Paraguay VAT, GST, and Sales Tax Guide

Paraguay

Asunción GMT

EY

Edificio Citicenter Mcal. López esquina Cruz del Chaco Asunción Paraguay

Indirect tax contacts

Gustavo Colman +595 (21) 664-308 gustavo.colman@py.ey.com

Alvaro Hoeckle +595 (21) 664-308 alvaro.hoeckle@py.ey.com

Tania Caceres +595 (21) 664-308 tania.caceres@py.ey.com

Tanya Moreno +595 (21) 664-308 tanya.moreno@py.ey.com

Sven N. Ratzlaff +595 (21) 664-308 sven.ratzlaff@py.ey.com

A. At a glance

Name of the tax

Value-added tax (VAT)

Local name Impuesto al valor agregado (IVA)

Date introduced 1 July 1992

Trading bloc membership MERCOSUR

Administered by Finance Administration (www.set.gov.py) (www.hacienda.gov.py)

VAT rates

Standard 10%

Reduced 5%

Other Exempt

VAT number format

General tax ID number is used for VAT ID. If the taxable person is an individual, the VAT ID is their tax ID plus its verification number. If the taxable person is a legal entity, it is eight digits plus its verification number.

VAT return periods

Monthly (general period), quarterly (for agribusiness), biannual (for nonprofit institutions) and each four months (some minor taxable persons)

Thresholds

Registration None

Recovery of VAT by non-established businesses No

B. Scope of the tax

VAT applies to the following transactions:

• The supply of goods or services made in Paraguay by a taxable individual or business

• The importation of goods from outside Paraguay, regardless of the status of the importer

C. Who is liable

A taxable person is any business entity or individual that makes taxable supplies of goods or services in the course of doing business in Paraguay. The term “taxable supplies” refers to supplies of goods and services that are liable to VAT.

The definition of a taxable person also applies to the following:

• Permanent establishment of a foreign business in Paraguay

• Transparent legal structures (i.e., trusts, investment funds and risk-sharing contracts)

• Undivided successions

Withholding VAT. Companies designated as withholding VAT (WHT) agents must withhold and pay VAT and issue virtual vouchers through the Paraguayan tax authority webpage for any tax withheld. Also, they must submit monthly tax returns indicating information related to pur chases, sales and withheld tax. Returns must be filed electronically.

Exemption from registration. The VAT law in Paraguay does not contain any provision for exemp tion from registration.

Voluntary registration and small businesses. The VAT law in Paraguay does not contain any provi sion for voluntary VAT registration, as there is no registration threshold (i.e., all entities that make taxable supplies are obliged to register for VAT).

Group registration. Group VAT registration is not allowed in Paraguay.

Non-established businesses. A “non-established business” is a business that has no fixed estab lishment in Paraguay. A non-established business is not required to become a taxable person by obtaining a tax ID in Paraguay.

Tax representatives. It is mandatory for all corporate entities (i.e., not individuals) to have their own legal representative in Paraguay.

For non-established corporate entities, if they are to operate in Paraguay, they must have a fixed establishment. If they make supplies that are not physically in Paraguay, then there is no need for a fixed establishment. For example, if an UK company sells a license for software and supplied it to customers in Paraguay, it is not necessary for that UK company to establish a fixed establish ment in Paraguay, to sell the license in Paraguay.

For tax purposes, companies must appoint a legal representative(s) on Tax Form 605 or Tax Form 615. In those forms, the company must complete all the information related to the business, including type of entity, tax obligations and legal representative(s) information, among others.

Reverse charge. Paraguayan tax legislation does not provide “reverse charges” for VAT purposes. VAT on the provision of services by nonresidents is collected by means of WHT (see the subsec tion Withholding VAT for more detail).

Domestic reverse charge. There are no domestic reverse charges in Paraguay.

Digital economy. Digital supplies of services, goods, e-commerce, etc., are subject to VAT.

For digital business-to-business (B2B) transactions, VAT is applied when the customer located in Paraguay makes a payment to a nonresident business; the Paraguayan customer is obligated to act as the VAT withholding agent for the payment made abroad through virtual vouchers issued by the Paraguayan tax authority webpage.

For digital business-to-consumer (B2C) transactions, VAT is applied when the customer located in Paraguay makes a payment to the nonresident business. Individual customers who are Paraguayan taxable persons are required to act as the VAT withholding agents for the payment

made abroad only if it is subject to business income tax through virtual vouchers issued by the Paraguayan tax authority webpage.

