US embassy cable - 03TEGUCIGALPA2109

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 002109 
 
SIPDIS 
 
FOR DS/OFM/VTC/TC - W. NEMETH 
 
INFO WHA/EX/PMO AND WHA/CEN 
 
E.O. 12958:  N/A 
TAGS: OFDP, AMGT, HO 
SUBJECT:  HONDURAN SALES TAX -- FULL RECIPROCITY STILL 
ELUSIVE FOR U.S. MISSION 
 
REF:      A) 02 TEGUCIGALPA 01076 
 
-     B) 02 TEGUCIGALPA 01621 
-     C) 02 TEGUCIGALPA 02034 
-     D) 02 TEGUCIGALPA 02443 
-     E) 02 TEGUCIGALPA 03378 
 
1.  SUMMARY:  MORE THAN A YEAR AFTER HONDURANS CHANGED ITS 
SALES TAX LAWS AND REVOKED LOCAL TAX CARDS FOR THE 
DIPLOMATIC COMMUNITY, EMBASSY TEGUCIGALPA IS STILL 
STRUGGLING WITH LOCAL AUTHORITIES TO ESTABLISH RECIPROCAL 
TAX TREATMENT FOR THE U.S. MISSION.  THE JUNE 2002 TAX LAW 
PROMPTED REVOCATION OF HONDURAN TAX CARDS IN WASHINGTON. 
IN DECEMBER 2002 POST RECOMMENDED THAT DS/OFM RESTORE FULL 
PRIVILEGES TO HONDURAN DIPLOMATS, BASED ON WHAT WE 
INTERPRETED AS A GOOD FAITH EFFORT TO PROVIDE RECIPROCAL 
TREATMENT IN TEGUCIGALPA.  AFTER ANOTHER NINE MONTHS OF 
MINOR CHANGES AND ADDITIONAL ADJUSTMENTS, FULL SALES TAX 
RELIEF IS STILL UNAVAILABLE TO THE U.S. MISSION AND ITS 
EMPLOYEES.  IN ADDITION, THE GOVERNMENT OF HONDURAS HAS 
DECIDED TO DISCONTINUE EXCISE TAX EXEMPTIONS ON THE SALE 
OF GASOLINE TO THE U.S. MISSION, TO THE TUNE OF OVER 
92,000 DOLLARS PER YEAR IN ADDITIONAL COSTS.  GASOLINE TAX 
IS THE SUBJECT OF A SEPARATE MESSAGE TO DS/OFM.  IN THE 
INTEREST OF OBTAINING BETTER COOPERATION FROM LOCAL TAX 
AUTHORITIES IN TEGUCIGALPA, DS/OFM SHOULD CONSIDER 
ADJUSTING ITS TAX TREATMENT OF HONDURAN DIPLOMATS IN THE 
UNITED STATES.  (END SUMMARY) 
 
2.  BACKGROUND:  ON JUNE 5, 2002, A NEW HONDURAN LAW 
REVOKED ALL POINT-OF-SALE TAX EXEMPTION CARDS, INCLUDING 
THOSE FOR FOREIGN DIPLOMATS AND DIPLOMATIC MISSIONS.  THE 
LAW TOOK EFFECT IMMEDIATELY, BEFORE A WORKABLE REPLACEMENT 
SYSTEM COULD BE DEVELOPED AND IMPLEMENTED.  REFS A AND B 
DESCRIBE THE NEW LAW, WHICH ALSO INCLUDED RESTRICTIONS ON 
VEHICLE IMPORTATION AND USE.  FOR THE PAST FIFTEEN MONTHS 
EMBASSY AND AID ADMINISTRATIVE STAFF HAVE WORKED 
DILIGENTLY WITH THE MINISTRY OF FOREIGN AFFAIRS (MFA) AND 
THE HONDURAN TAX DIRECTORATE (DEI) TO RE-ESTABLISH TAX 
RELIEF MECHANISMS FOR THE U.S. MISSION AND ITS STAFF. 
MOST OF THE CONTROVERSY CENTERS AROUND THE 12 PERCENT 
SALES TAX, BUT THERE ARE OTHER LOCAL TAXES INVOLVED, E.G., 
HOTEL TAX, AIRPORT TAX AND GASOLINE TAX. 
 
