DOMINICAN POLITICS #4: FERNANDEZ AND REPEAL OF TAX

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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not repealed, eventual congressional ratification of the free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