El Salavdor Passes Tax Reform Package

UNCLAS SAN SALVADOR 001238 C O R R E C T E D C O P Y - MISSING REFTEL SENSITIVE SIPDIS DEPT PLEASE PASS USTR E.O. 12958: N/A TAGS: EFIN PGOV ETRD ES SUBJECT: El Salavdor Passes Tax Reform Package REF: 09 SAN SALVADOR 1154 ¶1. (SBU) SUMMARY: On December 12 and December 16, El Salvador's National Assembly approved the Government of El Salvador's fiscal/tax reform package, with tax changes expected to enter into force January 1. Only the alcoholic beverage tax changed substantially from the GOES's original proposal, though the changes did not address the WTO and CAFTA concerns with the law. The reforms represent the economic cabinet's most substantial achievement to-date, but may not generate as much revenue as the GOES hopes. END SUMMARY. ¶2. (SBU) El Salvador's National Assembly passed the GOES's fiscal reform (reftel) in two separate packages on December 12 and December 16. President Funes told the press he was "satisfied" with the package and is expected to sign the laws into effect by January 1. The GOES projected $240-250 million will be captured in new revenues. Visiting Standard & Poor's analysts privately told Emboffs that they expected the government to actually collect less than half of its projections. ¶3. (SBU) The first tranche of reforms passed December 12 included mostly non-controversial, technical changes to the value-added tax and other tax laws, with the Assembly approving the GOES's proposal with few changes. It also contained a new tax on gasoline (when oil is below $70/barrel) based on a complicated pricing formula. Petroleum Distributors Association (ASAPETROL) President and Esso Representative Jose Alfaro told Econoff the industry had no issue with a new tax, only its proposed implementation. In ASAPETROL's view, the formula for calculating the tax and method for collecting the tax are very time consuming, while the government included harsh penalties for late or incorrect payments. ¶4. (SBU) The Assembly approved the second tranche with 61 (out of 84) votes just after midnight on the last session of the year. To secure the votes of the smaller parties, especially the dissident (conservative) ARENA faction GANA, the Assembly made several small changes, such as reducing the new ad valorem tax on non-carbonated non-alcoholic beverages from 10% to 5%. ¶5. (SBU) The tax on alcoholic beverages changed the most from the government's original proposal. The Assembly cut the proposed ad valorem tax in half (to 5 percent),reduced a proposed tax increase on beer, and rejected the Finance Ministry's revised proposal for lower taxes on locally produced vodka and aguardiente (though the tax on aguardiente is still less than half of the tax on other alcohols). The Assembly also accepted the Ministry's proposal to increase taxes on imported gin and whiskey to $0.16/liter, roughly double that of other types of alcohol. Representatives from Diageo Latin America, the U.S.-based subsidiary of Diageo UK, told Emboffs they applauded the overall trend towards harmonization but remained concerned by the higher rates for imported liquors. ¶6. (SBU) Minister of Finance Carlos Caceres told Econcouns December 20 he was pleased that the reform had passed before the end of the year and more or less as he had proposed it. Pressed on WTO inconsistency with the formula for taxing alcohol and imported liquors, Caceres replied that he was not overly concerned with the tax rates on whiskey and gin. He was far more worried with the revenue "lost" by the Assembly failing to raise taxes on beer. ¶7. (SBU) COMMENT: The tax reform marks the most substantial policy achievement of the economic cabinet in the first six months of the Funes Administration. The actual results of the reform, however, are unlikely to amount to much, especially if S&P is correct in its revenue projections. The GOES owes the swift passage with minimal changes primarily to the 12 members of GANA; without their defection, ARENA would have had the power to force considerable changes and hold up the legislation until 2010. We have heard from technical contacts in the GOES that efforts to collect data needed to implement a property tax are progressing and could be done by late 2010. Passing this reform package, which was seen as non-ideological, still took the GOES months of negotiation with the private sector and Assembly, and while the process itself was transparent, the GOES has certainly created anxieties with the private sector along the way. Passing a major reform like a property tax is unlikely to go as smoothly. BLAU