TRANSITION #8: DOMINCAN CONGRESS AWASH WITH TAX

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 004392

SIPDIS

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E.O. 12958: N/A
TAGS: DR EFIN PGOV
SUBJECT: TRANSITION #8: DOMINCAN CONGRESS AWASH WITH TAX
CHANGE PROPOSALS


1. (SBU) This is number 8 in our series covering the
transition between the Mejia and the Fernandez governments.

DOMINICAN CONGRESS AWASH WITH TAX CHANGE PROPOSALS

Fifteen days ago President Mejia sent Congress the
PLD-drafted fiscal package. The Fernandez team projected its
proposal would increase revenues by 2.7 percent of GDP
annually. The central measure is an increase in the
value-added tax (ITBIS) from 12 to 16 percent. President
Mejia has convoked an extraordinary session of Congress in
order to give more time for the fiscal package, which may be
passed before August 16 when Leonel Fernandez takes power.
Members of Congress are actively debating the package with no
one attempting to block it. It appears that Mejia and the
PRD will not actively pursue a salary adjustment via
legislative action. The consensus opinion is that the package
is essential to getting the IMF back to the negotiating
table.

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The Tax Work Continues
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The Finance Committee of the Dominican House of
Representatives continues its hearings, both private and
public, on the tax package drafted by Leonel Fernandez's
transition team and delivered by President Mejia "without one
comma changed." (Mejia joked to Treasury Under Secretary John
Taylor on July 10 that he would be "holding it out with a
pair of pincers.") Congressional and business leaders are
not in agreement on the shape the fiscal package will take.
On July 23 the lower house held a hearing on the fiscal
package with technical advisors from the PRSC,
representatives of the Entrepreneurs' Council (CONEP),the
National Association of Young Businessmen (ANJE) the National
Association of Banks, the Association of Industrialists, the
Association of Private Businesses, and the Hotel, Bar and
Restaurant Association. On the PLD delivered proposed
amendments negotiated with bankers and the private sector.
PLD fiscal team leader Rafael Camilo indicated that as long
as the revenue yield is unchanged, they will consider changes
in broadening the base for the VAT, modifying taxes on rents,
changing the mechanism for taxes on financial instruments and
altering the structure of incentives for investment in the
regions along the border with Haiti. Finance Committee
chairman Marino Collante (PRSC) had earlier commented to the
press that the fiscal package would certainly be amended
before passage.

Congress busily cleaned up its agenda before the end of the
regular session on July 27, passing legislation on public
access to government information, national parks, nepotism in
government, migration, sales of government owned land, and
pension rights for Mejia administration employees. On July 22
it ratified the Article 98 bilateral agreement with the
United States on the International Criminal Court. Given the
evident need for ample consultations and hearings on the tax
measures, Mejia convoked the legislature into a special
session that could last up to August 15, the day before the
presidential inauguration.

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Content
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The PLD's package focuses less on "reform" than on increasing
revenues from taxes on consumption. It does little to alter
the tax structure of the economy. Projections of revenue
gained from taxes on a full-year basis indicate that it will
not be sufficient to cover the fiscal deficit in the
government budget, let alone to make a dent in the
quasi-fiscal deficit of the Central Bank. The tax package
focuses on taxes that are easily collected, generally those
that have a pre-existing mechanism of enforcement. The
value-added tax (VAT or ITBIS) would go from 12 percent to 16
percent, but the base would not be expanded (the Dominican
Republic has one of the narrowest bases in the region,
collecting ITBIS on only about 60 percent of sales). Tax
increases likely to be passed along to the consumer will be
those on financial services, alcoholic beverages, tobacco
products, insurance, airline tickets, telecommunications,
personal income, advertising, and rents.

Proposed measures facing strong opposition include the
expansion of the 1 percent tax on real estate generally (both
personal and business property),not just on high-value
residences and commercial property (IVSS) valued over RD$ 3
million or about US$65,000. Even if passed in some form,
these measures would be hampered by an insufficient tax
infrastructure and database for collection. Taxes on rents
may be unenforceable. After consultations between the PLD
and the Commercial Bank Association the PLD delivered
proposed amendments that would replace the proposed 15
percent tax on interest paid on financial instruments with a
tax on check clearing, equivalent to 0.15% of the amount
transferred (this will apply to credit card transacions and
ATM operations, as well). The PLD gave in to the bankers
and agreed to eliminate the proposed mandatory reporting of
bank transfers to the tax collection authorities, a measure
that bankers characterized as a violation of bank secrecy
laws.

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Others with the Big Picture
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At least three local economists or consulting institutions
have proposed tax overhaul plans that focus on restructuring
the tax code, but their efforts will have little impact on
the current fiscal package. The PRD's economic consultant
Andy Dauhajre, Jr., elaborated a tax reform proposal intended
to collect taxes principally from the well off, but the PRD
decision to give carte blanche to the incoming PLD team made
this a dead letter. On the expenditure side of the debate,
Grupo Leon, a power in beer, tobacco and banking, ran
double-page ads all major papers describing a proposed
program including reductions in government salaries and other
state expenditures, continued reform of the banking and
energy sectors, a tax amnesty applicable to repatriated
capital and a 20 percent increase in salaries beginning in
August. Grupo Leon advocates an increase in ITBIS to 16 now
with commitment to a gradual reduction to a broader 10
percent ITBIS by 2007. Much current newspaper commentary
focuses on the probable incidence of taxes, maintaining that
most will be paid by the poor and the middle classes.

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Support for the Effort
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Prominent members of government and the business community
are putting their support behind the fiscal package,
acknowledging that some kind of package, however imperfect,
will be necessary to move toward financial stability and to
bring the IMF back to the negotiating table. President of
the lower house Alfredo Pacheco (PRD) has made public
statements generally in support of the PLD fiscal package and
the use of the ITBIS as its main revenue source. Business
leader Elena Viyella de Paliza, the president of CONEP (the
Entrepreneurs' Council),has asked for a consensus on
accepting the tax reform.

President Mejia has continued to needle the PLD about a need
for an early salary increase for public servants, but it
appears that he and his party are less likely to pursue this
point through legislative action. Mejia said nothing about
salary increases when he had breakfast with Treasury Under
Secretary Taylor on July.

SIPDIS

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Comment
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Embassy Santo Domingo expects that the fiscal package may be
passed before the August 16 inauguration with only minor
changes and with the support of government and industry
leaders. The fiscal plan is only a first step and is so far
confined to the revenue side of the budget. The new
government will need an additional assortment of firm
corrective measures in hand when it seeks to renew talks
with the IMF. A major question is the approach that
Fernandez and his team will take to government expenditure.
The plan does not address persistent problems associated with
subsidies for cooking gas or electricity, nor does it contain
any commitments concerning the number of public employees or
the wages to be paid to them. PLD commentators to date have
stressed a "smaller but better paid public workforce." The
rush for jobs by PLD supporters will make that difficult to
achieve.


2. (U) Drafted by Mark Kendrick.


3. (U) This messages and others in our transition and
elections series are
available on the SIPRNET at
http://www.state.sgov.gov/p/wha/santodomingo/
along with extensive other material.
HERTELL