US embassy cable - 04SANTODOMINGO4392

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 004392 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA/CAR, WHA/EPSC, EB/OMA;NSC FOR SHANNON AND 
MADISON; LABOR FOR ILAB; USCINCSO ALSO FOR POLAD;TREASURY 
FOR OASIA-LAMONICA;USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN 
BASIN DIVISION 
USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS 
ITURREGUI; CINCSOUTH ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: DR, EFIN, PGOV 
SUBJECT: TRANSITION #8: DOMINCAN CONGRESS AWASH WITH TAX 
CHANGE PROPOSALS 
 
1. (SBU)  This is number 8 in our series covering the 
transition between the Mejia and the Fernandez governments. 
 
DOMINICAN CONGRESS AWASH WITH TAX CHANGE PROPOSALS 
 
Fifteen days ago President Mejia sent Congress the 
PLD-drafted fiscal package.  The Fernandez team projected its 
proposal would increase revenues by 2.7 percent of GDP 
annually.  The central measure is an increase in the 
value-added tax (ITBIS) from 12 to 16 percent. President 
Mejia has convoked an extraordinary session of Congress in 
order to give more time for the fiscal package, which may be 
passed before August 16 when Leonel Fernandez takes power. 
Members of Congress are actively debating the package with no 
one attempting to block it.  It appears that Mejia and the 
PRD will not actively pursue a salary adjustment via 
legislative action. The consensus opinion is that the package 
is essential to getting the IMF back to the negotiating 
table. 
 
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The Tax Work Continues 
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The Finance Committee of the Dominican House of 
Representatives continues its hearings, both private and 
public, on the tax package drafted by Leonel Fernandez's 
transition team and delivered by President Mejia "without one 
comma changed." (Mejia joked to Treasury Under Secretary John 
Taylor on July 10 that he would be "holding it out with a 
pair of pincers.")  Congressional and business leaders are 
not in agreement on the shape the fiscal package will take. 
On July 23 the lower house held a hearing on the fiscal 
package with technical advisors from the PRSC, 
representatives of the Entrepreneurs' Council (CONEP), the 
National Association of Young Businessmen (ANJE) the National 
Association of Banks, the Association of Industrialists,  the 
Association of Private Businesses,  and the Hotel, Bar and 
Restaurant Association. On the PLD delivered proposed 
amendments negotiated with bankers and the private sector. 
PLD fiscal team leader Rafael Camilo indicated that as long 
as the revenue yield is unchanged, they will consider changes 
in broadening the base for the VAT, modifying taxes on rents, 
changing the mechanism for taxes on financial instruments and 
altering the structure of incentives for investment in the 
regions along the border with Haiti.  Finance Committee 
chairman Marino Collante (PRSC) had earlier commented to the 
press that the fiscal package would certainly be amended 
before passage. 
 
Congress busily cleaned up its agenda before the end of the 
regular session on July 27, passing legislation on public 
access to government information, national parks, nepotism in 
government, migration, sales of government owned land, and 
pension rights for Mejia administration employees. On July 22 
it ratified the Article 98 bilateral agreement with the 
United States on the International Criminal Court.  Given the 
evident need for ample consultations and hearings on the tax 
measures, Mejia convoked the legislature into a special 
session that could last up to August 15, the day before the 
presidential inauguration. 
 
- - - - - 
Content 
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The PLD's package focuses less on "reform" than on increasing 
revenues from taxes on consumption.  It does little to alter 
the tax structure of the economy.  Projections of revenue 
gained from taxes on a full-year basis indicate that it will 
not be sufficient to cover the fiscal deficit in the 
government budget, let alone to make a dent in the 
quasi-fiscal deficit of the Central Bank.  The tax package 
focuses on taxes that are easily collected, generally those 
that have a pre-existing mechanism of enforcement.  The 
value-added tax (VAT or ITBIS) would go from 12 percent to 16 
percent, but the base would not be expanded (the Dominican 
Republic has one of the narrowest bases in the region, 
collecting ITBIS on only about 60 percent of sales).  Tax 
increases likely to be passed along to the consumer will be 
those on financial services, alcoholic beverages, tobacco 
products, insurance, airline tickets, telecommunications, 
personal income, advertising, and rents. 
 