Nonresidents that provide electronically supplied services do not need to register for VAT in Paraguay (for both B2B and B2C supplies).

Individuals who are only taxed by personal income tax and VAT are allowed to issue invoices through the Paraguayan tax authority webpage.

There are no other specific e-commerce rules for imported goods in Paraguay.

Online marketplaces and platforms. A digital service is deemed to be rendered in Paraguay, and therefore subject to local VAT, when any of the following is located in Paraguay:

• The IP address of the device used by the customer or country code of the SIM card

• The customer billing address

• The bank account used for the payment

• The billing address of the customer as available to the bank

• The financial institution issuing the credit or debit card with which the payment is made

Where a payment for digital services is made through a financial institution in Paraguay, the financial institution is responsible for collecting and remitting VAT at the standard rate of 10% on the payment, entering into force from 1 January 2021. Such financial institutions, therefore, must act as VAT collection agents when the holders of credit or debit cards contracts for digital services from foreign entities. Such entities are required to provide a VAT receipt. “Financial institutions” include banks, financial entities, exchange houses, cooperatives, payment processors and similar entities, as well as telephone companies and other intermediary entities.

The VAT stated in the credit or debit card statement of the user acquiring the service may be used by the taxable person as a VAT tax credit, to the extent it is linked to income subject to tax. For this purpose, the evidence for the credit will be the card or account statement.

The financial institutions must also collect nonresident tax (INR) on behalf of nonresident enti ties operating in Paraguay. INR is a withholding tax. The withholding agents must issue a with holding receipt on a monthly basis for each nonresident outlining the total amount of operations related to digital services recorded in that month.

VAT is charged at 10% and INR at 4.5% on the value of the digital services.

In addition, the following digital services are subject to this obligation:

• Digital multimedia content distribution (games, movies, music, videos, among others)

• Processing and storage of data in general, software development or updates or applications in general

• Cable or satellite television

• Marketing and advertising

• Gambling, chance, bets and similar activities

• Educational services provided through technological platforms

Registration procedures. Registration starts through an online process; immediately after registering the taxable person receives a confirmation by email and must present physically (papers in person or through power of attorney) the following documents:

• Public deed of incorporation of the company in Paraguay

• Tax Form 605

• Copy of legal representative’s ID card

Deregistration. The following documents are required for deregistration of any Paraguayan taxable person:

• Public deed of liquidation of the company (if the taxable person is a business)

• Certificate of indebtedness with the Paraguayan tax authority

• Cancellation of Tax Validity Number or “Timbrado” number (Tax Form 621)

• Cancellation of tax identification number or “RUC” (Tax Form 623)

• Copy of legal representative’s personal ID card (if the taxable person is a business – if not, the personal ID card of the taxable individual). If the business or individual decides to deregister from VAT only, they must file Form 615 or 610, respectively.

Changes to VAT registration details. It is the taxable person’s obligation to notify the tax admin istration when there is a change in its tax registration details in Paraguay. Changes related to tax status include address, new local establishment, additional type of business, changes or new representatives, etc. The notification is related to taxable persons in general, not specific VAT registration. The time limit to present any updates is 30 days from the time of the change. The notification must be submitted online.

D. Rates

The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT.

The VAT rates are:

• Standard rate: 10%

• Reduced rate: 5%

The standard rate of VAT applies to all supplies of goods or services unless a specific measure provides for a reduced rate or an exemption.

Examples of goods and services taxable at 5%

• Basic family products

• Pharmaceutical goods

• Sale or housing purposes lease of real estate

• Agricultural products and cattle

A reduced tax base applies to certain supplies, thereby reducing the effective rate of VAT.

Examples of goods and services with a reduced tax base

• Certain imports of goods under specified tax treatment (Decree 1931/19 known as the Tourism Regime), such as: beauty creams, food supplements, video game consoles and machines, arti cles and equipment for physical culture, gymnastics or athletics, etc.

• Real estate

• Due to COVID-19 pandemic, the tax authority reduced the taxable base for some services to 50% until 31 December 2021. Currently, the services related to warehouse and offices leasing, tourism, hospitality and restaurants apply a 10% VAT rate to 50% of the sale price. The tax authority announced that this special tax treatment would be postponed until 31 March, 2022. However, at the time of preparing this chapter, the formal resolution has not been issued yet.

