US embassy cable - 04SANTODOMINGO5468

UNCLAS SECTION 01 OF 04 SANTO DOMINGO 005468 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA, WHA/CAR, WHA/EPSC, E, EB, EB/TPP/BTA, HST, 
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 
 
E.O. 12958: N/A 
TAGS: PGOV, PREL, ETRD, DR 
SUBJECT: DOMINICAN POLITICS #4: FERNANDEZ AND REPEAL OF TAX 
MEASURE 
 
 
1.  Following is number 4 in our series on the 2004 politics 
of the Fernandez administration: 
 
Fernandez and Repeal of Tax Measure 
 
President Leonel Fernandez signed and promulgated on 
September 28 the tax measures passed by the Dominican 
Congress and submitted to the Dominican Senate on September 
30 a letter and draft legislation to repeal the 25 percent 
tax on beverages made with fructose syrups.  The tax measures 
are in effect today, October 1, since the official gazette 
with notice of the president's action appeared yesterday. 
 
At the opening of the Cibao Regional Trade Fair in Santiago, 
following the Ambassador's speech on the advantages of free 
trade, President Fernandez rose for ten minutes of impromptu 
remarks. These were carried live in Santiago and widely 
rebroadcast.  He briefly outlined the challenges facing the 
new administration and the fact that it has a minority in the 
Congress.  Again he evoked the benefits of the free trade 
agreement.  "But we have a little problem," he commented.  He 
recognized as valid the concerns of the sugar sector -- "but 
no one sector of the nation has the right to jeopardize the 
welfare of the rest of the nation." The administration would 
propose amending the fiscal reform package.   He favored 
excluding the tax on fructose drinks "as an obstacle to the 
strategy of competitiveness that will guarantee the progress 
of the country. . . This problem will be overcome in 
democratic fashion -- through reason, persuasion and 
consensus." Fernandez suggested that even if the measure is 
not repealed, eventual congressional ratification of the free 
trade agreement, an international instrument, would override 
the tax.  "By whatever rational and democratic legal means, 
the free trade agreement will prevail here. . . Mr. 
Ambassador, take this message to your government: in whatever 
legal and democratic way possible, we will pass DR-CAFTA." 
The trade-friendly crowd gave him a standing ovation and many 
of those nearby reached past the President's security detail 
to shake his hand. 
 
The hot defense of national pride and the sugar industry 
remains a theme in press coverage but a new note has 
appeared: a discussion of how to preserve the already 
negotiated free trade agreement. The papers have widely 
reported the postponement of the signing of a DR-CAFTA 
environmental agreement originally scheduled for September 24 
-- as well as the fact that the decision was due to the 
uncertain status of the Dominican portion of the agreement. 
 
Various lawyers have endorsed Fernandez's interpretation that 
an international agreement would take precedence domestic 
law.  None has addressed the lengthy and uncertain process by 
which this would be examined and decided, considering that 
the tax was deliberately crafted to elude commitments to 
eliminate tariffs over time.  One entrepreneur suggested that 
soft drink bottlers relocate to the provinces bordering 
Haiti, which recently were granted tax exonerations to boost 
economic development. 
 
Fernandez has said that the mechanisms of the World Trade 
Organization would be more appropriate venues for examining 
trade controversies.  In public discourse he has left vague 
the substance of any eventual discussion or dispute -- 
failing even to indicate which country would be the plaintiff 
and which the defendant.  Despite this,the draft law sets 
forth in preambular language considerations that suggest a 
strategy of seeking a WTO finding that high fructose corn 
syrup presents unfair competition to locally produced sugar 
because it is "highly subsidized" (sic). 
 
Following are Embassy Santo Domingo's informal translations 
of Fernandez's cover letter and the text proposed for the 
law.  The Spanish texts were faxed this morning to the 
Department, USTR and the Treasury. 
 
(begin informal translations) 
 
Leonel Fernandez 
President of the Dominican Republic 
Number 1895             Santo Domingo, National District 
                        September 30, 2004 
Hon. 
Andres Bautista Garcia 
President of the Senate 
Congressional Building 
Santo Dmingo 
 
Dear Mr. President, 
 
On September 28 I promulgated as Law number 288-04 the tax 
reform law intended to reduce the fiscal deficit currently 
confronting the Dominican economy, so that we may comply with 
the negotiations with the International Monetary Fund. 
 
