INSIGHT: Uruguay Tax Transparency Act Requirements Extended

Multinational enterprises (“MNEs”) have until December 31, 2018 to submit detailed information on their branches and other related entities around the world to the Uruguayan Tax Office.

This requirement is in accordance with a recent Decree (No. 353/2018) (the “Decree”) issued by the Uruguayan Executive Branch. This is in the framework of the so-called Master File and Country-by-Country Report (the “Reports”) required by the Organization for Economic Co-operation and Development (“OECD”).

The obligation to submit such Reports will, however, be restricted to those MNEs whose total income, at a global level, exceeded 750 million euros ($857.5 million) in 2016.

What Does “Transfer Pricing” Mean?

Transfer pricing rules are aimed to guarantee that transactions executed between related entities (which belong to the same business group) are consistent with normal market practices (the “arm’s length principle”).

Insofar as prices established in such transactions are not reasonably equal to those prices which independent entities would have agreed, the tax authority is entitled to estimate the prices which would correspond under normal conditions, and in consequence reassess corporate income tax (Impuesto a las Rentas de las Actividades Económicas).

What Information have MNEs been Filing?

In application of such rules, MNEs established in Uruguay are required to perform a transfer pricing study, which allows verification from an accounting/economic point of view that their transactions are in compliance with standard market practices.

Such companies are also required to submit the transfer pricing study to the Uruguayan Tax Office (together with a sworn statement), but only when the annual amount of their transactions (executed with related entities and offshore companies) exceeds $6.1 million. The sworn statement includes a detailed description of such transactions.

What Information will MNEs file Going Forward?

With the recent approval of the Decree (which complements Chapter 4 of the so-called Tax Transparency Act (Ley de Transparencia Fiscal No. 19,484), the Uruguayan government has extended the information to be submitted by MNEs to the tax authority.

In addition to the transfer pricing study and the sworn statement MNEs have been filing until now, the Decree also introduces the possibility to require two more reports, namely the Master File and the Country-by-Country Report. The obligation to submit these reports will be imposed only on those business groups whose income, as a whole, exceeds 750 million euros.

Master File

The Master File shall provide an overview of the business group, including:

• organizational chart revealing the structure, ownership of the share capital and geographical location of all the group’s entities;
• general description of the main revenue sources of the business group;
• description of the supply chain of: (i) the five main products/services of the business group, and (ii) all the other products/services which represent more than 5 percent of the group’s sales;
• list and description of the main services agreements between the several entities of the group;
• description of the policies used to determine intra-group prices;
• identification of the main geographical markets of the products/services sold by the business group;
• analysis of the main contributions made by the different entities of the group in terms of performed functions, assumed risks and used assets;
• description of the main corporate restructuring operations (mergers, acquisitions, divisions);
• description of the group’s global strategy in terms of development, ownership and exploitation of intangible assets (trademarks, patents, software, among others);
• identification of the geographical location of the main research and development centers;
• list of the main intangible assets owned by the group;
• description of the assignments of intangible assets property rights executed between the group’s entities;
• description of the primary means available for the financing of the business group;
• identification of the group’s entities which centralize such financing;
• copy of the consolidated financial statements of the group;
• list and description of the advanced transfer pricing agreements executed by the several group’s entities with their corresponding tax offices.

Country-by-Country Report

The Country-by-Country Report shall provide accounting and tax information of the entities belonging to the group, including:

• gross income;
• taxed net income;
• generated income tax;
• income tax effectively paid;
• share capital;
• accumulated profits;
• number of employees;
• intangible assets.

Are There any Situations Where the MNE is not Required to Submit the Reports?

The MNE shall not be required to submit the Country-by-Country Report to the Uruguayan tax authority in the event the same report is filed in any other country which has a tax information exchange agreement in force with Uruguay.

The MNE shall not be required to submit the Master File either in the event the controlling entity of the group is not required to do the same in the country where such a controlling entity resides.

Which Sanctions Might Apply if MNEs Fail to Comply with their Reporting Obligations?

Neither the Tax Transparency Act nor the new Decree introduced any amendment into the regime of sanctions applicable to those companies which are not in compliance with their obligation to provide information related to transfer pricing rules. They therefore still may be subject to a fine of up to $235,000.

Planning Points

MNEs should be vigilant during the next few weeks. The Uruguayan tax authority will issue the necessary guidelines for the submission of the required Reports by December 31, 2018. While others will be celebrating the end of the year, MNEs should be finalizing the preparation of such Reports.

Guzmán Ramírez is Senior Associate, Tax Department, with Bergstein Abogados, Uruguay.

The author may be contacted at: gramirez@bergsteinlaw.com