INSIGHT: Country-by-Country Reporting Reaches Uruguay

The list of nations adopting country-by-country reporting (CbCR) continues to expand, with Uruguay joining the group as of 2018. Uruguay is well-suited for multinational corporations (MNCs), being strategically situated in the south cone of South America between Argentina and Brazil, and featuring favorable policies toward free trade and foreign investment. But as attractive as these attributes may be, when it comes to the Uruguayan brand of CbCR, global executives of large MNCs with entities in Uruguay should review the CbCR requirements closely.

What’s Happening?

Through a regulatory decree issued Oct. 26, 2018, Uruguay’s Ministry of Economy and Finance established definitions applicable to the preparation and presentation of CbCR. The requirements are closely aligned with Action 13 of the Base Erosion and Profit Shifting (BEPS) Initiative by the Organisation for Economic Co-operation and Development (OECD).

Beginning in 2019, Uruguay’s national tax authority, the Dirección General Impositiva (DGI), will require Uruguayan taxpayers that are part of a large multinational group with consolidated revenues over 750 million euros ($823 million), to be subject to CbCR regulations. These regulations require Uruguayan taxpayers to supply a notification form with the following information on an annual basis:

• The name and fiscal residence of the entity that will submit the CbCR on behalf of the multinational group;

• The name and fiscal residence of the final controlling entity of the multinational group; and

• The name and Tax Information Number (TIN) of other Uruguayan entities of the multinational group in Uruguay.

Submission of CbCR to the Uruguayan tax authority is compulsory, unless another member of the multinational group files the CbCR in a country that will ultimately share it with the Uruguayan tax authorities. Therefore, all affected taxpayers must submit the corresponding notifications for each fiscal year beginning on or after Jan. 1, 2017. Note that the filing deadline for CbCR in Uruguay for FY 2017 is April 30, 2019, and for FY 2018 is Dec. 31, 2019.

If no entity that is a member of the multinational group submits the report in a jurisdiction with which Uruguay has an information exchange agreement, the taxpayer must submit the report locally, and the CbCR must contain the following:

• Information on each entity that is a member of the multinational group, including its country of tax residence, country of incorporation (when it differs from the country of residence), and activities of the entity;

• Consolidated gross income, income obtained from related parties and independent firms, financial results before taxes, income tax paid and accrued, share capital, accumulated results, number of employees, and intangible assets. These attributes must be reported for each entity that is a member of the multinational group (OECD format). It can be grouped by country.

Currently, there is no tax treaty between the U.S. and Uruguay, and therefore, no current mechanism is in place for exchanging information between the two tax authorities. Accordingly, all entities (i.e., entities incorporated in Uruguay) that are members of any U.S. MNC doing business in Uruguay must submit 2017 and 2018 CbC reports to the DGI, unless they have submitted CbCRs in another jurisdiction that has a treaty with Uruguay allowing for the exchange of tax information.

Compliance Is Essential

U.S. MNCs often express serious concerns over the privacy and confidentiality of data being provided in situations where local tax authorities from less developed countries implement CbCR. In some CbCR rollouts, MNCs have debated whether or not they would be better off withholding sensitive company data and instead simply paying any associated fines.

Note that this is not an attractive option with regard to Uruguay. Firstly, although fines can be higher or lower based on the severity of the breach, penalties for failure to comply with the full spectrum of Uruguayan transfer pricing rules (see sidebar below) can ultimately become substantial. In fact, in cases of recidivism (i.e., repeat offenses), fines can reach as much as UYU 8.100.000 (or USD 250,000 approximate) per fiscal year.

In addition, failure to comply can lead to total business disruption. Companies (i.e., companies incorporated in Uruguay) doing business within Uruguay are required to obtain—and maintain—a Certificado Único, Uruguay’s official tax certificate. Failure to comply with the nation’s full transfer pricing regime, including the newly introduced CbCR regulations, can lead to denial or suspension of the certificate. Without a certificate, a Uruguayan company would no longer be able to sell and/or import goods within the country, effectively shutting down the business.

Engage and Comply

Understanding and meeting the formal requirements established by Uruguay’s transfer pricing regime (including CbCR) is now vital to avoiding possible burdensome fines.

