DOMINICAN VOTE TO REPEAL PROTECTIONIST TAX -

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 006609

SIPDIS

SENSITIVE

STATE FOR WHA/CAR, WHA/EPSC, WHA/USOAS, EB/TPP/BTA,
EB/IFD/OMA;NSC FOR SHANNON AND MADISON;LABOR FOR ILAB;
USCINCSO ALSO FOR POLAD; TREASURY FOR OASIA-LCARTER
STATE PASS USTR FOR VARGO, RYCKMAN, MALITO, CRONIN
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 EFIN DR
SUBJECT: DOMINICAN VOTE TO REPEAL PROTECTIONIST TAX -
PYRRHIC VICTORY?

REF: A. SANTO DOMINGO 6292


B. FAX TO STATE/WHA/CAR

C. TREASURY/OASIA

D. USTR 12/3/04


1. (SBU) Summary: The Dominican Senate achieved a
breakthrough of sorts on December 7 with a preliminary vote
(19 to 1) in favor of repealing a protectionist 25 percent
tax on beverages containing imported high fructose corn
syrup, which for months has been a barrier to Dominican
participation in the Central American Free Trade Agreement
(CAFTA). The bill goes to a special Senate committee and
must be subject to a final vote scheduled for December 15.
It must then be approved by the Chamber of Deputies and the
President. The measure includes extensive tax breaks for the
sugar industry and other businesses, estimated by the
administration at USD 150 million -- which would complicate
efforts to reach a new IMF agreement. End summary.

A Vote to Repeal -- and More
- - - - - - - - - - - - - - -


2. (SBU) The Dominican Senate on December 7 voted on a first
preliminary reading to repeal a protectionist 25 percent tax
on beverages containing imported high fructose corn syrup, a
measure inserted in late September into an otherwise
necessary tax package. (The USG has refrained from
recommending to Congress that the Dominican republic be a
member of CAFTA as long as the 25 percent tax remains in
effect.) The vote took place more than two months after
President Leonel Fernandez submitted draft repeal
legislation. It was preceded by increasingly tense
negotiations among the 29 senators (of 32) who belong to the
main opposition PRD. The Senate convened for a protracted
afternoon and evening session to consider the repeal.


3. (SBU) Before the vote, Senate President Andres Bautista --
a proponent of repeal -- angrily criticized senators for
repeatedly blocking the repeal and packing the bill with
concessions to special interests. Bautista had favored
putting the proposed concessions into a separate bill. "I
have convoked four Senate sessions to consider this bill and
have been boycotted. Now that it's on today's agenda, a new
bill is introduced." The new version included the repeal of
the tax, but also significant tax breaks for Dominican
business. The ultimate objective of the bill, he asserted,
was in fact to prevent the repeal of the 25 percent tax and
ultimately to block approval of CAFTA. "We understand some
senators took naive positions, some had economic motives and
others were pushed by the intervention of sectors outside the
Senate." Another senator speculated to us Bautista
considered that his personal authority had been challenged
and weakened in the weeks-long standoff.


4. (SBU) Bautista declared the session to be concluded and
left the Senate chamber, followed by about eight other
senators "in solidarity" with the president. Senate Vice
President Cesar Matias took the chair and the 20 who remained
voted to resume the session. They voted 19-1 to pass the
bill. The sole senator from Fernandez's Dominican Liberation
Party (PLD),Jose Tomas Perez, was absent from the chamber.
Bautista told us the next day that he considered his vice
president's action to be a violation of Senate procedure, but
another key senator said that the proceedings were in
accordance with the rules.

Key Provisions
--------------

5. (U) Article 1 of the bill (Ref B draft text) repeals the
specific provisions of the September 28 law creating the 25
percent tax on fructose-sweetened drinks and refreshments.
The remaining articles define compensatory measures in the
form of changes to Dominican tax laws.


