Exchange of Information for Fiscal Purposes Applies in Paraguay

Paraguay has introduced the Convention on Mutual Administrative Assistance in Tax Matters, MAAC, through Law No. 6656. As a result, the exchange of information came into force on Jan. 1, 2022, with a few exceptions. The exchange of information has been developing significantly worldwide, and Paraguay has joined a network of 146 countries that can request and receive information for fiscal purposes.

It is essential to consider the reservations Paraguay made to the convention to understand what type of information can be exchanged, and how. The OECD created the Global Forum on Transparency and Exchange of Information for Tax Purposes to coordinate efforts worldwide, and in 2010 designed an additional protocol to the original MAAC of 1988, allowing all countries to join the multilateral agreement whether or not they were Organization for Economic Cooperation and Development members.

Paraguay has adhered to the global forum since 2016 and as a result received its induction program, which allowed the country to adopt the international transparency standards necessary to exchange information with other countries. In addition, in 2018 Paraguay joined the Punta del Este Declaration, a Latin American program to develop capacities to exchange information and build synergies between the states in the region.

Before it incorporated the convention into its legal system, Paraguay wasn’t included in the main lists of non-cooperative jurisdictions or singled out as a non-cooperative jurisdiction by the EU and the OECD, nor by the Tax Justice Network. Argentina formerly included Paraguay in its list of non-cooperative jurisdictions, but has removed it recently on the basis that Paraguay now exchanges information through the convention.

When did the convention come into effect? Paraguay signed the convention on May 29, 2018, and deposited the instrument of ratification with the Secretariat of the Global Forum on July 15, 2021; the convention has been in force since Nov. 1, 2021. However, as a general rule, the convention is in full effect for administrative assistance regarding fiscal periods that start on Jan. 1, 2022. The exception to the general rule regards the exchange of information involving intentional conduct that is subject to a judiciary procedure under the criminal laws of the requesting state. In this case, as per a reservation made over the MAAC, Paraguay can exchange information from fiscal periods that started on Jan. 1, 2018 onward.

What taxes are covered by the convention? Paraguay can only apply the information received regarding the taxes indicated in Annex A: income taxes on individuals and companies, tax on dividends and profits, value-added tax, and selective consumption tax. Conversely, Paraguay can only request assistance regarding these taxes.

What modes of exchange are accepted by Paraguay? The convention is administered in Paraguay by the local tax authority, the Under Secretariat of State of Taxation, or SET. The SET can exchange information in the context of the convention using any of the following methods:

• By request. This implies that there must be a prior fiscal investigation or audit regarding a specific individual or entity conducted by the tax authority of the requesting state, and that there may be elements indicating the required state can provide information. It isn’t possible to use this mode of exchange in the context of “fishing expeditions,” where the tax authority of the requesting state is looking for evidence to start an audit or investigation.
• Automatic exchange of information. Paraguay hasn’t made any reservations over Article 6 of the MAAC; therefore, this method can be applied. However, to effectively exchange information automatically, the SET must first have a multilateral or bilateral agreement with other tax authorities to establish how this exchange will work, and over which information. The SET intends to apply this method in the medium term, most likely by adherence to the multilateral agreements of the common reporting standard and the exchange of country-by-country reports.
• Spontaneous exchange of information. This type of exchange can be carried out when a tax authority notices information that can be valuable to another tax authority and decides to remit it without a prior request, and mainly functions on a reciprocal basis.
• Simultaneous tax audits. This method can be very helpful for the tax authority in fiscal audits involving transfer pricing rules, which have recently been applied to the Paraguayan domestic fiscal system through Law No. 6380/2019.
• Foreign tax audits. Officials of the tax authority of the requesting state can conduct investigations (interviews, analysis of documents, and participation in fiscal audits) in the territory of the requested state, with prior consent from that state. Paraguay has declared that as a general rule it won’t receive officials from a requesting tax authority, and therefore each request will be analyzed on a case-by-case basis.

What type of information can be exchanged from Paraguay? Following Article 4 of the convention, the parties can exchange information that will be foreseeably relevant for auditing their taxpayers’ fiscal obligations. This implies there must be a reasonable possibility that the requested information will be relevant, whether or not this proves to be the case later in the investigation. However, this condition doesn’t apply to the automatic exchange of information.