3.  INITIAL RESPONSE:  SEVERAL WEEKS AFTER THE HONDURAN 
LAW WAS PASSED AND IMPLEMENTED, DS/OFM REVOKED HONDURAN 
TAX CARDS IN THE UNITED STATES PENDING A FAVORABLE 
RESOLUTION IN HONDURAS.  IN DECEMBER 2002 EMBASSY 
TEGUCIGALPA RECOMMENDED RESTORATION OF THE HONDURAN TAX 
CARDS IN THE U.S.  WE BELIEVED AT THE TIME THAT THE 
HONDURAN GOVERNMENT WAS MAKING A GOOD FAITH EFFORT TO 
RESTORE TAX EXEMPTIONS IN TEGUCIGALPA.  THE MFA AND DEI 
HAD IMPLEMENTED A SYSTEM OF TAX COUPON BOOKS FOR 
DIPLOMATIC PERSONNEL.  ALTHOUGH CUMBERSOME TO USE AND 
DIFFICULT TO REPLACE, THE COUPONS PROVIDED POINT-OF-SALE 
TAX RELIEF SIMILAR TO THE U.S. TAX CARD SYSTEM.  LAST 
DECEMBER, THE U.S. MISSION ALSO WAS RECEIVING REGULAR 
REFUNDS FOR TAXES ALREADY PAID, BOTH FOR PERSONAL AND 
OFFICIAL PURCHASES.  DS/OFM RESTORED THE HONDURAN TAX 
CARDS BASED ON THE EMBASSY'S RECOMMENDATION. 
 
4.  RESIDUAL BUREAUCRACY:  THE NEW TAX RELIEF SYSTEMS IN 
HONDURAS REQUIRE NEW, MULTI-STEP PROCEDURES ON THE PART OF 
THE EMBASSY AND ITS ELIGIBLE EMPLOYEES.  FOR OFFICIAL 
PROCUREMENT, THE EMBASSY HAS TO SEND PURCHASE ORDERS TO 
THE DEI OFFICE FOR PRE-APPROVAL OF A SALES TAX EXEMPTION, 
INSERTING AN EXTRA STEP INTO AN ALREADY LENGTHY 
PROCUREMENT PROCESS.  FOR LOCAL CASH AND CREDIT CARD 
PURCHASES, THE EMBASSY HAS TO PAY THE TAX AND SUBMIT A 
REIMBURSEMENT APPLICATION AFTERWARDS.  TAX-EXEMPT 
INDIVIDUALS ARE ISSUED COUPON BOOKS TO BE USED FOR POINT- 
OF-SALE TAX DISCOUNTS.  BUT COUPONS CAN ONLY BE USED IN 
CONJUNCTION WITH THE USER'S DIPLOMATIC CARNET, A DOCUMENT 
THAT TAKES THE FOREIGN MINISTRY 4-5 MONTHS TO PRODUCE. 
ADDITIONALLY, THE COUPON BOOKS CANNOT BE REPLENISHED UNTIL 
THE USER SUBMITS ORIGINAL RECEIPTS (ONE FOR EVERY COUPON 
ALREADY USED) AND A SPREADSHEET DETAILING EACH PURCHASE 
AND THE AMOUNT OF TAX EXEMPTED. 
 
5.  RECENT DEVELOPMENTS:  SINCE DECEMBER THERE HAVE BEEN 
NEW SETBACKS.  THE DEI EFFECTIVELY TERMINATED THE PARALLEL 
TAX REIMBURSEMENT SYSTEM IN APRIL, LEAVING THE MISSION 
UNABLE TO OBTAIN AFTER-THE-FACT TAX RELIEF FOR OFFICIAL 
CREDIT CARD AND PETTY CASH PURCHASES.  GIVEN THE TIME IT 
TAKES TO OBTAIN A DIPLOMATIC CARNET, TERMINATION OF THE 
REIMBURSEMENT PROGRAM ALSO DEPRIVED NEW ARRIVALS OF SALES 
TAX RELIEF FOR THE FIRST 4-5 MONTHS OF THEIR TOURS. 
EMBASSY AND AID OFFICIALS PROTESTED THIS ACTION TO THE 
MINISTRY OF FOREIGN AFFAIRS, EVENTUALLY OBTAINING A 
WRITTEN COMMITMENT TO REINSTATE THE REIMBURSEMENT SYSTEM 
FOR CASH PURCHASES AND NEWCOMERS PENDING ISSUANCE OF 
DIPLOMATIC IDS.  HOWEVER, THE EMBASSY MUST NOW OBTAIN AN 
INTERIM PERMIT FOR NEWCOMERS TO USE THIS BENEFIT. 
 
