This chapter assesses options to strengthen Paraguay’s tax system and increase revenue in a fair and growth-friendly manner. It reviews the tax mix, tax structure and revenue buoyancy, with a detailed analysis of the personal income tax, including an assessment of tax expenditures. The chapter also examines corporate income taxation, dividend taxation and the VAT, and discusses the potential for additional revenue mobilisation through health excise taxes, environmentally related taxes and property taxes.
Financing Social Protection in Paraguay
The Role of General Revenues and Social Security Contributions
Abstract
Paraguay’s tax revenue remains low by both regional and international standards, limiting the government’s fiscal space to finance public goods and services, including for social protection. In 2023, the tax-to-GDP ratio, including social security contributions (SSCs), stood at 14.5%, significantly below the Latin America and the Caribbean (LAC) average of 21.3% and the OECD average of 33.9% (Figure 5.1, Panel A). Excluding SSCs, Paraguay’s tax revenues are only 10.4% of GDP, highlighting the limited contribution of taxation to revenue mobilisation. Between 2000 and 2023, Paraguay’s tax-to-GDP ratio increased by 3.1 percentage points, compared to an average increase of 4.4 percentage points across LAC countries (Figure 5.1, Panel B). However, over the same period, Paraguay recorded an average annual GDP growth rate of 3.1%, exceeding the LAC regional average of 2.3%, which partly explains the smaller increase in Paraguay’s tax-to-GDP ratio. From 2023 to 2024, tax revenue increased by one percentage point to 11.4% of GDP, mainly due to a rebound in corporate income tax (CIT) revenue and improvements in the tax administration (IMF, 2025[1]).
In addition to tax revenues, Paraguay collects non-tax revenues equivalent to 4.2% of GDP in 2023. The reliance on non-tax revenues is a common feature across LAC countries, with levels ranging from 11.6% of GDP in Cuba to 0.4% in Peru (OECD et al., 2025[2]). In Paraguay, approximately 1% of GDP in non-tax revenues is derived from the country’s participation in two binational hydroelectric projects: the Itaipu dam, jointly operated with Brazil, and the Yacyretá dam, shared with Argentina.
Paraguay’s tax revenues have shown strong responsiveness to economic growth over the past two decades. Tax buoyancy, defined as the percentage change in tax revenue resulting from a 1% change in GDP, reflects the combined effect of discretionary tax policy changes and the relationship between economic growth and revenue. Figure 5.2 presents estimates of long-run tax buoyancy based on 5-year moving averages from 2000 to 2023. Over this period, average annual tax buoyancy stood at 1.3, implying that for every 1% increase in GDP, tax revenues rose by roughly 1.3%1. These estimates are consistent with the IMF’s estimate of 1.2 for Paraguay over the 2004-2024 period (IMF, 2025[1]). In the LAC region, average long-run tax buoyancy amounted to 1.07 for the period 1999-2021 (OECD, 2023[3]).
Note: The grey areas in Panel B present the difference between the lowest and highest tax-to-GDP ratios in the LAC region.
Source: OECD/ECLAC/CIAT/IDB (2025[2]).
Tax buoyancy exhibited considerable volatility over the past two decades, reflecting periods of both weak and strong revenue responsiveness (Figure 5.2). Between 2000 and 2005, tax revenue growth lagged behind GDP growth, with buoyancy below one. Since 2006, however, tax revenue growth has consistently outpaced GDP growth. The buoyancy ratio peaked in 2012, when tax revenue growth was 80% higher than GDP growth. Although buoyancy declined between 2012 and 2019, it has recovered since 2021 (excluding the COVID-19 shock in 2020) and has remained stable at approximately 1.2. This recent trend reflects strengthened revenue mobilisation and a tax system that has become increasingly responsive to economic growth. Boosting growth while ensuring that this translates into higher revenue should be a key policy objective. As long as tax buoyancy is above one, GDP growth would, under the current tax system, lead to a more rapid increase in the tax-to-GDP ratio.
Note: The figure presents the estimated tax revenue buoyancy for Paraguay, including social security contributions. The values shown reflect a five-year moving average; for example, the estimate for 2005 represents the average buoyancy over the period 2001-2005. Buoyancy is calculated as the ratio of the annual percentage change in (nominal) tax revenues to the annual percentage change in (nominal) GDP. To better reflect long-run trends, the value of the year 2020 is imputed to remove the effects of the COVID-19 shock, i.e. the value for 2020 is replaced by the average buoyancy value of 2019 and 2021.
Tax buoyancy across major tax categories has varied significantly over recent periods. For example, CIT revenues remained buoyant throughout 2015-2023, with revenue growth outpacing GDP growth (Figure 5.3). However, tax buoyancy was more pronounced during the period 2015–2019 than in 2019–2023. Social security contributions and value-added tax (VAT) displayed the opposite pattern: From 2015 to 2019, both SSC and VAT revenues grew at a slower pace than GDP, while from 2019–2023, these revenues outpaced economic growth, indicating improved buoyancy. The personal income tax (PIT) revenue collected under the Impuesto de la Renta Personal (IRP) exhibited strong buoyancy between 2015 and 2019, driven primarily by gradual tax base broadening as the IRP exemption threshold was gradually lowered over this period. From 2019 to 2023, IRP revenue grew faster than GDP, though at a reduced pace. Conversely, revenue collected from individual’s profits declined, reflecting the removal of dividend income from the PIT base and the elimination of the IRAGRO-IMAGRO tax following the 2019 tax reform.
Tax revenue growth rate divided by GDP growth rate for periods 2015-19 and 2019-23
Paraguay’s tax structure is characterised by a strong reliance on indirect taxation. In 2023, taxes on goods and services accounted for approximately half of total tax revenues, with the VAT accounting for 5.4% of GDP, excise taxes 1% of GDP, and other indirect taxes 1.1% of GDP (Figure 5.4). Direct taxes represented around one-fifth of total revenues, comprising 2.5% of GDP from CIT and 0.2% of GDP from PIT. Social security contributions accounted for a significant share, generating nearly one-third of total tax revenues, or 4.1% of GDP.
Paraguay collects less revenue from indirect and direct taxes than the average LAC country. Like most other LAC countries, Paraguay relies heavily on indirect taxation, particularly the VAT (Figure 5.4). In 2023, Paraguay’s VAT revenue stood at 5.4% of GDP, below the LAC average of 6.0% of GDP. This comparatively lower revenue performance may be partly attributed to Paraguay’s relatively low standard VAT rate (10%) and the extensive use of VAT-related tax expenditures. CIT generates relatively more revenue than PIT in Paraguay and across the LAC region, and in contrast to OECD countries. Paraguay lags behind a number of LAC peers in the mobilisation of both PIT and CIT revenues, with 23 countries collecting more PIT revenue and 20 countries collecting more CIT revenue as a share of GDP. This underperformance may reflect relatively low statutory rates, the presence of generous tax expenditures and a higher prevalence of informality relative to the average LAC country. On the contrary, Paraguay’s SSC revenue, at 4.1% of GDP, exceeds the LAC average of 3.6% of GDP. This may partly reflect Paraguay’s relatively high reliance on public pension funds, in contrast to the greater prevalence of private pension funds observed in many other LAC countries. Contributions to private pension funds are not classified as tax revenue in OECD revenue statistics.
Tax revenue as a percentage of GDP by tax type, 2023
Source: OECD/ECLAC/CIAT/IDB (2025[2]).
The composition of Paraguay’s tax mix has undergone notable shifts since 2000. The share of indirect taxes in total revenues declined from 60% in 2000 to approximately 50% in 2023. Within this category, the VAT’s contribution increased, while the share of excise taxes declined (Figure 5.5). Direct taxes have become more important in the tax mix over the period: CIT increased from 13% of total tax revenues in 2000 to 19% in 2023, while PIT showed a modest increase to 1% of total revenues in 2023. SSCs have become an increasingly important source of revenue, rising from 26% of total tax revenues in 2000 to 28% in 2023.
Tax revenue as a percentage of GDP by tax type, 2000-2023
Source: OECD/ECLAC/CIAT/IDB (2025[2]).
Significant additional tax revenue could be collected from direct taxes and indirect taxes. As mentioned before, Paraguay raises more revenue from SSC as a percentage of GDP than other LAC countries (Table 5.1). However, Paraguay raises lower revenues as a percentage of GDP than the average LAC countries for PIT, CIT, VAT, excise taxes, and property taxes. A rough estimate of the additional tax revenue potential by tax type is calculated as the difference between tax revenue in Paraguay and average tax revenue in the LAC region (Table 5.1, row 3). Benchmarking Paraguay against the LAC average, where countries face comparable structural constraints, may understate the scope for further revenue mobilisation. The largest additional tax revenue potential is found in PIT, CIT, exceeding one percentage point of GDP. Policies aimed at broadening the PIT base – particularly by enhancing formalisation and ensuring more comprehensive taxation of labour and capital income – could play an important role in supporting stronger revenue mobilisation.
Note: The first two rows indicate the tax-to-GDP ratios for Paraguay and the LAC average by tax type for 2023. The third row shows the distance between Paraguay’s tax-to-GDP ratio and the LAC average.
Source: Calculations based on OECD (2024[5]).
