With around 180 active tax expenditures and an estimated revenue foregone equivalent to about 6 percent of GDP in 2021, the third highest in Latin America, Uruguay offers a diverse array of tax breaks for both households and businesses.
This IMF Selected Issues Paper investigates the composition and trends of tax expenditures in Uruguay, benchmarking the results from a cross-country perspective. Since many of these incentives have endured for decades, previous results from the literature suggest that a detailed reevaluation of their costs and benefits would be beneficial. Macroeconomic simulations suggest that a relatively modest tax reform reducing tax expenditures could create additional space for productive public expenditure and enhance Uruguay’s long-term growth.
Introduction
1. Tax expenditures, defined as a deviation of a benchmark tax system, can have a significant budgetary impact (IMF, 2022). Tax expenditures are often aimed at encouraging investment and job creation. However, these incentives impose significant fiscal costs in terms of revenue foregone. Although there is some uncertainty on quantification, cross-country data indicates Uruguay has one of the highest levels of tax expenditures in Latin America, with foregone revenue equivalent to 6 percent of GDP in 2021, ranking third after Honduras and Colombia according to the Global Tax Expenditures Database. This extensive reliance on tax breaks raises concerns about their efficiency and sustainability, particularly given their long-standing nature and lack of periodic reassessment.
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