What is the 10-10-10 rule that Paraguay uses to attract investment 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, with the exception of VAT in Panama.

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

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

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

“We’re not going to raise taxes on entrepreneurs, or corporations, or anyone else, because startups generate a big impact where they are based. They bring direct jobs, social security and countless benefits to the area, such as increased commercial movement, corporate social responsibility programs and much more,” he said in a video published on his social networks.

“They are the 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 are going well for them, things are going well for all of us,” the current president summarized.

Peña reiterated the idea this month when speaking to business leaders.

“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 a country can have,” he said.

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

A succession of tax reforms

The current tax system in Paraguay began to be shaped in 1992 with a tax reform that created VAT, which would increase to 10% two years later.

In 2004, he sharply reduced corporate tax, from 30% to 10%, and the argument at the time was to tax less to include more companies in the formality and thus expand the tax base, the then Finance Minister explained to BBC Mundo . , Dionisio Borda.

“The vision we had was that if it was cheaper for companies to formalize than to have double-entry bookkeeping – one real and the other disguised for the state – then more companies would pay all their taxes,” he said.

“We also reduced corporate tax with the counterpart that we would include personal income tax, which Paraguay did not have until then because it came from tradition. stronist (from former de facto president Alfredo Stroessner) that it was a communist tax,” he added.

However, it wasn’t until 2012 that the country introduced personal income tax, and when it did, it instituted a single rate of 10%, rather than introducing a progressive scale as Borda had planned.

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

The last tax reform took place in 2020; Taxes paid by companies were standardized and some exemptions were abolished.

Despite what authorities see as a favorable tax environment for attracting capital, foreign direct investment in Paraguay has remained around 1%, well below that in South America.

One of the countries with the least taxes

Despite the advantages offered by Paraguay’s political authorities, this view contrasts with that of specialists such as Borda and international organizations, who understand the need to raise more money 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 tax segments to be defined based on the purchasing power of each taxpayer, while with VAT everyone – rich and poor – pays the same percentage. And while the poor pay VAT on their entire income (because they spend all their money), the rich spend a small part of their income on consumption.

A system in which everyone pays the same rates is called regressive, and a system in which those who have the most pay more is called progressive.

“The rates are extremely low and the regressiveness of the system is maintained,” Borda said.

The VAT collects almost half of the annual $2.6 billion in taxes, while corporate income collects almost 40% and personal income 2.3%.

The government emphasizes that indirect taxes have fallen from 60% to 51% between 2019 and 2022.

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

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

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

The fiscal burden – defined as the ratio of taxes to GDP – in Paraguay stands at 14%, the second lowest in the region after Panama, below the average for Latin America (22%) and developed countries (34%), said the Organization for Economic Co-operation and Development.

In the world, Paraguay ranks 26th among countries with the fewest tax revenues in relation to the size of its economy, according to the World Bank.

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

Paraguay is one of the poorest countries in South America, compared to gross domestic product per capita.

According to the INE, two out of three Paraguayan workers are informal and therefore have no social coverage or pension contributions.

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

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

Inequality between the poorest and the richest has also decreased in recent years and, according to the Gini index, is in the middle of the rankings in South America.

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

Sustainable development

The International Monetary Fund told Paraguay to go ahead with the tax changes.

“In addition to the continued improvement of tax administration, authorities should re-evaluate Paraguay’s special tax regimes for specific sectors and activities and consider a new tax reform that goes beyond the improvements implemented in 2020,” the agency said in mid-2020.

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

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

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

According to a note published on the IDB website, “despite recent socio-economic progress, important development challenges remain that put Paraguay on the path of sustainable development.”

He understands that there is a gap in “access to basic services” and that efforts should be made to “better coverage and targeting of social spending”.

But in a program in which it worked with Paraguay to “strengthen its tax policy and administration and improve public expenditure management,” the IDB supported measures “to sustainably address development disparities and strengthen Paraguay’s competitive advantage through low tax rates.” retain.” (JO)