DOMINICAN POLITICS #4: FERNANDEZ AND REPEAL OF TAX

UNCLAS SECTION 01 OF 04 SANTO DOMINGO 005468 SIPDIS SENSITIVE STATE FOR WHA, WHA/CAR, WHA/EPSC, E, EB, EB/TPP/BTA, HST, EB/OMA; NSC FOR SHANNON AND MADISON;LABOR FOR ILAB; USCINCSO ALSO FOR POLAD;TREASURY FOR OASIA-LAMONICA USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS ITURREGUI E.O. 12958: N/A TAGS: PGOV PREL ETRD DR SUBJECT: DOMINICAN POLITICS #4: FERNANDEZ AND REPEAL OF TAX MEASURE ¶1. Following is number 4 in our series on the 2004 politics of the Fernandez administration: Fernandez and Repeal of Tax Measure President Leonel Fernandez signed and promulgated on September 28 the tax measures passed by the Dominican Congress and submitted to the Dominican Senate on September 30 a letter and draft legislation to repeal the 25 percent tax on beverages made with fructose syrups. The tax measures are in effect today, October 1, since the official gazette with notice of the president's action appeared yesterday. At the opening of the Cibao Regional Trade Fair in Santiago, following the Ambassador's speech on the advantages of free trade, President Fernandez rose for ten minutes of impromptu remarks. These were carried live in Santiago and widely rebroadcast. He briefly outlined the challenges facing the new administration and the fact that it has a minority in the Congress. Again he evoked the benefits of the free trade agreement. "But we have a little problem," he commented. He recognized as valid the concerns of the sugar sector -- "but no one sector of the nation has the right to jeopardize the welfare of the rest of the nation." The administration would propose amending the fiscal reform package. He favored excluding the tax on fructose drinks "as an obstacle to the strategy of competitiveness that will guarantee the progress of the country. . . This problem will be overcome in democratic fashion -- through reason, persuasion and consensus." Fernandez suggested that even if the measure is not repealed, eventual congressional ratification of the free trade agreement, an international instrument, would override the tax. "By whatever rational and democratic legal means, the free trade agreement will prevail here. . . Mr. Ambassador, take this message to your government: in whatever legal and democratic way possible, we will pass DR-CAFTA." The trade-friendly crowd gave him a standing ovation and many of those nearby reached past the President's security detail to shake his hand. The hot defense of national pride and the sugar industry remains a theme in press coverage but a new note has appeared: a discussion of how to preserve the already negotiated free trade agreement. The papers have widely reported the postponement of the signing of a DR-CAFTA environmental agreement originally scheduled for September 24 -- as well as the fact that the decision was due to the uncertain status of the Dominican portion of the agreement. Various lawyers have endorsed Fernandez's interpretation that an international agreement would take precedence domestic law. None has addressed the lengthy and uncertain process by which this would be examined and decided, considering that the tax was deliberately crafted to elude commitments to eliminate tariffs over time. One entrepreneur suggested that soft drink bottlers relocate to the provinces bordering Haiti, which recently were granted tax exonerations to boost economic development. Fernandez has said that the mechanisms of the World Trade Organization would be more appropriate venues for examining trade controversies. In public discourse he has left vague the substance of any eventual discussion or dispute -- failing even to indicate which country would be the plaintiff and which the defendant. Despite this,the draft law sets forth in preambular language considerations that suggest a strategy of seeking a WTO finding that high fructose corn syrup presents unfair competition to locally produced sugar because it is "highly subsidized" (sic). Following are Embassy Santo Domingo's informal translations of Fernandez's cover letter and the text proposed for the law. The Spanish texts were faxed this morning to the Department, USTR and the Treasury. (begin informal translations) Leonel Fernandez President of the Dominican Republic Number 1895 Santo Domingo, National District September 30, 2004 Hon. Andres Bautista Garcia President of the Senate Congressional Building Santo Dmingo Dear Mr. President, On September 28 I promulgated as Law number 288-04 the tax reform law intended to reduce the fiscal deficit currently confronting the Dominican economy, so that we may comply with the negotiations with the International Monetary Fund. With the aim of correcting possible distortions created by the law in