OIL PROFITS TAX: GON HAVING IT BOTH WAYS

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 000394

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/17/2016
TAGS: EPET EINV PREL PGOV NU
SUBJECT: OIL PROFITS TAX: GON HAVING IT BOTH WAYS

REF: 05 MANAGUA 2613

Classified By: Ambassador Paul A. Trivelli; reasons 1/4 (b),(d),(e)




1. (C) Summary: The February 13 political &deal8 that
ended the week-long Managua bus strike over rate increases
continues to reverberate in the political sphere and the
business community. Representatives of the FSLN, Alternativa
Cristiana, and Camino Cristiano signed a document with the
FSLN Mayor of Managua in the presence of Cardinal Obando y
Bravo and an OAS representative, committing to introduce a
law which will create a special &temporary8 tax on oil
company profits that, at least in the case of Nicaragua,s
only refinery, amounts to a confiscation of all profits. The
tax is supposed to be &reviewed8 in four months, during
which period the GON will supposedly ensure import of new
Japanese buses for which passengers will be happy to pay
higher fares. The proposal generated immediate protests from
private sector organizations, and the umbrella organization
COSEP issued a press statement, along with AMCHAM and the
Italian-Nicaraguan Chamber of Commerce, calling on the
Assembly to reject the tax, reject further subsidies to the
transport collectives, instruct the competent authority (city
of Managua) to apply rate increases, and if that is not done,
to transfer the city transport council to the central
government. Nevertheless, a draft bill to implement the tax
has been introduced in the legislature, and FSLN leader
Daniel Ortega, in full campaign mode, has excoriated the
&shameless, thieving, grasping, lying8 oil companies, the
private sector and political groups who oppose the law, and
the &subservient8 media that has generally taken their
side. FSLN Managua Mayor Nicho Marenco and Cardinal Obando y
Bravo both called upon the Assembly to enact the law. End
Summary


2. (C) Augustin Fuentes, general manager of Esso Standard,
Nicaragua,s only refinery, called on Ambassador February 16
to update us on the status of the confiscatory oil profits
tax that is being touted as the &solution8 to the transport
crisis. He emphasized that the tax is 3% on net sales, not
on profits, explained that his profit margin over sales was
in fact just 3% last year, so it is in effect a 100% tax on
profits, and complained that the GON and FSLN each claimed
the other was responsible for the situation. Though both the
PLC and Camino Cristiano,s Reverend Osorno had assured him
there were not enough votes in the Assembly to pass the law,
Fuentes was unhappy that the GON had allowed the FSLN to take
the issue as far as it had gone. Comment: The final
agreement containing the profit tax proposal was signed by
CC,s Delia Arellano as well as Alternativa Cristiana deputy
Orlando Tardencilla (the Assembly,s Herty supporter, and at
one time a nominal member of the pro-Bolanos Blue and White
bloc). A bill proposing the tax was submitted to the
Assembly February 15, signed by Tardencilla, Arellano, FSLN
deputy Edwin Castro, and APRE,s Miguel Lopez Baldizon. The
bill will be sent to the Economic Committee, whose chairman,
PLC deputy Wilfredo Navarro, has already expressed
opposition. The ALN-PC has also come out publicly against
the idea. End comment.


3. (C) Fuentes shared figures on his balance sheet provided
to the tax authorities for the last three years, noting that
this normally confidential information was about to become
public. His profit margin was 5% in 2003 ($9 million),1% in
2004 ($2.9 million),and 3% in 2005 ($11.1 million); he
expected the margin to remain at approximately 3% for 2006.
He stressed that Esso was already offering bus owners a 2
cordoba discount on gasoline and a 1 cordoba discount on
diesel at the pumps, money which comes out of company
pockets. He also questioned the 20 million cordobas/month
which the transport cartel claims to require to maintain bus
fares at their current 2.50 cordobas, since on the basis of
their daily fuel consumption, the subsidy required should be
on the order of 8-9 million cordobas/month. Comment: this
tracks with other reports that the transport cooperatives
overstate the number of units actually on the roads, and
feeds general suspicion that the bus owners are funneling the
money into FSLN coffers or their own pockets.


