Presenting the Uruguayan case may contribute to shed more light — or darkness — on the work the OECD is developing towards achieving a consensus-based solution — “the quest for the Holy Grail” — by 2020.
The tax challenges arising from the digitalization of the economy — and, in particular, the criteria for taxing income derived from new business models resulting from this phenomenon — have been under the spotlight within the international tax community for a while. Under this context, Uruguay has been effectively taxing — since 1 January 2018 — income obtained by foreign enterprises rendering certain online services to Uruguayan customers, with no physical presence in the country and regardless of the size of the company or its annual turnover.
2. Source of income and “extensions of source”
Historically, the Uruguayan corporate income tax has been based on the source principle, taxing profits from activities developed, assets located, or rights economically used within the Uruguayan territory, regardless of the nationality, domicile or residence of those who intervene in the operations and of the place where business is concluded. It has been interpreted, by both the Uruguayan tax authority and scholars, that the determination of the source of income is based on where the factors of productions are applied.
However, some exceptions to this general criterion — some “extensions of source”, as recognized by the Uruguayan tax authority itself —, have relaxed the traditional approach to the definition of source. In effect, income derived from independent technical services — defined very broadly by the law — rendered to enterprises subject to local corporate income tax — i.e. basically local companies and PEs of non-residents —performed outside the Uruguayan territory is considered Uruguayan-sourced. Since 1 January 2016, the same criterion is applicable to income derived from advertising services. Although there is not a statutory definition of “advertising services”, the Uruguayan tax authority has considered that the definition includes not only the production of an ad but also its exhibition. Therefore, the service consisting of placing a local enterprise’s ad on a digital interface targeted at its Uruguayan users, like the one that may be provided by Facebook or Google, will fall under this provision.
3. Amongst income of “international” source
Recognizing that business activities may be partially carried out in the country, and that income may then be of “international” source — i.e. partially Uruguayan-sourced and partially foreign-sourced —, domestic legislation establishes, for some of these activities, the notional determination of the net income originated in Uruguay, therefore becoming taxable. In this regard, some activities have been listed in the rule and, for each one of them, different percentages apply to the gross amount paid to the provider of the service. It is within this non-exhaustive list that we find certain inbound activities, such as the intermediation in services and the transmission of audio-visual content performed through digital means.
In practice, the percentage of Uruguayan-sourced income corresponding to the intermediation in the supply or demand of services rendered through software applications — e.g. Airbnb or Uber —, was established at 100 per cent when the supplier and recipient of the underlying service — e.g. the driver and the passenger, under Uber’s business model — are situated within the national territory, or at 50 per cent when the supplier or the recipient of the underlying service — e.g. the owner of the property or the tenant, under Airbnb’s business model — is abroad. Furthermore, income obtained by foreign enterprises from the online transmission of audiovisual content — e.g. Netflix or Spotify —, whenever the recipient is located within the Uruguayan territory, is considered entirely Uruguayan-sourced. For both kinds of services, the recipient is deemed to be located in Uruguay under one of the following simplified criteria, which are determined at the moment of hiring the service: (i) the IP address of the device used for hiring the service or the user’s billing address is located in Uruguay; or, if this cannot be verified (and unless evidence of the contrary), (ii) when the payment is made through electronic means managed from Uruguay.
Notice that these foreign entities with no physical presence in Uruguay must pay taxes via self-assessment and local registration at a tax rate of 12 per cent on the notional amount when rendering services to non-corporate customers — as neither these nor the financial institutions intermediaries were conceived as withholding agents —, which, in practice, seems to be working.
4. Final comments
What are the arguments behind the “extension of source” described under section 2.? The services are used or enjoyed in Uruguay and, furthermore, these services, being deducted as expenses by Uruguayan enterprises or PEs of non-residents in Uruguay, may erode the local corporate income tax base. Regarding this last point, it is important to highlight that, within the Uruguayan corporate income tax, deductible costs and expenses must represent taxable income for the counterpart, whether under local income tax and/or foreign income tax law — known as the “lock rule” —; this means that expenses incurred with a counterpart residing in a tax heaven that also pays no local tax on the income obtained would not be deductible. However, this lock rule is protecting the worldwide taxable base, but not the local base, by allowing a deduction in the country that has no corresponding taxable income. It should also be noted that the extension of source applies only if the services rendered from abroad are linked to a receiver obtaining income included in the local corporate income tax base and, therefore, one that deducts service expenses.
Regarding the provisions described in section 3., these were aimed at providing tax certainty to certain business models by expressly establishing in the legislation the amount on which taxes must be paid in Uruguay. Furthermore, they aimed to put these businesses and those rendering similar services in a more traditional way on an equal footing. However, the provisions that introduced these digital businesses amongst activities of “international” source established, for two of the three hypotheses, the Uruguayan source income as equivalent to 100 per cent of the total outbound payment, with no special tax rate. But, what about the portion of income sourced abroad if the income is of “international” source?
Is Uruguay abandoning the traditional approach of defining the source of business profits from a supply-side approach, favouring a demand-supply approach or, may we say, a destination approach? Well, I do think so!
 The appraisals expressed in this comment belong to the author and do not compromise any of the institutions to which she is related.
 Bal refers to the current discussion on finding a consensus-based solution to the tax challenges of the digitalization as “the quest for the Holy Grail”; see Bal, Aleksandra, (Mis)guided by the Value Creation Principle – Can New Concepts Solve Old Problems?, Bulletin for International Taxation (IBFD), Vol. 72, No 11, 2018.
 And of course, in situations where no DTA establishes a limitation of taxing rights for Uruguay.
 Domestic law establishes that technical services include those provided in the areas of management, technique, administration or advice of all kinds.
 These intermediation activities intervening in the supply or demand of services are defined as those that are basically automated, required minimal human intervention, and are not viable without information technology.
 The rule establishes that the supplier of the underlying service is deemed to be located in Uruguay when said service — e.g. the transportation or accommodation rental — is rendered in Uruguay.
 E-learning services are excluded expressly by the rule.
 That is, electronic money instruments, credit or debit cards, bank accounts, or other similar instruments.
 Or 25 per cent if the foreign enterprise is located in a low- or non-tax jurisdiction