With the aim of correcting possible distortions created by 
the law in question, in respect of our oblgiations in the 
Free Trade Agreement signed on August 5, 2004 with the United 
States and Central American countries, I am submitting 
through you to the senate a draft proposal of law, enclosed, 
which seeks the derogation of paragraph IX of Article 375 of 
Law Number 11-92, as approved by Law 288-04 cited above, 
Article 11, in the understanding that the subject will be 
dealt with at the World Trade Organization and a solution 
will be found there. 
 
I call upon your good offices and those of your fellow 
legislators, with the spirit of maintaining commercial 
practices that are congruent with the multilateral, regional 
and bilateral engagements we have assumed. 
 
God, Country, and Liberty 
 
(signed) 
 
Leonel Fernandez 
 
(end informal translation) 
(begin informal translation of draft law) 
 
DRAFT PROPOSAL OF LAW 
 
Considering that the Congress approved the draft law dealing 
with a tax reform with the aim of reducing the fiscal deficit 
currently confronting the Dominican economy so as to comply 
with the negotiations between the Dominican Goverment and the 
International Monetary Fund, begun on August 5, 2003; 
 
Considering that the Dominican Republic, along with Central 
American countries, signed on August 5, 2004 a Free Trade 
Agreement with the United States, the principal trading 
partner and investor in the region, in which was obtained 
protection for the sugar industry better than that for 
Central America, as concers the basic tariff; 
 
Considering that in the process of negotiating the 
aforementioned Free Trade Agreement on the basis of 
reciprocal and mutual advantage, the Dominican Republic is 
obliged to reduce tariffs for all products, including those 
corresponding to customs subcategories 1702.30 to 1702.90, 
corresponding to glucose syrups containing fructose; 
 
Considering that the parties to the Free Trade Agreement 
among the United States, Central America and the Dominican 
Republic are empowered to agree upon amendments in the texts 
and the annexes of the aforesaid agreement, using the 
appropriate legal procedures; 
 
Considering that the World Trade Organization (WTO) is the 
common institutional framework for reconciling differences, 
in the case of unfair practices that might cause harm or 
serious disadvantage to a sector of national production, when 
resulting from the provision of subsidies or the 
disproportionate surge of imports; 
 
Considering that the Dominican Republic succeeded in 
obtaining at the WTO a Technical Rectification that altered 
its list of concessions to the Most Favored Nation List, via 
which a tariff-quota was set that protects eight agricultural 
products, including sugar; 
 
Considering that cane sugar is one of the four traditional 
products of the agro-exporting sector generating significant 
amounts of foreign exchange and employment and therefore 
should be preserved; 
 
Considering that internal excise taxes are applied currently 
to a small group of products in order to protect the health 
and lives of persons and to conserve natural resources, among 
other purposes, and not as a mechanism to respond to 
anticompetitive practices which prejudice free choice of 
inputs by producers; 
 
Considering that the current administration commits itself to 
see that high fructose syrups, categorized in Customs 
subcategories 1702.30 to 1702.90, extracted from agricultural 
products such as corn that are highly subsidised, will be 
dealt with at the WTO; 
 
Considering that the Dominican Republic should be consistent 
in its commercial practice and in the undertakings assumed on 
the multilateral, regional and bilateral levels, especially 
as concerns the engagements in associated trade agreements, 
in effect or in the process of congressional ratification; 
 
In view of Congressional resolution number 2-95 of January 
20, 1995 ratifying the legal texts of the WTO: 
 
In view of the original texts in Spanish of the Free Trade 
Agreement among the United States, Central America, and the 
Dominican Republic, signed on August 5, 2004; 
 
In view of Law 288-04, promulgated on September 28, 2004, 
approving the tax reform, 
 
CONGRESS ENACTS THE FOLLOWING LAW: 
 
Article 1.  This measure repeals paragraph IX of Article 375, 
modified by Article 11 of Law number 288-04, dated September 
28, 2004 aproving the tax reform, so that the 25 percent 
(sic) on beverages sweetened with corn syrup is eliminated. 
 
Article 2.  The administration commits itself, along with 
national producers, to seek alternative solutions with the 
aim of protecting the Dominican sugar industry. 
 
DATED . . . . (blank) 
 
(end of informal translation) 
2.  Drafted by Michael Meigs 
3.  This report and others in our series can be consulted on 
our SIPRNET site 
http://www.state.sgov.gov/p/wha/santodomingo< /a> 
along with extensive other material. 
HERTELL