Expanding public expenditure on health, social protection and other priority areas will require an increase in tax revenues in Paraguay. The current government intends to increase the tax revenues almost exclusively through improvements in tax compliance. In this context, the tax administration has set a target to increase tax revenues (excluding social security contributions) from 11.4% of GDP in 2024 to 12.0% of GDP by 2029 (DNIT, 2025). This projected increase is expected to be achieved exclusively through gains in tax efficiency, as no significant changes to tax rates or broadening of tax bases are currently envisaged. In a context of weak tax compliance, strengthening the tax administration represents a valid approach, as it could strengthen the tax base while avoiding potential distortions that may arise from rate increases. While this objective reflects a step towards enhanced revenue mobilisation, it remains modest in light of pressing fiscal demands, particularly linked to social assistance, health and pension expenditure (see Chapters 2, 3 and 4). In the short term, revenue gains could be achieved through a combination of tax administrative measures strengthening compliance and tax policy measures that limit tax expenditures and build a capital income tax base. Developing a strategy to strengthen the formalisation of the economy would be an integral part of a tax base broadening reform. However, to approach the LAC average over the medium to long term, adjustments to tax policy, including rate increases, will likely be necessary. The adoption of a medium-term revenue strategy, underpinned by clear intermediate targets, could support a more sustainable and predictable path for tax revenue growth (IMF, 2024[6]).
Paraguay’s tax system is characterised by comparatively low statutory tax rates. As illustrated in Figure 5.6, the standard rates for VAT, CIT, and the top marginal PIT rate are each set at 10%. These rates are significantly below the regional averages observed in LAC, where the average VAT rate stands at 15%, the CIT rate at 22%, and the top PIT rate at 27.7%.
Source: IBFD, OECD.
In 2019, Paraguay undertook a comprehensive tax reform aimed at modernising and simplifying its tax system. Law No. 6380 introduced significant changes to both direct and indirect taxes, reflecting a strategic shift towards strengthening direct taxation (Box 5.1). According to estimates by the Ministry of Economy and Finance (MEF), the reform contributed to an increase in tax revenues equivalent to 0.23% of GDP in 2022 and 0.19% of GDP in 2023 (Artana and Guardarucci, 2025[7]). Changes made to the taxation of dividends contributed to 81% of this revenue increase in 2022 and 26% in 2023.
Corporate income tax (IRE):
The former corporate income taxes IRACIS and IRAGRO were replaced by the Impuesto de la Renta Empresarial (IRE) at a flat rate of 10% on net income.
Introduction of two simplified regimes for small and medium enterprises (SIMPLE for firms with annual turnover below PYG 2 billion, and RESIMPLE for firms with annual turnover below PYG 80 million).
Introduction of loss carry forward rules which allow carry forward of tax losses for five years, capped at 20% of net income per year.
Introduction of Transfer Pricing rules, including Transfer Pricing documentation requirements.
Broadening of the tax base through the taxation of foreign income by resident companies, but only for foreign income taxed at a lower rate than in Paraguay
Dividend income tax (IDU):
Introduction of the dividend income tax (IDU), with a tax rate of 8% for residents and 15% for non-residents.
Personal income tax (IRP):
Transition to a dual system for taxing individual income, where a progressive tax rate schedule applies to labour income, and capital gains, rental and interest income are taxed separately at an 8% flat rate.
The annual income exemption threshold was set at PYG 80 million and is no longer calculated as a multiple of the monthly minimum wage.
Introduction of a third income bracket (PYG 50-150 million) taxed at a 9% rate.
Tax deductions for expenses abroad limited to health and education expenses.
Non-resident income tax (INR):
Introduction of a 15% tax on Paraguayan-source income earned by non‑resident individuals and corporations.
Digital services provided by non-residents to Paraguayan users are taxed at an effective rate of 4.5% (15% on a presumed taxable base of 30% of the gross payment).
Value added tax (IVA):
The 10% standard rate and 5% reduced rate for selected items remain unchanged.
Introduction of a VAT on digital services at the 10% standard rate.
Selective consumption taxes (ISC):
Increase of tax rates for tobacco and alcohol, and introduction of a 2% sugar sweetened beverages (SSB) tax.
Source: Paraguayan Law No. 6380, MEF.
As part of the 2019 reform, Paraguay reformed its taxation of dividend income by introducing a dividend income tax Impuesto a los Dividendos y Utilidades (IDU), which entered into force in 2020. Prior to the reform, dividend income was taxed both under the CIT and the PIT. Since its implementation, revenue from the IDU has shown a steady upward trend, increasing from 0.36% of GDP in 2020 to 0.42% of GDP in 2023. The IDU applies a withholding tax rate of 8% on dividend income received by resident individuals and 15% for non-residents. The tax base comprises the net amount of dividends and distributed profits, excluding corporate income tax (IRE) already paid by the distributing entity. Dividends or distributed profits not subject to the IDU are taxed under the personal income tax (IRP).
In 2023, Paraguay implemented a major institutional reform by merging the former tax and customs administrations to establish the Dirección Nacional de Ingresos Tributarios (DNIT) (Law 7143 and Decree 1184). This reform aimed to enhance the efficiency and effectiveness of revenue administration and to strengthen overall tax compliance and revenue mobilisation. To support this transformation, a strategic plan for the period 2024–2029 outlines a comprehensive modernisation agenda. Key priorities include the introduction of new tax collection processes, the expansion of digital tools such as electronic invoicing, and the reorganisation of internal administrative procedures. The integration of tax and customs functions also facilitates improved taxpayer identification and monitoring through the use of a unified taxpayer identification number (Registro Único del Contribuyente, RUC), which links information across the tax filing system (Marangatú) and the customs system (Sofía).
Current revenue mobilization efforts focus on strengthening tax administration and enhancing compliance. Notable progress has been made in this area, including a growing emphasis on digitalisation. The combination of increased tax administrative capacity and low tax rates is an opportunity for Paraguay to first strengthen compliance, formalise the economy and broaden tax bases. Once this is achieved, further tax policy reforms – including potential tax rate increases – may be required, as the tax administrative measures might not be sufficient to generate the required increase in revenue in the long-term.
Tax revenue collected from PIT in Paraguay is particularly low. In 2024, the PIT generated only 0.16% of GDP, reflecting one of the lowest revenues from the PIT in the region. A persistent challenge across LAC countries remains the narrow PIT base, largely attributable to high levels of informality in labour markets, which significantly constrain revenue mobilisation through personal income taxation (ECLAC, 2023[8]). Paraguay’s narrow PIT base is explained by a high exemption threshold and the availability of particularly generous deductions. The PIT in Paraguay operates under a dual structure, that distinguishes income from employment and income from capital. In 2024, revenues from employment income amounted to 0.13% of GDP, while revenues from capital income and gains accounted for 0.03% of GDP.
The PIT’s design departs significantly from standard international practice
Paraguay has a progressive PIT rate schedule (Table 5.2), which applies to taxable income of individuals earning labour income if their annual income exceeds PYG 80 million. The absence of a zero-rated income tax bracket results in very high marginal tax rates for individuals with earnings just above the PIT threshold, as their full income becomes subject to PIT once the threshold is exceeded.
Note: Only taxpayers with annual labour incomes above PYG 80 million need to prepare a tax return and pay PIT on their full income. The minimum wage is PYG 2 899 048 per month as of 1st July 2025. The average exchange rate for January to June 2025 was USD 1 = PYG 7 950.
Source: DNIT.
Paraguay applies a low top marginal PIT rate compared with other LAC countries. Paraguay has the lowest top marginal PIT rate in the LAC region, at 10% (Figure 5.7). This rate is equivalent to the bottom marginal PIT rate in several other LAC countries, including Costa Rica, Nicaragua, and Uruguay.
Top and bottom marginal PIT rates in percent
Source: OECD adapted from ECLAC (2023[8]).
PIT is not withheld at source by the employer, but instead taxpayers are required to self-declare and remit their PIT liability to the tax authorities. Individuals earning labour income below PYG 80 million are not required to file a tax return and are tax exempt. The progressive PIT rate schedule (Table 5.2) applies to the taxpayer’s taxable labour income (from wages and self-employment), starting from the first Guarani earned. Article 64 of Law No. 6380 from 2019 defines a number of deductible expenses that are subtracted from gross income. Taxpayers must retain and submit acceptable documentation – including invoices, receipts, and financial statements – to support expense claims for tax purposes (Box 5.2). Only in a few specific cases, agents need to withhold PIT on non-labour income.2 International good practice is for employers to withhold PIT and remit it directly to the tax administration, a procedure that could also be adopted in Paraguay.
Registration for PIT on labour income (Impuesto a la Renta Personal – Rentas de Servicios Personales, IRP-RSP) is mandatory when a taxpayer’s gross labour income exceeds PYG 80 million within a tax year. Upon exceeding this threshold, the taxpayer must register for the PIT and begin self-declaring labour income.
In the initial year of registration, only income earned from the day after the PIT threshold is exceeded until 31 December is subject to PIT. Deductible expenses are also limited to this same period. From the subsequent tax year onwards, the income earned in the full calendar year – if exceeding PYG 80 million – is considered for taxation. If, in any following year, the taxpayer’s gross income falls below the PIT threshold, a tax return must still be filed even if no PIT is due.
To declare expenses, the taxpayer needs to provide accurate documentation, which includes printed and electronic invoices, receipts, sales slips, bank statements, credit or debit card statements, tickets for transport or events. All supporting documents must be registered in the Marangatu online system, where the tax return is submitted.
