Uruguay s Executive Power proposes bill on fiscal transparency

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1 12 August 2016 Global Tax Alert News from Americas Tax Center Uruguay s Executive Power proposes bill on fiscal transparency EY Global Tax Alert Library The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: Tax/Americas-Tax-Center---borderlessclient-service On 11 July 2016, Uruguay s Executive Power proposed a bill that would align Uruguay s fiscal transparency rules with international standards on international fiscal transparency matters. The bill also would establish rules to prevent money laundering and terrorism financing. The bill is divided into four chapters, summarized below. Automatic reporting of financial balances and income to the tax authority Resident financial entities and branches of nonresident financial entities located in Uruguay would have to report annually to the tax authority, information on account balances and incomes maintained by resident or nonresident individuals at year end. The bill details what would be financial accounts for purposes of these provisions. The bill would require the following financial entities to report the information: Those engaged in financial intermediation activities (i.e., trading activities or the mediation of supply and demand for securities, money or precious metals) Those conducting custody or investment activities on behalf of third parties (regardless of whether they are under the supervision of the Central Bank of Uruguay)

2 2 Global Tax Alert Americas Tax Center Insurance entities that issue insurance contracts in which an account is established in the insured s name and monthly amounts are deposited in the account and are invested, which results in capital gains Insurance entities that issue annuity contracts The bill would grant the Executive Power the authority to exclude some entities from the obligation to report the information (based on the entity s purpose, business characteristics and low fiscal risk). Additionally, financial entities would have to identify the account holder s tax residency. If, under the criteria established by the Executive Power, the account holder is an entity that is considered a high risk for tax evasion, the financial institution also would have to inform the final beneficiary. The bill would eliminate confidentiality laws, meaning if the tax authorities request information on a taxpayer, the information would have to be disclosed. Additionally, the bill would make changes to the net wealth tax calculation for financial institutions. Provisions in this chapter would enter into force on 1 January Obligation to identify the final beneficiary and identification of shareholders and equity-holders of registered shares As of 1 January 2017, resident entities in Uruguay, as well as nonresident entities that meet the following characteristics would be required to identify the final beneficiary: Act in Uruguay through a permanent establishment Have their effective place of management in Uruguay Have final beneficiaries of investment funds and foreign trusts whose managers or trustees are residents in Uruguay The bill would define final beneficiary as an individual that (1) holds, directly or indirectly, at least 15% of the capital or its equivalent, (2) has voting rights, or (3) by any other means, exercises ultimate control over the entity (e.g., a legal person, trust, mutual fund or any other legal structure). The bill would treat as ultimate control the exercise of control, directly or indirectly, through a chain of ownership or any other control method. For trusts, if an individual meets the final beneficiary conditions included above in relation to the settlor, trustee and beneficiary, the individual should be informed. The bill would require entities that issue registered shares or other registered equity participations to report additional information. Failure to comply with the provisions in Chapter 2 would result in monetary penalties, as well as non-monetary restrictions. The bill would grant the Executive Power the authority to establish due dates. Changes regarding transactions with entities located in countries or jurisdictions of low or null taxation The bill would modify the corporate income tax (CIT), personal income tax (PIT), nonresident income tax (NRIT), net wealth tax (NWT), corporation control tax (CCT) and real estate transfer tax (RETT). This chapter would be effective from the date of its publication in the Official Gazette. The bill would modify tax regulations applicable to entities resident, domiciled, incorporated or located in countries or jurisdictions with low or null taxation or that benefit from a special regime of low or null taxation (referred entities). The bill would eliminate the list of countries considered low or null taxation. The bill would grant the Executive Power with the authority to determine which regimes would be treated as low or null taxation. The bill would include as Uruguayan source income any income derived from the transfer of shares and other equity participations of referred entities. Uruguayan source income also would include income derived from the establishment and assignment of the use of goods, in which more than 50% of an entity s assets, valued according to CIT rules, are integrated, directly or indirectly, in the goods located in Uruguay. This provision would apply for purposes of determining CIT, PIT and NRIT. Additionally, regarding CIT, transactions with referred entities would be considered as made with related parties, instead of between independent parties and, therefore, would be subject to transfer pricing analysis. Regarding PIT, the bill would establish that if resident individuals participate in the capital of nonresident entities, then the income obtained by the nonresident entities would be determined and allocated as dividends or distributed profit to the corresponding individuals according to their participation percentage. The income that would be assigned would include capital gains obtained by referred entities. Under current law, capital gains from such transfer are exempt from PIT.

