08 December 2011

Uruguay – Complying with OECD requirements: a moving target?


Mark Teuten

Attorney Mark Teuten provides an update on Uruguay and its controversial relationship with the Organisation for Economic Co-operation and Development (OECD).

Introduction:

Uruguay has been on the OECD “grey list” of countries, which do not fully comply with the OECD’s requirements in terms of sharing of tax information, since 2009. Uruguay’s government at that time took the approach that they would do what was necessary to get off that list. After two years, the first stage of investigations by the two OECD countries (USA and Switzerland) detailed to report, resulted in a pronouncement that Uruguay had NOT complied with the requirements. This in turn led to French President Sarkozy naming (and shaming?) Uruguay at the end of the most recent G20 meeting as one of the few tax havens still existing around the world and that should be barred from world commerce.    

Why is Uruguay still on the Grey List?

Many Uruguayans were surprised to find that we are one of the few countries still on the grey list and that other countries, which have traditionally been tax havens were not named. For example Switzerland itself  (which is now investigating Uruguay!!) has got off the list. Monaco was not included either. Also, the UK with all its associated tax havens (Jersey, Guernsey, Isle of Man, Gibraltar, and the Cayman Islands) was not named. What has happened? Is this a conspiracy by the developed nations to ignore their own tax havens, whilst picking on other poorer countries? Is the OECD moving the goalposts so that Uruguay, amongst others, can’t get off the list? Or is it just that these other jurisdictions have done their homework and done what is necessary, whilst Uruguay has not?

The answer would appear to be a combination of the last two. There is no evidence of a conspiracy against Uruguay, although most here believe that the Argentine government played some part in getting Sarkozy to refer to Uruguay by name, since they are the most interested party in getting access to Uruguayan tax information and bank accounts.

Uruguay understood in 2009 that in order to get off the list it had to sign 12 tax treaties. It embarked on negotiations with several countries. To date it has signed and ratified agreements with 5 countries and has signed but not ratified another 4. From this point of view it would appear clear that Uruguay has simply not complied with the OECD requirement, whilst the other countries referred to above, probably have, which explains why they were not named.

However, in addition, in its report on Uruguay the OECD has also moved the goalposts somewhat by indicating that the obligation is not only to sign 12 treaties, but that these must include its major commercial partners. The problem for Uruguay is particularly with Argentina. Our financial system and real estate market are dominated by Argentine deposits and purchasers. It is estimated that 50 percent of bank deposits and a large portion of the real estate in Punta del Este and Colonia belong to Argentines. They themselves come to Uruguay mainly to get their assets out of their own country, where historically they have been shown to be unsafe. Just in the past month Argentina has implemented currency controls in an effort to stop the flow of money out of the country. Of course this doesn’t change the fundamental reason why Argentines want to get money out of their country - if anything, it just reinforces that desire.

What is Uruguay going to do now?

Uruguay had already made the decision that it would do what was necessary to get off the list, rather than trying to reap the benefits of being a “tax haven”. That is not going to change now. This decision to do so was made in the context of a boom in foreign investment, the likes of which the country has never seen. The government therefore prefers to protect that. On balance that looks like a good call: economic sanctions would have a far greater negative effect on the economy than losing some financial services and investments from Argentina.

So, Uruguay has started negotiations with Argentina on a treaty to prevent double taxation and share tax information. Negotiations are at an early stage and Uruguay will probably not rush into signing anything. It is particularly noted that the sharing of information will not permit the use of that information with retroactive effect and likewise fishing expeditions will not be permitted. The requesting authority must have some evidence of a crime, whether it be money-laundering or tax evasion, before being entitled to information from the Uruguayan authorities. In general it is likely that only a specific number of requests for information will be dealt with each year. It is also likely that such requests will be dealt with with some skepticism by Uruguayan authorities, particularly at a judicial level.

In addition Uruguay will have to negotiate treaties with at least 2 more countries.

How will this affect potential investors/residents?

In the case of Argentine investors, who would still appear to have very valid reasons for wanting to move their assets out of Argentina, within Uruguay there are still corporate vehicles available to them which can give them protection. Uruguayan Sociedades Anonimas (S.A.’s) (Anonymous Societies) with bearer shares can still be used for everything except the ownership of farmland. Whilst long term the future for bearer share S.A.’s may not be good, for the moment they are not prohibited by the OECD.

In the case of other investors or people looking at Uruguay for possible residence, the effects would not appear important.

Notice:
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.

Mark Teuten
Teuten Abogados
Juncal 1408, Oficina 702
CP 11000 Montevideo - Uruguay
Tel: + (598 2) 9088638
Fax: + (598 2) 9088640
mteuten@teutenabogados.com
www.teutenabogados.com

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