HONDURAN SALES TAX -- FULL RECIPROCITY STILL

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 002109

SIPDIS

FOR DS/OFM/VTC/TC - W. NEMETH

INFO WHA/EX/PMO AND WHA/CEN

E.O. 12958: N/A
TAGS: OFDP AMGT HO
SUBJECT: HONDURAN SALES TAX -- FULL RECIPROCITY STILL
ELUSIVE FOR U.S. MISSION

REF: A) 02 TEGUCIGALPA 01076

- B) 02 TEGUCIGALPA 01621
- C) 02 TEGUCIGALPA 02034
- D) 02 TEGUCIGALPA 02443
- E) 02 TEGUCIGALPA 03378


1. SUMMARY: MORE THAN A YEAR AFTER HONDURANS CHANGED ITS
SALES TAX LAWS AND REVOKED LOCAL TAX CARDS FOR THE
DIPLOMATIC COMMUNITY, EMBASSY TEGUCIGALPA IS STILL
STRUGGLING WITH LOCAL AUTHORITIES TO ESTABLISH RECIPROCAL
TAX TREATMENT FOR THE U.S. MISSION. THE JUNE 2002 TAX LAW
PROMPTED REVOCATION OF HONDURAN TAX CARDS IN WASHINGTON.
IN DECEMBER 2002 POST RECOMMENDED THAT DS/OFM RESTORE FULL
PRIVILEGES TO HONDURAN DIPLOMATS, BASED ON WHAT WE
INTERPRETED AS A GOOD FAITH EFFORT TO PROVIDE RECIPROCAL
TREATMENT IN TEGUCIGALPA. AFTER ANOTHER NINE MONTHS OF
MINOR CHANGES AND ADDITIONAL ADJUSTMENTS, FULL SALES TAX
RELIEF IS STILL UNAVAILABLE TO THE U.S. MISSION AND ITS
EMPLOYEES. IN ADDITION, THE GOVERNMENT OF HONDURAS HAS
DECIDED TO DISCONTINUE EXCISE TAX EXEMPTIONS ON THE SALE
OF GASOLINE TO THE U.S. MISSION, TO THE TUNE OF OVER
92,000 DOLLARS PER YEAR IN ADDITIONAL COSTS. GASOLINE TAX
IS THE SUBJECT OF A SEPARATE MESSAGE TO DS/OFM. IN THE
INTEREST OF OBTAINING BETTER COOPERATION FROM LOCAL TAX
AUTHORITIES IN TEGUCIGALPA, DS/OFM SHOULD CONSIDER
ADJUSTING ITS TAX TREATMENT OF HONDURAN DIPLOMATS IN THE
UNITED STATES. (END SUMMARY)


2. BACKGROUND: ON JUNE 5, 2002, A NEW HONDURAN LAW
REVOKED ALL POINT-OF-SALE TAX EXEMPTION CARDS, INCLUDING
THOSE FOR FOREIGN DIPLOMATS AND DIPLOMATIC MISSIONS. THE
LAW TOOK EFFECT IMMEDIATELY, BEFORE A WORKABLE REPLACEMENT
SYSTEM COULD BE DEVELOPED AND IMPLEMENTED. REFS A AND B
DESCRIBE THE NEW LAW, WHICH ALSO INCLUDED RESTRICTIONS ON
VEHICLE IMPORTATION AND USE. FOR THE PAST FIFTEEN MONTHS
EMBASSY AND AID ADMINISTRATIVE STAFF HAVE WORKED
DILIGENTLY WITH THE MINISTRY OF FOREIGN AFFAIRS (MFA) AND
THE HONDURAN TAX DIRECTORATE (DEI) TO RE-ESTABLISH TAX
RELIEF MECHANISMS FOR THE U.S. MISSION AND ITS STAFF.
MOST OF THE CONTROVERSY CENTERS AROUND THE 12 PERCENT
SALES TAX, BUT THERE ARE OTHER LOCAL TAXES INVOLVED, E.G.,
HOTEL TAX, AIRPORT TAX AND GASOLINE TAX.


