From 2014 to 2016, there was an increase of determined liabilities of 195.1% (in 2014, 384,783 liabilities were determined (in millions of PYG); in 2016, 1,135,643). The implementation of a series of measures resulted in a significant reduction in the tax gap for VAT: in 2005, the VAT gap was 55.3%, whereas in 2014, it stood at 30.9%. Progress was also made in enhancing fairness of the tax system. The share of indirect taxes decreased from 62% in 2014 to 58% in 2016. Furthermore, the number of taxpayers increased from 566,252 in August 2013 to 724,997 in December 2016, an increase of 28%.
Policy coherence for development
In order to align the efforts in the area of domestic revenue mobilisation with a sound fiscal policy, the Fiscal Responsibility Act (No. 5098/2013) was passed. The Act aims to ensure prudent management of public finances to guarantee fiscal sustainability and macroeconomic stability in the medium term. The Finance Ministry has been strongly committed to ensuring compliance with fiscal rules and this commitment is reflected in the preparation and presentation of the annual government budget.
Since 2015, when the Fiscal Responsibility Act came into force, draft budgets submitted to Congress have complied with the limits established by law. The fiscal balance for 2016 was in strict compliance with the Fiscal Responsibility Act, showing an accumulated deficit of PYG 2.2 billion, which was 1.4% of GDP. This is clear proof of the government’s commitment to complying with the limits established in the Act, not only in the approval of the budget, but also in its implementation. The deficit recorded for 2016 was entirely due to public investment, which, with an unprecedented nominal increase of 20.4%, rose to a record high (2.9% of GDP).
Paraguay’s National Development Plan 2030 (in Spanish) is a strategy document designed to coordinate action by line departments of the Executive Branch and with different levels of government, civil society, the private sector and, where necessary, the Legislative and Judicial Branches.
The National Development Plan is based on three strategic directions: firstly, poverty reduction and social development, secondly, inclusive economic growth, and, thirdly, a meaningful role in the world arena. These strategic directions and the related crosscutting areas are shown in the figure below.
In line with the National Development Plan 2030, the tax authority has formulated its Strategic Plan 2014-2018. Its vision is to become one of the most innovative and efficient institutions in Latin America. The tax authority has the mission to collect taxes with integrity, efficiency and transparency, helping taxpayers to comply with their obligations by ensuring constant service innovation and management excellence, with a view to making every citizen a responsible and committed taxpayer. To achieve this, a series of directions and objectives have been set, which are explained in detail in the Strategic Plan 2014-2018. Accordingly, the Finance Ministry’s Strategic Plan (in Spanish) can be found here.
The Public Finance Report of the Republic of Paraguay (in Spanish) and the Central Government’s Financial Performance Report (in Spanish) are available online as well.
Outlook & strategic priorities
The challenges that Paraguay is currently facing are, firstly, to reduce the tax gap in order to continue increasing tax revenue and achieve an efficient, progressive and fair tax system. To this end, tax compliance checks by economic sector are increasing and taxpayer customer service is being improved to promote voluntary compliance. The second challenge is to incorporate the minimum standards established in the Inclusive Framework on BEPS into domestic legislation, bring legislation in line with the Global Forum’s recommendations in order to begin making the changes required for effective implementation of the exchange of information, and meet the OECD Development Centre’s requirements. Moreover, strengthening the national tax system is an important challenge, as is training tax officials in tax scrutiny and compliance techniques with the goal of ensuring ongoing improvement of compliance checks for all taxes, particularly corporate income tax.
Consequently, the priorities defined for 2017 are to:
- Implement electronic invoicing;
- Create the Tax Intelligence Centre;
- Strengthen the tax system and improve tax fairness in Paraguay, particularly with regard to personal income tax;
- Provide training for the effective detection and monitoring of aggressive tax planning strategies and the development of skills for negotiating agreements to avoid international double taxation;
- Obtain assistance in the use and application of statistical and econometric software (SPSS, Stata or EViews) in estimates and the analysis of standards within the framework of the OECD’s international tax initiatives – the Global Forum and the Inclusive Framework on BEPS;
- Increase tax compliance checks by economic sector;
- Implement the register of shareholders and beneficial owners.
Support is needed in the following areas:
- Training in the negotiation skills required to establish international double taxation agreements;
- Training in the detection of aggressive tax planning consistent with the recommendations of the Inclusive Framework on BEPS and the OECD;
- Changes in legislation to have a domestic effect on the requirements of the Global Forum on Transparency and Exchange of Information for Tax Purposes;
- Training in best practices for the exchange of information for tax purposes;
- Creation of the Tax Intelligence Centre;
- Estimation of the income tax gap;
- Application of statistical and econometric software tools;
- Strengthening of the tax system to achieve greater tax fairness in Paraguay, particularly in relation to personal income tax.