Uruguayans will be scrutinising their pay packets this month after the government introduced its first income tax in almost four decades from July 1, as the centrepiece of a package to reform the country’s unwieldy tax system.
Lawyers, accountants and other university-educated professionals working for themselves will be among the hardest hit, as they had previously not been liable for any tax, unlike workers on company or state payrolls, who had paid a charge that is now replaced by the new income tax.
The new regime, which applies rates of up to 25 per cent, promises to be a shock to the system for many – Uruguay scrapped income tax in the early 1970s because it proved inefficient.
The new system goes further, and other sources of income are now taxable: Marcelo Varela, a Uruguayan living in Buenos Aires who rents out his house back home, was aghast to discover that he will now have to pay the equivalent of 1½ months’ rent to the state in tax.
The leftist government of President Tabare Vazquez says the aim of the overhaul is not to raise more cash but to diversify sources of revenue and make the system fairer and simpler.
“Sixty per cent of the population will benefit. Many people – about 25 per cent – will be in a similar situation to now, and the rest will be a bit better off,” said Mario Bergara, economy under-secretary.
“It’s going to affect me a lot – about 5,000 pesos [$210, €155, £105] a month, nearly 10 per cent of my income,” said Amanda Tizze, a 65-year-old retired architect who also collects a teacher’s pension. “But I think it’s right.”
Uruguayan legislators have gradually added to the number of taxes over the years, resulting in a cluttered system with many tiny taxes. The reform scraps about half of them.
But critics say the new system still relies far too heavily on sales taxes, which raise about three-quarters of the country’s tax revenue and are some of the highest in the world.
Daniel Garcia, international tax partner at PwC in Montevideo, said the reform was too timid. Corporate taxes have been cut from 30 to 25 per cent, but companies that distribute dividends face a tax rate of 32 per cent. Both rates are far above those of countries such as Ireland, which charges 12.5 per cent corporate tax.
Many Uruguayans said they had not yet fully digested the tax reform but commentators warned the government to brace itself for a backlash from its own supporters.
Ignacio de Posadas, a former economy minister, said the reform could turn into “political suicide” for the government.