Paraguay plans to introduce VAT on cross-border B2C supplies of digital services will finally come into effect on January 1, 2021. The burden of the settlement and collection of the VAT due will be placed on the local bank, the issuer of the payment card used in the purchase, thus mirroring a common approach in Latin America,. These plans had previously been postponed by 12 months.
Planned date of introduction: January 1, 2021
Tax rate: 10% VAT
Paraguay’s original plans were revealed in Decree No. 3667/2020 issued by Paraguay's Executive Branch on June 5. As is common in Latin American approaches to taxing non-resident digital businesses, the burden of the collection of the 10% Paraguay VAT on these digital sales is the responsibility of certain financial institutions. A new non-resident income tax – effectively a Digital Services Tax (or DST) – was also unveiled.
The tax reform is outlined in the publication of Paraguay’s Law 6380/19 of Modernization and Simplification of the National Tax System (Ley de Modernización y Simplificación del Sistema Tributario Nacional).
Digital services are defined in the law as: “Those services that are made available to the user through the internet or any adaptation or application of the protocols, platforms or technology used by the internet or any other network through which services are rendered by online access and that are characterized by being essentially (i) automatic; and (ii) non-viable in absence of information technology.”
The location of the customer is determined based on pieces of evidence commonly used in similar regulations around the world. The customer’s location in Paraguay is determined using:
- The IP address of the device used by the customer, or
- The country code of the SIM card, or
- The customer’s billing address, or
- The bank account used to remit payment; or
- The billing address of the customer available to the bank, or
- The financial institution issuing the credit or debit card with which the payment is made.
In common with other South American rules, the burden of the settlement and collection of the VAT due (Paraguay’s standard VAT rate is 10%) is on the local bank, the issuer of the payment card used in the purchase.
In early January 2021, Paraguay's tax administration revealed what digital services are subject to VAT and non-residents income tax. The non-exhaustive list includes:
- Distribution of multimedia content through digital means (e.g. games, movies, music, videos, amongst others)
- Processing and storing of information
- Supply, development or update of software or applications
- Cable and satellite television
- Marketing and advertising
- Gambling games, betting games and similar
- Provision of educational services through technological platforms.
Paraguay non-resident income tax/Digital Services Tax (DST)
As mentioned earlier, on January 1, 2021, Paraguay's tax administration also introduced a 4.5% non-resident income tax on the price of a digital service paid to a non-resident digital business.
While this non-resident income tax is a general tax, it is effectively a DST as it specifically applies to digital services provided from abroad. The definition of the affected digital services mirrors the definition above.
Date of introduction: September 16, 2020
Tax rate: 12% VAT
Ecuador's new VAT plan to tax digital services supplied by non-residents came into effect on September 16, 2020. The collection of VAT as is common in Latin American jurisdictions is via a financial intermediary (or more specifically local credit card issuers). The plan is estimated to raise $100.3m per annum.
Since the rules went live Ecuador's Internal Revenue Service — Servicio de Rentas Internas (SRI) — have produced some excellent material for affected non-resident digital businesses. These include a guide on its website for non-resident digital businesses with advice on the registration, declaration, and payment of VAT. There is an English language version in the 'Guides' section.
Ecuador's VAT law was originally published on December 31, 2019. The country's President issued the relevant VAT regulations on July 28, 2020. The new VAT came into effect on September 16, 2020. The unusual introduction date was due to a legal requirement for the law to go live within a specific number of working days after its publications.
Ecuador’s SRI first revealed its plans back in October 2019 to tax digital services supplied by non-resident businesses to customers based in Ecuador. The plans were revealed in the government’s draft Economic Growth Law that was presented to Ecuador’s national assembly in October 2019.
The SRI has issued two lists. The first one lists the affected domestic credit card issuers. The second list – available as a PDF download here – includes the names of over 200 affected digital service suppliers. The second list while mirroring the approach in Argentina and in Costa Rica (where the introduction of such rules has been delayed until October 1) is significantly more detailed.
The burden of the collection of the 12% VAT due on these digital sales is the responsibility of certain domestic credit card issuers act as withholding agents. However, the foreign suppliers on the above list also have the option to voluntarily register themselves to collect and remit the VAT due on their sales to customers in Ecuador.
Foreign digital service providers should note that there is also an option to register directly. To encourage this the Ecuador tax authorities have designed a simplified system to do so.
Ecuador’s Government expects to raise $100.3 million per annum.
We will, of course, keep you up-to-date with developments in South America and beyond.
MORE: Digital tax developments in South America and Mexico
Acknowledgement: Thanks to Erika Bañuelos and Paola Gachet, of Ferrere Abogados, for their help with this article.
PLEASE REMEMBER THAT THIS INFORMATION HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND IS NOT PRESENTED AS SPECIFIC TAX OR LEGAL ADVICE. ALWAYS CONSULT A QUALIFIED TAX OR LEGAL ADVISOR BEFORE TAKING ANY ACTION BASED ON THIS INFORMATION. VERTEX INC. ACCEPTS NO LIABILITY FOR ANY LOSS RESULTING FROM ANY PERSON ACTING OR REFRAINING FROM ACTION AS A RESULT OF THIS INFORMATION.