Uruguay s Ministry of Economy formally proposes tax increases

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1 25 July 2016 Global Tax Alert News from Americas Tax Center Uruguay s Ministry of Economy formally proposes tax increases 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 16 June 2016, Uruguay s Ministry of Economy formally proposed to Parliament, a bill that would increase taxes. Once approved, the provisions would apply as of 1 January 2017, unless a specific date is provided in the provision. 1 Corporate income tax (CIT) Currently, accumulated net operating losses (NOLs) are fully deductible for five fiscal years from the date they were generated. The bill would allow companies to offset only 50% (rather than 100%) of their taxable income with NOLs. The bill also would remove the notional employer salary deduction and would only allow a deduction for the real employer s salary (i.e., salaries on which personal income tax is paid). This provision would apply to companies with formal accountancy (i.e., companies that register their transactions in a logbook and calculate their taxes based on what is registered in the logbook). Additionally, the fiscal inflation adjustment would only apply when the Executive Power establishes that an accounting inflationary adjustment is needed because of a hyperinflationary economy (according to accounting standards). The bill would require partners or shareholders providing independent personal services to their own organization (where the organization is a CIT payer) to have formal accountancy, when their organization provides personal services of an identical nature.

2 2 Global Tax Alert Americas Tax Center As of 1 March 2017, the bill would require companies to calculate and withhold taxes on notional dividends, which would be deemed to be paid to shareholders. Upon receipt of actual dividends, shareholders could credit the taxes already paid against their income tax liability, so no tax would be due. To determine the value of those notional dividends, companies would have to follow specific steps. Generally, the bill would base the calculation on adjusted income (excluding NOLs) that is more than three years old and subject to CIT and would impute the notional dividends in the third month following the three-year period. As part of the calculation, the bill would also allow companies to deduct their equity participation investments in other resident entities and in fixed and intangible assets from the accumulated adjusted income (i.e., all adjusted income from July 2007 onwards), provided the transferor is identified. Personal income tax (PIT) Under the bill, PIT would apply to withdrawals that owners take from sole proprietorships that are subject to CIT. With respect to capital gains for personal income tax purposes, the bill would increase the tax from 3% to 7% in the following cases: Interest on long-term deposits (i.e., more than one-year) in Uruguayan pesos and indexed units in local banks and financial institutions Interest on corporate bonds or other debt instruments with terms in excess of three years that are conducted by public subscription (i.e., public offer to buy shares or bonds issued by a company) and issued by listed resident entities Incomes derived from certificates of participation in listed financial trusts that are conducted by public subscription and have periods that exceed three years The bill would increase from 5% to 7% the tax applicable to interest on short-term deposits (i.e., one year or less) in local banks and financial institutions in Uruguayan pesos without a readjustment clause. Under the bill, the profit distribution exemption would include distributions made by sole proprietorships whose incomes do not exceed the limit established by the Executive Power. The bill, however, would repeal the profit distribution exemption claimed by entities that render independent personal services and have chosen to be included in the CIT. Annual progressive rates applicable to work income would increase as follows: a. For individuals 0 up to 84 0 up to 280,560 0 up to 9,050 0% 0% Over 84 up to 120 Over 280,560 up to 400,800 Over 9,050 up to 12,929 10% 10% Over 120 up to 180 Over 180 up to 360 Over 360 up to 600 Over 600 up to 900 Over 900 up to 1,380 Over 400,800 up to Over up to 1,202,400 Over 1,202,400 up to Over up to 3,006,000 Over 3,006,000 up to 4,609,200 Over 12,929 up to 38,787 Over 38,787 up to Over up to 96,968 Over 96,968 up to 148,684 15% 15% 20% 25% 22% 27% 25% 31% Over 1,380 Over 4,609,200 Over 148,684 30% 36%

