TAX COLLECTIONS EXCEED TARGETS THANKS TO PROGRESS

UNCLAS GUATEMALA 001765 SIPDIS SENSITIVE TREASURY FOR TOLUI AND PARODI E.O. 12958: N/A TAGS: ETRD GT UNCTAD WTRO SUBJECT: TAX COLLECTIONS EXCEED TARGETS THANKS TO PROGRESS WITH CUSTOMS REFORM REF: GUATEMALA 1641 ¶1. (SBU) Summary: Tax collections are above target through June, despite delays in the fiscal reform. The good news comes as a result of much better collections by Customs of duties and value added tax in the ports, the result of a shifting focus from physical inspection of containers to ensuring that all containers are systematically tracked. This shift in focus augurs well for revenues, combating corruption, and removing a key obstacle to more fundamental tax reform. ¶2. (U) Superintendent of Tax Administration Willy Zapata told the press July 14 that preliminary data on tax collection for the first half of 2004 showed that revenues were almost 8% over the target, despite the substantial delay in passing tax reform and replacing the IEMA alternative minimum tax that was declared unconstitutional in December 2003 (reftel). The mid year target had been Q 9.3 billion, but actual collections were Q10 billion ($1 = approx Q8). Zapata was optimistic that the target for the year of Q21 billion would be reached with the recent replacement of the IEMA with the IETAAP. ¶3. (SBU) Zapata's special advisor on Customs Christian Ros and Customs Intendent Rodolfo Fernandez told EconCouns and Econoff July 7 that collections of duties and value added tax on imports had been increasing dramatically and were offsetting the revenues lost as a result of the court ruling on the IEMA, which took effect in the second quarter of 2004. They said that preliminary information indicated that border tax collection for May was some 12% above the amount in May 2003 and that June collections were up by over 20%. They expected collections to continue to rise as new measures they were taking came into effect. Ros said that under-valuation of invoices, the principal focus of the Portillo Administration, was not the principal source of tax evasion. The greater problem was the complicity of corrupt officials in the ports with organized smugglers, allowing containers to pass through the ports without a trace. Ros's priority was to ensure that everything coming off or on a ship matched the ship's electronic manifest. Containers leaving the port by truck also had to be in the Customs computer. Smugglers were finding that they could not avoid the controls by sneaking containers around inspection points, and that was the reason collections were up. His next step would be to ensure, through audits, that what is declared on incoming manifests matches up with what importers buy, produce and sell. ¶4. (SBU) Comment: The news is encouraging, for several reasons. First, prospects are looking better for meeting the Berger Administration's target of a fiscal deficit no greater than 2% of GDP. Secondly, Ros's approach to customs management marks a clear intention to shift from a focus on physical inspection, where corrupt customs agents have long practiced discretion to ignore what they see, to an information and audit based system where evasion and under-valuation are difficult. It not only seems to be working by raising more revenues, but it is also better attuned to the concepts of business facilitation we are promoting in the WTO, FTAA and CAFTA. Finally, effective and efficient management of Customs is something the private sector has long been demanding as a condition for significant tax reform. The Portillo Administration, along with some in the international community, accused the private sector of rejecting its responsibility to pay its fair share of taxes. Private sector leaders have responded that they will pay more taxes, but not until massive contraband is eliminated and the playing field is leveled. The argument is self-serving, but it also has merit. An effective crackdown on contraband will remove the strongest argument that still exists for delaying effective fiscal reform. WHARTON