After more than 6 months of debate, on 29 December 2010, the Uruguayan parliament approved Law No 18.718, which makes changes in the Income Tax law. In a previous report this year we set out the details of the changes that the government was proposing. At that stage the bill had caused widespread controversy due to a lack of prior consultation and it was uncertain how many of the changes would actually be implemented. In the end and as a result of agreement with some of the other political parties in Uruguay, most of the bill has been passed unchanged with only minor changes in the provisions regarding bank secrecy. The new law was published in the Official Gazette of 3 Jan 2011 and the law is already in effect.
The principal change is that income arising from foreign monetary instruments is now taxable income. This is a very major change for Uruguayan law as it is the first time that the territorial basis for liability to tax has been varied. The idea of the government is that residents who have an income from, for example, bank accounts in Uruguay should not be penalised vis-a-vis others who have their savings in a non-Uruguayan account. In fact as the law is now it will be the other way around - those with a Uruguayan bank account will actually pay a lower rate of interest than those with a foreign account. The rate of interest on foreign generated income is 12%, whilst for local income the rate of interest is 3-7%.
Residence for the purposes of this law means 180 days or more of physical presence in the country in any given tax year – which corresponds with the calendar year in Uruguay. It does not have any relationship with the concept of legal residence for immigration purposes. It is possible to be a legal resident, but not be resident for tax purposes and vice-versa, not be a legal resident, but still be resident for tax purposes.
It is important to note that credit will be given for any tax already paid in the foreign jurisdiction, whether or not there is a double tax treaty in force with that country. It remains to be seen in the Regulating Decree however, how the tax office will administer this and what documentation it will require. But the principle is that if 12% or more tax has already been paid there will be no additional liability and if for example 5% tax has been paid abroad, then the taxpayer will only have to pay the difference i.e. 7%. Also it should be noted that the law ONLY covers foreign income arising from monetary instruments – bank deposits, loans, share income for example. It does not affect any other kind of income, particularly pension or rental income.
If payment is received via a Uruguayan subsidiary of the foreign institution where the funds are based, then the Uruguayan subsidiary is obliged to act as a retention agent for the 12% tax due.
Uruguay is renowned for having a very strict bank secrecy law – it is a criminal offence to reveal information about any particular bank account or anybody’s personal dealings. It is largely as a result of these secrecy provisions, plus Uruguay’s history of stability, that Uruguay has such a large financial sector - bank deposits of non-residents far exceed those of residents. As a result of this Uruguay, like many other tax havens, has come under increasing pressure from the OECD countries to make its system more open. Uruguay is in the process of signing the 15 tax information sharing treaties with other countries in order to be removed from the OECD “grey list”. It is in this context that the secrecy provisions have been modified to make it easier for the criminal and tax authorities to get access to bank information.
The new law states that in the case of an alleged criminal offence, the tax authorities must make a request to a Judge for access. The Judge or the public prosecutor must object to this request within 30 days, otherwise the request will be considered as granted and forwarded to the Uruguayan Central Bank, for it to forward on to the appropriate financial institution.
In cases where the tax authorities simply want to check that a person has paid the correct amount of tax, then again the tax authority must make a written request to the court and the Judge will only permit access if there are objective indications that make it reasonably clear that tax evasion has taken place and also that the information requested is necessary for the authority to make a correct determination of the tax due and what offence/s have taken place.
Secrecy can also be lifted in accordance with the terms of any treaties signed, on application by the authorities of the relevant country.
This report is not intended to be legal advice and should not be taken as such. You should consult with a lawyer or accountant about your particular circumstances.
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