Tax is back

Tax reform and collection rises back up the agenda in Paraguay.

Between 2002 and 2018, the economy in Paraguay grew at higher levels than its South American neighbours, with an annual 2.7% increase in GDP which contributed to a reduction in levels of poverty and social inequality. However, the COVID-19 pandemic has brought a halt to this growth and corruption accusations surrounding the ruling Colorado Party have resulted in massive demonstrations against the government.

Successive Paraguayan governments have shown little concern about corruption as evidenced by the OECD Tax Transparency in Latin America 2021 report. According to the OECD, Paraguay registers the lowest tax revenue as a share of GDP in South America, with at 13.5%. The average tax revenue level in Latin America stands at 20.6% compared to 33.8% for OECD countries.

An official from SEPRELAD, Paraguay’s anti-money laundering agency, told us, “Tax collection is a structural problem in Paraguay. We can either blame whichever government holds office or have an honest debate about the matter and try to find a solution from a more holistic perspective.”

“Tax collection is a structural problem in Paraguay. We can either blame whichever government holds office or have an honest debate.”

Official, SEPRELAD, Paraguay

Despite the low tax take in the country, since 2016 Paraguay has shown a greater commitment to implement tax reforms, aimed at ensuring an effective implementation of domestic tax obligations. Some of these reforms include the creation of a beneficial ownership register, the lifting of bank secrecy, and increasing the powers of the Root Certification Authority to regulate electronic transfers.

A local financial analyst was sceptical about the motivation for these reforms, “I sincerely doubt that the desire for tax reform is driven by an aspiration for transparency. It is more the case that an efficient system of tax collection will result in more money for the government to spend.”

These recent improvements are still hindered by the country’s economic informality and high levels of tax avoidance. In the mid-term, Paraguayan state authorities are likely to improve their record in tax transparency; in November 2020 the country ratified the Convention on Mutual Administrative Assistance in Tax Matters, which facilitates international cooperation for the implementation of best practices in the matter.

The SEPRELAD official confirmed, “The government faces innumerable challenges in the fight against money laundering and tax evasion, the most important of which is the sense of impunity of some elites and, of course, the political class.”

“The government faces innumerable challenges […], the most important of which is the sense of impunity of some elites and, of course, the political class.”

Official, SEPRELAD, Paraguay

The challenges imposed by the COVID-19 pandemic with weaker economic activity and a pressing need to focus on other policy areas will soon be overcome by an urgent requirement to find resources to finance basic public services. “The pandemic has postponed the debate of fiscal reform,” the SEPRELAD official said, “but it is just a matter of time before it tops the political agenda again. The low tax take is limiting government spending in a time of crisis. This will lead to more protests and demonstrations.”

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