Anyone who is considering investing or has invested all or some of their assets in Uruguay may be alarmed by recent news that Uruguay is proposing a new tax law that may have a detrimental effect on banking privacy currently enjoyed by foreign residents. What has leaked out on to many blogs and news sites has been inaccurate and misleading. We would like to put the record straight.
The following email to Roger Gallo was received from Juan Federico Fischer in regard to the recent Tax Proposal in Uruguay. Juan Federico Fischer is the Managing Partner of FISCHER & SCHICKENDANTZ, one of Uruguay’s leading law firms. Both a lawyer and an M.B.A., he manages the firm’s foreign investment consulting unit, advising both multinationals and individual investors in privatizations, real estate developments and acquisition of local companies.
Last week, some blogs wrote about a supposed tax proposal in Uruguay, incorrectly generating panic.
So you can have the real story, here´s the situation:
Unfortunately, much of what the press articles and blogs have been saying is much more alarming than the reality. It has been said that Uruguay will tax:
its corporate vehicles’ offshore assets
foreign residents’ assets
foreign residents’ income
That is incorrect.
The problem was originated because a draft of a proposed change to a tax law was leaked ten days ago. That draft is still a work in progress. And the proposed change only aims to tax the money that Uruguayans have abroad, not foreigners who come to Uruguay.
Here’s the exact situation of where the issue stands on the three supposed taxes:
Taxes on corporate vehicles’ offshore assets: Last Friday, May 28th, the Ministry of Finance, where the bill proposal is being discussed, issued an official statement clarifying one issue of the proposed bill: that there will be no new taxes on Uruguayan companies, and that their offshore assets will not be taxed. Explicitly: that nothing will change for Uruguayan corporate vehicles. So, Uruguay remains an offshore tax free jurisdiction.
Taxes on foreign residents’ assets: It has been made clear from the start that assets owned abroad by foreign residents in Uruguay will not be taxed at all. This was never in doubt. This is only for citizens (at a very small scale; and remember that this asset tax is gradually being phased out since 2007, and will disappear by 2017).
Taxes on foreign residents’ income: Some types of income (not all) generated abroad could be taxed. But the aim of the law is to tax the money that Uruguayans have abroad, not foreigners who come to Uruguay. The Ministry of Finance issued a second statement on June 1st, clarifying that the law will in no way jeopardize the country’s policy of attracting foreigners to relocate in Uruguay. And that their income will not be taxed. The likelihood is that on income tax (on some types of income: interest on deposits and dividends) the tax will be circumscribed to Uruguayan citizens.
I´ll be glad to keep you updated, if you´re interested.
Juan Federico Fischer
FISCHER & SCHICKENDANTZ
Rincón 487, Piso 4
Montevideo 11000, Uruguay
Tel: (+598) 2 915-7468 ext. 130
Cell: (+598) 99 925-106
Fax: (+598) 2 916-1352
Further, we published the following article by David Hammond on Expat Daily News which clearly sets out the proposals and explains that there is no need for foreign investors to panic.
New Proposed Tax Law in Uruguay Set to Rock the Offshore Banking 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 would be affected by the tax 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 indicate that it is a priority to the Executive Power, who created the bill, that Uruguay remains attractive to foreign retirees and foreign based businesses who want to live and do business in Uruguay.
This article first appeared on the author’s blog http://www.paradiseuruguayblog.com/2010/06/uruguay-tax-proposal-rocks-boat.html and has been reposted with his permission.