3 Global Tax Alert Americas Tax Center 3 b. For households, when work income of each member of the household considered individually exceeds 12 minimum wages (values for 2016 are UYU133,800 or US$4,316) in the year 0 up to up to 561,120 0 up to 18,100 0% 0% Over 168 up to 180 Over 180 up to 360 Over 360 up to 600 Over 600 up to 900 Over 900 up to 1,380 Over 561,120 up to Over up to 1,202,400 Over 1,202,400 up to Over up to 3,006,000 Over 3,006,000 up to 4,609,200 Over 18,100 up to 38,787 Over 38,787 up to Over up to 96,968 Over 96,968 up to 148,684 15% 15% 20% 25% 22% 27% 25% 31% Over 1,380 Over 4,609,200 Over 148,684 30% 36% c. For households, when work income of one member of the household does not exceed 12 minimum wages (values for 2016 are UYU133,800 or US$4,316) in the year 0 up to 96 0 up to 320,640 0 up to 10,343 0% 0% Over 96 up to 144 Over 144 up to 180 Over 180 up to 360 Over 360 up to 600 Over 600 up to 900 Over 900 up to 1,380 Over 320,640 up to 480,960 Over 480,960 up to Over up to 1,202,400 Over 1,202,400 up to Over up to 3,006,000 Over 3,006,000 up to 4,609,200 Over 10,343 up to 15,515 Over 15,515 up to 38,787 Over 38,787 up to Over up to 96,968 Over 96,968 up to 148,684 10% 10% 15% 15% 20% 25% 22% 27% 25% 31% Over 1,380 Over 4,609,200 Over 148,684 30% 36% * BPC is a specific index that varies according to inflation ** Approximate value

4 4 Global Tax Alert Americas Tax Center Additionally, the bill would limit deductions for social security contributions and certain expenses by replacing the current 10% to 30% progressive rates for deductions with two rates. A 10% rate would apply to annual incomes of up to 180 BPC and an 8% rate would apply to annual income exceeding that amount. Nonresident income tax The same notional dividends and profits provision applicable for PIT purposes would apply to nonresidents. For capital gains for nonresident income tax purposes, the same rates described for PIT purposes would apply. The bill also would increase from 12% to 25% the tax rate applicable to income earned by entities: (1) resident, domiciled, incorporated or located in countries or jurisdictions with low or no taxation; or (2) benefiting from a special regime of low or no taxation. The new tax rate would not apply to dividends or profits paid or credited by CIT taxpayers. Social security assistance tax Annual progressive rates applicable to social security assistance income would increase as follows: 0 up to 96 0 up to 320,640 0 up to 10,343 0% 0% Over 96 up to 180 Over 180 up to 600 Over 320,640 up to Over up to Over 10,343 up to 10% 10% Over 600 Over Over 25% 30% * BPC is a specific index that varies according to inflation ** Approximate value Value added tax (VAT) Currently, the general VAT rate is 22% and the reduced rate for certain goods and services is 10%. The bill would authorize the Executive Power to reduce the VAT by two percentage points for acquisitions performed through debit card or electronic money instruments. This provision would apply to transactions involving amounts lower than 4,000 Indexed Units (approximately UYU13,800 or US$445). Other provisions The bill would incorporate the notion of economic unit into the Tax Code. The Tax Code would include a provision that states when an economic unit should be presumed. Additionally, the bill would hold entities jointly liable for their tax debts. Also, the bill would repeal the definition of economic unit included in paragraph 1 of Article 32 of Law No. 13,426. The bill would change some of the provisions regarding the power of the tax office to estimate taxes owed by taxpayers. For example, when coefficient samplings are performed, the samplings are deemed to be representative of the company reality when they amount to at least 10% of the sampling universe. The bill would allow the coefficient or proven relationship for a

5 Global Tax Alert Americas Tax Center 5 fiscal year to be applied to the previous three years. Also, the bill would allow tax authorities to appeal indexes prepared by non-profit private specialized organizations (in addition to the ones prepared by public or parastatal (i.e., an institution that cooperates with the state) organizations according to the current law). Finally, the bill would eliminate the secrecy provisions, established by Article 47 of the Tax Code, for administrative or judicial proceedings for information related to third parties that is used for the presumptive calculation. The bill would not allow imported goods that are competitive with the national industry to benefit from the exemptions established in Title 3. The bill also would authorize the Executive Power to include exceptions to this provision in justified cases. For the purpose of obtaining the exemptions included in Title 3, the bill would require sports clubs and institutions to include, as affiliates, young people for free. The young people should make up at least 10% of their affiliates. These young people would be students from specific educational institutions. Endnote 1. See EY Global Tax Alert, Uruguayan Ministry of Economy announces tax increases, dated 7 June 2016.

6 6 Global Tax Alert Americas Tax Center 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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