US embassy cable - 04TEGUCIGALPA2289

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 002289 
 
SIPDIS 
 
STATE FOR EB/IFD, WHA/EPSC, AND WHA/CEN 
TRREASURY FOR DDOUGLASS 
STATE PASS AID FOR LAC/CAM 
 
E.O. 12958: DECL: 10/12/2014 
TAGS: EFIN, ECON, EINV, PGOV, HO 
SUBJECT: HONDURAS: TAX MAN IS MOVED BACK INTO MINFIN 
 
REF: TEGUCIGALPA 1741 
 
Classified By: Classified By: Economic Chief Patrick Dunn for reasons 1 
.4 (b) and (d) 
 
1. (C) Summary: The Honduran National Congress has decreed 
that the Executive Revenue Directorate (DEI) will no longer 
be a semi-autonomous tax agency and will instead be folded 
into the Ministry of Finance (MOF).  The DEI is overstaffed 
and highly politicized, as alleged in the justification to 
move it back into MOF, but the move will not solve, and could 
exacerbate, these problems.  In addition, the move gives MOF 
greater control over GOH revenue collection efforts, where 
they could be subject to abuse as the campaign season 
approaches.  The loss of DEI autonomy concerns Post, and we 
will continue to monitor the situation closely, in particular 
for any signs of weakening resolve on fiscal restraint or any 
effect of the restructuring on our bilateral technical 
assistance program on tax administration.  End Summary. 
 
2. (C) On September 30, the Honduran National Congress issued 
a decision that the Executive Revenue Directorate (DEI, the 
GOH equivalent of the USG,s Internal Revenue Service) will 
no longer be a semi-autonomous agency and will instead be 
folded into the Ministry of Finance (MOF).  The DEI, formerly 
composed of the Customs Authority and the Tax Authority under 
the MOF, became independent in 1994 with the goal of 
improving the efficiency and credibility of tax collection. 
In recent testimony, Minister of Finance William Chong Wong 
called for the reintegration of the DEI into MOF, citing the 
DEI,s lack of responsiveness to the MOF, the rapid growth in 
both its personnel and budget, and its politicization.  In a 
conversation with EB Deputy Assistant Secretary Greenwood, 
however, Chong included in his list of motivations the fact 
that DEI employees were seeking to unionize.  Moving them 
into the Ministry of Finance could impede this unionization, 
a concern that was protested by DEI employees on October 5 
with a work-stoppage, supported by a peaceful demonstration 
by leftist Bloque Popular members.  In settling the strike, 
Chong agreed there would be no reprisals against strikers, 
and former benefits, including salary and tenure, would be 
carried over in the DEI move to MOF. 
 
3. (C) Post spoke on October 1 with Vice Minister of Trade 
and Industry Salvador Melgar Ascencio about the 
restructuring.  Melgar noted that the bill was pushed through 
with very little debate, and in his view the situation is now 
&worse than it was before.8  He admitted the DEI is 
inefficient and terrifically overstaffed, and said that the 
politicization of the staff continues to be a problem.  (DEI 
staff positions experienced an earlier staff turnover once 
during the current administration for mostly political 
reasons.)  However, he said, moving it to the MOF fails to 
address these core problems and introduces another. 
According to Melgar, Chong continues to operate an accounting 
consultancy in addition to his job as Minister, and as such 
he is in a position to &clean up tax messes8 for clients or 
potential future clients.  (Note:  According to the Honduran 
Constitution, it is illegal for a government official to have 
two paid jobs in the public sector at the same time.  It is 
unclear if there is a similar statute in force prohibiting 
such conflicts of interest involving a paid position in the 
private sector.  In any case, this standard appears to be 
laxly or selectively enforced.  For example, Minister of 
Investment Promotion, Camilo Atala also continues to manage 
Banco Ficohsa.  End note.) 
 
4. (C) The solution to the DEI,s problems, Melgar said, is 
right-sizing and professionalization of the staff through 
adequate pay, job tenure, training, and promotion tracks that 
attract and retain qualified investigators.  The current 
restructuring, by placing the DEI securely within the 
antiquated and inflexible Civil Service system, makes this 
kind of reform much more difficult and therefore unlikely. 
 
5. (C) Another concern voiced by Melgar and echoed in the 
local press is that the restructuring will in some way also 
bring greater control over revenue accountability and 
disbursements to the MOF, where they could be subject to 
abuse as the campaign season approaches.  He compared former 
Minister of Finance Alvarado with Chong, noting that rather 
than break the budget by &finding8 an additional unbudgeted 
USD 30 million for the electoral commission, Alvarado 
resigned.  (Note:  As noted reftel, the reality is somewhat 
more complex, but Post believes this issue did play a role in 
his decision to resign.  End Note.)  Chong, on the other 
hand, is inclined to disburse the funds, and is currently in 
talks with donors seeking additional contributions for this 
purpose.  Melgar concludes that Chong will be far more 
responsive to National Party demands for increased spending 
as the elections draw near than Alvarado would have been, and 
Chong,s assumption of direct control over the DEI could 
further facilitate this process. 
 
6. (C) Comment:  The loss of DEI autonomy concerns us, and we 
find many of Melgar,s worries well-founded.  A USG tax 
advisor, resident in the DEI, has previously told post that 
allegations continue to swirl within the DEI that Chong has 
blocked or otherwise disposed of tax cases against persons or 
firms with whom he has personal ties (reftel).  Post is aware 
of no smoking gun, but continues to monitor the situation 
closely.  Chong is also widely regarded as a member of the 
&dark side,8 the old-guard of the National Party, 
reportedly willing to apply questionable tactics (such as the 
off-budget spending noted above) to ensure continued access 
to power.  If Chong loosens the reins on fiscal restraint at 
the behest of the National Party to improve their chances at 
the polls, he risks increasing inflation, alienating donors, 
and potentially even breaking the pact with the IMF -- as 
happened in 2001 when the GOH,s last IMF deal collapsed over 
irresponsible spending in the run-up to the 2002 elections. 
Post, the IMF, and the entire donor community will continue 
to press the GOH to restrain spending and comply with its IMF 
terms.  We expect it will do so at least until it reaches 
HIPC completion point early in 2005.  There is some concern 
at the IMF, however, that once that milestone is reached the 
GOH could lose its self-control and undo all its hard work to 
date. Given political pressures in the run up to the November 
2005 elections, Post shares the Fund,s concern that the GOH 
could fall off some elements of its IMF program at that time. 
 
7. (C) Comment (continued):  Post will also monitor the 
effect of this restructuring on our bilateral technical 
assistance program on tax administration.  To date this 
program has been very successful in encouraging the DEI to 
take small but meaningful internal reforms aimed to improve 
collections and professionalize the tax service.  DEI 
director Mario Duarte has been an enthusiastic (if not always 
effectual) supporter of the program.  Duarte has made few 
public comments about the DEI reorganization, and some 
speculate that Duarte might be tapped to fill the 
Vice-Minister of Finance position vacated by Chong Wong in 
September when he became Minister.  If he is not named Vice 
Minister, it is unclear what position Duarte would hold in 
the post-reorganization DEI.  Post will watch to see whether 
Duarte is named to a Vice Ministership under Chong -- with 
whom there was reportedly tension when Chong was still Vice 
Minister of the Budget before becoming Minister -- and 
whether the DEI,s move into MOF hampers Duarte,s ability to 
pursue even the meager reforms we,ve seen to date.  End 
Comment. 
 
PIERCE 
Pierce