question, in respect of our oblgiations in the Free Trade Agreement signed on August 5, 2004 with the United States and Central American countries, I am submitting through you to the senate a draft proposal of law, enclosed, which seeks the derogation of paragraph IX of Article 375 of Law Number 11-92, as approved by Law 288-04 cited above, Article 11, in the understanding that the subject will be dealt with at the World Trade Organization and a solution will be found there. I call upon your good offices and those of your fellow legislators, with the spirit of maintaining commercial practices that are congruent with the multilateral, regional and bilateral engagements we have assumed. God, Country, and Liberty (signed) Leonel Fernandez (end informal translation) (begin informal translation of draft law) DRAFT PROPOSAL OF LAW Considering that the Congress approved the draft law dealing with a tax reform with the aim of reducing the fiscal deficit currently confronting the Dominican economy so as to comply with the negotiations between the Dominican Goverment and the International Monetary Fund, begun on August 5, 2003; Considering that the Dominican Republic, along with Central American countries, signed on August 5, 2004 a Free Trade Agreement with the United States, the principal trading partner and investor in the region, in which was obtained protection for the sugar industry better than that for Central America, as concers the basic tariff; Considering that in the process of negotiating the aforementioned Free Trade Agreement on the basis of reciprocal and mutual advantage, the Dominican Republic is obliged to reduce tariffs for all products, including those corresponding to customs subcategories 1702.30 to 1702.90, corresponding to glucose syrups containing fructose; Considering that the parties to the Free Trade Agreement among the United States, Central America and the Dominican Republic are empowered to agree upon amendments in the texts and the annexes of the aforesaid agreement, using the appropriate legal procedures; Considering that the World Trade Organization (WTO) is the common institutional framework for reconciling differences, in the case of unfair practices that might cause harm or serious disadvantage to a sector of national production, when resulting from the provision of subsidies or the disproportionate surge of imports; Considering that the Dominican Republic succeeded in obtaining at the WTO a Technical Rectification that altered its list of concessions to the Most Favored Nation List, via which a tariff-quota was set that protects eight agricultural products, including sugar; Considering that cane sugar is one of the four traditional products of the agro-exporting sector generating significant amounts of foreign exchange and employment and therefore should be preserved; Considering that internal excise taxes are applied currently to a small group of products in order to protect the health and lives of persons and to conserve natural resources, among other purposes, and not as a mechanism to respond to anticompetitive practices which prejudice free choice of inputs by producers; Considering that the current administration commits itself to see that high fructose syrups, categorized in Customs subcategories 1702.30 to 1702.90, extracted from agricultural products such as corn that are highly subsidised, will be dealt with at the WTO; Considering that the Dominican Republic should be consistent in its commercial practice and in the undertakings assumed on the multilateral, regional and bilateral levels, especially as concerns the engagements in associated trade agreements, in effect or in the process of congressional ratification; In view of Congressional resolution number 2-95 of January 20, 1995 ratifying the legal texts of the WTO: In view of the original texts in Spanish of the Free Trade Agreement among the United States, Central America, and the Dominican Republic, signed on August 5, 2004; In view of Law 288-04, promulgated on September 28, 2004, approving the tax reform, CONGRESS ENACTS THE FOLLOWING LAW: Article 1. This measure repeals paragraph IX of Article 375, modified by Article 11 of Law number 288-04, dated September 28, 2004 aproving the tax reform, so that the 25 percent (sic) on beverages sweetened with corn syrup is eliminated. Article 2. The administration commits itself, along with national producers, to seek alternative solutions with the aim of protecting the Dominican sugar industry. DATED . . . . (blank) (end of informal translation) ¶2. Drafted by Michael Meigs ¶3. This report and others in our series can be consulted on our SIPRNET site http://www.state.sgov.gov/p/wha/santodomingo< /a> along with extensive other material. HERTELL