6.  RECENT DEVELOPMENTS (CONTINUED):  IN APRIL THE FINANCE 
MINISTRY PROPOSED AND THE NATIONAL CONGRESS PASSED ANOTHER 
NEW TAX LAW.  DECRETO 51-2003 IMPOSES SALES TAX ON RENT 
AND ON SERVICES SUCH AS BANKING, MEDICAL SERVICES, FREIGHT 
FORWARDING AND SMALL PACKAGE DELIVERY.  AS WITH THE JUNE 
2002 TAX LAW, NO REIMBURSEMENT SYSTEM FOR DIPLOMATIC 
MISSIONS WAS CONTEMPLATED AS PART OF THIS NEW LEGISLATION. 
THE US MISSION WAS SUDDENLY LEFT WITHOUT THE ABILITY TO 
SEND AND RECEIVE TAX-FREE AIR FREIGHT, FEDEX SHIPMENTS OR 
TO OBTAIN OTHER SERVICES USING NON-STANDARD PROCUREMENT 
DOCUMENTS SUCH AS AIRWAY BILLS.  ONE AID OFFICER HAD HIS 
OUTGOING AIR FREIGHT DELAYED BY ONE MONTH WHILE THE 
EMBASSY FRANTICALLY DEVELOPED A WORK-AROUND WITH THE DEI. 
WE NOW HAVE A NEW TAX RELIEF SYSTEM IN PLACE, BUT AS 
ABOVE, IT REQUIRES AN ADDITIONAL STEP -- DEI PRE-APPROVAL 
OF A BLANKET PURCHASE AGREEMENT FOR ALL SHIPPING 
TRANSACTIONS. 
 
7.  A NEW BOMBSHELL -- CANCELLATION OF GASOLINE TAX 
RELIEF:  IN JUNE, THE FOREIGN MINISTRY NOTIFIED DIPLOMATIC 
MISSIONS THAT IT WOULD NO LONGER DISCOUNT THE TAX PAID ON 
GASOLINE, AS IT CONSIDERED THIS AN "INDIRECT TAX".  THE 
AMOUNT IN QUESTION IS OVER 1.05 US DOLLARS PER GALLON, 
APPROXIMATELY 40 PERCENT OF THE PRICE PAID AT THE PUMP. 
THE WITHDRAWAL OF THE EMBASSY'S CURRENT GASOLINE TAX 
DISCOUNT WILL COST THE U.S. MISSION AND ITS MEMBERS MORE 
THAN 90,000 DOLLARS PER YEAR IN ADDITIONAL GASOLINE 
CHARGES FOR OFFICIAL AS WELL AS PERSONAL VEHICLES.  THE 
ISSUE INVOLVES USER FEES, AMONG OTHER THINGS FOR HIGHWAY 
RECONSTRUCTION, AND IS THE SUBJECT OF A SEPARATE MESSAGE 
FROM POST TO DS/OFM. 
 
8.  ANALYSIS AND RECOMMENDATION:  IN REF D, THE EMBASSY 
STATES, "WE HAVE EVERY REASON TO BELIEVE THE MFA AND THE 
DEI WILL WORK WITH THE DIPLOMATIC COMMUNITY TO IRON OUT 
THE REMAINING PROBLEMS."  IN RETROSPECT, THIS STATEMENT 
WAS OVERLY OPTIMISTIC AND HAS, THUS FAR, NOT PROVEN TRUE. 
RATHER THAN IRONING OUT THE REMAINING PROBLEMS, THE 
HONDURAN GOVERNMENT HAS PUT ADDITIONAL HURDLES IN FRONT OF 
THE U.S. AND OTHER DIPLOMATIC MISSIONS.  NEW BUREAUCRACY 
HAS ADDED TO THE BURDEN OF SEEKING TAX RELIEF FOR BOTH 
OFFICIAL AND PERSONAL PURCHASES.  THERE IS A GROWING 
INEQUITY BETWEEN THE TAX TREATMENT OF THE U.S. EMBASSY AND 
ITS STAFF IN TEGUCIGALPA AND THE TREATMENT OF HONDURAN 
DIPLOMATS IN THE UNITED STATES, WHO PRESUMABLY ENJOY FULL 
POINT-OF-SALE TAX DISCOUNTS.  IN OUR DISCUSSIONS WITH THE 
HONDURAN GOVERNMENT WE NOW DEAL FROM A POSITION OF 
RELATIVE WEAKNESS.  POST ASKS DS/OFM TO LOOK FOR WAYS OF 
READJUSTING ITS TREATMENT OF THE HONDURAN MISSION TO 
ESTABLISH GREATER EQUITY BETWEEN THE TWO GOVERNMENTS. 
 
Palmer