Identifier
Created
Classification
Origin
04TEGUCIGALPA2289
2004-10-13 18:25:00
CONFIDENTIAL
Embassy Tegucigalpa
Cable title:  

HONDURAS: TAX MAN IS MOVED BACK INTO MINFIN

Tags:  EFIN ECON EINV PGOV HO 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 002289 

SIPDIS

STATE FOR EB/IFD, WHA/EPSC, AND WHA/CEN
TRREASURY FOR DDOUGLASS
STATE PASS AID FOR LAC/CAM

E.O. 12958: DECL: 10/12/2014
TAGS: EFIN ECON EINV PGOV HO
SUBJECT: HONDURAS: TAX MAN IS MOVED BACK INTO MINFIN

REF: TEGUCIGALPA 1741

Classified By: Classified By: Economic Chief Patrick Dunn for reasons 1
.4 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 002289

SIPDIS

STATE FOR EB/IFD, WHA/EPSC, AND WHA/CEN
TRREASURY FOR DDOUGLASS
STATE PASS AID FOR LAC/CAM

E.O. 12958: DECL: 10/12/2014
TAGS: EFIN ECON EINV PGOV HO
SUBJECT: HONDURAS: TAX MAN IS MOVED BACK INTO MINFIN

REF: TEGUCIGALPA 1741

Classified By: Classified By: Economic Chief Patrick Dunn for reasons 1
.4 (b) and (d)


1. (C) Summary: The Honduran National Congress has decreed
that the Executive Revenue Directorate (DEI) will no longer
be a semi-autonomous tax agency and will instead be folded
into the Ministry of Finance (MOF). The DEI is overstaffed
and highly politicized, as alleged in the justification to
move it back into MOF, but the move will not solve, and could
exacerbate, these problems. In addition, the move gives MOF
greater control over GOH revenue collection efforts, where
they could be subject to abuse as the campaign season
approaches. The loss of DEI autonomy concerns Post, and we
will continue to monitor the situation closely, in particular
for any signs of weakening resolve on fiscal restraint or any
effect of the restructuring on our bilateral technical
assistance program on tax administration. End Summary.


2. (C) On September 30, the Honduran National Congress issued
a decision that the Executive Revenue Directorate (DEI, the
GOH equivalent of the USG,s Internal Revenue Service) will
no longer be a semi-autonomous agency and will instead be
folded into the Ministry of Finance (MOF). The DEI, formerly
composed of the Customs Authority and the Tax Authority under
the MOF, became independent in 1994 with the goal of
improving the efficiency and credibility of tax collection.
In recent testimony, Minister of Finance William Chong Wong
called for the reintegration of the DEI into MOF, citing the
DEI,s lack of responsiveness to the MOF, the rapid growth in
both its personnel and budget, and its politicization. In a
conversation with EB Deputy Assistant Secretary Greenwood,
however, Chong included in his list of motivations the fact
that DEI employees were seeking to unionize. Moving them
into the Ministry of Finance could impede this unionization,
a concern that was protested by DEI employees on October 5
with a work-stoppage, supported by a peaceful demonstration

by leftist Bloque Popular members. In settling the strike,
Chong agreed there would be no reprisals against strikers,
and former benefits, including salary and tenure, would be
carried over in the DEI move to MOF.


3. (C) Post spoke on October 1 with Vice Minister of Trade
and Industry Salvador Melgar Ascencio about the
restructuring. Melgar noted that the bill was pushed through
with very little debate, and in his view the situation is now
&worse than it was before.8 He admitted the DEI is
inefficient and terrifically overstaffed, and said that the
politicization of the staff continues to be a problem. (DEI
staff positions experienced an earlier staff turnover once
during the current administration for mostly political
reasons.) However, he said, moving it to the MOF fails to
address these core problems and introduces another.
According to Melgar, Chong continues to operate an accounting
consultancy in addition to his job as Minister, and as such
he is in a position to &clean up tax messes8 for clients or
potential future clients. (Note: According to the Honduran
Constitution, it is illegal for a government official to have
two paid jobs in the public sector at the same time. It is
unclear if there is a similar statute in force prohibiting
such conflicts of interest involving a paid position in the
private sector. In any case, this standard appears to be
laxly or selectively enforced. For example, Minister of
Investment Promotion, Camilo Atala also continues to manage
Banco Ficohsa. End note.)