Steps to take to help mitigate such fines include:

(1) Learning and understanding the Uruguayan transfer pricing mechanism;

(2) Evaluating the potential impact of Uruguay’s transfer pricing regime (including CbCR) on profitability both in Uruguay and globally;

(3) Developing relationships and engaging with local tax authorities to improve processes for preserving data confidentiality;

(4) Becoming current with tax audit trends in Uruguay; and

(5) Determining the results of audits of close industry peers, and the impacts of new market regulations (e.g., other regulations that are somehow related to transfer pricing, such as customs, free-trade zones regulations, etc.)

A Summary of Uruguay’s Transfer Pricing Regime and Tax Favorable Investment Regimes for Foreign Direct Investment

Uruguayan transfer pricing rules closely follow the associated principles of the OECD/BEPS guidelines, although the Uruguayan regulations do not expressly mention the international guidelines. Certain terms have been interpreted differently under the Uruguayan regulations compared to the OECD/BEPS guidelines. Specifically, the Uruguayan interpretation of “related party” generally broadens the OECD/BEPS definition.

The Relevant Rules

Law No. 18,083, dated Dec. 27, 2006, replaced Title 4, Corporate Income Tax Law 1996, as amended, updated a corporate income tax and thus establishing Uruguay’s transfer pricing system (Chapter VII of the Title and abovementioned Amendment). Uruguay begin imposing transfer pricing documentation requirements as of July 2007.

Application of this system was regulated through Presidential Decree No. 56/009, dated Jan. 26, 2009, as amended by Presidential Decree No. 392/009, dated Aug. 24, 2009.

Section 38, Title 4, Corporate Income Tax Law 1996, as amended, establishes the “arm’s length” principle as the fundamental concept governing international transactions subject to transfer pricing rules.

A Broader Definition of Related Party

It is important to note that the concept of related party in Uruguay’s corporate income tax law is somewhat broader than the typical OECD-based definition (i.e. two enterprises are considered to be related if both enterprises are under common control). In addition to the OECD’s definition, parties may also be considered related when the corporate income tax payer engages in transactions with (according to Section 39, Title 4, Corporate Income Tax Law 1996, as amended):

• a nonresident

• entities operating in customs exclaves and enjoying a low or nil taxation system:
  • where both parties are directly or indirectly subject to the management or control of the same natural or artificial persons;
  • whether due to their equity interest in the capital, the amount of their receivables, their functional, or other influences; or
  • with decision-making power, whether under contract or otherwise, to direct or define the activities of those taxpayers

Favorable Tax Investment Regimes

Uruguay’s tax law also provides certain favorable tax regimes for investors which are described below.

Free trade zones. Free trade zones (FTZs) are areas of public or private property, delimited to guarantee their isolation from the rest of the national territory. Users are exempted from national taxes related to their activities in the FTZ.

Investment projects regime. Corporate income taxes on investments as well as certain customs duties, and value added taxes, are exempted for a period of time after the initial investment. To qualify, companies must be engaged in activities that the government considers strategic.

Trading regime. A special tax system applies to (1) trading companies (i.e., companies buying and selling goods abroad that do not have the Uruguayan territory as origin or destination), or (2) the provision of services that are hired and rendered, exclusively, outside the national territory. Both cases are taxed at the very low rate of 0.75 percent.

Free port. Under this special program, goods located within this regime are exempted from certain local taxes as well as from customs duty.

Special tax regimes for investments related to software and biotechnology. This is a special regime for companies that engage in research and development in these two areas.

Special tax regime for shared service centers (SSCs). An SSC is an entity belonging to a multinational group that provides advisory and data processing services to be used by its related parties, residents, or non-residents in at least 12 other countries. One of the main tax benefits includes up to 90 percent exemption from corporate income tax for up to 5 years, extended to 10 years in certain cases.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

The views expressed in this article and sidebar are those of the authors and do not necessarily reflect the views of Ernst & Young LLP, Ernst & Young Sociedad Civil or any other member firm of the global Ernst & Young organization.

Martha Roca is a tax managing partner, Marianella Capoano is a senior manager, and Rafael Garcia is a senior consultant in transfer pricing with Ernst & Young Sociedad Civil in Montevideo, Uruguay. Nadine Bruck is a supervisor, International Tax Services, with Ernst & Young Sociedad Civil in Montevideo. Carlos Mallo is a senior manager, National Tax, transfer pricing with Ernst & Young LLP in Washington.