PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
faces significant profit shifting concerns given its competitive tax rates. As a result, policies targeting CFCs are unlikely to be a focus of the tax agenda in the near future. 9.9 Anti-Avoidance Rules Paraguay’s tax framework includes some anti-avoid - ance measures, and many of its modern double tax treaties contain limitation on benefit clauses designed to prevent “treaty shopping”. In practice, these pro - visions require that taxpayers demonstrate real eco - nomic substance and that transactions are carried out on an arm’s length basis. For inbound investors, this means that if their corpo - rate structures or financing arrangements appear to be primarily designed to exploit treaty benefits with - out genuine commercial activity, the tax authority may deny those benefits, particularly when applying the latest double taxation treaties with Spain, Uruguay, Qatar and the UAE. Similarly, outbound investors may also face restric - tions if their arrangements are seen as contrived for tax purposes. Overall, while these rules add an extra compliance layer, with proper planning and econom - ic substance, their impact on legitimate investment activities can be minimised. 9.10 Transfer Pricing and IP Taxation Paraguay’s transfer pricing rules came into effect in 2021 following the enactment of the 2019 legisla - tion. While these regulations incorporate many BEPS recommendations, their implementation is still in an early phase, with both tax authorities and taxpayers undergoing a learning process. So far, no significant changes have been made to the framework, as the focus remains on adaptation and practical application rather than immediate revisions. 9.11 Country-by-Country Reporting and Transparency Provisions While increased transparency, including country-by- country reporting (CbCR), is a key tool in the global fight against profit shifting, Paraguay has not yet implemented a CbCR framework. Currently, the coun - try only requires a local file, which must be submitted alongside a sworn statement. This documentation
includes certain information about the multinational group’s parent entity, but does not yet extend to a full CbCR requirement. At the same time, Paraguay is focused on enhanc - ing its transparency standards and strengthening its capacity for information exchange. However, the adoption of CbCR remains a future consideration rather than an immediate priority. 9.12 Digital Economy Businesses Paraguay has implemented a structured system for taxing digital economy businesses, primarily through its IVA framework and INR provisions. This model follows approaches successfully implemented in countries like Uruguay and Chile, ensuring that digital transactions contribute appropriately to tax revenues. Digital services consumed in Paraguay are subject to IVA at 10% rate if certain conditions are met, such as indicators like IP address, billing address, or bank account details confirming domestic consumption. For income taxation, the treatment depends on the type of recipient. • If the foreign service is provided to a local corpora - tion, withholding tax (INR) of 4.5% applies on the payment. • If the service is provided to individual residents, the foreign provider must register with the tax author - ity and comply with tax obligations. However, this does not require incorporation in Paraguay nor cre - ate a permanent establishment; it is simply a com - pliance mechanism that involves registering and appointing a local representative for tax purposes. While Paraguay’s current framework is effective in tax - ing digital services, the potential impact of Pillar One remains uncertain, as there have been no discussions on its adoption within the country so far. 9.13 Approach to Digital Services Taxation Instead of introducing a separate digital services tax, Paraguay has chosen to integrate the taxation of digi - tal transactions into its existing tax framework. This approach ensures consistency with broader tax poli -
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