As a result of the sustained growth that South Korea, Hong Kong, Singapore and Taiwan have been maintaining, the world has referred them as the “four Asian Tigers”. By its economic growth and its prominent role in the region, similarly, we could define Paraguay as the South American “Jaguareté” – feline that inhabits the Paraguayan Chaco-.

Despite having a population of just 7 million, in recent years the Paraguayan economy has grown more than its neighbors, at an average rate of 5% -. Despite the price fall of raw materials in 2015, this growth was based on the efficient production and export of agricultural and livestock products, as well as in the electric energy production from Itaipu and Yacyretá. In this context, advances were achieved, such as the Law of Fiscal responsibility, inflation targets and the creation of the tax advisory board. In the past two years, there were significant improvements in the solvency index, facilitating the access of Paraguay to international capital markets through the issuance of sovereign bonds in 2016, at a rate of 5%.

On the occasion of the recent CIAT General Assembly, held in Asunción, I could personally verify the foregoing. Just by traveling around the country and observing carefully, I could validate the above mentioned economic indicators. Flying from Asunción to the Itaipu Hydroelectric plant, I saw large tracts of neat cereal fields and many cattle heads, and the capital city has acquired a “swing” that only recent visitors could imagine – with new hotels, bars, restaurants, shopping centers, office buildings and apartments, among other new businesses. It is also worth mentioning the incredible landscapes and biodiversity of the famous natural reserve of Mbatovi, a few kilometers from Asunción.

All these advances must logically be accompanied by appropriate tax policies that will allow access to the resources needed to sustain a development plan according to the situation of the country and the new emerging challenges. In this scope, Paraguay has implemented a fiscal rule, reformed the VAT, introduced a tax on additional income for products traded on transparent markets, reformed the corporate tax on agricultural revenue, and improved the levels of fiscal transparency.

Some days ago, I had the opportunity to deal with the team of the Large Taxpayers General Directorate of the Under-Secretary of State Taxation (SET) of Paraguay, and learn about the particular tax regime of the agricultural export sector (Act Nr. 5061/2013, Decree nr. 1832 / 2014; General resolutions No 31/2014; 58/2015; 60/2015 and 66/2015). That regime establishes the implementation of price adjustments in export operations goods whose price are quoted in transparent markets, stock exchanges or similar. According to the same regulations, the goods affected are soybean and its derivatives – oils, flours, pellets and expellers-. For these goods a formula that determines its “reference price[1] ” was established. If the price stated in the export invoice is lower than the reference price of the exported good, an adjustment is caused by the difference between the two prices, which is taxed at a rate of 10% in income tax and without admitting proof to the contrary. Finally, this adjustment should be added to the tax calculated according to the general income tax regime, whose general rate is also 10%.

The rule also establishes that taxpayers must register their export contracts in the SET export contract registration system[2], within 10 days after the conclusion of the contract, and up to one day before if the period between conclusion of the contract and the date of embarkation is less than 10 days. Such contracts should be sent to the SET via web and through a preset form, within 50 calendar days of their signature, in “.pdf” format.

For this purpose, a system of information was developed, consisting of a ” information statement of price adjustments”, which register office data, international prices and the calculation of the reference price, a ” price adjustment statement” that occurs annually and allows to settle and pay a tax of 10% on the net taxable prices or income adjustment, and a “report on prices adjustment”, which is carried out by the external tax auditor, which guarantees the fairness of the exports, the adjustments, the CBOT fees and the base.

Due to its characteristics, the said procedure has similarities with the so-called “6th Method” introduced by Argentina more than 13 years ago to regulate prices for exports of goods with transparent markets. However, the Paraguayan development presents more than significant differences, which makes the application of the Paraguayan method a much simpler and more productive task when assessing the cost/benefit of collection by the tax administration and the compliance cost by taxpayers. For example, its application is not related to the existence of an international intermediary without economic substance, it does not consider criteria of attachment, do not set the condition that prices should conform to the principle of “arm’s length”, consider adjustments clearly defined by the international price which arises from the transparent markets, the price difference being adjusted by a special tax of 10%, among others.

Personally, I think that for the Paraguayan context – and perhaps many other developing countries contexts where the economy depends mostly on the export of natural resources and the tax administration is moving towards an optimal degree of maturity- the referred approach would be highly recommended.

While simplification could threaten equity, “excessive equity” would go against the simplification, the certainty and compliance/management costs. On the other hand, a sophisticated and equitable standard for the control of “commodities” exports which are very difficult to manage would be against the equity for captive taxpayers in relation to those operating in international markets. It is not easy to meet all that which is desirable or find a balance, especially when abuse by taxpayers operating in critical business for a country are detected and there is no sufficient capacity by the tax administration to attend them in the short term.

The challenge of tax policy is to develop manageable standards, avoiding the loss of tax resources without driving away investment. Paraguay being one of the most competitive economies in the region, maintaining an effective tax pressure still significantly lower than its neighbors – 2015, 17.9 points of GDP, the tax regime of the agro-exporter Sector, despite its extreme simplification and the presumptions that it adopts, is a measure more than reasonable to protect the tax base.

A proof of this is the increase of the net taxable income as a result of the tax regime of the Agro-exporter Sector, where, despite the sharp prices fall of “commodities” in 2015, the tax applied for prices adjustment went from G 1,511 million in 2014 to G 5,223 billion in 2015, and surpassed G 9,000 million in 2016; this, not to mention that tax profitability has grown from 2% to 6% from 2012 to 2015.[3]

At the same time, the SET is carrying out analysis of the self-declared price adjustments and has implemented control mechanisms that will detect the unadjusted differences, and determine them ex officio, and several companies of the sector were already notified.

If Paraguay had implemented the standard transfer pricing regime, based on the Arm’s length principle, many tax resources would have been lost over time in the agro-export sector. It should be noted that the majority of the countries of Latin America that have sanctioned transfer pricing regulations – with a few exceptions – have delayed their implementation between 5 and 10 years, assuming at the same time major drawbacks to train and keep the qualified personnel, access to information, and resolve disputes.

Some may express their disagreement with respect to the Paraguayan regime, to create a risk of double taxation by implementing a unilateral regime, which could be considered simply as a tax or as a specific anti abuse measure or a regime for the control of transfer prices applicable to a specific economic sector. However, I believe that this reflection does not apply to this case, since the duty of the State is to safeguard its taxable bases, in a context favoring foreign investment, where the income criterion is territorial and whose effective tax burden is relatively low.

As taxpayers keep adjusting their prices, the adjustments will certainly keep decreasing and they will begin to pay more in the general tax income regime, which is clearly more convenient.

Meanwhile, the challenge of Paraguay consists in carefully evaluating their international commitments, especially those related to the BEPS Action Plan and progress on the effective implementation of the transparency and exchange of information standards. For this purpose, significant resources and time are needed so that the Paraguayan State institutions may reach a level of sufficient maturity for their effective and responsible implementation.

I have no doubt that the SET of Paraguay keeps preparing to keep up with these important requirements and provide the State with the necessary resources, so all the citizens would benefit from the economic growth that the country enjoys.

[1] Calculation of the reference price: international price in transparent markets (lower trading CBOT), +/-Regional Basis – costs (Ports services, quality control, insurance and freight), – other concepts (waste, financial expenses from loans or financings) = reference price.

[2] The contracts will be considered only when they are registered within the prescribed period and contain all required data, and when the time between their signature and the pricing does not exceed 365 days.

[3] Average of the largest exporters, representing on average more than 80% and 94% of soy beans and flour and exported pellets.

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