The Challenge of Pillar 2 

The Organization for Economic Co-operation and Development (OECD) developed the "Pillar 2" strategy with the aim of creating a fair playing field through a Global Minimum Tax (GloBE) of 15% for multinational entities (MNEs) with revenues above €750 million in at least two of the last four fiscal years to ensure that taxes are paid in each jurisdiction where they operate.

Pillar 2 was created to counteract the harmful effect of selecting jurisdictions with low or no taxation to minimize the tax burdens of MNEs through the transfer of their profits to them. This practice triggers harmful tax competition between jurisdictions, significantly affecting the collection capacity of the Treasuries.

It is clearly identified that the stakeholders in this new OECD measure are the tax jurisdictions and MNEs, with antagonistic interests, on one hand to collect more taxes, and on the other hand, to collect as little as possible, respectively. Here, Pillar 2 plays an important role as a mediator to establish a Global Minimum Tax (GloBE) of 15%.

It seems that as a country we are far from the OECD incidence with the implementation of Pillar 2 that already came into force in January 2024. However, its effect is challenging given that, if we omit it, we are left out of the OECD's efforts to avoid Base Erosion and Profit Shifting (BEPS). Including it in domestic tax legislation will require a thorough review of the special tax regimes, and in general of the tax regime currently in force in Paraguay.

The Global Minimum Tax (GloBE) of 15% provided for in Pillar 2, already mentioned, is higher than the 10% rate of the Corporate Income Tax (IRE), created by Law No. 6380/19 on the Modernization and Simplification of the National Tax System; however, for comparative purposes, should we also apply the withholding rate of the Dividends and Profits Tax (IDU) of 15% for subjects not domiciled in the Republic of Paraguay, also created by Law No. 6380/19?

On the other hand, how are the special tax regimes, Law No. 523/1995 and Law No. 1064/1997 on the Free Trade Zone and the Maquila Zone, respectively, with presumptive bases that have rates well below the Global Minimum Tax (GloBE) of 15%?

Trying to legislate on numerous tax jurisdictions with different tax systems is a daunting task, however, it is necessary to initiate the process of harmonization to achieve the following objectives:

• Avoid national isolation as other jurisdictions could seek to apply sanctioning measures to a country that does not collaborate with international tax harmonization;
• The MNEs could avoid investing in self-isolated countries in the face of regulatory uncertainty, they could even move their existing investments to other jurisdictions;
• Undoubtedly, the most affected will be the jurisdictions that, by not implementing Pillar 2, will not receive tax revenues in the range of 15% provided for the Global Minimum Tax (GloBE);
• Finally, those countries that refuse to adopt Pillar 2 could damage their international reputation and be considered as jurisdictions that do little to collaborate with the fight against tax evasion.

Here, a simple case study will be very useful to better understand the effects of Pillar 2; What happens when the effective tax rate on income, for example, 10%, is lower than the Global Minimum Tax (GloBE) of 15%? The MNE would be responsible for paying the difference, i.e. 5%, in the jurisdiction where its principal place of business is located, or in another jurisdiction that applies Pillar 2. The country that does not apply Pillar 2 would lose tax revenues, since the MNE would also have to pay the difference between the rate in force in the jurisdiction of the source and the Global Minimum Tax (GloBE) in a different jurisdiction.

The challenge of Pillar 2 should be taken into consideration immediately to minimize the eventual lost opportunities for Paraguay.