Labour income (IRP-RSP) and capital income (IRP-RGC) is reported separately, using two distinct tax returns (Forms 515 and 516). There is no statutory threshold for declaring capital income.
Source: OECD based on information from MEF and DNIT.
The PIT base is narrow and PIT liabilities are often low
In Paraguay, most formal employees earn income below the PIT threshold. Figure 5.8 illustrates the distribution of gross earnings among formal salaried workers contributing to a pension fund. While most formal salaried workers earn above the legal minimum wage, their incomes remain below the PIT registration threshold (with a significant proportion of workers’ earnings concentrated around PYG 3.5 million per month). Only 22% of formal salaried workers earn above the statutory PIT threshold, and 7% of taxpayers earn gross income above the top statutory PIT rate threshold.
Note: Formal income is defined as primary and secondary income for which employees contribute to a pension fund. Gross income is calculated as net income plus social security contributions, considering the different contribution rates for private and public sector employees. The average monthly minimum wage of 2023 and 2024 is displayed. The statutory PIT threshold amounts to PYG 80 million annual gross income (approximately PYG 6.6 million monthly gross income). The top PIT rate (10%) applies to gross incomes above PYG 150 million per year (PYG 12.5 million per month). Note that self-employed workers’ and employers’ earnings are excluded from the figure.
Source: OECD based on EPHC (2024[9]).
Although the number of taxpayers reporting labour and capital income has increased over time, the number with positive tax liability has remained stable (Figure 5.9). The number of active taxpayers from labour income rose from 164 752 in 2020 to 256 285 in 2024. For capital income, the number of active taxpayers more than tripled from 15 692 in 2020 to 47 292 in 2024. Despite this expansion, the percentage of workers subject to PIT remains limited, with labour income tax filers accounting for only 7% of the working population and approximately 20% of formal workers. Furthermore, over the same period, the share of the taxpayers reducing their tax liability to zero has also increased, leaving the number of taxpayers with a positive tax liability on labour income relatively stable since 2020, with a significant drop in 2024.
Number of taxpayers reporting labour and capital income, by tax liability status, 2020-2024
Source: MEF/DNIT (2025).
A significant share of labour income taxpayers with earnings above the PIT threshold report zero tax liability. In 2024, 62% of individuals that filed a PIT return on employment income reduced their tax liability to zero (Figure 5.9) due to the extensive range of deductions – many of which are uncapped – and exemptions (see Box 5.3).
For capital income, about 50% of registered taxpayers reported zero tax liability. In 2024, 50% of the registered taxpayers reduced their tax liability on capital income to zero primarily by either reporting sales prices below the original purchase price for capital assets or expenditures exceeding rental income. Another factor that contributes to explain this result, though to a lesser extent, is the number of inactive taxpayers. In 2024, 5% of taxpayers who filed the capital income tax return did not report any capital income but were nonetheless required to file a tax return because they reported earning capital income in a previous year.
Paraguay grants particularly generous PIT deductions
Paraguay does not provide a general tax allowance under its PIT system but instead allows for a wide range of deductions. Taxpayers may deduct a broad range of expenses from their taxable income, including purchases of goods and services for themselves and their dependants. Eligible deductible expenses include both essential consumption items, such as food and clothing, and leisure-related spending (Box 5.3). Dependants for tax purposes include children of legal age enrolled in higher education, as well as grandparents, parents, and parents-in-law (who do not need to live in the same household), provided that each dependant’s annual income does not exceed PYG 30 million. In addition to deductions for basic consumption goods and services, taxpayers may deduct education and health expenditures incurred abroad for themselves and their dependants, with no limitation on the amount (Box 5.3). Additional provisions permit the full deduction of high-value purchases, including vehicles (once every three years) and residential property (once every five years). These deductions can be accumulated and, in many cases, reduce taxable income to zero, even for individuals with gross incomes well above the PIT threshold.
PIT deductions are regressive as the associated revenue forgone increases with income. In other words, taxpayers facing the 10% marginal tax rate benefit from a larger total deduction than those subject to the 8% rate. The regressive impact is further amplified as deductions are not subject to caps.
PIT deductions:
The following expenses can be deducted from gross income under the PIT in Paraguay, as stated in Art. 64 of Law No. 6380 and the personal income tax filing Form 515:
Expenses directly related to a business activity (furniture, equipment, construction, remodelling or refurbishment of the office).
Any personal or dependant’s expenses incurred in the country (including food, clothing, health, education, renting and maintenance of housing, acquisition of furniture, household appliances and goods, expenditures for recreation, etc.).
Personal and dependents' expenses incurred abroad exclusively for health and education purposes.
Personal expenses for the acquisition of a vehicle every 3 years.
Employer's social security contributions paid on accounts of domestic workers.
Contribution to a private insurance scheme made by independent workers.
Donations made in favour of the State and associations (up to 5% of the gross taxable income of the fiscal year).
Personal expenses for the acquisition of a property for housing every 5 years in cash or through a loan (this expense may be carried forward in the following fiscal years).
PIT exemptions:
The following types of income are exempt from PIT in Paraguay as stated in Art. 56 of Law No. 6380:
Interest generated by government and municipality bonds.
Income and capital gains derived from the income from expropriated real estate.
Income and capital gains derived from the sale or disposal of movable property, provided that the sum of these in the fiscal year does not exceed PYG 20 000 000.
The exchange rate difference arising from the holding of foreign currency or from deposits or credits in foreign currency.
Christmas bonus or thirteenth salary.
Severance payments up to the legal minimum.
Remunerations of diplomats, consular agents and other foreign official representatives of countries or international organisations.
Retirement benefits and pensions, whether contributory or non-contributory.
Capital gains from the sale of stock exchange bonds.
Earnings from trading regulated securities.
Investment fund earnings.
Interest from bank and savings accounts.
Prizes from lotteries, raffles, drawings, bingos and similar events held in Paraguay with a value below PYG 500 000.
Scholarships promoted by the Government, destined to the coverage of the expenses of stay and per diem.
Source: DNIT, Law No. 6380, Form No. 515.
PIT deductions lead to substantial revenue forgone
The majority of the deductions under the PIT can be classified as tax expenditures. Tax expenditures are defined as provisions within the tax legislation that reduce the tax liability of certain individuals or groups, relative to a defined benchmark tax system. These provisions are typically introduced to pursue specific policy objectives – such as promoting economic development, enhancing social welfare, improving equity, or simplifying tax administration. The majority of deductions under Paraguay’s PIT, as set out in Article 64 of Law No. 6380, can be classified as tax expenditures (see Table 5.A.1 in the Annex). An exception are deductions for expenses directly related to income-generating business activities (Field 15 of tax return form 515). These business-related deductions are not classified as tax expenditures because they are integral to the definition of net taxable income under the benchmark tax system.
The uncapped deduction of personal and dependant’s related expenses in Paraguay represents the costliest deduction under the PIT. PIT designs generally include a first zero-rate bracket or a general tax allowance that aims at covering expenses incurred by the individual that allows him or her to earn income. This zero-rate bracket or basic tax allowance is generally not considered a tax expenditure. The PIT in Paraguay does not include a zero-rate bracket nor a basic tax allowance, but these expenses are deducted together with other personal or dependant’s expenses within the country in field 16 of form 515. That is, deductions reported in field 16 of the tax return would be considered as a tax expenditure except for those directly necessary to earn income (e.g. transport from job to work, job specific clothing, etc.). Under the assumption that the amount of expenses workers incur to generate their income would be equal to the minimum wage, which likely is an over-estimation, one could estimate the amount of tax expenditures. I.e., the amount of expenses deducted in field 16 of form 515 that exceed the value of one annual minimum wage would be classified as a tax expenditure. Revenue forgone from this deduction is substantial, amounting to 0.7% of GDP (Table 5.3).
Note: The DNIT is currently reviewing the measurement of the tax expenditure in Field 16 of Form 515 and is considering measuring revenue forgone from additional tax expenditures in form 515 (Fields 28 and 38), and in form 516 on capital income. See Table 5.A.1 in the Annex for a complete list of the identified tax expenditures.
Source: DNIT (2025).
PIT deductions result in revenue losses estimated at approximately 0.76% of GDP. Table 5.3 presents detailed cost estimates of revenue forgone for some PIT deductions that are considered tax expenditures. A complete list of all identified PIT tax expenditures is included in the Annex (Table 5.A.1) estimates of revenue forgone for the remaining tax expenditures are pending. Among the tax expenditures for which revenue forgone estimates are available, the deduction for personal and their dependants’ expenditure accounts for the largest share of total revenue forgone (0.7% of GDP). The second largest tax expenditure relates to the deduction for vehicle purchases, although the associated revenue forgone remains limited, at only 0.033% of GDP. This modest fiscal cost likely reflects the fact that many taxpayers already reduce their income tax liability to zero through deductions for basic expenditures, thereby rendering the remaining deductions unused. However, should the scope of basic expenditure deductions be narrowed, the revenue forgone associated with this tax expenditure could increase accordingly. The deduction for social security contributions made by households employing domestic workers represents 0.008% of GDP, making it the fourth-largest PIT tax expenditure in Paraguay in terms of revenue forgone. This comparatively low level may reflect compliance challenges, as a significant share of domestic workers are not formally registered, and employers therefore do not pay the associated SSCs that would otherwise be deductible. As a comparison, a similar provision ranks as the second largest of all tax expenditures in France. Note that even if most PIT exemptions provided under Article 56 of Law No. 6380 (see Box 5.3) are considered tax expenditures, the analysis does not include them as there is so far no data available to calculate their revenue forgone.