In the context of each request, the SET must act as if the information requested is necessary to fulfill its own activities. Therefore, if the information requested is outside the reach of its database, the SET can use the legal instruments that domestic legislation provides to obtain information from other local institutions.

Legal Reforms Grant Access to More Information

Paraguay’s domestic legal system underwent significant reforms to allow for more transparency in business activities conducted there. Through Law No. 6446/2019, Paraguay created the administrative registry of final beneficiaries and the administrative registry of legal persons and legal structures. Legal entities such as corporations, associations, foundations, trusts, and investment funds must register and identify their ultimate beneficiary owners.

Further, bank secrecy in Paraguay was abolished for fiscal purposes through Law No. 6657/2020. Previously, until 2016 the SET couldn’t request taxpayer information from financial institutions, and from 2017 onward could only request information if there was an open tax audit. Since the enactment of Law No. 6657/2020, the SET can request natural and legal persons, as well as other legal structures, to provide information regarding financial accounts in Paraguay and other assets, such as real estate registered in the country, investments in the local securities market, and other information, without the previous restrictions.

Further, through General Resolution No. 90/2021, the SET established the obligation for taxpayers to register the fiscal documentation used for assessing their tax obligations on the online platform, which then functions as a sworn statement. Taxpayers must register, on a monthly or yearly basis depending on their fiscal obligations, invoices issued and received, and other documents used to assess their fiscal obligations.

The SET can exchange all this information in the context of the convention.

Can the information exchanged be used by states in matters outside the application of fiscal laws? Paraguay has made a declaration regarding its interpretation of Article 4 of the convention. According to this, the information provided in the context of any exchange can only be used for fiscal purposes, which implies that the information can’t be used in criminal law proceedings that aren’t exclusively related to the breach of fiscal laws, nor in civil proceedings. Special permission for these other purposes must be granted by the state that provided the information.

Further, Paraguay hasn’t made any reservation over Article 22(4) of the convention; so in addition to the prior authorization necessary to use the information exchanged for other than fiscal purposes, similar use of the information exchanged must be allowed in the sending jurisdiction to apply it for other purposes.

Are there any exceptions to the request for assistance? Under Article 21 of the convention, Paraguay can deny assistance to the requesting state when the request contravenes domestic law provisions, violates public order, or involves information under corporate, professional, industrial, or trade secrecy that if revealed could undermine public order. It can also be denied when the information requested can’t be obtained by the requesting state under its domestic legislation or, if obtainable, the state hasn’t used all available tools in its jurisdiction to obtain the information by itself.

Paraguay has also made reservations to the convention regarding the collection of taxes from other states (which includes penalties), notification of documents from other states, and application of measures for the conservancy of foreign fiscal taxes.

Paraguay has made a reservation regarding assistance on taxes imposed on behalf of political subdivisions of the state or its local authorities (other than those set by central government); contributions to social security; real estate taxes; donation, property or inheritance taxes; and taxes on the use or property of motor vehicles. Under the principle of reciprocity, Paraguay can’t request assistance it denies under the above reservations.

Other Instruments to Exchange Information

Paraguay currently has five treaties in force to avoid double taxation, with Chile, Uruguay, Qatar, United Arab Emirates, and Taiwan (recognized as a country by Paraguay) and has negotiated a treaty with Spain that isn’t yet enforceable. It incorporates a clause to exchange information in all treaties. Nonetheless, it is more likely that any exchange of information with these countries (except Taiwan) now takes place under the convention since most of them participate in it, and it offers more options than the tax treaties, unless the information required corresponds to fiscal periods before the convention came into force.

Further, Paraguay has an agreement in substance under model 2 of the Foreign Account Tax Compliance Act with the US.

For anyone affected by the provisions of the convention, it will be necessary to determine what information is available to the tax authority in Paraguay and to stay updated on the implementation of Paraguay’s automatic exchange of information, whether it is under the CRS or CbC or both.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Horacio Sanchez Pangrazio and Andrés Vera are senior associates in the tax department of Vouga Abogados, Paraguay.

We’d love to hear your smart, original take: Write for us.