Free Zones: Exports of Goods
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Sectorial report FREE ZONES: EXPORTS OF GOODS June 2020 Free Trade Zones play an important role in attracting investment, generating skilled employment and diversifying the country's exports. This report focuses on the importance of free zones in Uruguay's exports of goods, either by using them as logistics centers (they are intermediate destinations for exports of grains or certain pharmaceutical products) or also as industrial processing locations (cellulose and beverage concentrate). In 2019, Uruguay's total exports of goods were around US$ 9.1 billion. Of this total, approximately 31% was sent abroad from one of Uruguay's Free Trade Zones. On the other hand, sales of goods from Uruguay to the Free Trade Zones explained 17% of total exports in 2019, totaling US$ 1.3 billion. These mainly correspond to wood for Fray Bentos Free Zone and Punta Pereira Free Zone for cellulose production, and grain for Nueva Palmira Free Zone. The large investments that have been made in the Free Trade Zones - favored by the current regulatory framework - have been the driving force behind their development. Based on data from the Free Zone Area of the Ministry of Economy and Finance, the total accumulated investment exceeded US$ 7.1 billion between 2005 and 2018. In the last year, the total investment in Free Trade Zones was US$ 380 million. The Free Trade Zones also play an important role in the generation of highly skilled employment. They employ 15,337 people (not including non-dependents), according to MEF data. The total number of companies operating in Free Trade Zones is around 1,125. The Special Economic Zones are a long-standing regime, which initially took the form of free ports, which facilitated the commercial operation of merchant ships with minimal involvement of local authorities. Modern Free Trade Zones emerged in the 1960s, and multiplied from the 1980s, in response to the export-oriented industrial development strategy of many countries. The acceleration of production and the growth of global value chains brought another wave of the 2000's. According to UNCTAD, there are more than 5,400 special economic zones globally, in 147 countries. The criterion for identifying these areas is based on three aspects: a clearly defined geographical area, a regulatory regime that is different from that of the rest of the economy, and infrastructure support. These regimes are used in several developed countries, but mainly in developing countries. Special economic zones can contribute significantly to growth and development by attracting investment, generating employment and boosting exports, both directly and indirectly. They can also leverage participation in global value chains, industrial development and diversification. However, the development of the Special Areas has been going on for decades and allows for the identification of some key points for their success, such as the strategic design of the applicable policy framework - harmonized with the rest of the economy - and their development program - linked to the country's competitive advantages and capacities. Increasingly, the inclusion of qualified resources, high levels of connectivity and first-rate service providers is also a prerequisite. In Latin America, free trade zones have a long tradition, although their current regulations were established during the 1990s2. In a context of a general decline in FDI flows at the global level, the Latin American region received nearly 6% foreign investment in 2018 compared to 2019. The Special Economic Zones play a fundamental role in this sense, as a highly valued regime for attracting investment. From 2010, the dynamism grows, and is expressed by the refocusing and expansion of the areas, as well as by the creation of new ones. Currently the region has more than 480 EEZs, where more than 10,000 companies are located, employing nearly 1 million people. Among the countries of the region, in addition to Uruguay, other countries such as Argentina, Brazil, Ecuador, El Salvador, Guatemala, Mexico, Paraguay and Peru have updated their Free Zone strategies in recent years, seeking to adapt the regime to current economic development needs. The current boom in these facilities is a response to a new wave of industrial policies and growing international competition for investment. The format of these venues is diverse, ranging from a basic Trade Logistics Facilitation venue - common in developed countries - to others focused on industrial development at various levels. 1 Source: UNCTAD – “World investment Report 2019 – Special Economic Zones”. 