On 30 December 2020, the tax authority of Paraguay issued Decree 4644/2020, providing further guidance on the technical aspects of Paraguay’s transfer pricing (TP) provisions included in Law 6380.
Law No. 6,380/2019 modernized the Paraguayan fiscal system significantly. The Tax Law introduced, among other measures, a full set of transfer pricing rules to determine the market value of controlled transactions conducted between associated entities.
The new transfer pricing provisions came into effect for fiscal year 2021 and will apply to companies engaging in transactions with related parties both in and out of Paraguay. The new rules clarify a section of Paraguay’s new transfer pricing law that establishes that Paraguay residents’ transactions with residents in jurisdictions with low or no taxation are presumed to be transactions with related parties.
Best method rule
Paraguay’s new TP law establishes that the first TP method to be considered must be the comparable uncontrolled price (CUP) method.
If the CUP’s application is not possible, the method that best suits the facts and circumstances of the controlled transaction should be applied.
Comparability
An uncontrolled transaction used as a comparable to analyze a controlled transaction must occur in the same fiscal year as the analyzed transaction.
However, in cases where there is no comparable information for the fiscal year in which the transaction was carried out, previous years’ information can be used, and previous justifications presented. If there are internal and external comparable, the taxpayer must prioritize the internal comparable in the analysis or, if not, justify its non-use.
Intra-group services
In the case of intra-group service transactions, before proceeding to the analysis of compliance with the arm’s length principle, one must consider if the service has been provided, if the services provide benefits that improve the recipient’s business, and if the price paid for the service is within arm’s length for comparable services.
Use of the Inter-quartile Range
The new TP regulation specifies that 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.
Application of the sixth method
The sixth method will be used for export commodities, such as soy or soy products, corn, rice, and wheat.
Technical study
The specific details are not yet provided on the terms and formalities regarding the transfer pricing technical study or the registry of transfer pricing professionals authorized to issue the technical study. However, the tax authority announced that they are working to issue further guidance, so it is expected that this information will be available soon. The regulations will govern for transactions carried out on 1 January 2021, and thereafter, except for export activities of the products indicated above, which will be subject to the rules as of 1 July 2021.
