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Uruguay risk: Tax policy risk
(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT
RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC43C43Tax policy riskC44C44Note: E=most risky; 100=most risky.SUMMARY
Tax policy risk is C-rated. The government is introducing a comprehensive tax reform in July 2007, which was passed in 2006. The reform, which aims to increase revenue and reduce red tape for businesses, envisages the simplification of the tax system, the reduction of the rate of Impuesto al Valor Agregado (IVA, value-added tax) by an average of 5-7 percentage points (currently the top rate is 23% and the lowest rate 14%), and fewer tax exemptions than at present. There will be an Impuesto a la Renta Empresarial that will tax liquid earnings. There will also be a Tasa Unica de Aporte Patronal al BPS (uniform employers' pension contribution) of around 8%. Currently, industrial and agricultural firms are exempted from pensions contributions, while commercial and service-centred firms pay 12.5% and 8% respectively. However, the public finances will continue to rely heavily on consumption taxes (VAT), making tax collection pro-cyclical. The reform also aims to reduce tax evasion, which remains high.
SCENARIOS
Simplification of the tax regime suffers delays (High Risk)
The FA government is committed to a comprehensive tax reform which will introduce a personal income tax and simplify the current tax system, in which four out of a total of 24 taxes account for around 90% of revenue. However, the minister of economy and finance, Danilo Astori, has said that the reform could take at least four years to implement as it would require a major overhaul of the tax administration. The new system is due to start to be administered in July 2007, but it will be a few years before it is fully operational, and a detailed schedule of how it will be phased in has yet to be published. However, by mid-April 2007 full details had still not been published, and the July deadline appears increasingly unlikely given the time needed to implement such an initiative. Businesses will therefore have to continue to grapple with the current labyrinthine system for some time to come.
The government resorts to further tax increases to reduce the fiscal deficit (Moderate Risk)
If political and public pressure leads to a sharp rise in expenditure, the government may seek to maintain its fiscal targets by resorting to other measures to boost revenue, including requesting pre-payment of taxes and one-off levies. Businesses, particularly large conglomerates and utilities companies, would be prime targets. Companies should be prepared to work with tax planners if further new legislation is passed.
BACKGROUND
(Updated: September 4th, 2006)
The corporate tax burden in Uruguay is similar to that in other countries in the region. The government has done away with most tax incentives for industrial investments (except for limited exemptions for import tariffs, the industry and commerce income tax, and the net-worth tax).
The tax system provides for levies on corporate income, net worth, consumption, foreign trade and a variety of specific transactions. The General Tax Directorate (Direccion General ImpositivaDGI) administers all taxes except real estate and general public-service levies (which fall under the jurisdiction of the municipal governments), and foreign-trade taxes (which are collected by the National Customs Directorate). The DGI has offices throughout Uruguay to assess and collect taxes within assigned regions.
Recent administrations have taken steps to tighten enforcement and broaden the tax base in recent years, and these measures have increased government revenues. However, further government action is necessary to improve tax collection. Evasion of income and value-added taxes continues to be a significant problem. The DGI estimates that it loses some 25% of revenue each year due to tax evasion. The government says that revenue shortfalls are attributable to poor management, inadequate facilities and obsolete equipment.
Under the 1979 tax law, firms applying for a new loan or a loan renewal (state or private) must present a certificate from the DGI and the Social Security Bank stating that they have met their tax obligations. Articles 662-668 of Law 16170 of December 1990 extended the certificate requirement to the sale of real estate, vehicles, aeroplanes, business establishments and similar assets.
Corporate Tax
The corporate tax burden in Uruguay is similar to that in other countries in the region. The government has done away with most tax incentives for industrial investments (except for limited exemptions for import tariffs, the industry and commerce income tax, and the net-worth tax).
The tax system provides for levies on corporate income, net worth, consumption, foreign trade and a variety of specific transactions. The General Tax Directorate (Direccion General ImpositivaDGI) administers all taxes except real-property and general public-service levies (which fall under the jurisdiction of the municipal governments), and foreign-trade taxes (which the National Customs Directorate collects). The DGI has offices throughout Uruguay to assess and collect taxes within assigned regions.
Recent administrations have taken steps to tighten enforcement and broaden the tax base, and these measures have increased government revenues. Nevertheless, further government action is necessary to improve tax collection. Evasion of income and value-added taxes continues to be a significant problem.
With revenue losses amounting to some 25% every yearattributable to poor management, inadequate facilities and obsolete equipmentDecree 166/05 of May 30th 2005, amending Law 17706 of November 4th 2004, overhauled the DGI in order to reduce tax evasion. The new regulation is considered the Vazquez administrations first serious structural reform. Under the new regime, DGI employees, who are very well trained, will be paid high wages but will not be allowed to have a second job nor may they provide consulting services to private companies and taxpayers. As a result, tax revenue increased by 8.6% in real terms in 2005 on the previous year. The government expects another 6% increase in 2006 since these reforms are supported by a stricter collecting scheme. The DGI is committed to making revenue grow by an estimated US$220m over four years, which equates to 1% of the countrys GDP by 2009.
