3.1.1. Personal income tax (PIT)
Contrary to what is usually claimed, Uruguay has a personal income tax. It is an incomplete cedular system, it is a variety of taxes that burden some sources of income at different rates but exempting others. For example, the Tax to the Personal Retributions (IRP) is imposed on wages and pensions, the Tax to the Commissions reaches a great
3 This point will be carried out later on.
4 Rezende (2005) complained on the emergence of a new tributary principle based in the easiness to collect by the tax administrators.
6
number of non-professional services (custom and currency exchange brokers, salesmen, etc.), sole proprietors are burdened by the corporate income tax, but other types of income –such as interests, real estate rents, capital gains and professional services-- are not taxed.
Next, we describe the main characteristics of the different taxes of this incomplete cedular system.
Tax on Personal Retributions –wages, salaries, and pensions-- (IRP)
The IRP taxes wages, salaries, and pensions on a monthly basis. The nominal income of each of the three categories6 is taxed according to the quantity of Bases de Prestación y Contribución (BPC)7 perceived at 0, 3 and 6. The IRP, which collected 1.2% of GDP in 2004, is applied on the whole income, not on the margin, but the income obtained from different jobs is not cumulative, on the contrary, it is taxed separately.
Additionally, there is a Tax on Commissions that levies on the income of commissions and brokerage services, which collected in 2004 some 0.10% of GDP.
3.1.2. Corporate Income Tax (CIT)
The Corporate Income Tax --CIT-- collected in 2004 US$274 millions, approximately 2%
of the GDP, 9.5% of the total tax revenue8. The nominal rate of the tax is 30% and the income is determined in the traditional form, on real basis (inflation adjusted) and with the accrual method.9 Although the nominal rate of the corporate income tax in Uruguay is 30%, the effective rate it is significantly smaller. The country does not escape to the traditional “dichotomic model” in which numerous incentives are granted without a development strategy. For example, they include from the industrial promotion to
5 Actually, the tax on Sales of Agricultural Goods (IMEBA, January 1996) and the tax on Insurance Companies (February, 2001), also were created.
6 In fact, four income categories are considered, as towards the inside of the public sector the income of the employees of the judicial power taxed to a minimum rate are considered as a separate category.
7 The current value of BPC is UR$1,482, approximately US$63. Until December 2005 the tax fringes were determined in minimum wages (SMN). The expressed intent of the government raising gradually the SMN has taken the same to use the BPC to determine the tax brackets and thus not to lose revenues.
8 The revenue of the Tax on Farming Income –IRA- did not reach one million dollars. The producers with a volume of sales lower to a certain limit can choose to pay the IMEBA, a tax on the sales of farming goods at differential rates. This tax collected US$42 million, 0.3% of the GDP in 2004.
9 It is important to point out that in Uruguay, like in most Latin American jurisdictions, the entrepreneurial income carried out in personal societies, including the sole proprietors and the limited liabilities partnerships, are taxed with the same tax as the corporations.
7
forestry, plus 8 foreign trade zones on services. This makes the effective rate significantly smaller to the nominal one.10 Also, at a macro level, from the total collection of the corporate income tax (2.5% of the GDP) 48% was paid by state-owned corporations in 2004. Consequently, the burden of the Uruguayan private sector by CIT is the lowest in Latin America, except for Haiti.
Tax on Small Enterprises
The firm or individual, who carries out economic activities and whose sales are not higher than certain annual limit should not pay the corporate tax -IRIC- but the Tax on Small Enterprises which is a fixed sum to be paid monthly. In the year 2004, this tax collected US $12.2 millions, approximately 0.09% of the GDP.
Taxing non-residents
Currently, the following rents are taxed: (i) income derived from the lease, use, or alienation of trademarks, patents, etc. carried out by taxpayers subject to the corporate tax –IRIC-- to non residents; (ii) technical assistance paid by firms subject to the CIT to non residents; (iii) dividends credited by firms subject to CIT to non residents, when they are taxed in the home country and it is entitled to tax credit; and (iv) income derived from the lease, use, or alienation of the copyright on literary, artistic or scientific works carried out by taxpayers subject to CIT to non residents.
In 2004, for these items US $14.6 millions, approximately 0.11% of the GDP were obtained in revenues.