The estimated revenue forgone in this analysis is larger than previous estimates reported in the literature. For example, Salim (2024[10]) estimates that PIT-related tax expenditures amounted to only 0.01% of GDP over the period 2000-2022, although the study does not provide a detailed breakdown of PIT tax expenditures. Similarly, the MEF reported revenue forgone of 0.01% of GDP for PIT tax expenditures in 2021 (MEF, 2023[11]). The PIT-related tax expenditures reported in this study are larger because more provisions are excluded from the benchmark.
The regular cost estimation and publication of tax expenditure reports is widely recognised as international best practice. Given that tax expenditures can entail substantial fiscal costs, their systematic assessment and reporting on a provision-by-provision basis are essential for enhancing fiscal transparency and supporting informed decision-making in the allocation of public resources. The breakdown presented in Table 5.3 and Table 5.A.1 in the Annex could be included in forthcoming tax expenditure reports. In the future, Paraguay could broaden the scope of its PIT tax expenditure estimates by incorporating exemptions into the analysis. Achieving this would require improved data collection from third-party sources. For example, financial institutions could be mandated to report information on exempt capital gains, thereby enabling a more comprehensive and accurate assessment of PIT tax expenditures.
There is significant scope for improving the design of the PIT
There is significant scope to strengthen revenue mobilisation from the PIT. While estimated revenue forgone from PIT tax expenditures cannot be fully considered as revenue gains – given possible behavioural responses – the elimination of certain tax expenditures could nonetheless generate substantial revenue gains.
Paraguay could consider replacing broad-based PIT deductions by introducing a basic tax allowance or a zero-rate bracket and significantly limiting the remainder deductions. The current design of Paraguay’s PIT substantially limits its revenue-raising capacity and undermines the progressivity of the tax. The introduction of a zero-rate income tax bracket or a basic allowance that replaces the deduction in field 16 of form 515 would simplify compliance for taxpayers, who would no longer need to retain receipts for a wide array of everyday expenses, and improve administrative efficiency for the tax authority. This would imply abolishing the current PIT registration threshold of PYG 80 million, which generates very high marginal tax rates for incomes at this threshold value and creates potential distortions such as incentives for wage underreporting. The introduction of a zero-rate bracket would help smooth marginal tax rate transitions and reduce these discontinuities. This reform could be accompanied by a requirement for employers to withhold PIT from employees.
Introducing a basic allowance or zero-rate bracket would bring Paraguay’s PIT structure more closely in line with international practices. Most OECD countries provide a personal tax allowance or tax credit (e.g. 27 OECD countries), and several include a zero-rate first bracket in their PIT (e.g. 10 OECD countries) (OECD Personal Income Tax database, 2024). As shown in Figure 5.10, exemption thresholds vary widely, ranging from around half a minimum wage in Germany to three minimum wages in Colombia. Paraguay could consider introducing an exemption threshold within this range, potentially around 1 to 1.5 annual minimum wages.
Thresholds of the first PIT bracket, when income is tax exempt, in multiples of the national minimum wage
Source: IBFD Country Tax Guides, national sources.
Additional allowances could be granted for spouses and dependent children while other existing deductions could be eliminated or significantly limited (e.g. deductions for house and vehicle purchases). Converting the remaining deductions into tax credits would constitute better practice, as it would ensure that all taxpayers with a positive tax liability are eligible for the same level of relief when they have, for instance, dependent children.
If the introduction of a zero-rate bracket or basic allowance proves unfeasible in the short term, limiting deductions and introducing a general cap could be an important first step toward improving equity and revenue raising capacity of the PIT. Under that scenario the deduction for personal and dependents’ expenditure should be capped while other deductions could be abolished or capped. Moreover, the introduction of an overall cap on total deductible amounts as a percentage of taxable income could prevent taxpayers from reducing their tax liability to zero. For example, Colombia implemented a cap on total PIT deductions and exempt income, which is set at 40% of total income, limited at UVT 1 340 annually (approximately USD 19 000).
Paraguay could consider taxing pension income under the PIT as is common practice in OECD countries. In Paraguay, pension benefits (i.e. the pension received) are fully exempt from PIT, while employee pension contributions are deductible from taxable income. In contrast, most OECD countries apply an “Exemption-Exemption-Tax” (EET) benchmark to mandatory pension systems, under which pension contributions are deductible from taxable personal income and returns are exempt during the accumulation phase, while the pension is taxed when it is received (OECD, 2025[12]). In Paraguay, income taxation applies only to amounts received from voluntary pension schemes and to early withdrawals of pension contributions (Decree No. 7,047/2022), which is also uncommon as many countries apply a “Tax-Tax-Exempt” benchmark to voluntary pension savings. Taxing pensions of taxpayers with income above the PIT threshold would therefore align Paraguay’s system more closely with international practice (EET benchmark). Even though only a small number of pensioners receive pension income above the current PIT threshold, such a reform would improve coherence within the tax system while maintaining protection for low-income retirees. The proposed change may not generate a visible impact under the current income tax threshold and deduction structure, but it could yield additional revenue if the other proposed PIT design changes are implemented.
Strengthening tax administration and improving monitoring mechanisms will be essential to limit the extent to which taxpayers can reduce their labour and capital income tax liabilities to zero. This is particularly important in what concerns form 516 where 45% of the taxpayers that filed a tax return in 2024, reduced their tax liability to zero by either reporting sales prices below the original purchase price for capital assets or expenditures exceeding rental income. This high percentage does not seem realistic and merits more monitoring.
In 2023, CIT revenue in Paraguay amounted to 2.5% of GDP, below the LAC regional average of 3.8% of GDP. CIT is levied under the Impuesto a la Renta Empresarial (IRE), which applies a standard statutory rate of 10%. However, simplified tax regimes are available for small and medium-sized enterprises, and reduced rates apply under certain special regimes. The 2023 total CIT revenue includes primarily revenue from the IRE (2% of GDP), but also from the dividend income tax (0.42% of GDP) and some small amounts from the former corporate income tax IRACIS (OECD et al., 2025[2]).
Business tax collection is highly concentrated among large taxpayers. Approximately 90% of revenue from IRE is collected from the 10% largest corporate taxpayers (Salim, 2024[10]), highlighting the importance of effective large taxpayer management in Paraguay’s tax administration. This level of concentration is significantly higher than observed in many other LAC countries. As of 2025, the Large Taxpayer Office (LTO) oversees around 750 taxpayers.
Paraguay operates three business tax regimes
Paraguay applies a tiered business tax system under the IRE that differentiates tax obligations according to firms’ annual turnover (Figure 5.11). This structure seeks to align tax and compliance requirements with the capacity of different taxpayer segments.
General IRE regime: Firms with annual turnover above PYG 2 billion (approximately USD 250 000) are subject to a 10% corporate income tax rate.
IRE SIMPLE regime: Small enterprises with annual turnover between PYG 80 million and PYG 2 billion (USD 10 000–250 000) are also taxed at a 10% standard rate, but they benefit from simplified accounting and reporting obligations. To report taxable income, the taxpayer can choose between reporting a presumptive tax base (30% of the turnover) or actual profits.
IRE RESIMPLE regime: Microenterprises with annual turnover up to PYG 80 million are exempt from VAT and pay a quarterly lump-sum IRE contribution ranging from PYG 60 000 to PYG 240 000, depending on their income level.
Note: The scales on the horizontal axis do not reflect the scales of the actual income. The exchange rate used is approximately PYG 7 200 per USD 1.
Source: OECD based on Law No. 6380/2019.
The number of active taxpayers increased across the three IRE regimes in the last five years (Table 5.4). The number of active taxpayers has increased under the IRE General scheme but slightly decreased in the past 1-2 years under the IRE SIMPLE and RESIMPLE schemes. The share of active taxpayers among all registered taxpayers varies between 38% in the RESIMPLE, 65% in the SIMPLE, 58% in the IRE General. Overall, participation under the IRE RESIMPLE scheme is very limited, with only 5 233 active taxpayers in 2024.
Source: MEF/DNIT (2025).
Paraguay’s presumptive tax regime has not attracted many firms
Small taxpayers operating under the simplified regimes are highly concentrated in the lowest turnover brackets. In 2024, around one-third of taxpayers registered in the simplified regimes (IRE SIMPLE and RESIMPLE) were inactive or declared zero gross income (Figure 5.12, Panel A). An additional 32% of all small taxpayers report annual gross income of up to PYG 80 million (RESIMPLE presumptive regime eligibility threshold). However, only about 13% of taxpayers within this income range are registered under RESIMPLE. Most taxpayers with gross income below PYG 80 million were already registered under IRE SIMPLE in previous years, and therefore remain in that regime even if their turnover fell below the RESIMPLE eligibility threshold in 2024. Taxpayers may also prefer to remain in the SIMPLE regime because their tax liability is lower due to modest profit levels and because the SIMPLE regime allows them to claim input VAT credits. In addition, the possibility of inflating deductible costs in a low-monitoring environment may also influence this preference. Within RESIMPLE, 91% of taxpayers report annual turnover below PYG 20 million, qualifying for the lowest lumpsum payment under the simplified regime (Figure 5.12, Panel B). This pattern suggests that taxpayers tend to opt for the RESIMPLE regime only if they qualify for the lowest lump-sum payment.