The term “exempt supplies” refers to supplies of goods and services that are not liable to VAT and that do not qualify for input tax deduction.

Examples of exempt supplies

• Foreign currency

• Oil by-product fuels

• Interest on public securities

• Interest on bank deposits, books, certificates and shares

• Exportation of goods and exportation freight services

• Transfer of credits is also VAT exempted

Option to tax for exempt supplies. The option to tax exempt supplies is not available in Paraguay.

E. Time of supply

The time when VAT becomes due is called the “time of supply” or “tax point.” The basic time of supply for goods is when they are transferred. For importations, tax obligation begins at the moment that the goods are registered at the Paraguayan customs office.

For services, the basic time of supply is when they are performed and/or totally or partially col lected. Specifically, the obligation to pay VAT begins after any of the following:

• The appropriate invoice is issued

• Partial or total payment for the service is received

• The deadline for payment passes

• The service is totally executed

Invoices must be issued on the date in which the tax point occurs.

Deposits and prepayments. Where a deposit is paid in respect of goods, the goods are considered to have been transferred to the customer and therefore the deposit is subject to VAT. According to tax regulations, any prepayments are subject to VAT for both goods and services. There are no special time of supply rules in Paraguay for deposits and prepayments. As such, therefore the general time of supply rules apply (as outlined above).

Continuous supplies of services. There are no special time of supply rules in Paraguay for supplies of continuous supplies of services. As such, therefore the general time of supply rules apply (as outlined above).

Goods sent on approval for sale or return. There are no special time of supply rules in Paraguay for supplies of goods sent on approval for sale or return. As such, therefore the general time of supply rules apply (as outlined above).

Reverse-charge services. Paraguayan tax legislation does not provide for reverse charges for VAT purposes. VAT on the provision of services by nonresidents is collected by means of WHT.

Leased assets. Lease payments and purchase option executions are subject to VAT. There are no special time of supply rules in Paraguay for supplies of leased assets. As such, therefore the general time of supply rules apply (as outlined above).

Imported goods. The time of supply for imported goods is either the date of importation or the date on which the goods leave a duty suspension regime.

F. Recovery of VAT by taxable persons

A taxable person generally recovers input tax by offsetting it against output tax (debit VAT).

Input tax includes VAT charged on goods and services supplied in or from Paraguay and VAT paid on imports of goods.

A valid tax invoice or customs document must generally support an input tax credit.

According to Paraguayan tax regulations, there are two different ways for taxable persons to recover VAT related to: 1) exportation of goods and exportation freight services; and 2) local withholding VAT.

Both are expressly regulated with formal procedures that must be followed by Paraguayan tax able persons and must include a Certification of VAT Fiscal Credit to be refunded issued by audit ing firms registered with the Paraguayan tax authority.

The time limit for a taxable person to reclaim input tax in Paraguay is four years. If a taxable person did not file a VAT refund process in the mentioned four-year period, this VAT can only be offset by generating output tax in the local market.

Nondeductible input tax. Input tax may not be recovered on purchases of goods and services that are not used for making taxable supplies or that are used for nonbusiness purposes (for example, goods acquired for private use by an entrepreneur). In addition, input tax may not be recovered for some items of business expenditure.

The following lists provide some examples of items of expenditure for which input tax is not possible to offset and examples of items for which input tax can be offset if the expenditure is related to a taxable business use.

Examples of items for which input tax is nondeductible

• Business gifts

• Private use of business assets

Examples of items for which input tax can be offset (if related to a taxable business use)

• Purchase, lease and hire of cars, vans and trucks, as well as maintenance charges

• Parking

• Taxis

• Travel expenses

• Conferences and seminars

• Mobile telephone advertising and sponsorship

• Overall acquisition of goods and services directly related to business use

Partial exemption. Paraguayan taxable persons can offset VAT fiscal credit for input tax incurred on expenses that relate to taxable activities. If the fiscal credit is directly related to exempt activities, the taxable person cannot use it. The only exempt activity that input tax can be recov ered is exportation operations (except agricultural products). The VAT fiscal credits are nonre coverable for all other input tax incurred in relation to exempt activities. The taxable person must include a Certification of VAT Fiscal Credit to be refunded issued by auditing firms registered with the Paraguayan tax authority.

Where a taxable person makes both taxable and exempt activities, they must evaluate the origin of each fiscal credit. If it directly relates to a taxable activity, the taxable person can get the input tax back in full. If the cost cannot be directly related to a taxable or exempt activity, it has to be proportionally calculated across both activities. The calculation is based on the amount of the last six months’ worth of sales (i.e., the turnover of the business in those areas in the last six months).

