US embassy cable - 04SANTODOMINGO6609

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 006609 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CAR, WHA/EPSC, WHA/USOAS, EB/TPP/BTA, 
EB/IFD/OMA;NSC FOR SHANNON AND MADISON;LABOR FOR ILAB; 
USCINCSO ALSO FOR POLAD; TREASURY FOR OASIA-LCARTER 
STATE PASS USTR FOR VARGO, RYCKMAN, MALITO, CRONIN 
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, EFIN, DR 
SUBJECT: DOMINICAN VOTE TO REPEAL PROTECTIONIST TAX - 
PYRRHIC VICTORY? 
 
REF: A. SANTO DOMINGO 6292 
 
     B. FAX TO STATE/WHA/CAR 
     C. TREASURY/OASIA 
     D. USTR 12/3/04 
 
1. (SBU) Summary:  The Dominican Senate achieved a 
breakthrough of sorts on December 7 with a preliminary vote 
(19 to 1) in favor of repealing a protectionist 25 percent 
tax on beverages containing imported high fructose corn 
syrup, which for months has been a barrier to Dominican 
participation in the Central American Free Trade Agreement 
(CAFTA).  The bill goes to a special Senate committee and 
must be subject to a final vote scheduled for December 15. 
It must then be approved by the Chamber of Deputies and the 
President. The measure includes extensive tax breaks for the 
sugar industry and other businesses, estimated by the 
administration at USD 150 million -- which would complicate 
efforts to reach a new IMF agreement.  End summary. 
 
A Vote to Repeal -- and More 
- - - - - - - - - - - - - - - 
 
2. (SBU) The Dominican Senate on December 7 voted on a first 
preliminary reading to repeal a protectionist 25 percent tax 
on beverages containing imported high fructose corn syrup, a 
measure inserted in late September into an otherwise 
necessary tax package.  (The USG has refrained from 
recommending to Congress that the Dominican republic be a 
member of CAFTA as long as the 25 percent tax remains in 
effect.) The vote took place more than two months after 
President Leonel Fernandez submitted draft repeal 
legislation.  It was preceded by increasingly tense 
negotiations among the 29 senators (of 32) who belong to the 
main opposition PRD.  The Senate convened for a protracted 
afternoon and evening session to consider the repeal. 
 
3. (SBU) Before the vote, Senate President Andres Bautista -- 
a proponent of repeal -- angrily criticized senators for 
repeatedly blocking the repeal and packing the bill with 
concessions to special interests.  Bautista had favored 
putting the proposed concessions into a separate bill.  "I 
have convoked four Senate sessions to consider this bill and 
have been boycotted.  Now that it's on today's agenda, a new 
bill is introduced." The new version included the repeal of 
the tax, but also significant tax breaks for Dominican 
business.  The ultimate objective of the bill, he asserted, 
was in fact to prevent the repeal of the 25 percent tax and 
ultimately to block approval of CAFTA.  "We understand some 
senators took naive positions, some had economic motives and 
others were pushed by the intervention of sectors outside the 
Senate."  Another senator speculated to us Bautista 
considered that his personal authority had been challenged 
and weakened in the weeks-long standoff. 
 
4. (SBU) Bautista declared the session to be concluded and 
left the Senate chamber, followed by about eight other 
senators "in solidarity" with the president.  Senate Vice 
President Cesar Matias took the chair and the 20 who remained 
voted to resume the session. They voted 19-1 to pass the 
bill.  The sole senator from Fernandez's Dominican Liberation 
Party (PLD), Jose Tomas Perez, was absent from the chamber. 
Bautista told us the next day that he considered his vice 
president's action to be a violation of Senate procedure, but 
another key senator said that the proceedings were in 
accordance with the rules. 
 
Key Provisions 
-------------- 
5. (U) Article 1 of the bill (Ref B draft text) repeals the 
specific provisions of the September 28 law creating the 25 
percent tax on fructose-sweetened drinks and refreshments. 
The remaining articles define compensatory measures in the 
form of changes to Dominican tax laws. 
 
