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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.