Proposed measures facing strong opposition include the 
expansion of the 1 percent tax on real estate generally (both 
personal and business property), not just on high-value 
residences and commercial property (IVSS) valued over RD$ 3 
million or about US$65,000.  Even if passed in some form, 
these measures would be hampered by an insufficient tax 
infrastructure and database for collection.  Taxes on rents 
may be unenforceable.  After consultations between the PLD 
and the Commercial Bank Association the PLD delivered 
proposed amendments that would  replace the proposed 15 
percent tax on interest paid on financial instruments with a 
tax on check clearing, equivalent to 0.15% of the amount 
transferred (this will apply to credit card transacions and 
ATM operations, as well).   The PLD gave in to the bankers 
and agreed to eliminate the proposed mandatory reporting of 
bank transfers to the tax collection authorities, a measure 
that bankers characterized as a violation of bank secrecy 
laws. 
 
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Others with the Big Picture 
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At least three local economists or consulting institutions 
have proposed tax overhaul plans that focus on restructuring 
the tax code, but their efforts will have little impact on 
the current fiscal package.  The PRD's economic consultant 
Andy Dauhajre, Jr., elaborated a tax reform proposal intended 
to collect taxes principally from the well off, but the PRD 
decision to give carte blanche to the incoming PLD team made 
this a dead letter.  On the expenditure side of the debate, 
Grupo Leon, a power in beer, tobacco and banking, ran 
double-page ads all major papers describing a proposed 
program including reductions in government salaries and other 
state expenditures, continued reform of the banking and 
energy sectors, a tax amnesty applicable to repatriated 
capital and a 20 percent increase in salaries beginning in 
August. Grupo Leon advocates an increase in ITBIS to 16 now 
with commitment to a gradual reduction to a broader 10 
percent ITBIS by 2007.  Much current newspaper commentary 
focuses on the probable incidence of taxes, maintaining that 
most will be paid by the poor and the middle classes. 
 
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Support for the Effort 
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Prominent members of government and the business community 
are putting their support behind the fiscal package, 
acknowledging that some kind of package, however imperfect, 
will be necessary to move toward financial stability and to 
bring the IMF back to the negotiating table.  President of 
the lower house Alfredo Pacheco (PRD) has made public 
statements generally in support of the PLD fiscal package and 
the use of the ITBIS as its main revenue source.  Business 
leader Elena Viyella de Paliza, the president of CONEP (the 
Entrepreneurs' Council), has asked for a consensus on 
accepting the tax reform. 
 
President Mejia has continued to needle the PLD about a need 
for an early salary increase for public servants, but it 
appears that he and his party are less likely to pursue this 
point through legislative action.  Mejia said nothing about 
salary increases when he had breakfast with Treasury Under 
Secretary Taylor on July. 
 
SIPDIS 
 
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Comment 
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Embassy Santo Domingo expects that the fiscal package may be 
passed before the August 16 inauguration with only minor 
changes and with the support of government and industry 
leaders.  The fiscal plan is only a first step and is so far 
confined to the revenue side of the budget.  The new 
government will need an additional assortment of firm 
corrective measures in hand when it seeks to renew  talks 
with the IMF.  A major question is the approach that 
Fernandez and his team will take to government expenditure. 
The plan does not address persistent problems associated with 
subsidies for cooking gas or electricity, nor does it contain 
any commitments concerning the number of public employees or 
the wages to be paid to them.  PLD commentators to date have 
stressed a "smaller but better paid public workforce."  The 
rush for jobs by PLD supporters will make that difficult to 
achieve. 
 
2. (U) Drafted by Mark Kendrick. 
 
3. (U)  This messages and others in our transition and 
elections series are 
available on the SIPRNET at 
http://www.state.sgov.gov/p/wha/santodomingo/  
along with extensive other material. 
HERTELL