6. (U) Agricultural enterprises including the sugar sector 
are allowed to offset without limit from their tax 
liabilities any amount spent on repair, maintenance or 
improvement of capital goods.  The sugar sector is allowed to 
deduct from tax obligations all amounts paid as VAT to its 
suppliers, with the notation in the preamble that sales of 
sugar are not subject to VAT.  The measure removes capital 
goods imports from the scope of the current ten percent tax 
on imports (disguised as an "exchange charge" and proposed 
for an increase to thirteen percent).  Changes to tax 
incentives for investments in businesses near the Haitian 
border (Article 6, Ref B) will do little to offset the 
revenue losses.  A concluding article repeals a series of 
articles and laws identified by dates and references and not 
further explained, including one that is applicable to 
alcoholic beverages. 
 
7. (SBU) The approved text varies only minimally from the 
working draft faxed to Washington  (Ref B).  Language is 
added to Article 5 specifically emphasizing favorable 
treatment for the sugar sector.  It now reads, in our 
informal translation: 
 
"All imports of capital goods in general, and inputs to the 
sugar industry, including but not limited to machinery, 
equipment and furniture; as well as replacements and parts 
(los repuestos, partes y piezas) for machines and equipment 
for industry, into the Dominican Republic shall be exempt 
from payment of the foreign currency exchange commission or 
any other charge of similar nature which has been 
established, or may be established in the future, by the 
Monetary Board or any other State institution or agency." 
 
Fiscal Impact 
------------- 
 
8. (U) Internal Revenue Director Juan Hernandez told the 
press after a meeting with the influential Council of 
Entrepreneurs (CONEP) that the bill would enact tax cuts 
amounting to 4.5 billion pesos (approximately USD 150 
million), obliging a revision of the 2005 government budget 
(the passage of which is one of several pre-conditions for 
approval of the IMF standby arrangement).  "Everyone has 
called the budget optimistic already, since the tax 
collection authorities will have to make an extra effort to 
meet the objectives -- and if in addition they enact tax 
cuts, this will create problems with the agreement we've 
already struck with the IMF."  Hernandez said that the 
measures would create "chaos" in tax administration. 
 
Next Steps to Repeal 
-------------------- 
 
9. (SBU) Some of the proponents of the free trade agreement 
are talking of seeking on December 15 simply to pass instead 
the repeal bill essentially as proposed by President 
Fernandez, without the tax concessions.  If the committee 
finishes its work as expeditiously as promised and if the 
Senate approves the bill on December 15, the measure would 
then pass to the lower house of Congress, where Finance 
Committee chairman Marino Collante previously assured us that 
a solid majority (at least 90 out of 150)favors the repeal. 
Timing is uncertain, and there is no schedule announced as 
yet for the holiday recess.  Once approved by the House, the 
measure would go to the President for signature and 
promulgation -- or veto.  Under the Constitution the 
President may return a entire bill to Congress with his 
"observations," in which case it dies unless overidden wthin 
eight days by a two-thirds vote in each houses. The current 
Congressional session has been extended until January 12; the 
new session will not begin until February 27. 
 
Comment 
------- 
 
10. (SBU) Many of the senators feel an obligation to protect 
the domestic sugar industry, as historically important and a 
provider of employment -- and because of the wealth and 
influence of the industry owners, expressed through many 
years of personal connections, favors and contributions overt 
and under the table.  Sugar and fertilizer interests have run 
an aggressive and mendacious public campaign since signature 
of CAFTA on August 5.  The press and politicians bristled 
with indignation and feigned patriotic fervor at the message 
from the Ambassador, the Embassy and senior USG officials 
that the Dominican Republic was setting itself up for 
exclusion from CAFTA.  All the legislators are now unhappily 
aware that the U.S. position is firm. We believe the votes 
are there for repeal of the tax in both houses of the 
Dominican Congress.  There is no sign that there is 
sufficient principle or indignation among legislators to 
constitute majority willing to stiff the sugar sector instead 
of buying it off.  The question is how many concessions the 
sugar sector and agricultural interests will be able to exact. 
 
11. (SBU) One great concern is the potential fiscal impact of 
compensatory measures - the bill lifts the 10 percent 
"exchange charge" on a category of expensive imports, while 
tilting tax treatment sharply in favor of the sugar industry 
(the Association of Manufacturers has already clamored for 
similar, "equitable treatment.") The Fernandez administration 
government and the Congress must be sure that whatever 
solution emerges takes into account the country's other 
interests, especially the pressing need for the agreement 
with the IMF.  By seeking to solve one impasse with 
concessions to agricultural producers and sugar barons, the 
Dominican Congress could possibly be setting up another 
impasse, equally dangerous,with the International Monetary 
Fund. 
KUBISKE