3.1.3. Net Wealth Tax
Uruguay is one of the few countries in the world that levies on net wealth. The collection of the net wealth tax at company level was of US $124 millions, almost 1% of the GDP, in 2004 and the one on individuals reached only 0.1% of GDP. Approximately half of this revenue comes from state-owned enterprises. The tax burdens the assets located in the country, it is allowed to deduct bank debt and the credit from suppliers. As there is no intention to burden the investments on productive assets, it presentes a great deal of exemptions --for example, the land and livestock in agriculture and 50% of the fiscal
10 For example, for the period between 1993-1997, a sample of 2.368 companies that represented more than 30% of the total output, paid an effective rate average of 21%.
8
value of the manufacturing equipment-- which determines that the tax burdens almost exclusively on the personal goods. The general rate is 1.5%, 2% for financial institutions and 2% for withholding on the principal of non-resident‘s loans.
Additionally, the net wealth tax can be credited to the corporate income tax with a limit of 50% of the former. On the other hand, the collection of the net wealth tax levied on individuals is insignificant: in 2004 it was of only US$8 millions, 0.06% of the GDP. The tax burdens the local assets disregarding the national bank liabilities, with a minimum exempt of US$85.000 progressively, with rates that go from 0.7% to 3%. In the same pattern as in the case of the net wealth tax levied on corporations, practically only the real estate is taxed.
3.2. Indirect taxes
3.2.1. Value Added Tax (VAT)
As it was stated, Uruguay was one of the first countries of Latin America on introducing the VAT, in 1974. Their revenue was US $1.200 millions in 2004, 9.1% of the GDP, more than 40% of the total tax revenue. Approximately 40% is captured in customs (VAT on imports). The productivity of the VAT in the last three years, amid a very favorable economic cycle, has been lower to 0.40 if it is estimated according to the GDP and it is lightly higher than 0.40 if the consumption is considered. According to estimates carried out for 1999, VAT tax expenditures were 4.5% of GDP, almost 80% of the total tax expenditures (Rossa and Roca, 2001). Also, Cobas, Perelmuter and Tedesco (2005), estimated that VAT evasion reached 25% of the real revenue. Nevertheless, if we exclude the calculation of the state-owned enterprises, which are not supposed to avoid taxes, evasion would reach 38.5%.
The Uruguayan VAT is consumption-based using the indirect method (all tax purchased are credited) and applies the destination principle. The general rate (“basic rate”) is 23%, however, certain goods and services are taxed at a reduced rate (“minimum rate”) of 14%
--medicines and goods of the basic needs basket--. The main exemptions are health and education services; real estate leases; fuels --diesel oil is taxed--, food staples of the basic needs basket; and books, magazines and newspapers. Tobacco and cigarettes and the sale of real estate, currently exempted, will be burdened by the proposed reform.
9
Regarding the financial transactions, the VAT only taxes interests of loans that finance consumption. It is distinctive of the Uruguayan VAT, the regime in “suspense” for the sales of the agricultural sector, similar to that of the internal community operations in the European Union.
Problems of the VAT
Uruguay has the highest VAT rate in the world: 26,1% (including the cumulative effect) --23% of basic rate plus 3% of COFIS, which has also cumulative effect on services--.
Broadening the base would allow a substantial discount of the rate of the VAT, strongly diminishing the reward of evasion. According to Barreix and Roca (2006b), a uniform VAT at 17% with only five exemptions (education, financial intermediation, and health services, real estate lease and gasoline) would obtain the same revenue. However, in the tax reform the government resisted the inclusion of this proposal for fairness purposes, and decided to reduce the rates of VAT to 22% and 10% and to eliminate COFIS.11
3.2.2. Excise taxes
The excise taxes –IMESI-- collects 3.1% of the GDP, approximately 15% of the total tax revenue, of which the tax on gasoline, diesel, and fuel oil represents 38% of the total.
The excises in Uruguay reach the traditionally taxed goods, that is: (i) goods with negative externalities: tobacco products and cigarettes, alcoholic beverages; (ii) as substitutes of user charges: fuels12, oils and lubricants, and automobiles; and (iii) other luxury goods, as non- alcoholic beverages, cosmetics, and perfumes. Table 7 shows the specific tax per unit on selected products.
