Identifier
Created
Classification
Origin
08MONTEVIDEO300
2008-05-21 16:20:00
UNCLASSIFIED
Embassy Montevideo
Cable title:  

GOU REPEALS CONTROVERSIAL INCOME TAX ON

Tags:  PGOV ECON SOCI UY 
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VZCZCXYZ0009
RR RUEHWEB

DE RUEHMN #0300 1421620
ZNR UUUUU ZZH
R 211620Z MAY 08
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 8223
INFO RUCNMER/MERCOSUR COLLECTIVE
RHEHNSC/NSC WASHDC
UNCLAS MONTEVIDEO 000300 

SIPDIS

E.O. 12958: N/A
TAGS: PGOV ECON SOCI UY
SUBJECT: GOU REPEALS CONTROVERSIAL INCOME TAX ON
PENSIONS AND INSTITUTES ?ASSISTANCE? TAX INSTEAD

REF: MONTEVIDEO 206

UNCLAS MONTEVIDEO 000300

SIPDIS

E.O. 12958: N/A
TAGS: PGOV ECON SOCI UY
SUBJECT: GOU REPEALS CONTROVERSIAL INCOME TAX ON
PENSIONS AND INSTITUTES ?ASSISTANCE? TAX INSTEAD

REF: MONTEVIDEO 206


1. On May 19, President Vazquez announced that the GOU
would repeal the controversial income tax on pensions
(reftel),and replace it with an ?Assistance Tax to
Social Security? (IASS in Spanish) that will cut taxes
for all but the highest levels of pensions. The
unexpected decision to repeal the tax on pensions was
triggered in part by Supreme Court rulings of
unconstitutionality earlier this year. While the
appointment of a new Justice in April had tipped the
Supreme Court?s balance back in favor of
constitutionality of the pensions tax, the previous
Supreme Court rulings made for a difficult situation,
with some pensioners exempted and others not. The
political opposition was actively using this
inconsistency to criticize the new tax system and the
GOU for its reluctance to repeal the tax.


2. Vazquez announced that he would soon submit two
bills to Parliament, one to repeal the current tax and
another to institute the IASS. Minister of Economy
Danilo Astori noted that the IASS would have a
significantly higher exemption for lower-end pensions
(raised by 60% to about USD 700) and different tax
brackets and taxable rates. Astori highlighted that
only 13% of pensioners would be subject to the IASS and
that only 4% would be taxed with an actual rate above
5%. According to GOU estimates, the move would benefit
about 50,000 pensioners who would now pay less.
Although the proposed reform significantly increases
taxes on high-end pensions, the GOU estimates the
revenue shortfall at USD 40-50 million, equivalent to
0.6%-0.7% of total GOU revenues. Unlike the previous
tax, which was directed to the general budget, the new
tax will be allocated to the national pension system,
helping to reduce Uruguay?s social security system
deficit and increase payments to lower-end pensions.


3. Comment: By replacing the pension tax with the
IASS, the GOU seeks to address the Supreme Court?s
arguments, harmonize the tax structure and ?reinstate
tax equity?. From a political standpoint, the move
strips a powerful political argument from the
opposition, which would have been central in next
year?s presidential campaign, and attempts to regain
the goodwill of pensioners. Still, the opposition
claimed the repeal as a political victory and may
continue to attack the new tax scheme as essentially
similar to the old one. Every party is trying to win
the favors of the massive population of over 600,000
pensioners with a view to the upcoming elections, as
they account for 18% of the population and for over 25%
of voters. End Comment.

BAXTER