Tax systems and tax reforms in Latin America: Paraguay

This paper analyses the main features of Paraguay’s current tax system and its evolution since the early 1990s. Paraguay is a poor and unequal country, even compared to Latin American standards. Its current tax system is the result of the radical fiscal reform of 1991, which replaced the previous obsolete and inconsistent system. In the decade after the reform, a growing number of tax amendments, exemptions and special regimes have been introduced, producing significant changes to the original structure and a considerable reduction of tax revenues. Furthermore, this tax system, dominated by indirect taxes and characterised by high levels of tax evasion, is rather ineffective in addressing inequality. Finally, tax revenues are significantly below their potential, due to the extent of the informal economy, the widespread tax evasion and the diffuse corruption of tax officers. A new fiscal reform, recommended by the IMF under the Stand-By Agreement of December 2003, was approved in June 2004. The reform aims to address the critical issues described, to rationalise the existing tax system and to better tackle tax evasion and inequality. However, a major obstacle to this reform is the ability of the Paraguay government to fully implement it. Its application has been initially delayed to the year 2006 and its contents partially weakened. Finally, despite recent changes, the tax system remains fundamentally biased towards indirect taxation, which yields approximately 80% of tax revenues, while the newly introduced personal income tax appears to be more of a facelift than a real change, at least as long as major problems are not solved, such as tax evasion, informal economy, corruption.