Distribution of taxpayers by annual turnover brackets in million PYG, 2024
Source: DNIT (2025).
Transitions between Paraguay’s simplified tax regimes follow best practices. To support firms’ growth, the tax administration grants a 1.5-year period to switch from the RESIMPLE to the SIMPLE regime once a firm exceeds the PYG 80 million turnover threshold. Transitions from the SIMPLE regime to RESIMPLE are generally not permitted to avoid abuse of the presumptive regime.
Note: Displayed thresholds: Paraguay - RESIMPLE : PYG 80 million; Brazil - Micro-empreendedor Individual: BRL 81 000; Uruguay - Monotributo: UYU 1 129 055; Argentina – Monotributo (2023 threshold): ARS 5 650 236.51.
Source: National websites and Mas-Montserrat, Colin and Brys (2024[13]).
The turnover thresholds of the IRE regimes have not been updated since the establishment of the regime in 2019. To update the thresholds, a legislative or regulatory amendment to Law No. 6380/19 would be necessary. Due to inflation, the real values of the thresholds will reduce over time, automatically pushing small companies from the RESIMPLE in the SIMPLE regime.
However, the RESIMPLE’s eligibility threshold appears appropriate. The eligibility threshold of Paraguay’s RESIMPLE regime is higher than the threshold of the simplified tax regime in Argentina (Monotributo) but lower than the thresholds of the simplified regimes in Uruguay (Monotributo) and Brazil (Simples Nacional for micro-entrepreneurs), when measured in multiples of the annual minimum wage (Figure 5.13).
Alignment between simplified tax regimes and regimes offering reduced social security contributions could be improved
Paraguay does not have a comprehensive presumptive tax regime (PTR) covering both taxes and social security contributions. The IRE RESIMPLE regime is a presumptive tax regime for taxes (CIT and VAT) but does not include social security contributions. Social security contributions under the IPS are governed by several different regimes (see Chapter 6). For workers in microenterprises, the most relevant scheme is the recently introduced Mipymes scheme (Law No. 7444/2025), which allows contributions on a reduced base equivalent to 80% of the minimum wage. The RESIMPLE regime exempts taxpayers from VAT and thus does not allow for input VAT refund, which may reduce its attractiveness for microenterprises purchasing from formal suppliers.
The classification of enterprises under the simplified IRE schemes and the Mipymes law use different turnover thresholds (Figure 5.14). Firms are classified as microenterprises where annual turnover does not exceed PYG 1 billion (approximately USD 85 453), and as small enterprises where annual turnover does not exceed PYG 5 billion (approximately USD 427 265). The thresholds for the categorisation of Mipymes are adjusted annually for inflation, whereas the income thresholds under the IRE regime are not subject to regular updates. Under the current design, the IRE RESIMPLE scheme only covers the smallest microenterprises, the IRE SIMPLE covers microenterprises and small enterprises and the general IRE covers small, medium-sized and large enterprises.
Note: The scales on the horizontal axis do not reflect the scales of the actual income. The exchange rate used is approximately PYG 7 200 per USD 1.
Source: OECD based on Law No. 6380/2019 and Law No. 7444/2025.
Both regimes provide preferential tax treatment for small and micro-enterprises. While the simplified IRE regimes provide lower business taxation, the Mipymes law exempts microenterprises from commercial licence and municipal fees for the first 36 months and provides discounts for small enterprises. Although this three-year exemption for municipal fees provides support to new microenterprises, it may also create incentives for firms to discontinue their business and open a new business to prolong access to these benefits.
A simplified regime covering both general taxation and social security contributions is recommended to promote the formalisation of microenterprises. The taxation and social security contribution obligations of firms could be consolidated within a revised presumptive regime drawing on practices implemented in other countries in the region. This could be an alternative approach to increase formalisation of workers in microenterprises, if the recent Mipymes law would have limited success in increasing the number of workers that pay SSCs. Bundling taxes and SSCs under a PTR could incentivise formalisation and help expand social insurance coverage to workers in microenterprises. Such a tax design is not intended to replace the standard tax and SSC regime but rather to facilitate the transition to it.
Paraguay offers a range of tax incentive regimes to attract investment
Paraguay offers a range of tax incentive regimes designed to incentivise foreign and domestic investment, particularly in export-oriented and capital-intensive sectors (Annex A.1, Table 5.A.2). The recent Law No. 7547 from September 2025 reforms several tax incentive regimes and overall broadens the scope of corporate tax incentives, while introducing sunset clauses to limit the benefit period of some incentives.
Maquila regime: Companies benefit from a single tax rate of 1% on the value added created in Paraguay or the amount exported, whichever is greater, along with exemptions from customs duties and VAT on imported inputs. The single tax substitutes all other taxes including the dividend tax, CIT and non-resident income tax (INR). Established under Law No. 1064/97, the regime is applicable to companies which import raw materials and components for processing or assembly in Paraguay, provided the final goods are exported. The regime permits users to sell up to 10% of the production to the domestic market, which increases the complexity of monitoring the regime and raises concerns regarding fair competition with other domestic firms. The recent reform under Law No. 7547/2025 extended beneficiaries under the Maquila regime to service providers with an export orientation (e.g. call centres or software industry companies), as well as to self-employed and unipersonal businesses. The new law also introduced a sunset clause on the benefits, which can only be granted for 20 years, with the option for another 20 years renewal.
Free Trade Zones (FTZ): Companies operating in FTZs are subject to a reduced income tax rate of 0.5%, and benefit from broad exemptions on customs duties, VAT, dividend tax (IDU), and non-resident income tax (INR). Governed by Law No. 523/1995, this regime enables commercial, industrial, and service activities within designated zones, primarily aimed at foreign markets. Paraguay currently operates one free trade zone in Ciudad del Este, close to the border with Brazil and Argentina.
Capital Investment Law (Law No. 60/90): This regime provides tax exemptions for approved investment projects, including exemptions from customs duties, VAT, and certain municipal taxes. Projects exceeding USD 5 million may also benefit from withholding tax exemptions on interest, commissions, and remittances for up to five years. Dividends are also exempt from dividend income tax, if the investment exceeds USD 13 million. Law No. 7548 of September 2025 reforms the Capital Investment Law by maintaining the existing tax incentives under the previous law and introducing additional new tax incentives and measures that reform the administration of the regime. The reform package introduces clearer eligibility criteria, stricter renewal limits, a sunset-clause of 20 years, and improved monitoring and enforcement mechanisms. Additional measures include extending VAT exemptions to the sale of capital goods imported under the regime and extending the dividend tax (IDU) exemption to domestic capital investments. The DNIT will be added to the Investment Council to manage the regime together with MEF and MIC.
National Automotive Policy (Law 4838/2012): Paraguay offers a targeted tax incentive regime for the automotive industry aimed at fostering domestic value creation within the sector. Eligible companies benefit from exemptions on customs duties for imported inputs used in production, a reduced VAT base whereby the 10% VAT rate applies to only 20% of the sale price of new vehicles, and a 50% reduction in customs duties for vehicles imported for re-export.
Despite generous special regimes and the low statutory tax rate, Paraguay has not attracted high levels of foreign direct investment. Between 2010 and 2024, FDI inflows into Paraguay fluctuated around an average of 1.6% of GDP, significantly below the LAC regional average of 3.5% of GDP (Figure 5.15). No comprehensive evaluation has been conducted to assess the effectiveness of these regimes in attracting FDI or their broader economic impact, including job formalisation. Given the generous tax incentives offered under the Maquila regime and in Free Trade Zones, it is recommended that future analysis assesses their cost-effectiveness and their contribution to formal employment creation.
Source: World Bank (2026[14]), World Development Indicators.
There is scope for a more comprehensive measurement of tax expenditures in the CIT
The foregone revenue from CIT expenditures remains modest in Paraguay compared to regional peers, despite their generosity. In 2024, tax expenditures in the CIT amounted to 0.24% of GDP, well below the LAC average of 0.9% of GDP (Figure 5.16, Panel A). These expenditures account for around 10% of total tax expenditures in Paraguay and correspond to 9.4% of CIT revenue, well below the regional average of 23.5% of CIT revenue (Figure 5.16, Panel B). The relatively low level of revenue forgone from tax expenditures may reflect several factors including limited access to information from special regimes, limited. take‑up of tax incentives and high non-compliance and underreporting Finally, Paraguay’s significantly lower standard CIT rate compared to other LAC countries partly explains the lower revenue forgone from tax expenditures.
Revenue forgone from tax expenditures, 2024 or latest year available
Note: The LAC average only includes the 18 LAC countries presented in this graph.
Source: Adapted from Peláez Longinotti (2025[15]) and the TEDLAC database; MEF.
The largest corporate income tax expenditures in Paraguay are associated with tax exemptions in the general regime and tax expenditures in the IRE SIMPLE regime (Figure 5.17). Tax expenditures under the corporate income tax encompass various types, including exemptions, simplified tax regimes, special tax incentive regimes, and reduced rates. The largest share of revenue forgone arises from tax exemptions, amounting to 0.14% of GDP. Within this category, exemptions related to stock market interest income, Cooperatives Law, and agricultural income each represent around 10% of total revenue forgone, approximately 0.02% of GDP (Box 5.4). The IRE SIMPLE regime accounts for approximately 39% of total revenue forgone under CIT tax expenditures, equivalent to 0.09% of GDP in 2024. Free trade zones and the Maquila sector represent a relatively small share of CIT revenue forgone, 0.9% and 2.2%, respectively. However, the estimated revenue forgone of the Maquila regime is expected to increase due to the recent expansion of the regime to the services sector.
