Paraguay pushes for tax reform in a key year

By BKM | Berkemeyer

Paraguay's government will present next month a bill that aims to increase tax collection by up to 2 percentage points of the Gross Domestic Product (GDP). "We have room to improve tax collection. What we need is a more efficient and agile legal framework", said the Minister of the Treasury, Benigno López. President Mario Abdo Benítez, in power since August 2017, looks to expand the tax base, which currently counts on the contributions of more than 700,000 people.

While further generating additional tax revenue, the bill also aims to strengthen Paraguay’s fiscal framework and institutions. It's a legislative package focused on improving the country's anti-money laundering and counterterrorism financing regime, as in 2019 the Financial Action Task Force, an intergovernmental organization, will evaluate Paraguay to assess the effectiveness of its anti-money laundering and counterterrorism finance systems.

A small but steady open economy despite external shocks from its big regional trading partners Argentina and Brazil, which in last years have fell into recession, Paraguay has a projected growth of 4 percent in 2019, and similar growth rates over the medium term. An International Monetary Fund (IMF) staff team visited Asunción during November 2018 to discuss recent economic developments and policies, and broadening the tax base by reducing exemptions and boosting compliance was one of the reccomendations. "Increasing non-tax revenue (including from the upcoming revision of the Itaipú treaty) may help bring in more resources even if tax rates stay the same”, an IMF statement said. 

According to the IMF, Paraguay’s tax system is characterized by low tax rates and heavy reliance on indirect taxes such as value-added taxes with low yields from personal income taxes. Value-added tax rates and personal and corporate income tax rates were set at 10 percent across the board in Paraguay’s last major tax reform nearly 15 years ago. "The time seems right to consider a tax reform that broadens the base, while maintaining competitive tax rates, including by reducing very generous income tax allowances and exemptions well above those of its regional peers. This would help with issues such as tax progressivity and income inequality", the statement added.