4. (C) The solution to the DEI,s problems, Melgar said, is
right-sizing and professionalization of the staff through
adequate pay, job tenure, training, and promotion tracks that
attract and retain qualified investigators. The current
restructuring, by placing the DEI securely within the
antiquated and inflexible Civil Service system, makes this
kind of reform much more difficult and therefore unlikely.


5. (C) Another concern voiced by Melgar and echoed in the
local press is that the restructuring will in some way also
bring greater control over revenue accountability and
disbursements to the MOF, where they could be subject to
abuse as the campaign season approaches. He compared former
Minister of Finance Alvarado with Chong, noting that rather
than break the budget by &finding8 an additional unbudgeted
USD 30 million for the electoral commission, Alvarado
resigned. (Note: As noted reftel, the reality is somewhat
more complex, but Post believes this issue did play a role in
his decision to resign. End Note.) Chong, on the other
hand, is inclined to disburse the funds, and is currently in
talks with donors seeking additional contributions for this
purpose. Melgar concludes that Chong will be far more
responsive to National Party demands for increased spending
as the elections draw near than Alvarado would have been, and
Chong,s assumption of direct control over the DEI could
further facilitate this process.


6. (C) Comment: The loss of DEI autonomy concerns us, and we
find many of Melgar,s worries well-founded. A USG tax
advisor, resident in the DEI, has previously told post that
allegations continue to swirl within the DEI that Chong has
blocked or otherwise disposed of tax cases against persons or
firms with whom he has personal ties (reftel). Post is aware
of no smoking gun, but continues to monitor the situation
closely. Chong is also widely regarded as a member of the
&dark side,8 the old-guard of the National Party,
reportedly willing to apply questionable tactics (such as the
off-budget spending noted above) to ensure continued access
to power. If Chong loosens the reins on fiscal restraint at
the behest of the National Party to improve their chances at
the polls, he risks increasing inflation, alienating donors,
and potentially even breaking the pact with the IMF -- as
happened in 2001 when the GOH,s last IMF deal collapsed over
irresponsible spending in the run-up to the 2002 elections.
Post, the IMF, and the entire donor community will continue
to press the GOH to restrain spending and comply with its IMF
terms. We expect it will do so at least until it reaches
HIPC completion point early in 2005. There is some concern
at the IMF, however, that once that milestone is reached the
GOH could lose its self-control and undo all its hard work to
date. Given political pressures in the run up to the November
2005 elections, Post shares the Fund,s concern that the GOH
could fall off some elements of its IMF program at that time.


7. (C) Comment (continued): Post will also monitor the
effect of this restructuring on our bilateral technical
assistance program on tax administration. To date this
program has been very successful in encouraging the DEI to
take small but meaningful internal reforms aimed to improve
collections and professionalize the tax service. DEI
director Mario Duarte has been an enthusiastic (if not always
effectual) supporter of the program. Duarte has made few
public comments about the DEI reorganization, and some
speculate that Duarte might be tapped to fill the
Vice-Minister of Finance position vacated by Chong Wong in
September when he became Minister. If he is not named Vice
Minister, it is unclear what position Duarte would hold in
the post-reorganization DEI. Post will watch to see whether
Duarte is named to a Vice Ministership under Chong -- with
whom there was reportedly tension when Chong was still Vice
Minister of the Budget before becoming Minister -- and
whether the DEI,s move into MOF hampers Duarte,s ability to
pursue even the meager reforms we,ve seen to date. End
Comment.

PIERCE
Pierce