Share of revenue forgone in CIT tax expenditures by type of tax expenditure, 2024
Note: Other exemptions include exemptions for religious institutions, industrial activities, real estate activities, and the tourism, transport, communication sectors, etc.
Source: MEF/DNIT (2025).
Exempt income in the IRE under Article 25 of Law 6380/2019.
Interest and profits from public debt securities issued by the State or municipalities
Income from recognised educational services (preschool to higher education)
Dividends and profits taxed under the IDU, received by shareholders, partners of corporations or limited partnerships
Surpluses of cooperative entities, within legal limits (Law No. 438/1994)
Income from international freight services related to exports, with proper transport documentation
Interest from Central Bank placements (Monetary Regulation Bonds and Commitment Letters)
Returns and capital gains from trading securities on regulated stock exchanges
Gains from valuation or sale of participation in Investment Equity Funds (Law No. 5452/2015)
Income of foreign official bodies (with reciprocity) and international public law organizations
Donations to religious institutions
Income of legally recognised non-profits engaged in social, cultural, environmental, or humanitarian work, provided no profit distribution occurs
Income of recognized political parties, unions, and business associations
Income of legally established or recognized social security institutions, including mutuals
However, exemptions do not apply to permanent, profit-oriented activities (e.g., transport, hospitality, advertising, leasing, construction, etc.) conducted by non-profits or religious entities.
The tax benchmark of CIT tax expenditures could be reviewed to identify additional provisions that qualify as tax expenditures. Specifically, the difference between actual profits and the presumptive tax base (30% of turnover) under the IRE SIMPLE could be considered a tax expenditure. When the taxpayer opts for the presumptive income option, this effectively grants relief equal to the difference between presumptive and actual profits. The same consideration applies to taxpayers who choose to use 30% of gross income as the tax base for activities in the forestry sector, as well as for those declaring income from property sales under the IRE General.
Value-added tax (VAT) is a key source of revenue, generating 5.4% of GDP in revenue in 2023 and representing more than one third of total tax revenue. The VAT revenue ratio (VRR), which compares actual VAT revenue to the theoretical revenue that would be collected if the standard VAT rate were applied to all final consumption, stood at approximately 70% in Paraguay over the past decade, indicating that 70% of the VAT revenue potential was actually collected. This very high VRR rate – well above the LAC average of 0.55 and the OECD average of 0.58 (OECD, 2024[16]; Peláez Longinotti, 2024[17]) – may partly reflect an underestimation of informal consumption in the national accounts and needs to be interpreted with caution.
The VAT regime applies a standard rate of 10% to a broad base and a reduced rate of 5% to basic consumer goods and some other goods (Table 5.5). The 2019 tax reform introduced a VAT on digital services at the 10% standard rate. Input VAT is creditable against output VAT, and exports are treated as zero-rated, allowing exporters to claim refunds on input VAT for goods and services directly or indirectly linked to export activities. However, input VAT on raw materials used in agricultural products destined for export – such as flour, raw oils, expeller, and pellets – is not refundable.
Note: Exports are treated as zero-rate supplies under the VAT regime, allowing for full recovery of input tax, whereas domestically supplied products that are VAT-exempt do not qualify for input VAT recovery.
Source: DNIT, Law No. 6380/2019.
Paraguay’s VAT system incorporates withholding taxes aimed at enhancing compliance and securing revenue collection. The withholding rate varies depending on the nature of the transaction: payments to foreign suppliers are subject to a 100% VAT withholding, while payments to domestic suppliers are generally subject to a 30% withholding. A reduced withholding rate of 10% applies to transactions involving agricultural products. These measures are designed to strengthen enforcement and reduce the risk of non-compliance in VAT collection.
Paraguay does not impose a VAT registration threshold. However, small businesses under the RESIMPLE regime with annual gross income below PYG 80 million (~USD 10 000) are VAT exempt. A key difference between a VAT registration threshold and the Paraguayan RESIMPLE threshold is that firms below the VAT threshold may opt into VAT registration and recover input VAT, while such voluntary registration and refund entitlements are not available to firms under the RESIMPLE regime.
VAT accounts for the largest share of revenue forgone from tax expenditures
Tax expenditure from VAT amounted to 1.1% of GDP in 2024. The VAT expenditures originate mainly from six items: Fuels (0.2% of GDP), consumer basket goods (0.2%), education (0.19%), agricultural products included in the consumer basket (0.08%), political parties, unions, associations, among other entities (0.04%), and medicines (0.04%) (Figure 5.18). About 60% of VAT tax expenditure is linked to exemptions (fuel, education, etc.) and 40% is due to reduced VAT rates (e.g. for basic consumption goods, agricultural products and medicines) (Salim, 2024[10]). In 2023, VAT tax expenditure accounted for 45% of total tax expenditure and 17% of VAT revenue.
Source: MEF (2025).
The elimination of reduced VAT rates on basic goods should only be considered once Tekoporã and Adulto Mayor reach all the eligible population. A potential reform option could be to eliminate existing reduced rates on consumer goods, while compensating the lowest income deciles. However, this should only be considered once Tekopora can be expanded to the first three deciles and Adulto Mayor is fully implemented. The VAT compensation could take the form of a monthly cash transfer or an immediate refund if Tekopora beneficiaries are allowed to purchase goods using an electronic wallet linked to the transfer, as is the case in Uruguay with beneficiaries of the family allowances cash-transfer programme (AFAM-PE).
There is scope to reform other VAT expenditures including eliminating the VAT exemption on fuels and on the purchase of hybrid and electric vehicles. Furthermore, reduced rates for the transfer of immovable property and the leasing of residential real estate are not very common and could be reconsidered.
Paraguay has a preferential VAT regime for tourism-related purchases (Régimen de Turismo de Compras, RTC). The regime applies to imported goods that are sold within Paraguay to non-resident entities or individuals, but only in five designated border cities. Under this scheme, the 10% standard VAT rate is levied on a reduced tax base equivalent to 12.5% of the value of the imported goods, resulting in an effective VAT rate of 1.25% (Table 5.5). In case that goods are sold to resident entities or individuals outside the regime, VAT applies to the full tax base, but input VAT can be credited. According to the DNIT, 465 firms were active under this regime in 2025. Given its preferential tax treatment of selected taxpayers, the tourism shopping regime should be considered a tax expenditure. The revenue forgone associated with this preferential regime amounted to approximately USD 230 million or 0.5% of GDP in 2025. However, this estimate should not be interpreted as the potential revenue gain from eliminating this preferential rate, as such a change could lead to a decline in tourist purchases. In the medium term, it is advisable to evaluate the cost-effectiveness of this regime, given the substantial amount of revenue foregone it generates.
Health excise taxes represent a triple win, as they improve public health by discouraging the consumption of unhealthy products, while also generating tax revenues and reducing long-term healthcare costs (WHO, 2025[18]). Health taxes are not only a revenue raiser but a health policy instrument. This type of taxation continues to gain momentum worldwide. In the latest years, many jurisdictions have raised taxes on tobacco, alcohol, and sugar-sweetened beverages to support public health objectives and increase revenues (OECD Tax Policy Reform reports 2023-2025).
In 2024, Paraguay’s revenue from health excise taxes levied on products that have negative public health effects, amounted to 0.14% of GDP, which is among the lowest in the region (Figure 5.19, Panel A). However, revenue from tobacco excise taxes has declined by 0.07 percentage points of GDP since 2019 and represents 0.09% of GDP in 2024 (Figure 5.19, Panel B). Alcohol excise tax revenue has fallen by 0.05 percentage points of GDP since 2014 and represents only 0.02% of GDP in 2024. The sugar-sweetened beverage (SSB) tax represents a stable but small revenue source for Paraguay (0.03% of GDP). In comparison to peer countries in the region, health taxes have a high revenue potential in Paraguay.
Health excise tax revenue from alcohol, tobacco and SSBs, as a percent of GDP
Note: Data presented in Panel A is from 2023, except for Paraguay (2024) and Suriname (2022).
Source: OECD.
Tobacco excise tax could be reformed
The prevalence of tobacco smoking amongst adults has declined but it has increased amongst youth, together with increasing electronic cigarette use.3 The prevalence of tobacco smoking among Paraguayan adults declined by 14% between 2011 and 2022, with a registered rate of 12.5% in 2022 according to data obtained from national surveys (MSPBS, 2012[19]; MSPBS, 2023[20]). However, tobacco smoking has increased among students aged 13-15, with a registered rate of 7.2% in 2019 (WHO, 2021[21]) compared to a rate of 5.8% in 2014 (WHO, 2018[22]). No information is available of how smoking prevalence has changed for students aged 13-15 over more recent years. Additionally, 12.5% of 13–15-year-old students reported using electronic cigarettes in 2019, a significant increase from 2014 when this figure stood at 3.7%. Recent empirical evidence concludes that youngsters who use electronic cigarettes are more likely to start smoking traditional cigarettes and become regular smokers (Banks et al., 2023[23]). Intensifying the efforts to reduce tobacco smoking prevalence rates becomes particularly important when considering the trend for younger generations.