Approval from the tax authorities is not required to use the partial exemption standard method in Paraguay. Special methods are not allowed in Paraguay.

Capital goods. When a Paraguayan company invests in capital goods, there is an incentive law that applies and no VAT is charged. This means that the business must initially pay the VAT on the purchase of capital goods, then they can offset it against fiscal credits, as long as they are making local supplies in Paraguay. To apply this regime, specific requirements established by laws must be met.

No special time limits apply to the input tax recovery of capital goods.

Refunds. If the amount of input tax (credit VAT) recoverable in a month exceeds the amount of output tax (debit VAT) payable, the excess credit may be carried forward to offset output tax in the following tax period.

If a taxable person overpaid VAT or paid VAT in error, it may correct the VAT return and use the overpayment to offset output tax in the following tax period or they could start a very formal process in order to reimburse the VAT paid in error.

Pre-registration costs. A taxable person can amortize preoperative cost within three to five years, but they cannot recover any pre-registration or preoperative costs.

Bad debts. Output tax accounted for on supplies that do not get paid by the recipient (i.e., bad debts) can be recovered in Paraguay. The following conditions must be met in order to recover the debt:

• The bad debts are credits that after 36 months from the date on which they became due, have not been collected

• The credits whose debtors are inhibited from selling goods (this only applies the first year in which the inhibition resolution was enacted)

• The claims of debtors who have been declared in bankrupt by the judicial authority

• The withdrawals granted in concordats approved by the judicial authority

• The bad debts must be recorded in the accounting and tax records

Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Paraguay.

G. Recovery of VAT by non-established businesses

Input tax incurred by non-established businesses in Paraguay is not recoverable.

H. Invoicing

VAT invoices. A taxable person must generally provide a VAT invoice for all taxable supplies made, including exports (exempted). A VAT invoice is necessary to support an input tax credit.

Credit notes. A VAT credit note may be used to reduce the VAT charged and reclaimed on a sup ply of goods and services. A credit note must contain a brief explanation stating the reason for the adjustment, and it must be cross-referenced to the original VAT invoice number.

Electronic invoicing. Electronic invoicing is allowed in Paraguay, but not mandatory. The elec tronic invoicing system allows local taxable persons to issue electronic invoices with a previous authorization by the tax administration. Starting in 2018, the Paraguayan tax authority has been developing the implementation of electronic invoicing in three steps, as follows:

• First step: a pilot program with selected taxable persons began the process. They must issue their invoices using only electronic format from 1 January 2022.

• Second step: the tax authority expanded the number of taxable persons issuing electronic invoic ing in testing process. They must issue their invoices using only electronic format from 1 April 2022.

• Third step: the principal taxable persons to be selected by tax authority will issue electronic invoices as well. It is very important to mention that all electronic invoices issued until now were as test processes. Scanned invoicing is, nevertheless, available for individuals that are not cor porate income taxable persons. At the time of preparing this chapter, this step has not yet gone live.

Simplified VAT invoices. Simplified VAT invoicing is not allowed in Paraguay. Nevertheless, the tax law provides some specific types of sales documentations, such as airline tickets, sales notes, public show tickets, among others. These can only be used for the relevant types of suppliers (i.e., airlines can use airline tickets, micro-businesses can use sales notes and show providers can use public show tickets, instead of full VAT invoices).

Self-billing. Self-billing is acceptable only in exceptional cases. For example, in cases where the supplier is not VAT registered and is selling an asset, the buyer (who is VAT registered) must issue a self-invoice.

Proof of exports. VAT is not chargeable on supplies of exported goods. However, to qualify as VAT-free, exports must be supported by an exportation file that includes the customs authority good formalizations to leave Paraguay.

Foreign currency invoices. If a VAT invoice is issued in a foreign currency, all amounts must be converted to the domestic currency, which is the Paraguayan guarani (PYG), using the exchange rate published by the tax authority for recording purposes (local books).

Supplies to nontaxable persons. Full VAT invoicing is mandatory for all transactions. If the buyer does not require an invoice, the seller must complete it with “no name” and an “X” in the RUC space. However, for supplies to nontaxable persons, taxable persons must still issue a full VAT invoice but without the name of the customer.

