US embassy cable - 04SANTODOMINGO5604

UNCLAS SECTION 01 OF 02 SANTO DOMINGO 005604 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB, CIP/HST(WATTS), WHA/CAR, WHA/EPSC, EB/OMA; 
NSC FOR SHANNON AND MADISON;LABOR FOR ILAB; USCINCSO ALSO 
FOR POLAD;TREASURY FOR OASIA-LUTHER CARTER 
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: ECPS, EFIN, DR 
SUBJECT: DOMINICAN INTERNAL REVENUE DIRECTOR GENERAL TO 
REVIEW NEW TELECOM TAX 
 
REF: SANTO DOMINGO 5153 
 
1. (U) Summary: During a visit by Ambassador Hertell to 
Director General of Internal Revenue Juan Hernandez, 
Hernandez indicated that the Dominican Republic continues to 
experience difficulties with tax collections and stated his 
intention to clamp down on tax cheats.  He responded to the 
Ambassador's inquiry about the new excise tax on 
telecommunications with a promise to review the first 3 
months to evaluate the effects on telecom turnover.  If the 
demand for telecommunication services turns out to be highly 
elastic, as argued by the telecoms, Hernandez said that his 
office will consider proposing modification of the tax.  End 
summary. 
 
------------------- 
Collection Problems 
------------------- 
 
2.  (SBU) On September 30 the Ambassador, DCM and embassy 
staff discussed challenges facing the new Director General of 
Internal Revenue.  Hernandez, who had served in the same 
position under President Fernandez,s first administration, 
said that despite the economic crisis he relished the 
opportunity to address today's problems.  He noted that 
during his earlier tenure, his office had doubled tax 
collections largely using technology upgrades to catch those 
intent on cheating the system.  He acknowledged the need to 
renew collection efforts and shared his philosophy that by 
catching those who abuse the system his agency will build 
confidence and goodwill among honest taxpayers. 
 
3. (SBU)  The Ambassador asked about the greatest needs of 
the Dominican Internal Revenue Office.  Hernandez said that 
collections and audit procedures are his greatest challenges. 
 He also indicated that the Dominican Republic is interested 
in participating in a tax information exchange agreement with 
the United States.  The Director General's office is 
preparing a letter for Treasury Under Secretary Taylor 
providing specific details about the assistance requested and 
confirming the government's interest in an information 
exchange agreement. 
 
4. (SBU) Regarding widespread tax evasion, Hernandez 
indicated that one of the sectors experiencing the most 
significant problems is the rapidly growing tourism sector. 
Many operators sell tour packages abroad for one price and 
then declare a lower price to the Dominican authorities for 
tax purposes.  Hernandez hopes that assistance in the form of 
training and an information exchange agreement will help 
ensure that tax collection on tourism revenues is based on 
actual revenue realized.   He said that he also plans to give 
special attention to non-taxable interest earned on deposits 
with the Central Bank.  This year, tax-free yields on money 
invested with the Central Bank ranged upwards of 50 percent. 
 
--------------------------------------------- ------ 
Willing to Review New Telecom Taxes in the New Year 
--------------------------------------------- ------ 
 
5.  (U) The Ambassador raised the subject of the new 10 
percent excise tax on telecommunications, asking whether the 
government had given serious consideration to the argument by 
the telecommunication companies that the rate chosen would 
have a negative effect on collections due to high elasticity 
of demand for telecom services.  Hernandez agreed that the 
sector was being particularly hard hit by new taxes, not only 
by the new excise tax but also by the increase in value added 
tax from 12 percent to 16 percent.  This is effectively a 100 
percent tax increase for telecommunication companies 
operating in the country (reftel).  He noted that the 
industry was chosen for the new tax precisely because of its 
strong growth and revenues, at a time when the Dominican 
Republic desperately needs cash to help resolve its economic 
crisis.  He indicated that his office plans to review the 
collections from the telecom sector at year end, after three 
months under the new tax regime.  If the demand for 
telecommunication services turns out to be highly elastic, as 
argued by the telecoms, Hernandez said, his office will 
consider proposing modification of the tax. 
 
6. (U)  Speaking specifically about Verizon, the largest 
investor in the Dominican telecommunications sector, Director 
General Hernandez told the Ambassador that he was surprised 
to learn that for tax purposes in the Dominican Republic the 
company declares itself as 90 Canadian and 10 percent U.S. 
Because the Dominican Republic has a tax equalization treaty 
with Canada but not with the United States, the revenue 
Verizon collects as a Canadian firm is taxed at 18 percent 
versus the 25 percent tax collected on the portion it 
realizes as a U.S. company.  Hernandez said that his office 
was reviewing what implications, if any, this would have. 
HERTELL