Cuestionario de recolección de datos

Paraguay’s current tax system was established in 1992 (Law 125/91, approved 9th January 1992). The 1992 fiscal reform aimed to rationalize and modernize an obsolete system, based on about 150 specific taxes with widespread exemptions. The resulting tax system was based on nine main taxes and rested primarily on indirect taxation. Since its approval, numerous incentives, deductions and exemptions were introduced, eroding the tax bases and tax revenues (Alarcón 2004). This system lacked a net wealth tax and an inheritance and gift tax and, until recently, it was characterized by the absence of a personal income tax (a feature that Paraguay shared with Bolivia and Uruguay). The Administrative Reform and Fiscal Adjustment Law approved in June 2004 (Law 2421/04) introduced some amendments to the system: it broadened the tax basis of VAT and of the corporate income tax, introduced a more effective tax regime to large producers, eliminated some large exemptions, and, finally, it brought in a new personal income tax. However, after hot protests, the application of this law was partially postponed to 2006.

In 2004 Central government fiscal pressure, as a percentage of GDP, was the sixth lowest among 19 Latin American countries (12.9 per cent), below the regional average of 15.5 per cent

8 _{Public sector employment grew by 50 per cent between 1989 and 2004 (Nickson 2004b). This trend is the opposite} of that which was registered in most Latin American countries, but it is due to the relatively limited number of public officials, especially in the health and education services, which were understaffed during the Stroessner years.

(Table 3). However if we exclude social contributions and take into account tax revenue only, Paraguay is the country with the ninth lowest Latin American level of revenue (11.9 per cent of GDP against a regional average of 12.9 per cent).

When compared to other Latin American countries (Martner and Tromben 2004), the Paraguayan tax system displays a number of similar features, but also some peculiar traits. First, similarly to other Latin American countries, Central government tax revenue as a percentage of GDP increased since the early 1990s (+26.3 per cent from 9.4 per cent of GDP in 1990 to 11.9 per cent in 2004). However Paraguay tax-performance was weak in relative terms: its growth rate was lower than the regional average of +34.6 per cent, and its ranking worsened up to 2003, to recover in 2004. In addition, Paraguay well reflects the regional trends as regards the contribution of different taxes to this increase: VAT revenues grew significantly (+25 per cent from 3.7 per cent of GDP in 1993 to 4.7 per cent in 2004), and revenues from indirect taxes increased by 23.5 per cent over the same period (Table 2). Second, similarly to other Latin American countries, the revenues from income taxes are very low, 2.1 per cent of GDP in 2004, and this is the lowest recorded value, half of the regional average of 4.2 per cent of GDP (Table 3), while indirect tax revenues (9.8 per cent of GDP) are slightly above the regional average of 8.6 per cent (Table 3). Furthermore, Paraguay displays a peculiar performance over the period 1990-2004: both the direct and indirect tax revenues’ growth was below the mean Latin American value. Indirect tax revenues grew by 23.5 per cent against an average of 25.7 per cent, the growth in revenues from direct taxes was 41 per cent against an average of 57 per cent. In conclusion, Paraguay has not managed to increase its tax revenues, in particular those from direct taxes, as much as many other Latin American countries. Economic stagnation and decline in foreign trade, the extent of the informal and illegal economy, the inadequacy and inefficiency of tax administration, the diffuse corruption, may have contributed to this outcome.

3.

Institutional characteristics of main taxes

The Paraguayan tax system partially reflects the three-tier government structure (Central government, Departments and Local governments). Central government has the power to levy the main taxes and duties, such as: corporate income tax (IRACIS – impuestos a la renta de actividades comerciales industriales o de seguros), Single Tax (Tributo Unico), farming and cattle-ranching income tax (IMAGRO – impuesto a la renta agropecuaria), value added tax (IVA – impuesto al valor agregado), excise duties (impuesto selectivo al consumo), custom duties (impuesto al comercio exterior), registration and stamp duties (impuesto a los actos y

documentos), and, from the year 2006, the personal income tax (impuesto a la renta personal). Local governments levy taxes on immovable property (impuesto immobiliario) and other minor taxes, while Departments may charge fees for the licenses, concessions and other services they offer. According to the Constitution, the power to introduce, abolish or change fiscal laws rests only with the Central government. Local governments may only set local tax rates (except for the Municipality of Asunción, which may apply some surcharges). The following sections describe the most important institutional features of the main taxes as they were in 2004, this is followed by the description of the main innovations introduced by the 2004 reform, where applicable.

