VZCZCXYZ0029
RR RUEHWEB

DE RUEHMN #0206/01 1071609
ZNR UUUUU ZZH
R 161609Z APR 08
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 8110
INFO RUCNMER/MERCOSUR COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS MONTEVIDEO 000206 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV ECON SOCI UY
SUBJECT:  SUPREME COURT RULING AGAINST TAX ON PENSIONS TRIGGERS 
POLITICAL TURMOIL 
 
¶1. Summary:  A ruling in March 2008 by the Supreme Court that 
declared as unconstitutional a new tax on pensions has triggered 
unprecedented attacks on the Judiciary and caused significant 
political turmoil.  So far, the GOU has refused to revoke the tax, 
in a stance that is being harshly criticized by the opposition. 
Since the Supreme Court4s ruling was a close 3-2 vote and one of the 
judges who opposed the tax retired in April, the GOU is gambling 
that the new Justice will tip the balance of the Court in its favor. 
 Should this not be the case, however, the opposition would press 
the GOU even harder to revoke the tax.  In such a scenario, the GOU 
would have to slash expenditures or postpone announced tax cuts, 
both moves politically costly.  The new personal income tax, which 
includes the tax on pensions, has been a bone of contention for 
months.  The noisy debate on the tax reform, already a daily 
highlight in the media, is expected to gain additional traction in 
the electoral campaign and could hamper the Frente Amplio's chances 
of winning the 2009 elections in the first round.  End Summary. 
 
Unprecedented pressures on the Judiciary 
---------------------------------------- 
¶2.  On March 26, prominent members of the Socialist Party accused 
Judge Sara Bossio, one of the five Supreme Court justices, of 
showing bias in a recent ruling against a tax on pensions.  In a 
March 28 press conference, Senator Fernandez Huidobro, an 
influential member of the MPP, the largest faction within the ruling 
Frente Amplio, bluntly expressed his discomfort with the inner 
workings of the Supreme Court, claiming that two justices had 
intentionally delayed their opinion for the final ruling.  At an 
April 6 demonstration, MPP Senator and former Agriculture Minister 
Mujica criticized the Supreme Court's decision and warned judges 
against judicial activism.  On April 9, MPP Congressman Perez 
accused the Supreme Court of lack of independence and of bias 
towards the wealthy.  He then went on to threaten to cut the 
Judiciary's budget.  Perez's statements found no echo in the Frente 
Amplio and were strongly rejected by the opposition.  The local 
Association of Judges reacted promptly to his statements and 
announced on April 11 that it would file a complaint against him 
before the UN's Special Rapporteur of the Commission of Human Rights 
on the Independence of Judges and Lawyers. 
 
A 3-2 vote in the Supreme Court 
------------------------------- 
¶3.  The detonator for these unprecedented attacks on the Judiciary 
--especially in a country proud of its longstanding division of 
powers and the independence of its Judiciary-- was the Supreme 
Court's ruling that found a new tax on pensions to be 
unconstitutional. The Parliament had approved in January 2007 a 
major tax reform which, among other things, imposed a tax on 
personal income including wages and pensions.  The tax reform went 
into effect in July 2007.  Immediately after passage of the tax 
reform, several thousand retirees filed some 360 cases before the 
Supreme Court, claiming that the tax on pensions was 
unconstitutional.  From March 26 through April 7, 2008, the Supreme 
Court ruled on 15 of the 360 cases that had been presented, and 
concluded in a 3-2 vote that the tax on pensions was 
unconstitutional.  Abiding by an article included in a 1997 
constitutional reform, the three-judge majority ruled that pensions 
are different from salaries, since they are an acquired right, and 
cannot be taxed in any way.  In turn, the two judges in the minority 
referred to a 1997 Supreme Court ruling that had declared an earlier 
tax on pensions to be constitutional. 
 