Paraguay has the most affordable cigarettes in the LAC region. In 2024, only 0.8% of the GDP per capita was needed to purchase 100 packs of 20 sticks of the most sold cigarette brand (Figure 5.20). Although cigarettes have become slightly less affordable compared with 2014 (by 0.2 percentage points), Paraguay is the country in the region where cigarettes are currently the most affordable. Furthermore, Paraguay stands out with one of the highest smoking-attributable medical costs as a proportion of GDP in the LAC region, amounting 0.8% of GDP or 11% of total health expenditure in 2015 (Pichon-Riviere et al., 2020[24]). In order to further reduce tobacco use and the costs it causes to the Paraguayan society, it is important that cigarette prices are increased. Tobacco taxes are the most cost-effective instrument to achieve this goal (WHO, 2021[25]).
Percentage of GDP per capita required to purchase 100 packs of 20 cigarettes
Note: The affordability indicator measures the percentage of the country’s GDP per capita required to purchase 100 packs of 20 cigarettes of the most sold brand in each country. A higher percentage means lower affordability of cigarettes while a lower percentage means higher affordability.
Source: WHO report on the global tobacco epidemic (WHO, 2025[26]).
Paraguay has scope to further align its tobacco tax system with WHO tobacco tax policy best practices (Table 5.A.2, Annex 5.A). The OECD (OECD, 2024[27]) identified twelve best practices on tobacco tax policy compiled by the WHO to assess LAC countries’ tobacco tax policy in a consistent manner. These best practices are based on global evidence on the effectiveness of tobacco taxes to reduce tobacco use (WHO, 2021[25]). Paraguay is completely aligned with 20% of these best practices. Tobacco tax policy areas where the country scores particularly well include the number of products subject to an excise tax, since the country levies an excise tax on all traditional tobacco products and on heated tobacco products, albeit at very low rates. Uniform tax rates are applied on all taxable tobacco products, which are more effective than tiered rates). Additionally, when compared to 2014, Paraguay has made some progress in reducing cigarette affordability and increasing the tax share applied to cigarettes. However, the country still has the most affordable cigarettes of the region, and the second lowest cigarette tax burden in LAC. Other tobacco tax policy areas that could be strengthened according to international best practices are discussed below.
The cigarette tax burden in Paraguay is the second lowest in the region. In Paraguay, the tobacco indirect tax burden accounted for only 20% of the retail price of a 20-cigarette pack of the most sold brand in 2024. Paraguay levies an ad valorem excise tax on traditional and heated tobacco products, in addition to import duties and VAT. The ad valorem excise tax rate levied on those products is set at 22% for 2025. Law No 7508/2025 establishes an ad valorem excise tax on additional tobacco, nicotine, and other derivative products consumed through electronic devices with a tax rate that can range between 22% and 24%. However, as of January 2026, the Law has not been regulated and, therefore, the excise tax for these products is not yet enforced. Setting uniform rates for the tobacco excise tax is in line with WHO best practices (Table 5.A.2, Annex 5.A). However, it is recommended to rely more on specific over ad valorem tobacco taxes4, since the former are more effective than the latter in increasing retail prices, particularly for the cheaper brands, and hence in reducing tobacco consumption (WHO, 2021[28]). Additionally, the ad valorem excise tax rate on traditional and heated tobacco products is low in Paraguay compared to other countries in the region which levy an ad valorem tobacco excise tax only (OECD, 2024[27]).
The ad valorem tobacco excise tax is applied to the ex-factory price for domestic products or the customs value for imported taxable products, while it is best practise to levy it on the retail price. The tobacco excise tax is levied on the first domestic transaction made – either upon importation of tobacco products or the initial sale following production – with manufacturers and importers as taxpayers. It is best practice to levy the ad valorem tax on the retail price rather than on intermediate prices of tobacco products such as ex-factory or import values. The retail price exceeds the ex-factory price or customs value since it includes the value added by tobacco wholesalers and retailers. The broadest tax base is preferable because it strengthens the tobacco tax burden and prevents tax base manipulation strategies.
Paraguay could strengthen the design of its tobacco excise tax through several measures. First, introducing a specific tobacco excise tax component – set at a level sufficient to raise retail prices, particularly for lower-priced brands – would help reduce price dispersion and affordability of tobacco products, and therefore discourage the consumption of these products. If an ad valorem excise tax component remains part of the system, Paraguayan authorities could assess the feasibility of levying it on the retail price of tobacco products. Data available to the administration could be used for tax base enforcement purposes. In addition, establishing a minimum tax or minimum tax base across all tobacco products, set high enough to influence retail prices, would ensure that a minimum amount of excise tax is paid. Indexing the specific tax, minimum tax, or minimum tax base to inflation and real income growth would avoid that tobacco products would become increasingly affordable over time. Finally, regulating Law No 7508/2025 would ensure that other tobacco and nicotine products consumed through electronic devices are taxed, thereby reducing their affordability, which is particularly important considering the increasing electronic cigarette use among young people.
Tax revenue collected from tobacco products is low compared to peers
The average excise tax revenue collected per pack of cigarettes in Paraguay is low compared to other countries in the region and the LAC average, signalling that there is scope to further increase the tax burden on cigarettes and leverage the revenue potential of tobacco taxation. Tobacco excise tax revenue expressed as a percentage of GDP has been declining in Paraguay since 2018, with a short exception in 2022 and 2023 (Figure 5.19, Panel B). In 2023, Paraguay collected USD purchasing power parity (PPP) 1.6 per pack of cigarettes sold on the legal market, which is significantly below the LAC average (USD PPP 2.8) (Figure 5.21). If Paraguay would increase the excise tax revenue raised per cigarette pack to align it to the LAC average (USD PPP 2.8), the country could raise in the short-term additional excise tax revenue amounting between 7% and 46% of its current tobacco excise tax revenue collection.5
Tobacco excise tax revenue in USD PPP collected per pack of legal cigarettes sold, 2014 and 2023
Note: The country selection is motivated by the availability of cigarette sales data in Euromonitor International’s Tobacco Industry edition. Brazil and Ecuador have been excluded due to limitations on data availability on their tobacco excise tax revenue.
Source: OECD calculations based on Euromonitor International’s Tobacco Industry edition6 (Euromonitor International, 2025[29]); Paraguay’s Revenues from the Impuesto Selectivo al Consumo (DNIT, 2025[30]); OECD Revenue Statistics in Latin America and the Caribbean 2025 (OECD et al., 2025[2]); WHO report on the global tobacco epidemic, 2025 (WHO, 2025[26]); World Bank Group Data (World Bank, 2026[14]).7
Alcohol excise taxes could be strengthened
The tax burden on alcoholic beverages in Paraguay is low compared to other countries in the region (Figure 5.22). Current rates range from 8% to 9% for beer and 11% for other alcoholic beverages. The 2019 tax reform introduced only a modest increase of 1 percentage point in these rates. Paraguay’s alcohol excise tax system does not include a specific component, and the tax is levied solely on an ad valorem basis. The tax base is defined as the ex-factory price for domestic production or the customs value for imports.
Total taxes on alcoholic beverages as a percentage of the retail price of the most sold brand of beer and spirits, 2024
Source: WHO (2024[31]).
Revenues from alcohol excise taxes have declined significantly over the last decade. Between 2009 and 2024, alcohol excise tax revenue declined from 0.07% of GDP to 0.02% of GDP (Figure 5.19, Panel B). This trend is partly attributable to tax planning practices whereby producers establish affiliated distribution companies and set artificially low prices on the first sale. Since excise duties are levied on the initial transaction, these arrangements have significantly eroded the tax base.
Several options could be considered to strengthen the design of alcohol excise taxes. First, a specific component based on alcohol content (e.g. fixed amount of tax per litre of ethanol) could be introduced to better align taxation with health objectives. Second, if the design relying only on ad valorem taxes would be maintained, a minimum tax could be implemented to ensure the collection of a minimum amount of excise tax revenue. A differentiated minimum tax could be established per drink category, to approximate to the principle of taxing the harm (i.e. alcohol content), if setting a fixed amount of tax per ethanol volume would not be administratively feasible. Third, Paraguayan authorities could assess the feasibility of levying the ad valorem excise tax on the retail price of alcoholic beverages rather than the first sale price. This would address tax avoidance strategies that leverage on the current design of the alcohol excise tax base. Finally, there is scope to increase rates, particularly for beverages with higher alcohol content, which remain among the lowest in the region.
Environmentally related taxes mobilise only 0.8% of GDP in tax revenues (World Bank, 2025[32]). The low revenue from environmentally related taxes could be partially attributed to the low net effective carbon price compared to other LAC countries (Figure 5.23). Paraguay’s net effective carbon rate is low at EUR 8.5 per tonne of CO2 and only about 16% of the greenhouse gas emission in Paraguay are taxed.
Note: Both graphs are based on net effective carbon rates.
Source: OECD (2024[33]).
Paraguay could consider increasing the tax burden on fuels once the recent increase in energy prices has subsided. As part of an IMF agreement (IMF, 2024[34]), Paraguay plans to introduce a carbon tax on liquid fuels (diesel, gasoline, LPG) replacing the existing excise tax so that the reform is revenue neutral. While this reform would not change effective tax rates, it could create the conditions for future, gradual increases in the carbon tax.