11 Nevertheless, with the broad base VAT at 17%, the poorest decile --the only loser-- could be easily compensated with targeted public expenditures. A 17% flat VAT implies a reduction of 35% of the rate and is highly superior in competitiveness, neutrality, political enforcement and administrative simplicity. This is even more relevant regarding the global impact of the reform determines that the seven poorest deciles end up the winners.
12 By a recent modification, the excises on fuel in Uruguay -and their uses- became a fixed amount per liter.
A fraction of the excise revenues are transferred to municipal governments.
10 Table 3
Source: Government Decrees
3.2.3. Trade Taxes
Trade taxes mainly charge on imports since export levies were practically eliminated since the mid 80‘s. The revenue was 1.3% of the GDP, nearly 6% of the total tax revenue in 2004. This fall that was accentuated with the advances of MERCOSUR.
3.3. Local taxes
Uruguay is a unitary state constituted by 19 departments, of which the capital, Montevideo, concentrates 42% of the population. Property taxes, user charges and automobiles licenses constitute 80% of the local revenue.
The rate of the rural property levy is fixed by the national government, which is collected for and by the departmental governments. Municipalities have a high autonomy in the determination of the taxable base and in the arrears collection on this local tax.
In 1990, the central government's transfers hardly represented 11% of total revenue of the municipalities, growing to 17% in 2000. These transfer as a share of local revenues are quite low comparing not only for the region but also contrasting with developed countries. The types of transfers are: (a) revenue sharing of selected national taxes; (b) reimbursement of specific infrastructure investment costs; and (c) subsidies to transportation infrastructure.13 The transfers of shared taxes represent approximately 36%
of the total resources transferred to local governments.14
13 Approximately, 3.5% of the excises collection (IMESI) on gasolines and fuels, and 5% of the IMESI on tobacco products are transferred to the municipalities and distributed among them according to their area and population –distributive approach--. Furthermore, 20% of the IMESI on the diesel oil is transferred to the local governments and the distribution criterium takes into consideration the origin of the revenue --devolution approach--. .
14 Finally, the central government pays the employer contribution to the social security for municipalities’
employees , except for the capital –Montevideo--.
11 3.4. Social Security Contributions
In 1996, Uruguay implemented a pension reform adopting a mixed system with two pillars: (i) the one of “intergenerational solidarity” (pay as you go), of allotment, obligatory, with defined benefits which is administered by a public decentralized entity, Social Security administration --BPS--; and (ii) the “individual savings”, financed by an obligatory contribution after certain wage threshold (approximately US$1,000 dollars per month to a limit of approximately US$3,000), based on individual capitalization, and managed by four funds –of which the state-owned fund represents 50% of the market--.15 Finally, the employers only contribute to the allotted pillar –Employer’s Social Security.
Table 4
Source: BPS (Social Security Administration)
Issues on the Employer’s Social Security Contributions
As can be seen in Table 8, the employer’s social security contributions --approximately 2% of the GDP-- present a great and unjustified scattering among the different sectors. In the tax reform, the government has proposed a 7.5% uniform rate that is revenue neutral.
It must be pointed out that a country with high unemployment --stabilized near 10% for more than 30 years--, sub employment estimated in more than 15%, a weak employment to GDP elasticity (0.33), and a public workforce of more than 20% of total employment, there are no doubts that these “employer’s” social security contributions, truly fall on workers reducing wages and/or employment.16
15 The personal contributions to the first pillar are 15% of the salaries up to the aforementioned limit (US$1,000) and to the pillar of individual capitalization the same rate to the income between this figure and a new. The contribution for the wage surplus is optional.
16 Additionally, regarding coverage, estimates of Buchelli et alter (2006), only 28% of the active workers would receive pensions at the age of 65 (minimum age of retirement for both men and women). Within this percentage, the public employees represent 57%, which reinforces the hypothesis of a very informal labor market as well as the high protection offered by the immobility —cannot be fired-- of public employees. In fact, 85% of the public servants will fullfill the condition (35 years of work) to get a pension at 65 years old.
Social Security Contributions (in % of gross wages and salaries)