Opposition criticizes GOU's decision to wait and see 
--------------------------------------------- ------- 
¶4.  The GOU has delayed revocation of the tax to comply with the 
ruling and remains in a wait-and-see mode, until retiring Supreme 
Court Justice Sara Bossio's replacement is appointed and the new 
Supreme Court rules on more cases.  The GOU hopes that the new 
Justice will back the tax and thus alter future rulings in its 
favor.  (Note: The Supreme Court is not empowered to revoke a law 
and rules on a case-by-case basis. End Note.)  For all practical 
purposes, the new Justice will determine the fate of the tax on 
pensions, which is expected to net about $100 million a year, or 
about two percent of the GOU's revenues.  (Comment:  If the tax on 
pensions is repealed and the GOU wants to stick to the fiscal 
discipline it has shown so far, it would have to slash expenditures 
or postpone announced cuts in the personal income tax, both of which 
would be politically costly.  End Comment.)  Since the first rulings 
were passed on March 26, the opposition --led by Blanco leader 
Senator Larranaga and former presidents Lacalle and Sanguinetti-- 
has harshly criticized the GOU's refusal to revoke the tax and has 
accused the administration of arrogance and disrespect for the 
Judiciary. 
 
In the meantime, political turmoil continues 
-------------------------------------------- 
¶5.  The upcoming appointment of a new Justice has generated 
significant political turmoil, as the GOU tries to garner the 
two-thirds majority required in Parliament. Negotiations with the 
opposition appear at a dead-end, with President Vazquez rejecting 
Larranaga's demand that the GOU revoke the tax as a "gesture of good 
 
will."  Should no agreement be reached within a 90-day period, the 
oldest judge of any Court of Appeals (CoA) would automatically fill 
in as the new Justice.  In the meantime, the Supreme Court will have 
to distribute over 300 pending cases randomly among members of the 
Court of Appeals.  The GOU is trying to avoid this random 
distribution of cases, as it could result in different rulings for 
each case and create significant legal uncertainty. 
 
¶6.  On April 15, the GOU counterattacked by convoking a General 
Assembly of Parliament for April 22, at which time it will propose 
as new Justice the same judge that would be automatically appointed 
if no agreement is reached within a 90-day period.  With this move, 
the GOU is putting the opposition on the spot by making them look to 
be acting irresponsibly and prolonging the uncertainty, should they 
refuse to support the GOU's nominee candidate.  According to press 
reports, the proposed Justice believes that the tax on pensions is 
constitutional which, if true, would tip the balance within the 
Supreme Court in favor of the GOU's position on this issue. 
 
Interest groups take a stand on the conflict 
-------------------------------------------- 
¶7.  Leaks of the Supreme Court's ruling long before the decision was 
made public (including the detailed arguments of each Justice) 
received massive press coverage and set-off considerable political 
turmoil that gradually spread to other interest groups.  On April 2, 
two organizations of pensioners gathered in support of the Supreme 
Court and accused the GOU of disloyalty.  In an April 9 speech 
delivered during a national strike before a large gathering of 
pensioners, representatives of the powerful umbrella union PIT-CNT 
urged the GOU to modify the general income tax by mid-year.  (Note: 
In a March 10 speech, President Vazquez had said that no 
modification would be made to the personal income tax until 
Parliament passes the annual budget and the GOU has a clearer 
picture of personal income tax collection.  End Note.)  On April 14, 
the leader of the small Partido Independiente began contacts with 
the opposition and the Frente Amplio with a view to organize a 
demonstration in favor of "the independence of the Judiciary and the 
separation of powers". 
 
Comment: Tax debate narrows FA's chances of reelection 
--------------------------------------------- ---------- 
¶8.  The opposition is reading the Supreme Court ruling as its first 
victory over the Frente Amplio government, which reacted late and in 
an aggressive manner that showed little tolerance for dissent.  The 
personal income tax, including the tax on pensions, is a bone of 
contention that is likely to continue to gather steam throughout the 
electoral campaign.  While Economy (Finance) Minister Astori argues 
that over 80% of retirees will pay lower taxes, general opposition 
within the middle class with the new taxes on incomes and pensions 
is sure to narrow his chances for the 2008 elections, should he be a 
candidate, as he is closely associated with the tax reform.  The 
opposition is likely to continue to exploit the Frente Amplio's 
reluctance to revoke the tax on pensions to paint it as arrogant, 
stubborn and showing little respect for the Judiciary.  Should this 
argument take hold among pensioners (about 600,000 in a 3.3 million 
population), it would certainly reduce the Frente Amplio's chances 
of winning in the first round of the 2009 general elections and 
perhaps altogether, if the opposition can unite.  The GOU is in a 
tough spot and the opposition is taking full advantage of it.  End 
Comment. 
 
BAXTER