US embassy cable - 04SANTODOMINGO596

UNCLAS SANTO DOMINGO 000596 
 
SIPDIS 
 
STATE FOR WHA AND EB 
PLEASE PASS TO USTR: S.CRONIN 
TREASURY FOR OASIS: R.TOLOUI AND L.LAMONICA 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECPS, EFIN, PREL, EINV, ECON, DR 
SUBJECT:  TELECOMMUNICATIONS COMPANIES UNHAPPY WITH NEW 
PRESIDENTIAL DECREE TAXING SALES REVENUES 
 
 
1.  (SBU) Summary:  Executives from three Dominican 
telecommunications companies, all with majority U.S. 
investment, briefed emboffs January 27 on a recent 
presidential decree they said effectively imposes a 10 
percent tax on telecommunications companies' gross revenues. 
They asked for USG advocacy to repeal the tax and indicated 
they would probably appeal on constitutional grounds if the 
measure remained in effect.  All four Dominican 
telecommunications companies are majority foreign-owned -- 
the fourth being French firm Orange.  End Summary. 
 
2.  (SBU) Representatives of the three largest 
telecommunications companies in the Dominican Republic told 
emboffs on January 27 they had been informed on January 23 
of a recent presidential decree imposing a ten percent tax 
on telecommunication company revenues.  The firms are 
Codetel (Verizon), Centennial Dominicana (New Jersey-based 
Centennial Communications), and TriCom (Dominican company 
listed on NYSE; majority shares U.S.-owned).  Prior to July 
2002, telecommunications companies had been taxed on sales; 
a legal change at that time subjected them to the same tax 
procedures as other firms (1.5 percent tax on of sales, 
credited toward the eventual payment of a corporate income 
tax).  The new decree -- decided without consultation and 
issued without advice to the affected firms -- is a step 
backward to that era.  Executives noted that the sector was 
also recently hit with the temporary five percent export 
tax, even though, they argued, the net balance of their 
earnings is in pesos. 
 
3.  (SBU) The representatives asked for USG advocacy for 
repealing the decree.  They based their argument on three 
main points: 
 
a) the GODR has singled out the telecom sector because of 
the majority foreign ownership; 
 
b) the decree was issued arbitrarily and in a manner that 
was not transparent (they received a letter last week from a 
mid-level tax authority official instructing them to begin 
payments in February); and 
 
c) the new tax on gross revenues completely alters their 
business plans, imposes a significant financial burden and 
negatively impacts their investment. 
 
4.  (SBU) All indicated that they were likely to cease 
investment in the Dominican Republic, given the uncertainty 
created in business conditions, unless the tax is repealed. 
Codetel representatives said that they had referred the 
issue to legal counsel for a decision whether to refuse 
payment while appealing the measure to the Supreme Court as 
unconstitutional.  (The Court held in November that the 5 
percent tax on exports, imposed by presidential decree, was 
invalid because all revenue measures must originate in the 
legislature; in December Congress approved the 5 percent tax 
as one of several measures to comply with an IMF agreement.) 
 
5.  (SBU) Comment:  Telecom and energy are the two Dominican 
economic sectors with the most U.S. investment, and recently 
there has been little good to report about companies' 
experiences in either sector.  Sectors with dollar earnings 
are attractive targets.  The GODR is hard pressed for 
revenue and the president's one-line decree derogating a 
previous measure aims at raising the government take 
immediately.  The GODR gave little consideration to the mid- 
term impact: the failure to consult and the completely 
unannounced reversion to the earlier, non-standard treatment 
warns any prospective investor that the GODR -- or at least 
the current administration -- is unpredictable at best.  If 
the firms decide to petition the Supreme Court, in the midst 
of a presidential campaign, their high profile exercise will 
feed comment in the press and in the parties. 
 
6.  Embassy has asked for documentation and will seek 
additional clarification from the GODR. 
 
7.  This report was coordinated with USFCS Santo Domingo. 
 
HERTELL