3. INITIAL RESPONSE: SEVERAL WEEKS AFTER THE HONDURAN
LAW WAS PASSED AND IMPLEMENTED, DS/OFM REVOKED HONDURAN
TAX CARDS IN THE UNITED STATES PENDING A FAVORABLE
RESOLUTION IN HONDURAS. IN DECEMBER 2002 EMBASSY
TEGUCIGALPA RECOMMENDED RESTORATION OF THE HONDURAN TAX
CARDS IN THE U.S. WE BELIEVED AT THE TIME THAT THE
HONDURAN GOVERNMENT WAS MAKING A GOOD FAITH EFFORT TO
RESTORE TAX EXEMPTIONS IN TEGUCIGALPA. THE MFA AND DEI
HAD IMPLEMENTED A SYSTEM OF TAX COUPON BOOKS FOR
DIPLOMATIC PERSONNEL. ALTHOUGH CUMBERSOME TO USE AND
DIFFICULT TO REPLACE, THE COUPONS PROVIDED POINT-OF-SALE
TAX RELIEF SIMILAR TO THE U.S. TAX CARD SYSTEM. LAST
DECEMBER, THE U.S. MISSION ALSO WAS RECEIVING REGULAR
REFUNDS FOR TAXES ALREADY PAID, BOTH FOR PERSONAL AND
OFFICIAL PURCHASES. DS/OFM RESTORED THE HONDURAN TAX
CARDS BASED ON THE EMBASSY'S RECOMMENDATION.


4. RESIDUAL BUREAUCRACY: THE NEW TAX RELIEF SYSTEMS IN
HONDURAS REQUIRE NEW, MULTI-STEP PROCEDURES ON THE PART OF
THE EMBASSY AND ITS ELIGIBLE EMPLOYEES. FOR OFFICIAL
PROCUREMENT, THE EMBASSY HAS TO SEND PURCHASE ORDERS TO
THE DEI OFFICE FOR PRE-APPROVAL OF A SALES TAX EXEMPTION,
INSERTING AN EXTRA STEP INTO AN ALREADY LENGTHY
PROCUREMENT PROCESS. FOR LOCAL CASH AND CREDIT CARD
PURCHASES, THE EMBASSY HAS TO PAY THE TAX AND SUBMIT A
REIMBURSEMENT APPLICATION AFTERWARDS. TAX-EXEMPT
INDIVIDUALS ARE ISSUED COUPON BOOKS TO BE USED FOR POINT-
OF-SALE TAX DISCOUNTS. BUT COUPONS CAN ONLY BE USED IN
CONJUNCTION WITH THE USER'S DIPLOMATIC CARNET, A DOCUMENT
THAT TAKES THE FOREIGN MINISTRY 4-5 MONTHS TO PRODUCE.
ADDITIONALLY, THE COUPON BOOKS CANNOT BE REPLENISHED UNTIL
THE USER SUBMITS ORIGINAL RECEIPTS (ONE FOR EVERY COUPON
ALREADY USED) AND A SPREADSHEET DETAILING EACH PURCHASE
AND THE AMOUNT OF TAX EXEMPTED.


5. RECENT DEVELOPMENTS: SINCE DECEMBER THERE HAVE BEEN
NEW SETBACKS. THE DEI EFFECTIVELY TERMINATED THE PARALLEL
TAX REIMBURSEMENT SYSTEM IN APRIL, LEAVING THE MISSION
UNABLE TO OBTAIN AFTER-THE-FACT TAX RELIEF FOR OFFICIAL
CREDIT CARD AND PETTY CASH PURCHASES. GIVEN THE TIME IT
TAKES TO OBTAIN A DIPLOMATIC CARNET, TERMINATION OF THE
REIMBURSEMENT PROGRAM ALSO DEPRIVED NEW ARRIVALS OF SALES
TAX RELIEF FOR THE FIRST 4-5 MONTHS OF THEIR TOURS.
EMBASSY AND AID OFFICIALS PROTESTED THIS ACTION TO THE
MINISTRY OF FOREIGN AFFAIRS, EVENTUALLY OBTAINING A
WRITTEN COMMITMENT TO REINSTATE THE REIMBURSEMENT SYSTEM
FOR CASH PURCHASES AND NEWCOMERS PENDING ISSUANCE OF
DIPLOMATIC IDS. HOWEVER, THE EMBASSY MUST NOW OBTAIN AN
INTERIM PERMIT FOR NEWCOMERS TO USE THIS BENEFIT.