3 Global Tax Alert Americas Tax Center 3 Furthermore, the bill establishes that if a corporation subject to CIT (CIT payer) participates in the capital of a referred nonresident entity, the capital gains of the referred nonresident entity will be determined and allocated as dividends or profits to the corresponding CIT payer for purposes of determining the dividends or profit taxed by PIT. Moreover, when a resident individual participates in the capital of a referred nonresident entity, and that entity receives dividends and profits from a CIT payer, those dividends and profits will be assigned to the individual. As regards to NRIT, the bill would include the following provisions: The bill would increase the applicable tax rate from 12% to 25% on incomes of referred entities. This new rate would not apply to dividends and profits paid or credited by CIT payers (current rate of 7% would be unchanged). Income obtained by the referred entities from transactions carried out with related parties subject to the CIT would be treated as Uruguayan source income if derived from the import of goods; it would be presumed (unless proven otherwise by the CIT payer) that the foreign source income is 50% of the import price, which cannot be less than the customs value. Income also would be treated as Uruguayan source income if it is derived from a transaction in which a referred entity buys imported goods from a Uruguayan CIT payer and then sells them; it would be presumed (unless proven otherwise by the CIT payer) that the foreign source income is 50% of the sales price abroad, which cannot be less than the wholesale price in the destination country. In both cases described, the CIT payer would be jointly liable for the foreign entity s tax obligations. For the purposes mentioned above, parties would be considered related when they are both subject, directly or indirectly, to the management or control of the same individuals or legal entities. The parties also would be related when the same individuals or legal entities are able to dictate or define the parties operations because of their capital participation, creditor rights, functional influences or decision-making power. If transactions are conducted with a nonresident referred entity, the CIT payer would file a tax return stating that they are not related parties. If the tax return does not state whether they are related parties, the tax office would presume that they are. Income obtained by the referred entities would be subject to the following provisions regardless of whether they are related parties: Income would be considered Uruguayan source income if it is from the sale of intangible assets to CIT payers that will be used in Uruguay. Income derived from capital gains of real estate located in Uruguay would be subject to a complementary tax rate of 5.25% (total tax rate of 30.25%). Income derived from the sale (or a sale s promises) of real estate located in Uruguay would be calculated considering a real basis unless it is impossible to determine it; in which case, a notional value would be used. A notional taxable income of 30% of the sales price would be used to calculate taxes on income derived from the transmission of goods located in Uruguay; real estate would not be subject to this provision. A tax exemption would apply to equity transfers made by the referred entities if: They are made before 30 June The acquirer is not a referred entity. They are registered entities and they close their activities with the Tax Office and Social Security Bank within 30 days of 30 June Lastly, goods transferred by referred entities would be exempt from RETT as long as they comply with the conditions established in the NRIT exemption. To determine the income derived from the sale of goods whose acquisition would be exempt under this provision, the basis would be the acquisition price paid by the entity that bought the goods before the current seller (i.e., the updated acquisition value of the previous selling entity). With reference to the NWT, the bill would increase the tax rate from 1.5% to 3% on the taxable equity of entities resident, domiciled, incorporated or located in countries or jurisdictions with low or null taxation that do not have a permanent establishment in Uruguay. Regarding CCT, the bill would impose tax on entities incorporated abroad that modify their articles of incorporation and adopt the type of Sociedad Anónima (corporation) regulated by Law No. 16,060.

4 4 Global Tax Alert Americas Tax Center Adjustments to the transfer pricing regime of the CIT The bill would require CIT payers that are part of multinational groups of large economic dimension, whose members are related (according to the definition in the following paragraph), to file a country-by-country report. CIT payers that are part of a multinational group would be considered related when they are both subject, directly or indirectly, to the management or control of the same individuals or legal entities. CIT payers also would be related when the same individuals or legal entities are able to dictate or define the parties operations because of their capital participation, creditor rights, functional influences or decision-making power. The bill would define multinational group of large economic dimension as those whose income exceeds the limit set by the Executive Power. The information included in the report would be used by the tax authorities and may be exchanged with other countries as a result of Agreements on Exchange of Information on Tax Matters (TIEA). The bill would require the country-by-country report to identify every entity that is part of the multinational group, their residency and their country of incorporation in case they differ. The report also would include the activities they develop. Also, the report would incorporate the consolidated gross income (separating the income obtained with related parties and the income derived from independent entities), the year s earnings before corporate income taxes, the total corporate income taxes paid in the year, the corporate income taxes accrued in the year, the integrated capital, the retained earnings, the number of employees and the tangible assets. Under the bill, entities that are part of a multinational group in which another member is required to file similar information to a tax office from a jurisdiction with which Uruguay has an information exchange agreement in force would be exempt from the country-by-country report requirement. Additionally, as of 1 January 2017, the Tax Office could require the filling of a tax return that includes information from the country-by-country report along with information and documentation related to the master file of the multinational group to which the CIT payer belongs. The master file would include information of the multinational group, the organizational structure, activities and functions developed, used assets and risks assumed by each entity, intangible assets, funding sources, and the financial and fiscal situation of the group. For additional information with respect to this Alert, please contact the following: Ernst & Young Uruguay, Montevideo Martha Roca martha.roca@uy.ey.com Rodrigo Barrios rodrigo.barrios@uy.ey.com Ernst & Young LLP, Latin American Business Center, New York Ana Mingramm ana.mingramm@ey.com Enrique Perez Grovas enrique.perezgrovas@ey.com Pablo Wejcman pablo.wejcman@ey.com Ernst & Young LLP, Latin American Business Center, London Jose Padilla jpadilla@uk.ey.com

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