6. (U) Agricultural enterprises including the sugar sector
are allowed to offset without limit from their tax
liabilities any amount spent on repair, maintenance or
improvement of capital goods. The sugar sector is allowed to
deduct from tax obligations all amounts paid as VAT to its
suppliers, with the notation in the preamble that sales of
sugar are not subject to VAT. The measure removes capital
goods imports from the scope of the current ten percent tax
on imports (disguised as an "exchange charge" and proposed
for an increase to thirteen percent). Changes to tax
incentives for investments in businesses near the Haitian
border (Article 6, Ref B) will do little to offset the
revenue losses. A concluding article repeals a series of
articles and laws identified by dates and references and not
further explained, including one that is applicable to
alcoholic beverages.


7. (SBU) The approved text varies only minimally from the
working draft faxed to Washington (Ref B). Language is
added to Article 5 specifically emphasizing favorable
treatment for the sugar sector. It now reads, in our
informal translation:

"All imports of capital goods in general, and inputs to the
sugar industry, including but not limited to machinery,
equipment and furniture; as well as replacements and parts
(los repuestos, partes y piezas) for machines and equipment
for industry, into the Dominican Republic shall be exempt
from payment of the foreign currency exchange commission or
any other charge of similar nature which has been
established, or may be established in the future, by the
Monetary Board or any other State institution or agency."

Fiscal Impact
--------------


8. (U) Internal Revenue Director Juan Hernandez told the
press after a meeting with the influential Council of
Entrepreneurs (CONEP) that the bill would enact tax cuts
amounting to 4.5 billion pesos (approximately USD 150
million),obliging a revision of the 2005 government budget
(the passage of which is one of several pre-conditions for
approval of the IMF standby arrangement). "Everyone has
called the budget optimistic already, since the tax
collection authorities will have to make an extra effort to
meet the objectives -- and if in addition they enact tax
cuts, this will create problems with the agreement we've
already struck with the IMF." Hernandez said that the
measures would create "chaos" in tax administration.

Next Steps to Repeal
--------------


9. (SBU) Some of the proponents of the free trade agreement
are talking of seeking on December 15 simply to pass instead
the repeal bill essentially as proposed by President
Fernandez, without the tax concessions. If the committee
finishes its work as expeditiously as promised and if the
Senate approves the bill on December 15, the measure would
then pass to the lower house of Congress, where Finance
Committee chairman Marino Collante previously assured us that
a solid majority (at least 90 out of 150)favors the repeal.
Timing is uncertain, and there is no schedule announced as
yet for the holiday recess. Once approved by the House, the
measure would go to the President for signature and
promulgation -- or veto. Under the Constitution the
President may return a entire bill to Congress with his
"observations," in which case it dies unless overidden wthin
eight days by a two-thirds vote in each houses. The current
Congressional session has been extended until January 12; the
new session will not begin until February 27.

Comment
--------------


10. (SBU) Many of the senators feel an obligation to protect
the domestic sugar industry, as historically important and a
provider of employment -- and because of the wealth and
influence of the industry owners, expressed through many
years of personal connections, favors and contributions overt
and under the table. Sugar and fertilizer interests have run
an aggressive and mendacious public campaign since signature
of CAFTA on August 5. The press and politicians bristled
with indignation and feigned patriotic fervor at the message
from the Ambassador, the Embassy and senior USG officials
that the Dominican Republic was setting itself up for
exclusion from CAFTA. All the legislators are now unhappily
aware that the U.S. position is firm. We believe the votes
are there for repeal of the tax in both houses of the
Dominican Congress. There is no sign that there is
sufficient principle or indignation among legislators to
constitute majority willing to stiff the sugar sector instead
of buying it off. The question is how many concessions the
sugar sector and agricultural interests will be able to exact.


11. (SBU) One great concern is the potential fiscal impact of
compensatory measures - the bill lifts the 10 percent
"exchange charge" on a category of expensive imports, while
tilting tax treatment sharply in favor of the sugar industry
(the Association of Manufacturers has already clamored for
similar, "equitable treatment.") The Fernandez administration
government and the Congress must be sure that whatever
solution emerges takes into account the country's other
interests, especially the pressing need for the agreement
with the IMF. By seeking to solve one impasse with
concessions to agricultural producers and sugar barons, the
Dominican Congress could possibly be setting up another
impasse, equally dangerous,with the International Monetary
Fund.
KUBISKE