EMBASSY TEGUCIGALPA MAY LOSE GASOLINE TAX

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 002110

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: EMBASSY TEGUCIGALPA MAY LOSE GASOLINE TAX
EXEMPTION



1. This is an action request -- see paragraph 7 below.


2. SUMMARY: Honduran tax law changes jeopardize the tax
relief Tegucigalpa currently enjoys with respect to
gasoline purchases. The U.S. Mission may soon lose its
current gasoline tax exemption, a discount of about 40
percent from the price paid by regular customers without
tax-free status. We request OFM's guidance on how best
to prevent the loss of this benefit, an annual cost
difference of over 90,000 dollars per year for official
and personal purchases. This message supplements a
separate, more general cable on bilateral sales tax
issues. END SUMMARY


3. A special relationship: By buying in bulk, Embassy
Tegucigalpa has always been able to purchase duty-free
gasoline for its official vehicles. In 1999 we
negotiated a special procedure with the government of
Honduras and Texaco, whereby three different types of
taxes and import duties were waived for individual
purchases at two local gas stations. The customer
presents a special Embassy-generated discount card and
all three gasoline taxes are discounted at point-of sale.
The current price paid for official and personal gasoline
purchases is 28 Lempiras per gallon (about 1.60 U.S.
dollars),a savings of 40 percent over the regular retail
price of 46 Lempiras (2.64 U.S. dollars). We are one of
only two diplomatic missions that receive tax-free
gasoline, mostly because the U.S. Mission's buying power
makes it worthwhile for companies like Texaco to do the
associated tax exemption paperwork. Since gasoline taxes
are levied under a separate law, unrelated to the regular
sales tax, our gasoline discount remained in place
despite last summer's tightening of Honduran sale tax
laws.


4. Historical background: The Honduran government has
traditionally granted the U.S. Mission gasoline tax
exemptions on consumption taxes as well as import duties.
A value-added tax known as "Fondo Compensatorio de
Subsidios" (Subsidy Compensation Fund) was not exempted
for the U.S. Mission until 1995. Relief from this tax
was granted annually as a special consideration to the
U.S. Mission, rather than an obligation under
international law. In 1998, a government decree
converted this tax into the "Aporte para la Atencin de
Programas Sociales y Conservacin del Patrimonio Vial"
(Contribution for Social Programs and National Highway
Conservation),establishing its rate at US 0.80 per
gallon. This surcharge is part of the present formula
used to determine the cost of gasoline and one of the
three types of taxes from which the U.S. Mission has been
exempt since 1999.


5. Others want in: The Honduran government has been
n
under increasing pressure to offer duty-free gasoline to
other foreign missions. Last year's tax law changes,
followed by substantial increases in the local
bureaucratic requirements for sales tax relief, prompted
other missions to begin looking for tax advantages
similar to those enjoyed by the U.S. Mission. A separate
message describes other effects of the June 2002 tax law
changes on the U.S. Mission.


6. The Honduran perspective: A portion of this tax was,
in fact, a sales tax, and all of it was ad valorem. It
was changed to an indirect tax in April, 2003, as an
intentional policy to flatten out the income stream and
stabilize government revenues. Honduras is not the only
country in the world that taxes gasoline heavily. The
gasoline tax is part of the Honduran government's efforts
to balance its budget and qualify for an IMF program.


7. The crackdown: On June 9th of this year, the
Ministry of Foreign Affairs sent a diplomatic note to the
Dean of the Diplomatic Corps clarifying the Honduran
government's present policy on duty-free fuel products.
Honduras recently abolished all other consumption and
import taxes on fuel products, at the same time raising
the "Patrimonio Vial" to over 1.05 dollars per gallon,
about 40 percent of the retail cost of gasoline. The
June note stated that this was an indirect, value-added
tax and thus no further exemptions would be allowed. The
Ministry cited Article 34 of the Vienna Convention,
stating that a diplomatic agent shall be exempt from all
taxes and duties except indirect taxes that are normally
incorporated in the price of goods or services. Ministry
officials have verbally informed the Embassy that this
interpretation precludes any continuation of tax relief
on gasoline for the U.S. Mission, at least after our
current bulk purchase permit expires in early March,

2004.


8. If it walks like a duck... Tegucigalpa believes any
tax that can be easily identified and quantified is a
direct tax within the meaning of the Vienna Convention.
We understand that there are highway repair fund
surcharges incorporated into the cost of gasoline in the
United States. But we also understand that these user
fees are only a fraction of overall U.S. fuel costs, as
opposed to the 40 percent "Patrimonio Vial" in Honduras.
We also find it highly coincidental that this surcharge
was raised just as other taxes were being eliminated,
conveniently allowing the same revenue stream to the GOH
but under the guise of a user fee or indirect tax.


9. Guidance requested: Tegucigalpa needs to develop an
effective strategy for preventing the elimination of fuel
tax exemptions by the Honduran government. Our current
bulk exemption expires in early March. Please provide
talking points, diplomatic note language and other
guidance, backed, if needed, by reciprocal tax treatment
of the Honduran mission in Washington. Many thanks.

Palmer