What is the 10-10-10 rule with which Paraguay attracts business and why it is controversial

In Paraguay there is a very simple rule about taxes: 10-10-10.

This formula means that the three most relevant taxes – value added tax (VAT), personal income and business income – have the same rate: 10%.

This percentage is the lowest in all of Latin America for the three taxes, except for VAT in Panama.

This characteristic, which has become a state policy, is pointed out by the rulers of the South American country as one of the strengths to develop its economy and receive investments that could go to other countries in the region.

“Paraguay’s attractive 10-10-10 regime (…) has also captured the attention of international investors and constitutes one of the main pillars of the country’s attractive business environment,” the government said in a note published by the Organization. Tourism World Cup at the beginning of this year.

President Santiago Peña, who took office in mid-August, stressed in the election campaign that taxes would not be modified.

“We are not going to raise taxes on entrepreneurs, or companies, or anyone, because startups generate a great impact where they are installed. They bring direct jobs, social security and countless benefits to the area such as greater commercial movement, corporate social responsibility programs and much more,” he said in a video posted on his social networks.

“They are key to the development of all corners of Paraguay” and “they are the ones who contribute with their taxes so that the State can develop the country with works and programs for the people,” he added.

“If things go well for them, things go well for all of us,” summarized the now president.

Peña reiterated this idea when speaking to businessmen this month.

“As president of the Republic, I am not interested in collecting taxes. [ni] benefit an industry, [sino] in generating employment in the Republic of Paraguay, (…) because employment is the best social policy that a country can have,” he said.

The president’s objective, according to his statements, is to increase tax collection with better controls on evasion, which in the case of VAT reaches 31%, a figure higher than the regional average, according to the Economic Commission for Latin America and the Caribbean (ECLAC). ).

A succession of tax reforms

The current tax scheme in Paraguay began to be outlined in 1992 with a tax reform that created the VAT and established that two years later it would rise to 10%.

In 2004, he strongly reduced the corporate income tax, from 30% to 10%, and the argument at that time was to tax less to incorporate more companies into formality and thus expand the tax base, the then Minister of Finance explained to BBC Mundo. , Dionisio Borda.

“The vision we had was that if it was cheaper for companies to formalize than to keep double accounting – one real and another disguised for the State -, more would pay all of their taxes,” he said.

“In addition, we lowered the company’s income tax with the counterpart that we would include the personal income tax, which Paraguay until then did not have because it came from the Stroessner tradition (of former de facto president Alfredo Stroessner) that it was a communist tax,” he added.

However, it was not until 2012 that the country incorporated the personal income tax, and when it did, it set a single rate of 10%, instead of establishing a progressive scale as Borda had planned.

To have to pay personal income tax you have to earn more than 120 minimum wages per year, but in addition, there are many expenses that can be deducted – housing, education, health, clothing, among others – so there are very few. that they end up paying for it.

The last tax reform was carried out in 2020; Taxes paid by companies were unified and some exemptions were eliminated.

Despite what authorities consider to be a favorable tax environment for attracting capital, foreign direct investment in Paraguay has remained around 1%, well below its South American peers.

One of the countries with the least taxes

Despite the advantages presented by the political authorities of Paraguay, this vision contrasts with that of specialists such as Borda and international organizations, who understand that more should be raised to expand social policies.

Taxes can be divided into two groups: direct taxes, such as personal or business income, and indirect taxes, such as VAT or taxes on specific products.

Direct taxes are often considered fairer because they allow different taxation segments to be defined based on the purchasing power of each taxpayer, while in VAT everyone – poor and rich – pays the same percentage. And while the poor pay VAT on their entire income (because they spend all their money), the rich allocate a small portion of their income to consumption.

A system in which everyone is charged similar rates is called regressive and one in which those who have the most pay more is called progressive.

“The rates are extremely low and the regressivity of the system continues to be maintained,” said Borda.

VAT collects almost half of the US$2.6 billion annually in taxes, while corporate income collects almost 40% and personal income adds up to 2.3%.

The government highlights that indirect taxes fell from 60% to 51% between 2019 and 2022.

According to Borda, the original personal income tax “arrived mutilated” on the day of its approval in Congress, after several postponements.

“The business lobby here is very strong and managed to convince the political system” not to reach more taxpayers, said the economist.

Borda stated that with the 2020 reform there was a “minimal improvement” in this tax.

The fiscal pressure – defined as the ratio between taxes and GDP – in Paraguay is 14%, the second lowest in the region after Panama, below the average for Latin America (22%) and developed countries (34%), according to the Organization for Economic Cooperation and Development.

In the world, Paraguay is in 26th place among the countries with the least tax revenue in relation to the size of its economy, according to the World Bank.

“The low tax pressure limits the capacity to finance expenses on universal rights such as health, education, security, housing, nutrition, in a country where the poverty level is 25% and there is high inequality,” he stated. Rail.

Paraguay is one of the poorest countries in South America, when compared by Gross Domestic Product per capita.

Two out of every three Paraguayan workers are informal, according to the INE, so they do not have social coverage or retirement contributions.

One in four people lives on less than 825,000 guaraníes a month (about US$112) and is therefore poor.

Some data are encouraging: poverty fell from 45% to 25% between 1999 and 2022, and indigence from 11.5% to 5.6%.

Inequality between the poorest and the richest, in addition, has decreased in recent years and is located in the middle of the table in the South American ranking, according to the Gini index.

Meanwhile, GDP has doubled in constant terms so far in the 21st century, a growth almost twice as high as that of Latin America and the Caribbean as a whole.

Sustainable development

The International Monetary Fund told Paraguay that it should continue with the tax changes.

“In addition to continued improvement in tax administration, authorities should reevaluate Paraguay’s special tax regimes for specific sectors and activities, and consider another tax reform that goes beyond the improvements enacted in 2020,” the agency said in mid-2020. 2022.

“Increasing domestic tax collection remains essential to provide sufficient investment in infrastructure, health and education for the citizens of Paraguay, which would increase productivity to generate future growth and shared prosperity,” he added on June 8, in the first review. of its program with Paraguay.

For the Inter-American Development Bank (IDB), “countries with high taxes also tend to be countries with higher spending.”

“In low-tax countries, assuming a minimum level of efficiency, broadening the tax base could generate considerable benefits,” says the IDB.

According to a note published on the IDB website, “despite recent socioeconomic advances, important development challenges persist to put Paraguay on a path of sustainable development.”

He understands that there is a gap for “access to basic services” and that “better coverage and targeting of social spending” must be sought.

But in a program in which it worked with Paraguay to “strengthen its tax policy and management, and improve public spending management,” the IDB supported measures “to sustainably address development gaps, preserving Paraguay’s competitive advantage from have low tax rates.”

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