Until 2010 Paraguay did not tax personal income. The government relied on value added tax, excises, company profits tax, and international trade taxes for its revenue.
To diversify its revenue base, effective January 1, 2010, Paraguay enacted a flat-rate personal income tax (PIT). It set the rate at 10% for 2010. The tax-free threshold is set at 120 times the minimum monthly wage (MMW is about US$ 268 in 2010). This puts the annual tax-free threshold at $21,000.
Estimates of the distribution of income in Paraguay indicate that the top tenth of the population receives about 47% of the national income. Average per capita income for the top tenth is about $12,000, which means that most individuals in the top tenth are not captured in the income tax net.
The personal income tax law broadens the base through 2017 by reducing the tax-free threshold each year by 12 times the MMW. The threshold falls to 108 MMW in 2011, then 96 MMW, 84 MMW, 72 MMW, 60 MMW, 48 MMW, reaching 36 MMW in 2017. In addition, the flat rate falls from 10% to 8% in 2011, where it remains through 2017.
The PIT allows deductions for contributions to the state social security system, up to 20% of income for charitable gifts, expenses related to producing income, deposits in banks, credit institutions, and investments joint-stock companies. Exemptions are provided for retirement annuities, interest income, and several other items.
There is one modest adjustment to the flat tax that will affect no more than 1-2% of taxpayers. During 2011-17, a 2% surtax will apply to individuals whose income exceeds 120 MMW. Despite this provision, I include Paraguay in the roster of flat-tax countries. The small number of persons subject to the 10% rate, after allowing for legitimate deductions and exemptions, constitutes a minuscule part of the income-taxpaying population.
KPMG 2009 list of global tax rates which states that Paraguay had a flat tax since 2007 is wrong. A first-hand account from Ascunsion can be read here. Other articles stating 2010 as the starting date can be read here and here.