Taxation in Paraguay: Marginalization of small-scale farming | Value Added Tax

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Paraguay’s tax system does not provide the resource base to eradicate poverty in the country, and has done little or nothing to achieve a more equal distribution of income and wealth. Two major taxation reforms over the last decade have done little to alleviate the fiscal injustice that is generated partly by the low tax reciprocity of the soy agribusiness – Paraguay’s main export crop. Meanwhile, programmes to support small-scale farming receive a level of public financing accounting for just 5 per cent of public expenditure. With one of the highest levels of unequal land ownership in the world, labour informality at very high levels and poor environmental regulation of soy producers, the livelihoods and ecosystems of Paraguay’s small-scale producers are at risk. There are serious loopholes in Paraguay’s tax system that must be addressed in order to deliver a fairer, progressive taxation system that will allow the country to meet its social objectives.
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  1 Oxfam Research Reports Taxation in Paraguay: marginalization of small scale farming Déborah Itriago   Intermón Oxfam May 2012 Paraguay’s tax system is insufficient to provide the resource base to eradicate poverty in the country, and has done little or nothing to achieve a more equal distribution of income and wealth. Two major taxation reforms over the last decade have done little to alleviate the fiscal injustice that is generated partly by the low tax reciprocity of the soy agribusiness – Paraguay’s main export crop. Meanwhile, programmes to support small-scale farming receive a level of public financing accounting for just 5 per cent of public expenditure. With one of the highest levels of unequal land ownership in the world, labour informality at very high levels and poor environmental regulation of soy producers, the livelihoods and ecosystems of Paraguay’s small-scale producers are at risk. There are serious loopholes in Paraguay’s tax system that must be addressed in order to deliver a fairer, progressive taxation system that will allow the country to meet its social objectives.   www.oxfam.org/grow  2 CONTENTS 1 Introduction 2 Tax injustice and agribusiness 3 Loopholes, contradictions and inequality of the Paraguayan tax system 4 Conclusion  3 EXECUTIVE SUMMARY In Paraguay, the poverty that in 2002 affected 52 per cent of the rural population now stands at around 49 per cent. The extreme poverty, which in urban areas affected 9 per cent of the population in 2009, in the countryside accounted for 32.4 per cent. Farms smaller than 20 hectares (smallholdings), despite comprising 83.5 per cent of the total number of farms, occupy only 4.3 per cent of the farmed land. To a great extent, one of the underlying causes is tax injustice, characterized by a very low and unstable tax burden which determines the effectiveness of governance to eradicate poverty and is excessively biased towards indirect taxes on consumption, further increasing the inequality that characterizes Paraguay. Furthermore, the emphasis on an excluding economic growth model sustains this reality – a model based on the agricultural exports of natural soy which, due to the inefficiency of the state, has had a negative impact on family farming (in Spanish, agricultura familiar campesina – AFC). In 1991, AFC generated 70 per cent of the gross value of agricultural production, whereas in 2008 its role had decreased drastically, falling to 32.1 per cent.  Almost 75 per cent of public spending in Paraguay is allocated or relatively fixed. That is, despite progress in tax collection over the last decade, the Paraguayan state has a low margin for saving and/or for supporting and stabilizing investment in major national projects. In fact, improvements in tax collection in the last decade have only allowed a level of social spending per capita which is three-and-a-half times lower than the average for Latin America. This gap is even wider when comparing Paraguay with neighbouring countries such as Argentina, Brazil and Uruguay, which also have economies based on agricultural exports. In the rural sector in particular, despite higher public spending, programs and projects related to AFC have received public funding at the levels of two decades ago and is subject to the swings in the country’s political polarization. Today, the family farming sector absorbs about 5 per cent of public spending, although more than 40 per cent of the Paraguayan population lives in the countryside. In the period 1990–2010, the rate of increase of the tax burden (including contributions to social security) in the Latin America and Caribbean region was 34.5 per cent. However, the increase in the tax has been unequal in different countries. Despite the tax reforms in 1991 and 2004, Paraguay is among the countries with the lowest increase in tax collection in the region. The same applies to its level of tax burden: it is one of the lowest in the region (13.5 per cent of the GDP) and is low compared with its potential. With the enactment of Law 125/91, as amended and extended by Law 2.421/04, the tax scheme in force in Paraguay was systematized as a limited set of taxes. Among the main direct taxes on business income, the tax on the income derived from commercial or industrial activities or those services that are not of a personal nature (in Spanish, Impuesto a las Rentas de actividades comerciales, industriales o de servicios IRACIS), and the tax on income derived from agricultural activity (el Impuesto a las Rentas de las actividades agropecuarias, IMAGRO) are still in force. Among others, the IRACIS taxes agro-exporters and the income from industrial commercial activity or services related to agribusiness. It does not apply to agricultural producers, who pay taxes through the IMAGRO. There is no personal income tax. The sole tax on capital is the property tax (land), which is currently under the administration of local government. With regard to indirect taxes, the system is essentially based on the value added tax (VAT), the selective consumption tax (ISC) and import tariffs. There is no tax on exports. The primary strength of the 1991 law can be summarised as being in advances relating to efficiency, achieved by simplifying and rationalising the current tax system. Meanwhile, in its purest version, the 2004 tax reform included the formalisation of the economy and sought to correct the still very low tax burden.   