Uruguay: No More Tax Haven?

Bob Bauman, 27 May 2010 -- It was announced Wednesday that the government of the Republic of Uruguay plans to introduce legislation to impose taxes on bank deposits and other assets held offshore by all citizens and residents in the country.

If it becomes law, this would be a radical change from the current territorial tax system that exempts citizens and residents of Uruguay from taxes on all offshore income, taxing only income earned within the country.
 
According to Economy Minister Fernando Lorenzo, the controversial proposal will tax all income generated overseas from deposits held by Uruguay residents, as well as income from assets or investments from non-resident companies or ownership in any foreign entities. Current Uruguayan 12% income tax and wealth taxes would apply.


No More Tax Haven?

I have in the past recommended Uruguay as a possible offshore residence and as a tax haven based on its recent history and existing laws.

Our sources in Montevideo say it is unclear whether the new taxes will be imposed on foreigners living in the country, but that seems to be the official plan. A considerable number of U.S. and European expatriates live there, many attracted by the country's current tax haven status. 

The Bank for International Settlements in Basil, Switzerland says Uruguayan residents have an estimated US$8.18 billion in bank deposits alone held offshore, in addition to any foreign investments and ownership.


Financial Privacy Weakened

Equally disturbing the proposed legislation would seriously weaken existing Uruguayan bank secrecy and financial privacy laws. Current law allows courts to reveal individual's information only in criminal or child support cases. The proposed bill would allow courts to order release of information to foreign governments in matters concerning tax evasion or other tax offenses.

This too would be drastic change to what is now one of the strongest financial privacy laws of any country.


OECD Pressures

News reports connected the government action to the decades-long international campaign against tax havens by the G-20 nation's propaganda arm, the Organization for Economic Cooperation and Development (OECD). But the main OECD demand has been for exchange of tax information, not a major expansion of a country's domestic taxes.

The government proposal created an instant controversy with vocal opposition from conservatives opposed to the left-of-center socialist coalition government.


Conservatives Opposed

"Uruguay is accepting pressure from rich countries and the government is not defending the interests of Uruguayans" claimed Conservative Party leader, Pedro Bordaberry. He added that rich countries such as the U.S. and neighboring Argentina "are interested in having information on our holdings and on our wealth".

"This is crucial for Uruguay since we are a small country and a net importer of capital. Very few Uruguayans have holdings overseas but many foreigners who live here have earnings outside Uruguay, and we have always stated that only whatever is earned here is taxed here".

Bordaberry said the government should have at least provided for "tax credits" which would mean that foreign residents in Uruguay are not double taxed by two countries. Uruguay now has only five tax treaties with other nations.


Bureaucratic Problems

A less political, more technical criticism came from a tax expert and former Deputy Cabinet Chief, Leonardo Costa, who pointed out the bill is unclear as to whether criminal or civil courts will decide on lifting privacy on bank depositors' information.

"Uruguay lacks specific courts for tax issues and will be at the mercy of the officials of the Revenue Office and their interpretation of regulations," said Costa.

"According to the draft I have read, taxpayers are left quite exposed and with limited rights. This is a very delicate terrain, since the country has a long tradition of protecting people's rights (human, civil, fiscal) and the only purpose should not be to have us removed from the OECD grey list," said Costa.


What to Do

For anyone who may be interested in possible residence or eventual citizenship in Uruguay, or who is currently engaged in acquiring or planning for residence there, obviously you should place any plans on hold until the legislative picture is clarified.

Our sources have promised to keep us informed and I will pass that information on as I receive it. At the moment it appears that yet another offshore tax haven, albeit a small, defenseless country, may be about to cave in to pressures of major tax hungry nations.