In March 2006 the government submitted to Congress a thorough tax-reform bill that will probably be passed without major changes some time this year. The reform aims to consolidate the improved fiscal performance of the previous administration in order to redistribute the tax burden. If the original bill is passed, the present labyrinthine systemin which four out of a total of 24 taxes account for around 90% of revenuewould be overhauled. At minimum, it would eliminate about 12 low-revenue levies. The proposal, which is intended to be revenue neutral, also envisions the rationalisation of corporate levies and the introduction of a first-ever personal income tax.
Under Article 50 of Law 14948 of November 1979, firms applying for a new loan or a loan renewal (state or private) must present a certificate from the DGI and the Social Security Bank stating that they have met their tax obligations. Articles 662668 of Law 16170 of December 1990 extended the certificate requirement to the sale of real property, vehicles, aeroplanes, business establishments and similar assets.
Personal Income Tax
As of early in 2006 Uruguay did not levy a personal income tax. Instead, it applies a progressive annual levy to an individuals local assets. However, a proposal to assess a personal income tax on salaries, pensions and professional fees at a progressive rate of 025% was submitted to Congress in March 2006. The bill is expected to be approved some time in 2006.
Other Taxes
A standard value-added tax (impuesto al valor agregadoIVA) of 23% applies to the domestic trade of goods, services and imports. Sales, transfers or assignments of most goods (including imports) and most services (including insurance, loans and transport) are subject to IVA. It is levied at each transfer on the full price of the product, but the seller deducts the IVA it has paid from its tax remittances. Firms must make monthly advance payments based on estimates of the tax due.
Many items qualify for a reduced IVA rate of 14%, and some goods and services are totally exempt from IVA. Major products subject to the reduced rate include such consumer goods as bread, cereal, coffee, edible oils and fats, fish, gas, meat, pasta, pharmaceuticals and prosthetic devices, salt for domestic consumption, soap, sugar, yerba mate, and public city and inter-provincial bus fares.
According to Law 17934 of December 26th 2005 and its Regulatory Decree 537/05, individuals (resident or non-resident) who pay bills at hotels, motels, hostels, restaurants, cafeterias, bars, catering services, party services and car rentals with credit cards are granted a 9-percentage-point reduction on IVA. This measure intends to reduce tax evasion in sectors where official receipts are not usually issued.
Goods and services wholly exempt from IVA include the following: farm products in their natural state except fruit, vegetables and flowers; agricultural machinery and accessories; all bank operations except those performed by the State Insurance Bank; bonds, bills and other securities and the interest that accrues to them; credit transfers and assignments; firewood; foreign exchange; medical and dental services; milk; newspapers, magazines, books and educational materials; petroleum-derived fuels; precious metals in ingots or coins; private education; real property; rent; tobacco, cigars and cigarettes; vehicles used in international transport; and interest on bank loans granted to borrowers who are exempt from both income tax and the agricultural activities tax.
Imports subject to IVA are assessed upon entering the country. Imports of capital goods have been exempt from IVA since June 1995 (via Decree 220/95).
Exports of goods and services are exempt, and IVA paid on the purchase of goods used to produce exports may be refunded at the time of export. Decree 167/03 of April 30th 2003 established a list of IVA-exempt export services provided to non-residents. This includes quality controls on exports, consulting services related to export operations and representation services such as contracting freight services on behalf of a foreign ship owner.
Under Decrees 167 of April 2003 and 179 of May 2003, services provided from Uruguay to individuals and corporations abroad related to exports of goods and data processing are IVA exempt. The measures are designed to improve the competitiveness of local companies.
The internal specific tax, an excise tax, applies at varying rates to the initial sale of certain goods, including the following: alcoholic and non-alcoholic beverages; cosmetics and perfumery; tobacco, cigars and cigarettes; lubricating oils, fuels and other petroleum derivatives; and motor vehicles.
Law 17345 and Regulatory Decree 200 of May 2001 created a temporary 3% sales tax to finance the social-security system. The tax, known as Cofis, is levied on imported or locally made manufactured goods, except capital goods covered by the Investment Promotion Law. It is charged before the calculation of IVA. Hence, a manufactured item costing Ps100 is first charged the 3% Cofis tax, raising the price to Ps103 and is then subject to the 23% IVA rate, bringing the final price to Ps126.69. The tax was supposed to remain in effect until the fiscal deficit fell below 2.5% of GDP but it remains in place for 2006 even though the deficit reached 1.5% in 2005. The tax reform project that Congress is now considering proposes the elimination of the Cofis tax.
Real property is subject to municipal taxes (based on valuations somewhat below the propertys actual worth). For example, Montevideos annual real-property tax is 0.62% of valuation (assessed by the municipality and updated annually), with a 10% surcharge for sanitation and street paving. Rural real property in the province of Montevideo is subject to a uniform 1.25% annual tax on its government-assessed value, which also is usually lower than actual value.
The Montevideo municipality also levies a general public-service tax of 0.1% per month on the assessed value of real property, payable by the occupant. Business premises are subject to an additional mercantile tax, at the same rate as the public-service tax, and to a monthly sanitation tax.
A 2% property-transfer tax paid by both seller and buyer applies to sales of real property. Cattle sales in the domestic market incur a 1% municipal sales tax. Only exports of unprocessed hides are subject to an export tax.
Copyright 2007 Economist Intelligence Unit
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