Executive summary:

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► Resolution N° 355 of the DNIT - Whereby powers are transferred and delegated to bodies of the DNIT

Through Resolution No. 355 of the DNIT (the "RG 355"), it was established that the highest authority of the DNIT, which is the National Director, will be vested with the powers of the GGII with respect to certain administrative acts, among which we mention the following: (1) Resolution of requests for tax credit refund and repetition of undue or excess payment for amounts exceeding Gs. 100,000,000; (2) Resolution of appeals for reconsideration filed against (2.1) the particular resolutions of tax assessment and application of penalties derived from administrative summaries, (2.2) the refund of tax credits of the exporter in the accelerated regime and (2.3) repetition of undue or excess payment; (3) resolution of appeals for reconsideration filed against the answers to the binding consultations, among others.

Avocation is an administrative law technique used in the public administrative organization to transfer the powers to resolve a specific matter from a hierarchically inferior body to a superior one. This technique is only effective between organs of the same administration, such as the GGII with respect to the National Director of the DNIT.

On the other hand, the highest authority of the DNIT delegates to the head of the GGII the powers to execute the following administrative acts: (a) Audit orders and their extensions, together with the Intervening Director; (b) Resolution of administrative proceedings for tax assessment and application of penalties; (c) Granting of extraordinary payment facilities up to twenty-four (24) monthly installments; and, (d) Answers to binding and non-binding consultations, among others.

In addition, the highest authority of the DNIT establishes powers to perform certain administrative acts to the following entities: (a) Directorate of Taxpayer Assistance and Tax Credits; (b) General Directorate of Tax Auditing; (c) General Directorate of Collection and Regional Offices; (d) General Directorate of Large Taxpayers; and (e) Directorate of Tax Planning and Technique.

► Response to the Guiding Consultation on the inapplicability of the exemption from withholding INR for reinsurance services rendered by non-residents

Through a response to a binding consultation during August 2023, the former SET established its position on the inapplicability of a request for exemption from the obligation to withhold VAT to a non-resident provider of reinsurance services. As the main argument for this request, the taxpayer explained that it has a VAT tax credit in its favour from previous tax periods.

In response to these arguments, the former SET explained that it was not relevant whether or not the taxpayer making the request had a VAT tax credit from previous periods since, in this case, the tax obligation to act as a withholding agent was triggered because the taxpayer received a service from a non-resident. Thus, the SET concluded that, in all cases, the consulting taxpayer must act as a VAT withholding agent when it receives a service from a non-resident, regardless of the amount of tax credits in its favor.

► Response to the Guiding Question on the deductibility of expenses for services paid to the owner of a sole proprietorship or to service providers who are not IRP taxpayers.

In this regard, the former SET explained that to consider such expenditures as deductible under the expenses item, first of all, they must be necessary to carry out the economic activity developed by the company, i.e., comply with the causality principle.

Having said the above, in response to the binding consultation, the SET concluded that expenses for services rendered by the owner to the sole proprietorship or by third parties that are not IRP taxpayers could be deducted within the limit of 1% of the gross income of the tax year of the IRE taxpayer. Amounts that surpass such threshold are non-deductible expenses in determining the IRE for the sole proprietorship.

► Administrative Court Ruling No. 172/2023 by which the Second Chamber of the Administrative Court confirmed the SET's criterion that a maquiladora company must withhold INR when it receives services from a non-resident entity.

The Second Chamber of the Court of Accounts resolved a contentious administrative action brought by a maquiladora company incorporated in Paraguay, which made a binding consultation to the former SET on the inapplicability of the obligation to withhold the INR. As the basis of its arguments, the taxpayer argued that being a maquiladora company, its income is taxed by the Tributo Único de Maquila ("TUM") and not by the IRE. Accordingly, the taxpayer argued that it is essential to observe the wording of Article 73, numeral 11 of Law No. 6,380/2019 ("Tax Law"), which provides as follows:

“…In addition, income from Paraguayan sources is considered income from:...

11. Services rendered by legal entities and other entities not resident in the Republic, performed from abroad or in the national territory, as long as they are related to the obtaining of income taxed by the IRE..." (emphasis added).

Thus, the taxpayer argued that since the services rendered by the non-resident are linked to income taxed by the TUM and not by the IRE, they are not obliged to withhold the INR since the income obtained by the non-resident service provider is not considered Paraguayan source income. In other words, the taxpayer alleged the "non-taxation" by the INR of the services rendered by the foreign suppliers to obtain income taxed by the TUM due to the lack of the territorial element of the taxable event. These arguments are sound, in accordance with the principle of legality, provided for in article 179 of the National Constitution.

However, the former SET and the Court of Auditors ruled that taxpayers must withhold INR in these cases. The basis of the former SET was that the TUM is equivalent to the IRE and constitutes a sort of special regime of the latter, with a reduced rate and not a different tax, and therefore, the withholding of the INR is appropriate. The Second Chamber of the Court of Accounts, contrary to the previous SET, recognized that the IRE and the TUM are two different income taxes but approached the matter from the perspective that the benefits of the maquila regime only reach the local maquila companies and not their suppliers abroad, for whom the maquila regime does not imply any exemption from INR.

In other words, the Court of Audit approached the issue raised from the point of view of the benefits of the maquila regime and the INR exemptions. In contrast, the dispute was about the INR rules and the "non-taxation" that would occur without the territorial element of the tax for services unrelated to the IRE.

Based on the above, the Second Chamber of the Court of Accounts held that the entry into force of the INR with the Tax Law does not collide with the maquila regime and, although it recognizes that the IRE and the TUM are two different income taxes, it concludes that the taxpayer operating under the maquila regime must withhold the INR when it receives services related to the IRE and the TUM and that the taxpayer operating under the maquila regime must withhold the INR when it receives services from nonresidents. This decision may still be appealed before the Supreme Court of Justice.