Download A base for Latin American business

A base for
Latin
American
business
By Geoffrey Hooper,
Chairman, Winterbotham
Trust Company (Uruguay)
SA, Montevideo, Uruguay
hirty three million sheep, eight
million cattle and three million
people were the vital statistics
that I learned when I moved to
Uruguay some fifteen years ago! Perhaps
even more unlikely seemed another
statistic - fifty thousand ostriches! But
these numbers, although approximate,
are relevant to the Uruguayan economy
today. Still a largely agricultural
environment, Uruguay produces and
exports meat (beef and mutton), wool
and leather, and fish from the South
Atlantic, as well as rice and fruit. The
Ñandu, the name for the local variety of
ostrich, is slightly smaller when
compared to the Australian version and
is a protected species, although it
consumes as much grass per day as one
sheep. However, it is also farmed with
some success and both feathers and meat
are also exported.
Notwithstanding these agricultural
impressions, Uruguay hides some
surprises. For example, it assembles and
exports cars to neighbouring Brazil and
Argentina, as well as providing customs
warehousing facilities for cars
manufactured in both major Mercosur
associates, in transit to the other
respectively. Other light industry
includes, for example, the manufacture
of disposable nappies and cartons for
the packaging and shipment of chicken
eggs. There is still a textile industry,
although today this does not reflect the
historic importance of the sector. Indeed
Uruguay is world famous for the original
creation of Genexus software, and
software is an area of significant
expertise. Tourism is also a contributor
to foreign earnings and the sector has
developed and modernised at a faster
pace over the last decade. There are now
several world class hotels, both in
Montevideo and in Uruguay’s principal
seaside resort, Punta del Este, of the
Gatt Round of Trade Talks fame.
Having hopefully given readers a
glimpse of a country with a diversified
economy, perhaps I should now say a
couple of words about its people.
Uruguay is a country of immigrants,
there being no indigenous people. Most
T
of the population come from all over
Europe, with a predominance of Spanish
blood. Essentially, it is a country that
welcomes new immigrants. It is easy to
obtain the necessary permit to settle
here and in many ways what Uruguay
needs more than anything else to make
its economy more viable is a larger
population. Uruguay has a European
look and feel to it, and the people, while
proud of their country, also often retain
close links to the countries of their
ancestors. Uruguay is democratic and
liberal but with a strong sense of
socialism. The level of education is
relatively high and available to everyone.
There are a number of top private
schools and the state universities are well
regarded internationally. It is not
uncommon to find Uruguayans in senior
positions especially, in my experience,
in international banking, working in
major markets around the world. From
a business perspective there is plenty of
skilled labour and, comparatively
speaking, this is still less expensive here
than in many other markets.
Uruguay is a democracy. Respected
within Mercosur, notwithstanding its
size, and internationally. It is the location
of choice for the headquarters of
Mercosur and the Latin American
Integration Association and many
diplomatic missions have a regional base
here. With sound institutions and solid if
conservative government, Uruguay
makes slow but steady progress.
Dependent in many respects on the
performance of its two large neighbours,
to the north and south, Uruguay
nevertheless provides a stable and secure
environment from which to develop
markets and business throughout Latin
America.
Uruguay is rated Investment Grade
by international rating agencies (BBBStandard & Poor’s and BAA3 Moody’s).
After three years of relatively strong
growth, 1999 was a year of recession and
GDP (US$21 billion - US$6,351 per
capita) contracted by 3.2% on the
previous year. This year growth will be
slow, around 1.3%, but should improve
in 2001 and 2002 to around 4% each
year. Inflation is stable at 4% per annum
while local currency, the Uruguayan
peso, is devaluing against the dollar at
a rate of the order of 7.5% per annum
(current
exchange
rate
is
US$1=U$12.35). On commercial
accounts the country runs with a trade
deficit of around US$1 billion (exports
US$2.2bn; imports US$3.3bn), total net
external debt is almost US$3 billion,
while international reserves total US$5.8
billion. Recently in one week the Stock
Exchange turned over some US$7
million in small change and the over-thecounter (electronic) securities market
some US$238 million. Dollar and local
currency interest rates are in the ranges
4 to 6% and 13 to 21% respectively.
Of a workforce of some 1.4 million,
the financial services sector occupies
6.4%. There are 23 full service banks,
of which 21 are privately owned, mainly
by international banking groups
including Lloyds TSB, HSBC, Citi Bank,
First Boston, ABN Amro, ING,
Santander, BBV, Sudameris and others.
In addition, there are 9 finance houses
(quasi-banks), 6 financial co-operatives,
and 11 offshore banks (Instituciones
Financieras Externas - IFEs) including
Credit Lyonnais, BNP, Safra and Citco
(Sandoz). There are also a large number
of representative offices of foreign banks,
principally engaged in the promotion of
private banking activities throughout the
Southern Cone region of South America,
as well as a multitude of exchange
houses.
As can be appreciated from the
economic indicators above the financial
services sector is of primary importance
to the Uruguayan economy. Free from
exchange controls and without
restrictions on capital flows, Uruguay
has served as a regional financial centre
since the Second World War, and was
even known as “the Switzerland of South
America” in the early fifties. Today it is,
perhaps, more comparable to
Luxembourg. A full member of
Mercosur, Uruguay occupies a privileged
position within the economic union,
notwithstanding its size. Strategically
located between the two largest
members, Uruguay is a provider of both
financial and commercial services to
corporate and individual customers
principally from neighbouring markets
but also to investors from all over the
world with interests in the region.
