Uruguay Tax Proposal Rocks the Boat

Uruguay made headlines all over the world this last week, with news of a proposed tax bill that could result in a weakening of Uruguay’s banking privacy and tax the offshore assets of Uruguayan citizens and foreign residents.

President José Alberto Mujica, who took office on March 1st has been assuring international investors that his administration will maintain the investment friendly policies of his predecessor. It was reported that no big tax changes were on the horizon and that members of his administration planned to encourage retirees from Europe and North America to choose Uruguay as a place to live.

So, if economic growth and attracting foreigners to retirees is the goal, why this piece of tax legislation?

According to a May 27 UPI article, the proposed bill “is intended to bring Uruguay into line with ambitious transparency targets set by the Organization of Economic Cooperation and Development…”

The Organization of Economic Cooperation and Development (OECD) is a convention that was originally signed by 20 countries in 1960. Eleven more countries have been added making a new total of 31. The stated mission of the OECD includes assisting economic development and raising living standards in a globalizing economy.

The OECD has also created an international tax standard that was supported by the G-20 Finance Ministers in 2004, and endorsed by the UN Committee of Experts on International Cooperation in Tax Matters in 2008.

In April 2009 the OECD set out to name, shame, and sanction countries that didn’t share tax related information when requested, which resulted in Uruguay being put on a short blacklist of non-cooperating tax havens. The next day Uruguay’s finance minister informed the OECD that Uruguay formally endorsed OECD’s standards on transparency and information exchange, and would use the standard when drafting new international treaties.

The term “tax haven” can have many meanings. Uruguay is not a tax haven because it is a low tax or no tax country. All Uruguayan banks have strict anti-money laundering practices in place and all private banks that accept US citizens as customers, report depositors’ information to the US Internal Revenue Service. I believe Uruguay got its “tax-haven” status primarily because it’s banking secrecy laws have been in conflict with the OECD’s information sharing requirements.

Since April 2009, Uruguay has signed treaties to avoid double taxation with Germany, Mexico, Spain, Portugal, France, Liechtenstein, Switzerland, Malta, Belgium, Korea, and Finland, all of which include the OECD standard for information exchange. According to Eliana Sartori, director in charge of international tax in Uruguay at PricewaterhouseCoopers (in an interview published in the British Society's newsletter June 1st), “Don’t forget that the Government has announced potential treaties with 15 other countries, including Malaysia, India, Vietnam, Costa Rica, Chile and Ecuador”.

The MercoPress reported that at a September 2009 G-20 meeting in Pittsburgh, OECD Secretary General, Angel Gurria stated that, “Signing agreements is only one step in a process. What we will now be looking for is effective implementation by all countries”

This brings us to the current tax proposal which, as written, would alter Uruguay’s banking secrecy laws and tax the offshore assets of all Uruguayan residents, both of which are reported to be for the purposes of complying with OEDC standards. The proposal maintains some of Uruguay’s banking privacy, but allows for the OECD mandated information exchange, providing that the requests for Uruguayan banking information be reviewed by a Uruguayan judge before a disclosure is made.

The draft also proposes that a new tax will apply to Uruguayan residents with assets in countries which have a signed treaty with Uruguay, taxing interest earned on financial accounts and dividends and capital gains in shares of company stock. The proposal also contains a wealth tax of 0.7 to 2% on all assets over approximately, 100,000 US dollars.

So what are the pluses and minuses of this proposal?

On the plus side, OECD membership in many ways is seen as desirable. Being in the club of 31 of the most industrialized nations has its benefits. Chile just became a member of the OECD on May 7th, and Estonia, Israel, Russia, and Slovenia are on deck to become members. In time, being a small country that is not a part of the OECD could result in reduced trade opportunities.

Also on the plus side, Uruguay estimates that Uruguayan residents (both citizens and foreign residents) have an estimated 8 billion dollars in overseas accounts. Although asset holders will likely keep their overseas holdings out of countries who have OECD treaties with Uruguay, the wealth tax liability could add some revenue to Uruguay’s government budget.

On the minus sides, both parts of the new tax proposal are fundamental changes to Uruguay’s culture that will likely meet resistance. Banking privacy in Uruguay is not just a tax issue. Uruguayans have fiscal rights, the same as human rights and civil rights. Banking privacy is part of the Uruguayan constitution, and considered a consecrated right. Also, Uruguay has a history of only taxing activities that take place inside Uruguay. Taxing offshore assets will be a completely new concept.

However perhaps the biggest challenge to the proposal is that many foreign residents and multinational companies who let it be known they would pull out of Uruguay to avoid tax reporting requirements for the same assets in two countries.

So with pressures weighing heavily from all quarters, Uruguay’s Economic Minister, Fernando Lorenzo, held a briefing before a June 1st Cabinet meeting to report that the proposed tax legislation was still being “tweaked”. In the briefing he specifically stated that in the revision foreigners who come to retire in Uruguay, and companies based outside of Uruguay, will not affected.

Although there are still unknown details with this piece of legislation, the quick turnaround and strong public statement by Lorenzo indicates that it is a priority to the Executive Power, who created the bill, that Uruguay remains attractive to foreign retirees and foreign based businesses.


Anonymous said...

Maybe the most influential topic that I have read this year!?


Anonymous said...

Great blog post, I have been looking for something like that.

My regards