3.1

Direct taxes

3.1.1. Corporate income tax

IRACIS, the corporate income tax, is an annual levy on income of resident9 legal bodies. A specific category of businesses, that of individual entrepreneurs are chargeable when their total revenues exceeds a maximum limit defined each year10 (otherwise they are subject to the Single Tax). Taxation is based on the source principle and taxable income is made of all incomes of Paraguayan source. A flat tax rate of 30 per cent applies to total yearly gross revenues, net of allowed deductions, but exemption is granted to a wide number of heads. Tax exemption is also granted to a selected group of companies and to free zone activities located in the international free zone near Ciudad del Este, which include trade (introduction of goods from abroad or from national custom areas), industry (manufacturing and processing of goods for export) and services. The 2004 tax reform (Law 2421/04) introduced some significant changes to this tax both with regard to the tax rate and the tax basis. First, in order to reduce incentives to tax evasion and promote a higher ‘formalisation’ of the economy, it lowered the tax rate from 30 per cent to 20 per cent during its first year of application (2005) and to 10 per cent from the second year onwards (2006). An additional rate of 5 per cent is charged on dividends distributed to residents, a higher rate of 15 per cent applies to dividends distributed abroad. Secondly, the law extended the tax basis by limiting exempted heads, by reducing allowed deductions, by constraining the list of exempted bodies and by abolishing special regimes. Finally, it extended the definition of

9 _{An individual has the status of ‘resident’ if s/he stayed in Paraguay for a minimum of 180 days during the previous} 12 months. A company is ‘resident’ if established in Paraguay according to Paraguayan law (excluding its branches or agencies abroad) or if it is a branch, agency or plant owned by non residents but established in Paraguay.

10 _{The 20,400,000 guaranis (approximately 15,394 US$) threshold, set by law 125/91, was to be adjusted every year} according to the variation of the Consumers’ Price Index published by the Paraguay Central Bank. In 2004 this threshold reached 52,389,833 guaranis (approximately 8,805 US$).

taxable income, and interests from capital investments abroad are included as revenues of Paraguayan origin.

3.1.2. Single tax / Small Business Tax

The Single Tax is charged on individual entrepreneurs, resident in Paraguay, whose revenues are below the IRACIS threshold. Those chargeable by the Single tax are exempted from the Value Added Tax. The tax basis is made up by the revenues from commercial, industrial or service activities. The tax is levied at a rate of 4 per cent, and the taxable income is either gross revenues or an imputed gross income given by the sum of: salaries and wages; rent, utility bills, purchases of goods, raw materials and other expenses, excluding financial expenditures (these expenditures are increased by a 30 per cent profit mark-up, according to the concept of a presumptive profit). A tax credit of 50 per cent of documented VAT paid during the fiscal year is allowed up to the taxpayers’ Single Tax liability. The 2004 reform abolished this tax from 2007 and substituted it with a Small Business Tax (impuesto a la renta del pequeño contribuyente – IRPC), that differs from the Single tax in three main respects: the tax rate, the definition of the tax basis and the threshold for its application. The Small Business tax is charged at a rate of 10 per cent, the same of the IRACIS. The taxable basis is the net income, calculated as the difference between revenues and expenses, or an imputed income equal to 30 per cent of gross revenues. Compared to the Single Tax, this tax is charged upon a wider range of businesses: the upper limit for its application was raised up to 100 million guaranis (approximately 16,738 US$ in 2004). Furthermore, the tax credit for VAT paid does not apply anymore. The Small Business tax has the potential to reduce the distortions favored by the previous regime, primarily the incentives for tax evasion by large companies due to the existence of two different tax rates for small and big businesses.

3.1.3. Farming and cattle-ranching income tax

IMAGRO, the farming and cattle-ranching income tax, is an annual tax on income from farming and cattle-ranching activities carried out in the national territory. The tax is charged at the flat rate of 25 per cent on the land owner, unless a written contract proves that the land is used by third parties. The taxable income is the imputed gross income from the land, equal to 12 per cent of the fiscal value of the land defined by the National Land Register Service (Servicio Nacional del Catastro), which is notoriously way below the commercial value of land, and this partly explains the tiny the tax yeld from IMAGRO. Exemption is granted to the first 20 hectares of any

landholding of less than 100 hectares and to those parts of landholdings occupied by forests and permanent lagoons. The basis for taxation is the gross income after deduction of selected allowable deductions. The 2004 reform overhauled this tax, with effects from the year 2005. It reduced the allowed deductions and introduced a distinction between large and medium-sized landholders11 both with regard to the taxable income and to the tax rate. While large landholders are taxed on their net income (total revenues net of expenditures linked to the activity), except when less than 30% of their property is used for farming activity, medium-sized ones are taxed on presumptive income, calculated on the basis of productivity coefficients defined by law. Similarly to the previous regime, small landholders are exempted. The reform reduces the tax rate, from 25 per cent to 10 per cent for large landholders and to 2.5 per cent for medium-sized landholders.

3.1.4. Personal income tax

The 2004 reform introduced a personal income tax (impuesto a la renta personal), to take effect from 2006. The tax is charged at a rate of 10 per cent on individuals whose annual income exceeds 120 minimum monthly wages.12 The taxable basis is the gross income from Paraguayan sources, defined as: employment income; 50 per cent of dividends and profits distributed to shareholders of companies subject to IRACIS; capital gains from the transfer of buildings or land; interest payments received. The basis of taxation is gross income net of deductions: social security contributions, donations to the State or other bodies, expenditures and investments related to the contributor’s job or profession, as well as personal and family expenses supported by VAT receipts. This latter provision aims to reduce tax evasion. However it significantly cuts potential revenues and will likely increase the costs of administering the tax (IMF 2005).

3.2 Indirect taxes