Uruguay has a territorial tax regime
and only Uruguayan source income and
Uruguayan located assets are subject to
tax in Uruguay. Non-Uruguayan source
income and non-Uruguayan assets are
not subject to tax, even when generated
by or belonging to a domestic
corporation, or for example, a branch of
a foreign company. There is no tax on
the income of individual persons and no
estate duties, gift or transfer taxes. There
is, however, a tax on Uruguayan assets
(individuals, above certain thresholds,
between 0.7% and 3%, corporations
1.5%, banks 2.8%). On the other hand
Social Security contributions are high
(18.625% employer; between 19.125%
and 24.125% for the individual
depending on the level of salary). These
contributions include health, pension
and other benefits such as limited
unemployment benefit, and also a payroll
tax.
Corporation tax is 30% of the taxable
revenue attributable to Uruguayan
source income. There is no tax on the
payment of dividends to individuals or
resident corporations. Withholding tax
is only charged on dividends paid to nonresident companies or individuals where
such companies or individuals are
allowed a tax credit for tax paid in
Uruguay in their own country of
domicile. Otherwise there is no
withholding tax on the payment of
dividends to non-residents. Value added
tax (IVA) is charged on the sale of all
goods and services, generally speaking
at the rate of 23%.
Some eight Free Trade Zones (Zona
Francas) provide a zero tax environment
for companies, including banks,
established under specific Free Trade
Zone legislation, introduced in 1987, and
located within their geographical
boundaries. The zone located close by
the town of Colonia, directly opposite
Buenos Aires across the River Plate, was
the first and was originally sponsored
and operated by the Uruguayan
government. Its administration is now
in the hands of the private sector. The
Colonia zone is principally involved with
warehousing and distribution, but
notably houses a large investment by
Pepsico, where their “secret coke
ingredient” is manufactured for Pepsi
bottling plants throughout the South
American region.
The most notable Free Trade Zone
is the Zona Franca Montevideo (ZFM).
Started ten years ago, the ZFM is
technologically advanced and is located
close to Montevideo’s international
airport, Carrasco. A private initiative,
under the Free Trade Zone law,
the ZFM is supported through
international development agencies such
as the IIC (InterAmerican Investment
Corporation), a shareholder, and the
InterAmerican Development Bank. The
ZFM has its own telecommunications
systems and is independent of the local
telephone utility. In practise, calls are
made from the ZFM as though the
caller was sitting in New York.
Communications costs are also 30%
lower when compared to the cost of
telecommunications in Uruguay in
general.
Although the ZFM initially was
principally involved with warehousing,
packaging and distribution, and
subsequently some light manufacturing,
its most significant developments today
are in the services sector. A modern
business park has sprung up, and a
Silicon Plaza building complex is under
construction, designed to house Internet
operators of all shapes and sizes. Merrill
Lynch has its own building within the
business park in which some 60 of its
regional
staff
are
located;
PriceWaterhouseCoopers will also
occupy a complete building, placing
some several hundred of their regional
staff within the ZFM; the other major
auditing and consultancy firms also have
offices there together with several
international banks such as Sudameris,
ABN Amro and Scotiabank.
The Free Trade Zone Company
(FTZC) is a zero tax base entity, it can
have bearer shares and both
shareholders and directors can be of any
nationality and domicile. In essence it
is an IBC type corporation, the principal
difference being that it must maintain
accounts and these have to be expressed
in Uruguayan pesos for filing purposes in
Uruguay. It can undertake any type of
business except banking but cannot, of
course, operate in Uruguay outside of
the Free Trade Zone.
So-called SAFIs, or Sociedades
Financieras Anónimas de Inversión, have
long been the preferred (offshore)
vehicle incorporated under Uruguayan
company law. These are standard
Sociedades Anónimas (SAs) which
declare on incorporation that they will
not undertake certain activities in
Uruguay or hold Uruguayan assets, as a
result of which they are accorded a
special privileged tax treatment. SAFIs
are exempted from income tax and VAT
but pay a small tax (0.3%) on their paidin capital (shareholder’s equity) and the
amount by which their liabilities exceed
twice the value of their shareholder’s
equity. SAFIs are bearer (or nominative)
share corporations. Although originally
designed as financial enterprises for the
management of assets outside Uruguay
for their own account or for third parties,
they have, over history, been used for
all kinds of purposes, including the
underwriting of non-Uruguayan risks.
Today, however, they are probably less
attractive for international business than,
on the one hand, a regular domestic SA,
and on the other, a Free Trade Zone
Company.
Winterbotham has found over recent
times that the regular domestic SA is
more attractive, both from an economic
(tax) as well as from a practical
perspective, for the purpose of holding
assets of any nature located outside
Uruguay. A Uruguayan SA is particularly
interesting in the context of a
shareholder of a European international
holding company. Dividend revenue
received is not taxed in Uruguay and
dividends can be paid to a zero tax
company free of any withholding tax (but
not of course to a FTZC).
Thus Uruguay enjoys a sound position
in today’s international markets. Well
rated as an economy; respected as a
soundly managed democracy; member
of a significant economic union,
Mercosur; liberal in the sense that it has
no currency controls and no restrictions
on capital flows; attractive because its
has a fully developed and well regulated
financial services sector with the
participation of major international
banks, auditors and brokerage houses;
acceptable in taxing environments
because it is not a zero tax regime and
because it requires the maintenance and
filing of accounts; and competitive and
secure in the international structuring
of financial transactions and trade
because it offers a range of well-proven
company forms.