6. RECENT DEVELOPMENTS (CONTINUED): IN APRIL THE FINANCE
MINISTRY PROPOSED AND THE NATIONAL CONGRESS PASSED ANOTHER
NEW TAX LAW. DECRETO 51-2003 IMPOSES SALES TAX ON RENT
AND ON SERVICES SUCH AS BANKING, MEDICAL SERVICES, FREIGHT
FORWARDING AND SMALL PACKAGE DELIVERY. AS WITH THE JUNE
2002 TAX LAW, NO REIMBURSEMENT SYSTEM FOR DIPLOMATIC
MISSIONS WAS CONTEMPLATED AS PART OF THIS NEW LEGISLATION.
THE US MISSION WAS SUDDENLY LEFT WITHOUT THE ABILITY TO
SEND AND RECEIVE TAX-FREE AIR FREIGHT, FEDEX SHIPMENTS OR
TO OBTAIN OTHER SERVICES USING NON-STANDARD PROCUREMENT
DOCUMENTS SUCH AS AIRWAY BILLS. ONE AID OFFICER HAD HIS
OUTGOING AIR FREIGHT DELAYED BY ONE MONTH WHILE THE
EMBASSY FRANTICALLY DEVELOPED A WORK-AROUND WITH THE DEI.
WE NOW HAVE A NEW TAX RELIEF SYSTEM IN PLACE, BUT AS
ABOVE, IT REQUIRES AN ADDITIONAL STEP -- DEI PRE-APPROVAL
OF A BLANKET PURCHASE AGREEMENT FOR ALL SHIPPING
TRANSACTIONS.


7. A NEW BOMBSHELL -- CANCELLATION OF GASOLINE TAX
RELIEF: IN JUNE, THE FOREIGN MINISTRY NOTIFIED DIPLOMATIC
MISSIONS THAT IT WOULD NO LONGER DISCOUNT THE TAX PAID ON
GASOLINE, AS IT CONSIDERED THIS AN "INDIRECT TAX". THE
AMOUNT IN QUESTION IS OVER 1.05 US DOLLARS PER GALLON,
APPROXIMATELY 40 PERCENT OF THE PRICE PAID AT THE PUMP.
THE WITHDRAWAL OF THE EMBASSY'S CURRENT GASOLINE TAX
DISCOUNT WILL COST THE U.S. MISSION AND ITS MEMBERS MORE
THAN 90,000 DOLLARS PER YEAR IN ADDITIONAL GASOLINE
CHARGES FOR OFFICIAL AS WELL AS PERSONAL VEHICLES. THE
ISSUE INVOLVES USER FEES, AMONG OTHER THINGS FOR HIGHWAY
RECONSTRUCTION, AND IS THE SUBJECT OF A SEPARATE MESSAGE
FROM POST TO DS/OFM.


8. ANALYSIS AND RECOMMENDATION: IN REF D, THE EMBASSY
STATES, "WE HAVE EVERY REASON TO BELIEVE THE MFA AND THE
DEI WILL WORK WITH THE DIPLOMATIC COMMUNITY TO IRON OUT
THE REMAINING PROBLEMS." IN RETROSPECT, THIS STATEMENT
WAS OVERLY OPTIMISTIC AND HAS, THUS FAR, NOT PROVEN TRUE.
RATHER THAN IRONING OUT THE REMAINING PROBLEMS, THE
HONDURAN GOVERNMENT HAS PUT ADDITIONAL HURDLES IN FRONT OF
THE U.S. AND OTHER DIPLOMATIC MISSIONS. NEW BUREAUCRACY
HAS ADDED TO THE BURDEN OF SEEKING TAX RELIEF FOR BOTH
OFFICIAL AND PERSONAL PURCHASES. THERE IS A GROWING
INEQUITY BETWEEN THE TAX TREATMENT OF THE U.S. EMBASSY AND
ITS STAFF IN TEGUCIGALPA AND THE TREATMENT OF HONDURAN
DIPLOMATS IN THE UNITED STATES, WHO PRESUMABLY ENJOY FULL
POINT-OF-SALE TAX DISCOUNTS. IN OUR DISCUSSIONS WITH THE
HONDURAN GOVERNMENT WE NOW DEAL FROM A POSITION OF
RELATIVE WEAKNESS. POST ASKS DS/OFM TO LOOK FOR WAYS OF
READJUSTING ITS TREATMENT OF THE HONDURAN MISSION TO
ESTABLISH GREATER EQUITY BETWEEN THE TWO GOVERNMENTS.

Palmer