2 At the Ibero-American level, some of the main Free Trade Zones are grouped together in the Association of Free Trade Zones of the Americas (AZFA) See: https://www.asociacionzonasfrancas.org/es/ º The Free Trade Zones are part of a set of policies whose main objective is to encourage investment in Uruguay among which are also the Law on Promotion and Protection of Investment, Free Port and Free Airport regimes, the Law on Public-Private Partnership (PPP), the Law on Industrial Parks, among others. The first two Free Trade Zones installed in Uruguay were established in 1923 by Law No. 7593 with the aim of developing industrial poles in the interior of the country. They were subsequently reformulated by Law No. 15.921 of 17 December 19873 and regulatory decree 454/988 of 8 July 1988. This regulatory framework has proven to be successful in attracting investment, generating employment and diversifying exports for more than 30 years. However, the need to adapt it to the national and international context was noted, so in December 2017, and through Law No. 19,5664, the regulation was updated. The main changes covered various points including: an update of the objectives, a change in the requirements for operating under the regime, an extension of the eligible activities, changes in the minimum national employment requirement, and tax changes - without affecting previously agreed rights-. The Free Zones can be exploited by the State or individuals, duly authorized. The private ones are managed by individuals and authorized by the government, which supervises and controls them through the Free Zone Area of the General Directorate of Commerce5. For the installation of a Free Zone in Uruguay, a government resolution is required, detailing data such as: period of authorization for exploitation, area occupied by the Free Zone, the minimum investment that the operator or operators undertake to make and the fee they must pay, among others. The interested party in carrying out activities in the Free Zone must submit to the Executive Power the request for authorization accompanied by an investment project that demonstrates the economic and financial viability of the undertaking and the benefits of it for the country. Any type of activity can be developed in the Free Trade Zones: commercial, industrial or service. Commercial activities are understood to be the purchase and sale of goods or merchandise that enter the free zone where the activity is carried out or another free zone, and that have 3 Ley 15.921 4 Ley 19.566 5 Página web: https://www.gub.uy/ministerio-economia-finanzas/zonas-francas both origin and destination outside of the national territory, or the national territory6, logistic activities are also counted within commercial activities. For service activities, this includes the provision of various types of services from free zones, either within the same zone, to users or developers in other free zones, to third countries or to the rest of the territory - to companies that are IRAE taxpayers. The new law extended this authorization to other types of services such as call centers, mailboxes, distance education, and others that the Executive Branch may authorize7. Law No. 19,566 also extended the activities authorized within the regime. In this regard, the main change lies in the authorization of Thematic Service Areas (Chapter VIII). The services covered are audiovisual, leisure and entertainment services, with the exception of games of chance and gambling, and their complementary activities. The companies authorized to develop activities in Free Trade Zones can be natural or legal persons under any corporate form. Users must have as their exclusive object any of the activities provided for in the Law. Foreign investments do not differ from domestic ones, so they do not require special procedures or requirements to be established. The activities of users of Free Trade Zones are exempt from any national tax, created or to be created, in particular they have the following benefits: » Exemption from Corporate Income Tax (IRAE), Net-worth Tax (IP), and any other national tax. » Tax exemption for dividends paid to shareholders domiciled abroad. » Option for foreign staff (up to 25% of total employment8) to exempt social security contributions in Uruguay. » Sales and purchases abroad of goods and services are not subject to Value Added Tax (IVA), nor are sales and services within the Free Trade Zone. » Goods exchanged between the Free Zones and the rest of the world, are exempt from customs duties. 6 Monopolies, state exclusivity or public concessions must be respected. Services provided to the rest of the national territory will receive the same tax treatment as services provided from abroad. 7 Excluding those whose sole or main destination is the rest of the national territory. / These activities shall be covered by the general tax regime, which may be established on the basis of definitive tax withholding regimes, in accordance with the provisions of the Executive Branch. 8 Natural or legal citizens are counted. In justified cases, this percentage can be extended, with prior authorization from the government. In the case of service activities, the minimum percentage of Uruguayan citizens may be 50%, prior authorization and when the nature of the business developed so requires; always seeking the highest possible levels of participation of Uruguayan citizens. Likewise, and as detailed in article 25 of Law No.