4. (C) Fuentes also shared a suspicion that perhaps the FSLN,
which allowed Esso to operate the refinery during the 1980s,
now wants to force the parent corporation to pull out of
Nicaragua in order to free up the refinery for the
Venezuelans. He pointed out that during the strike, many
ordinary Nicaraguans were forced to pay extra for transport
to work, and had in fact laid out more than the difference
between the current fare and the &market8 rate would amount
to over a four-month period.


5. (C) After the meeting, DCM contacted Presidential
Secretary Leonardo Somarriba to reiterate our unhappiness
with the proposed anti-business measure. Somarriba attempted
to justify the GON,s action by pointing out that the GON had
not endorsed the confiscatory tax; indeed, they had insisted
on rewriting the February 13 agreement from its initial draft
so that it was clear that the tax was an initiative of the
legislators and the GON had only committed to assist in
importing new buses and signed on to a call for an audit of
what had been done with previous subsidies. He added that he
expected the bill to die in the Assembly, in which case the
GON would have to deal with the problem at a later date.


7. (C) Econ Counselor consulted local IMF resrep Humberto
(&Tito8) Arbulu on the Fund,s views of the GON,s options.
Arbulu said that of course the law was a terrible idea, but
that the Fund would not have independent grounds to object if
the GON insisted this was the only way to keep within the
public expenditure ceiling agreed to in the IMF program. He
said that the IMF program did not incorporate any specific
GON commitments to refrain from further transportation
subsidies (there is a commitment to allow electricity rates
to rise and avoid further subsidies),though the GON had made
its own public commitment during the last transportation
crisis of September 2005 that there would be no more money
given to transport groups. The IMF program does contain a
commitment to amend the Energy Stability law in order to
eliminate market distortions (including calls to regulate the
fuel market); however, the deadline for this action is the
August review, and the GON could argue that the &temporary8
confiscatory tax on oil company profits, while clearly a step
backward, would expire before the deadline.


8. (C) Arbulu said that, within the limits of agreed overall
spending, and commitments to maintain the level of social
spending, the GON would be free to rearrange its priorities
to grant a further transport subsidy. However, acceding to
such a request would open the floodgates to other requests,
including demands to increase salaries for teachers and
health workers (in the case of salaries, however, there is a
commitment not to increase the total wage bill, so any
increase for teachers or health workers should be compensated
by cuts in other salary accounts). The IMF would object to
subsidizing the transport companies by waiving fuel taxes
(ISC) for buses for four months (a suggestion of Fuentes),as
this would create a breach in the GON,s revenue targets.


9. (C) Arbulu had no confidence in the arrival of the
promised new buses; there has been talk of new units for
years and none have appeared. He also said that he would not
place too much confidence in the PLC,s declared hostility to
the legislation: one phone call from Ortega to PLC leader
Aleman and the PLC deputies could well execute a 180-degree
turn on this issue. Arbulu appeared perturbed that the GON
-- specifically Finance Minister Arana who should be the
GON,s voice of reason on economic matters -- had not come
out publicly against the tax, and that Arana had actually
been quoted in the press to the effect that if the Assembly
passed the bill, the GON would have to implement it. Such
GON passivity implies that the executive has ceded economic
policy to the Assembly. Arbulu said that, judging by recent
experience, the way to stop the tax bill would be to take it
to the National Dialogue (Comment: of course, the February
13 political deal was taken in the context of a session that
very much resembled the Dialogue).


10. (C) Comment: We agree that the PLC's declared
opposition to this offensive bill could prove a weak reed.
We understand that the GON does not want to create more
problems for itself, but we will continue to urge the
executive to take a responsible stance in the face of blatant
confiscatory legislation pushed by the FSLN, if only to force
the aggressively partisan Managua mayor to assume the
solution of the problems he himself created by blocking
justifiable fare increases with a threat of violent protests
from Sandinista-inspired student groups while simultaneously
urging further subsidies for the anti-competitive
FSLN-dominated transport collectives.
TRIVELLI