AMCHAM'S DISCONTENT: OECD BLACKLISTS COSTA RICA

UNCLAS SAN JOSE 000365

SENSITIVE
SIPDIS

DEPT FOR EEB/IFD/OIA:GHICKS
DEPT FOR WHA/CEN AND WHA/EPSC:AWONG
TREASURY FOR SSENICH

E.O. 12958: N/A
TAGS: EFIN ECON PGOV PREL CS

SUBJECT: AMCHAM'S DISCONTENT: OECD BLACKLISTS COSTA RICA


1. (U) SUMMARY: Representatives of the American Chamber of Commerce
(AmCham) met with DCM and Emboffs on April 17 to make a strong case
against the recent OECD listing of Costa Rica on the tax haven
"blacklist". They argued that the OECD's decision, which seemed to
ignore the transparency of the 1991 Costa Rican-U.S. Tax Exchange
Information Agreement (TEIA),was totally inappropriate:
substantively incorrect, procedurally mishandled, and politically
motivated. In addition, AmCham expressed dismay at how quickly
Finance Minister Guillermo Zuniga acceded to the OECD listing by
submitting a letter pledging that the GOCR would consider new
legislation eliminating the need for a court order in order to open
bank account records (a prominent OECD complaint). Ostensibly,
Zuniga's action changed Costa Rica's OECD classification from the
"black list" to the "grey list." AmCham -- deeply concerned about
Costa Rica's reputation after the initial OECD announcement --
requested that the USG make a statement on Costa Rica's behalf.
Post countered that Zuniga could raise the issue (at his discretion)
in his meeting with Treasury officials on April 27 (on the margins
of the World Bank meeting in Washington). Of note, the GOCR has not
approached us about the "black list." See Action Request, para 11.
END SUMMARY.

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AN EXPERIENCED DELEGATION
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2. (U) Executive Director Lynda Solar, President Luis Gamboa, and
ex-presidents Humberto Pacheco and Hernan Pacheco represented
AmCham. Given that Humberto Pacheco negotiated the GOCR's TIEA in
the 80's, he led AmCham's presentation. Pacheco seemed personally
offended by the OECD's failure to acknowledge the effectiveness of
the existing TIEA with the US (in effect since 1991) and emphasized
the difficult five-year process of gaining legislative approval for
the TIEA.


3. (U) The AmCham representatives' believed the OECD decision was
based on the following factors (which also figured prominently in
local media reporting about the black listing):

-- Costa Rica does not tax overseas income; and

-- Costa Rica requires a court order to be obtained in order to open
any bank account records.

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A DELEGATION WITH A MISSION
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4. (U) AmCham adamantly disagreed with Costa Rica's classification
as a tax haven by the OECD and pressed that there are "no
technically valid reasons" to place Costa Rica on any tax haven
black list for three reasons:

-- Humberto Pacheco noted that a characteristic of a tax haven is
low taxes. Quite the contrary, Costa Rica has a high tax regime;

-- Typical tax havens do not disclose tax information to the proper
foreign counterparts. Pacheco claimed that Costa Rica consistently
cooperated with U.S. counterparts, abided by the TIEA with the US,
and exercised considerable control over its banking system through a
regulator. (NOTE: Pacheco was unaware of any European disclosure
requests. END NOTE.) He stated that, to his knowledge, never in
the history of the TIEA with the United States had a request for
information been denied. That is, judicial permission to access
account information requested by the IRS has always been
forthcoming; and

-- Costa Rica purposely designed its foreign tax regime to eliminate
any appearance of "ring fencing," the issue of treating foreign
source income differently, based on the residency of the taxpayer.
The GOCR made a conscious decision to exempt taxation of all foreign
source income for all taxpayers; thus, the law treats all taxpayers
the same on this issue, which, in Pacheco's words, "is a choice that
the government made. . . very wisely."


