Paraguay Tax Agency Releases Binding Consultation Clarifying VAT Treatment of Breach of Contract Penalties

The Paraguayan National Tax Revenue Directorate July 2 issued Binding Consultation No. 528, clarifying the application of VAT to amounts received or paid as penalties for breach of contract. The taxpayer, a consulting firm, inquired whether amounts paid or received as a penalty for untimely delivery of goods in breach of a contract, was exempt from VAT. The Tax Agency responded that: 1) amounts received or paid as a penalty or fine for a contractual breach don’t constitute a VAT-generating event and therefore are exempt from VAT; 2) the penalty amounts at issue, however, arose from a commercial grain supply ...