GOU REPEALS CONTROVERSIAL INCOME TAX ON

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