5. (SBU) In addition to the specific arguments on tax havens,
AmCham cited Costa Rica's role as a good neighbor in the war against
drugs and its fight against money laundering (it passed an
anti-money laundering law earlier this year). AmCham further argued
on the issue of the OECD's "Eurocentric" outlook. AmCham contended
that the four countries on the OECD's black list -- Costa Rica,
Uruguay, Malaysia, and Philippines -- had no ties to Europe. Thus,
the OCED selected easy targets -- countries without direct European
ties -- while overlooking European counties with questionable
practices on bank secrecy, i.e. Belgium, Switzerland, and/or
Luxembourg.


6. (SBU) AmCham disapproved of the "easy way out of this," as
proposed by Finance Minister Zuniga, of simply proposing changes in
the law regulating bank secrecy. Hernan Pacheco stated that AmCham
strongly opposed eliminating the requirement that a judge review any
request to open bank account records. Real or perceived abuses of
the power to open bank records, Pacheco added, could do enormous
harm to Costa Rica's democracy by altering Costa Ricans' perceptions
of (and confidence in) government. Furthermore, it isn't clear how
the government would truly guarantee the protection of privacy
rights (without the requirement for a judicial order).

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SAY IT ISN'T SO
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7. (SBU) Humberto Pacheco argued that "the US should not have
allowed [Angel] Guria [OECD Secretary General] to denigrate Costa
Rica's reputation, since there is not a technical reason [for Costa
Rica's presence on a black list]". Pacheco noted that the term "tax
haven black list" still lingers in the air, in spite of the OECD
elevating Costa Rica to the "grey list" five days after the "black
list" announcement. Pacheco, the ex-TIEA negotiator, continued,
"We're looking for a face-saving comment from the USG that helps
clear Costa Rica's reputation." "Whatever the inner workings of
this situation," Pacheco continued, "it was made to look like the
G20 originated this." He suggested the following points: "Costa
Rica has a TIEA with the US, has cooperated with the United States,
and has never denied access to requested bank information."


8. (SBU) We listened to the presentation and noted that GOCR's
delinquency on many issues, such as passing the anti-money
laundering law, could have played a part in the OECD decision.
Also, the DCM shared some of the findings provided informally to us
by Treasury (TREAS) prior to the AmCham meeting: (1) TREAS is not
comfortable with the OECD list-making, (2) nonetheless, TREAS
generally agreed with OECD's underlying goals, and (3) the US
Internal Revenue Service is reasonably comfortable with Costa Rica's
cooperation through the framework of the TIEA. However, we were
noncommittal about any USG statement in defense of Costa Rica, urged
AmCham to voice their concerns directly to the GOCR, and suggested
that Zuniga raise the issue at his meeting with Treasury on the
margins of the IMF/World Bank meeting April 27. We also said we
would report AmCham's concerns to Washington.


9. (SBU) In one notable follow-up, Finance Vice Minister Jenny
Phillips has invited Jeffrey Owens of the OECD's Center for Tax
Policy and Administration to Costa Rica for a review session of the
proposed legislation. The Ministry is girding itself for the
session by publicly noting that several other Latin American
countries also have bank secrecy laws, while stressing the GOCR's
cooperation on information requests.

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COMMENT AND ACTION REQUEST
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10. (SBU) The GOCR evidently does not share AmCham's concerns and
has not approached us. (In fact, we understand that Zuniga did not
discuss the issue during his meetings in Washington). We respect
AmCham's enthusiasm for (and expertise on) this issue, but believe
that the GOCR decided to quickly dispense with the issue by
promising to introduce legislation that would eliminate the need for
a court order to open bank account records. We doubt such
legislation could be passed quickly or easily (if at all) in Costa
Rica, but the pledge alone seemed to have satisfied the OECD.
Though an OECD designation can sully the reputation of a designee,
we understand that a designation carries no penalties or sanctions.



11. (SBU) ACTION REQUEST: In the aftermath of the controversy (which
we expect may re-surface here given the pending OECD review session,
we remain interested in others' views of the transparency and
fairness of the OECD ranking process. We would appreciate insight
from the Department, USEU, and/or Treasury. We cannot judge from
here, but AmCham makes a persuasive case against OECD's objectivity.
Why, for example, did the OECD rating seem to discount the
importance of a functioning TIEA between the GOCR and the USG?

CIANCHETTE