TELECOMMUNICATIONS COMPANIES UNHAPPY WITH NEW

UNCLAS SANTO DOMINGO 000596

SIPDIS

STATE FOR WHA AND EB
PLEASE PASS TO USTR: S.CRONIN
TREASURY FOR OASIS: R.TOLOUI AND L.LAMONICA

SENSITIVE

E.O. 12958: N/A
TAGS: ECPS EFIN PREL EINV ECON DR
SUBJECT: TELECOMMUNICATIONS COMPANIES UNHAPPY WITH NEW
PRESIDENTIAL DECREE TAXING SALES REVENUES



1. (SBU) Summary: Executives from three Dominican
telecommunications companies, all with majority U.S.
investment, briefed emboffs January 27 on a recent
presidential decree they said effectively imposes a 10
percent tax on telecommunications companies' gross revenues.
They asked for USG advocacy to repeal the tax and indicated
they would probably appeal on constitutional grounds if the
measure remained in effect. All four Dominican
telecommunications companies are majority foreign-owned --
the fourth being French firm Orange. End Summary.


2. (SBU) Representatives of the three largest
telecommunications companies in the Dominican Republic told
emboffs on January 27 they had been informed on January 23
of a recent presidential decree imposing a ten percent tax
on telecommunication company revenues. The firms are
Codetel (Verizon),Centennial Dominicana (New Jersey-based
Centennial Communications),and TriCom (Dominican company
listed on NYSE; majority shares U.S.-owned). Prior to July
2002, telecommunications companies had been taxed on sales;
a legal change at that time subjected them to the same tax
procedures as other firms (1.5 percent tax on of sales,
credited toward the eventual payment of a corporate income
tax). The new decree -- decided without consultation and
issued without advice to the affected firms -- is a step
backward to that era. Executives noted that the sector was
also recently hit with the temporary five percent export
tax, even though, they argued, the net balance of their
earnings is in pesos.


3. (SBU) The representatives asked for USG advocacy for
repealing the decree. They based their argument on three
main points:

a) the GODR has singled out the telecom sector because of
the majority foreign ownership;

b) the decree was issued arbitrarily and in a manner that
was not transparent (they received a letter last week from a
mid-level tax authority official instructing them to begin
payments in February); and

c) the new tax on gross revenues completely alters their
business plans, imposes a significant financial burden and
negatively impacts their investment.


4. (SBU) All indicated that they were likely to cease
investment in the Dominican Republic, given the uncertainty
created in business conditions, unless the tax is repealed.
Codetel representatives said that they had referred the
issue to legal counsel for a decision whether to refuse
payment while appealing the measure to the Supreme Court as
unconstitutional. (The Court held in November that the 5
percent tax on exports, imposed by presidential decree, was
invalid because all revenue measures must originate in the
legislature; in December Congress approved the 5 percent tax
as one of several measures to comply with an IMF agreement.)


5. (SBU) Comment: Telecom and energy are the two Dominican
economic sectors with the most U.S. investment, and recently
there has been little good to report about companies'
experiences in either sector. Sectors with dollar earnings
are attractive targets. The GODR is hard pressed for
revenue and the president's one-line decree derogating a
previous measure aims at raising the government take
immediately. The GODR gave little consideration to the mid-
term impact: the failure to consult and the completely
unannounced reversion to the earlier, non-standard treatment
warns any prospective investor that the GODR -- or at least
the current administration -- is unpredictable at best. If
the firms decide to petition the Supreme Court, in the midst
of a presidential campaign, their high profile exercise will
feed comment in the press and in the parties.


6. Embassy has asked for documentation and will seek
additional clarification from the GODR.


7. This report was coordinated with USFCS Santo Domingo.

HERTELL