Records. All documentation related to taxes, including accounting books and records, documents, invoices, purchase and sales invoices, must be held by taxable persons in Paraguay. Although the records can be kept outside the country, the platform and the archives should be accessible locally and all data related to account software must be kept by local taxable persons.

Record retention period. The action for collection of the taxes shall expire after five years from 1 January of the year following that in which the obligation should have been fulfilled. For annual taxes on income or profits, it shall be understood that the taxable event occurs at the close of the fiscal year. It is mandatory to keep tax files during the abovementioned statute of limita tion period.

Electronic archiving. Electronic archiving is permitted in Paraguay if the requirements are met: a digital signature and the documents must be stored for five years in a durable format (e.g., pdf).

I. Returns and payment

Periodic returns. VAT returns are submitted on a monthly basis. The due date for VAT returns depends on the last number of the taxable person’s tax identification number.

Periodic payments. The due date for VAT payment depends on the last number of the taxable person’s tax identification number. Return liabilities must be paid in Paraguayan guarani. Payment must be made through the Paraguayan tax authority online system (https://marangatu. set.gov.py/eset/login). The VAT payments are the difference between output VAT generated through the local sales and the input VAT accumulated through the purchase of goods and ser vices. If the input VAT is higher than output VAT, the difference can be used in the following periods.

Electronic filing. Electronic filing is mandatory in Paraguay for all taxable persons. It must be done online through the tax administration’s system (www.set.gov.pyunder “Sistema Marangatú”). This is a software created by the Paraguayan tax authority (https://marangatu.set.gov.py/eset/ login). This online/electronic system also allows taxable persons to make tax payments through this system. Taxable persons log on using their own tax ID and password.

Payments on account. The Paraguayan tax authority may require VAT payments on account at the end of the fiscal period. This is only applicable when a taxable person does not submit their tax return or pay taxes online on time. In this case, the tax authorities can claim the overdue tax from the previous tax return as a payment on account. However, while this facility is included in the law, it is not enforced in Paraguay and it is not common.

Special schemes. Tourist VAT system. The Paraguayan tax authority provides a specific list of products that a tourist can buy with a VAT exemption by presenting their passport. The taxable person must be registered in the tourist regime and a copy of the tourist’s passport is attached to the VAT exempt invoice.

Secondhand goods. There is a special scheme for the sale of secondhand goods that treats only 30% of such supplies subject to VAT; the remaining 70% is considered VAT exempt.

Annual returns. Annual returns are not required in Paraguay.

Supplementary filings. The Paraguayan tax authority may require a taxable person to use special books, sales and purchase books, records or forms of accounting for VAT purposes, according to the category of the taxable person. This would only be required to be submitted where the tax authorities request this from a taxable person, which can be done by the tax authorities on demand. The tax authorities may also request copies of invoices from certain suppliers.

Correcting errors in previous returns. The tax law and regulations allow to present a tax return amendment in case of errors or omissions. This presentation must be done online with an additional tax return that must be used in case of amendments.

Digital tax administration. There are no transactional reporting requirements in Paraguay.

J. Penalties

Penalties for late registration. Penalties are assessed for late registration for VAT. In addition, fines and interest are also applicable if the taxable individual owes VAT.

Penalties for late payment and filings. A default penalty is charged on late payments of VAT. The penalty begins at 4% of the tax due and increases by 2% per month, up to a maximum of 14% (charged for a delay of more than five months). In addition to the default penalty, monthly inter est is charged on unpaid tax at a rate of 1.5% per month, calculated on a daily basis.

Penalties for errors. Omission of payments is equivalent to 50% of the whole tax unpaid.

The penalties for failing to notify changes to a taxable person’s VAT details are approximately USD10.

Penalties for fraud. A taxable person who intends to achieve an unlawful gain is deemed to com mit fraud. Fraud is punished with a fine equal to one to three times the amount of the tax amount related to the fraud or the intention to defraud.

Penalties for severe cases of nonpayment of VAT, infringement of VAT regulations and fraud include criminal sanctions, such as fines and imprisonment.

Personal liability for company officers. In the case that the taxable persons correct any errors or omissions through the corresponding tax return amendment, the representative (for example directors, managers, etc.) cannot be held personally liable.

Statute of limitations. The statute of limitations in Paraguay is five years. This starts from 1 January of the following year from when the tax must be paid. A taxable person is able to volun tarily correct and pay previous VAT returns for the non-prescribed period (until five years) or prescribed period (more than five years). In this last case, it the taxable person who decides.