The taxation applied to the importation or purchase of vehicles could be increased, in particular for non-electric cars. The importation and registration of petrol and diesel vehicles could be taxed under the excise tax, or a feebate mechanism could be established (World Bank, 2025[32]). Another alternative could be to introduce an annual tax on CO2 emissions generated by vehicles. Furthermore, tax incentives could be restricted to only fully electric vehicles, excluding hybrid vehicles (World Bank, 2025[32]).
Property taxation in Paraguay remains underutilised as a revenue source, generating only 0.2% of GDP in 2023, well below the LAC regional average of 0.8% of GDP. The recurrent real estate tax (impuesto inmobiliario) is levied annually on the cadastral value of property, which is determined based on official valuations by zone and gradually adjusted to market values over a five-year period. The standard tax rate is 1%, with a reduced rate of 0.5% applied to rural properties smaller than five hectares. The tax is payable by property owners or users and is administered and collected at the municipal level. However, weak enforcement at the local level significantly undermines its effectiveness. The DNIT is responsible for updating cadastral values annually based on consumer price indices, with a full cadastral revision mandated every five years. Nonetheless, according to DNIT officials, data limitations – particularly in rural areas – hinder the accuracy and comprehensiveness of these updates. A surtax also applies to rural properties exceeding 10 000 hectares. In addition, a 0.3% tax is levied on the transfer of immovable property, based on the higher of the transaction price or cadastral value. While the overall revenue potential of property taxation remains modest, strengthening its administration could enhance subnational revenues and support fiscal decentralisation.
Personal income tax:
Introduce a generous basic tax allowance or zero tax rate for the first income bracket with a high threshold and eliminate the PYG 80 million exemption threshold. Alternatively, introduce an overall cap on total deductions defined as a percentage of taxable income.
Abolish some deductions and limit the remaining ones.
Introduce PIT withholding for labour income.
Strengthen monitoring mechanisms to prevent a significant share of taxpayers from reducing their labour and capital income tax liability to zero.
Tax pension income.
Assess the costs of tax expenditures in the PIT, including deductions and exemptions, on an annual basis. Quantify revenue forgone of PIT tax exemptions, using third-party data.
Corporate income tax:
Refrain from extending corporate tax incentives.
Evaluate the impact of existing tax incentive regimes on formal job creation in the domestic economy.
Consider reporting and measuring additional tax expenditures in the IRE.
Value-added tax:
Consider the preferential tourism shopping regime as a tax expenditure and assess its cost-effectiveness.
Eliminate the VAT exemption on fuels and on the purchase of hybrid and electric vehicles.
Maintain reduced VAT rates on basic consumer goods as long as Tekoporã is not fully expanded to all eligible low-income households and Adulto Mayor is fully rolled-out, then consider eliminating reduced rates on basic consumer goods while compensating low-income households.
Health taxes:
Tobacco:
Introduce a sufficiently high specific excise tax component and index it at least to inflation.
Levy the ad valorem excise tax on the retail price of tobacco and nicotine products instead of the ex-factory price.
In the absence of a specific excise tax, introduce a sufficiently high minimum tax or tax base on all tobacco and nicotine and index it at least to inflation.
Alcohol:
Introduce a specific component based on alcohol content (e.g. fixed amount of tax per litre of ethanol).
In the absence of a specific tax, a minimum tax could be implemented to ensure the collection of a minimum amount of excise tax revenue.
Apply the excise tax rate on the retail price rather than the first sale price.
Consider increasing excise tax rates, particularly for beverages with higher alcohol content.
Environmental taxes:
Increase taxation on fuels once the recent increase in energy prices has subsided.
Property taxes:
Strengthen the administration of property taxes to enhance subnational revenues and support fiscal decentralisation.
Note: The DNIT is currently reviewing the measurement of the tax expenditures in Field 16 of Form 515 and is considering measuring revenue forgone from additional tax expenditures in form 515 (Fields 28 and 38), and in form 516 on capital income. Tax exemptions in form No. 516 are considered tax expenditures if the presumptive income base is smaller than the real net income base (applying to all items listed in Rubros 1 and 2, file No. 516). The revenue forgone of those tax expenditures could be calculated as the difference between the real net income (column III, file 516) and the presumptive net income (column IV, file 516) times the personal income tax rate.
Source: DNIT.
Source: Vargas and Gómez Sánchez (2024[35]); Artana and Guardarucci (2025[7]); Law No. 7548 from 2025; microdata on the IRE provided by MEF.
Assessment of tobacco tax policy performance in Paraguay
Selected WHO tobacco tax policy best practices are:
BP1: Increase tobacco taxes significantly to reduce the affordability of tobacco products. To reduce affordability, tax increases need to result in nominal retail price increases that exceed the increase in nominal incomes (affordability).
BP2: Rely more on tobacco excise tax increases over other general indirect (and direct) taxes as they are most effective in raising both absolute and relative prices of tobacco products (type of taxes).
BP3: Rely more on specific tobacco taxes over ad valorem taxes, and in mixed tax structures, give more weight to the specific tax component than to the ad valorem tax component (tobacco excise tax structure).
BP4: Tax all traditional tobacco products (i.e. cigarettes, cigars, cigarillos, roll-your-own [RYO] tobacco) with a tobacco excise tax (taxable products).
BP5: Tax new and emerging tobacco and nicotine products (i.e. electronic nicotine delivery systems [ENDS], electronic non-nicotine delivery systems [ENNDS] and heated tobacco products [HTP]) with an excise tax when their sales are not banned (taxable products).
BP6: For ad valorem tax structures, set the retail price as the tax base rather than, for instance, the cost, insurance and freight (CIF) value or the producer price (tobacco excise tax base).
BP7: For specific excise taxes, clearly define the tax base (for cigarettes, cigars and bidis, it is the number of sticks; for other tobacco products, such as smokeless tobacco or RYO tobacco, it is the weight of tobacco) (tobacco excise tax base).
BP8: Tax all tobacco and nicotine products similarly (e.g. similar tax structure, similar tax rates) (tobacco excise tax rates).
BP9: Rely more on uniform excise tax rates over tiered rates (tobacco excise tax rates).
BP10: Adjust specific tobacco taxes for inflation and real income growth on a regular basis (prices are not decreased at times of deflation) (indexation).
BP11: Complement the ad valorem excise tax with an excise tax floor (e.g. a minimum excise tax, a minimum retail price) (excise tax floors).
BP12: Implement non-tax policies affecting price levels of tobacco products (e.g. sale restriction for single sticks of cigarettes, bans of promotional discounts for tobacco products, minimum number of cigarettes per pack) to support the effectiveness of tobacco tax policies (sale regulations that affect tobacco tax policy design).
Note: BP refers to best practise based on the WHO framework.
Source: OECD based on WHO technical manual on tobacco tax policy and administration (WHO, 2021[25]); WHO report on the global tobacco epidemic 2025 (WHO, 2025[26]) and national legislation: Law 5538/2015, Minister of Health’s General Resolution 630/2019, Law 6380/2019, Decree 3109/2019, National Directorate of Tax Revenue’s Binding Ruling 358/2023, Decree 8878/2023, Law 7508/2025.
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← 1. The long-run average tax buoyancy value is 1.1 if the 2020 value is not imputed.
← 2. The following agents need to withhold PIT: Entity that distributes dividends and profits not taxed under the IDU; Entity that pays royalties to individuals; Notary when involved in selling real estate; Casinos and similar institutions that pay out prizes exceeding PYG 500 000; Foreign Ministry and military for remunerations paid to staff providing services abroad; Independent workers need to withhold income tax on non-residents when they hire services from a non-resident INR. In these, cases the withholding agents must submit withholding taxes through Formulario No. 725 on Settlement of Withholdings of the Income Taxes to the DNIT.
← 3. Electronic cigarettes include Electronic Nicotine Delivery Systems (ENDS) and Electronic Non-Nicotine Delivery Systems (ENNDS).
← 4. Ad valorem tobacco taxes are those levied as a percentage of the value of the tobacco product being taxed, whereas specific tobacco taxes are those levied per quantity of the tobacco product (WHO, 2021[25]).
← 5. To estimate a range of potential additional tobacco excise tax revenue collection, two different average cigarette price elasticities computed from existing evidence on LAC countries have been considered: -0.75 from Guindon et al. (2025[36]) and -0.31 from Guindon et al. (2018[37]).These computations have been developed assuming that the additional excise tax raised per cigarette pack would be fully passed through into cigarette prices.
← 6. This document includes source material that is the exclusive property of Euromonitor International Ltd and its licensors. All such source material is © Tobacco Industry Edition 2025, Euromonitor International Ltd and is provided without any warranties or representations about accuracy or completeness. Further sharing, disclosure, publication or making available of all or part of the material contained in this document (or any data or other material derived from it) will require Euromonitor’s prior written consent. Euromonitor International Ltd cannot be held liable for analysis or findings within this report and cannot be held liable for any reliance on such materials in any capacity and any reliance is done at the user’s risk.
← 7. Data on tobacco excise tax revenue for this Figure was obtained from three different sources: (i) OECD Revenue Statistics in Latin America and the Caribbean (2025[2]) for Argentina, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, and Uruguay; (ii) the WHO report on the global tobacco epidemic (WHO, 2025[26]) for Bolivia and Peru; and (iii) national data for Paraguay.