Unfortunately, the reform of 2004 was only partly implemented. The personal income tax did not overcome the obstacles imposed by powerful groups, and the agribusiness sector got a privileged position, thus eroding the contribution of the wealthiest sectors of the population. This was due both to a clear intention to lighten the tax burden, as well as to the loopholes and contradictions that remained in the tax and fiscal scheme as a whole.  4 In addition to low tax rates, the Paraguayan tax system is a victim of major tax evasion (estimated at 50 per cent only in VAT) and has loopholes that encourage tax avoidance. The most important of these gaps is the absence of a personal income tax. This, coupled with low levels of control over the operations of the transnational corporations controlling the soybean value chain, and in particular the very low contribution of IMAGRO and almost no contribution derived from the property tax (land) largely explain the lack of revenue collection.  Additionally, this system coexists with a large number of tax exemptions for which there is no clear measurement of their impact on public finances and equity. The IMAGRO contributes less than 1 per cent of the total revenues from taxes, and the very low level of revenue to date is mainly the result of specific and general design flaws in the Paraguayan tax system, of ‘ad hoc’ decrees favouring agribusiness, and of obstacles to its implementation, including effective controls and sanctions. As for the land tax, the lack of a proper rural cadastre and the use of tax values as a basis for its estimation which are well below the market value of the land are the main causes of its non-existent contribution. The other issue that merits serious consideration is the inequity of the Paraguayan tax system. The result of adding VAT, other consumption taxes (such as fuel) and the rights or tariffs on imports accounted for 79 per cent of Paraguay’s total tax revenues in 2010 (74 per cent if contributions to social security are included). In contrast, income taxes, which are potentially progressive, accounted for 17 per cent of total tax revenues, while in other South  American countries this figure was on average 31 per cent of total tax revenues. VAT is applied to all goods except those that are in a raw or unprocessed state, and there is little difference between the rates levied on basic consumer goods and luxury goods. In 2011, a study concluded that VAT implemented in Paraguay in 1991 and updated as part of the reform of 2004 is regressive with regard to income. A more recent study confirms that the average rate (payment of VAT/income) tends to decline as income increases: the poorest 20 per cent of people pay 18 per cent of their income as VAT, while the richest 20 per cent pay 14 per cent. Finally, to complete the picture, there are large-scale unfair subsidies. Petropar, the state company that supplies fuels, sells at a loss and has an estimated debt of $400m, fundamentally due to subsidies (gasoil). Approximately 30 per cent of diesel fuel is consumed by the agriculture sector (mainly soy producers with more and better machinery), 50 per cent is consumed by middle and upper-class households with private cars and vans, and only 20 per cent is used for industry and transportation in general. Between 1995 and 2000 over 70 per cent of public expenditure on agriculture was used for subsidies, most of which benefited large agro-export producers. Some analysts suggest that from 2003 to 2008, the subsidy received by the soy agribusiness sector, based on the reduction of its production costs, was greater than $100m. In order to achieve a more progressive and fairer tax collection, it is essential to complete the picture of the existing opportunities which, in combination with other necessary reforms on the side of public revenues (social security system and hydroelectric royalties received by municipalities) and also in environmental and labour matters, help to articulate the possibilities for the Paraguayan state to effectively address the protection of the most vulnerable and the support the fight against poverty and inequality. It is crucial that the potential to increase the public expense that may arise from those reforms is really productive, clearly identifying where, how and how much should be invested so that the collection can result in a real and integral development of small-scale farming and thereby overcome poverty. This roadmap should contain the analysis and design of strategies for overcoming not only the technical and legal obstacles in Paraguay but above all the political and sociological ones in order to achieve a tax system consistent with social demands. Civil society should clearly get involved and fully understand the deficiencies and effects of the injustice of the Paraguayan tax and fiscal system, demand the relevant reforms and answer with a greater compliance with the obligations incumbent upon them. This report, notwithstanding the scarcity of data and analysis available, is part of a series of works that aim to contribute to a constructive, thorough debate that gives rise to greater fiscal justice in Paraguay.
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