US embassy cable - 05TEGUCIGALPA1644

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 001644 
 
SIPDIS 
 
STATE FOR EB/CBA, EB/IFD, WHA/EPSC, L/CID, AND WHA/CEN 
COMMERCE FOR MSELIGMAN 
GUATEMALA FOR COMATT: MLARSEN 
STATE PASS USTR 
 
E.O. 12958: DECL: 08/02/2015 
TAGS: EINV, EFIN, PGOV, KJUS, HO 
SUBJECT: DOLE FILES $137 MILLION SUIT AGAINST HONDURAS 
ALLEGING DOUBLE TAXATION; SEEKS USG SUPPORT 
 
 
Classified By: Classified by EconChief PDunn for Reasons 1.5(e) 
 
1. (U) This is an action request for EB/IFD and L/CID -- 
please see paragraph 11. 
 
2. (C) Summary:  Following the rejection of its two appeals 
of a recent $137 million tax judgment against it by the GOH 
revenue authority, Dole sees little choice but to challenge 
the administrative ruling in court.  Dole describes the case 
as clear double taxation of a stock swap that took place 
outside of Honduras and for which taxes have already been 
paid to the USG.  The GOH sees instead a sale of Honduran 
assets by means of a stock swap, with large profits on which 
taxes are owed to Honduras. Dole is reviewing its options for 
actions to defend itself outside of Honduras, such as whether 
this ruling could be considered "de facto expropriation" and 
whether the U.S.-Honduras Bilateral Investment Treaty (BIT) 
could be invoked.  This tax case involves extremely complex 
and legally technical issues and, unless otherwise 
instructed, Post intends to remain carefully neutral in this 
matter. End Summary 
 
3. (C) U.S.-based tropical fruit producer Dole (which 
operates in Honduras under the name Standard Fruit Company) 
recently received a notice of tax judgment from the GOH tax 
authority (the DEI) in the amount of $137 million for a 2001 
transaction.  According to Dole, a somewhat complex 
stock-swap arrangement involving three other offshore 
companies was used when Dole sold Honduran brewery Cerveceria 
Hondurena (CH) to SAB-Miller that year.  The sale yielded 
significant profits for Dole, which reports paying $173 
million in taxes to the U.S. IRS.  In the view of Dole's 
internal and external auditors (at the time Arthur Anderson), 
the U.S. was the proper taxing jurisdiction for the 
transaction, so no taxes were paid to the GOH. 
 
4. (C) The GOH views the transaction differently, claiming 
that, whatever the mechanism invoked, at its heart this 
transaction was the sale of a Honduran asset at a profit, and 
therefore taxes on those profits are due to Honduras. The GOH 
calculates the taxes due at approximately $50 million, with 
an additional nearly $100 million in penalties and interest, 
for a total of $137 million.  If collected, this would 
reportedly be the largest single judgment in GOH history. 
 
5. (C) Dole immediately appealed the judgment, considering it 
"wrong technically and legally" according to Dole Chief 
Financial Officer Joseph Tesoriero, who briefed Charge, ADCM, 
and EconChief on August 3.  In his opinion, the transfer of 
shares outside of Honduras is not equivalent to a transfer of 
assets, as the GOH alleges.  Dole's first appeal of the 
judgment, to the Executive Revenue Directorate (the DEI -- 
equivalent to the U.S. IRS) was rejected in July.  Dole then 
invoked its right to a second appeal, to the Ministry of 
Finance.  In only three days, the Ministry sided with the 
DEI, ruling that the taxes are indeed due. 
 
6. (C) With Embassy assistance, Dole senior officials met 
with Minister of Finance William Chong Wong on August 3 to 
discuss the case.  As Tesoriero noted to Chong, Dole does not 
want to find itself suing its host country, as that could 
poison relations for years to come.  Chong told the 
executives that the administrative review had run its course 
and he could not arbitrarily reverse it, and that Dole must 
decide whether to challenge the administrative judgment in 
court within the stipulated 15-day window (which closes 
August 5).  However, Chong also said the firm could file for 
an extraordinary review of the case.  Because Chong is 
currently on leave from auditing firm DeLoitte-Touche -- 
which is Dole's current outside auditor, but was not at the 
time of the 2001 transaction -- Chong has all but recused 
himself from the proceedings, delegating review of the case 
to Vice Minister Donald Dubon.  Dubon has an extensive 
background in both tax matters and central banking, and it 
was he that concurred with the DEI judgment following Dole's 
appeal. 
 
7. (C) Dole told Post it will file suit by August 5, but the 
firm is also debating internally whether to request the 
extraordinary review offered by Chong.  Dole executives note 
the benefits of keeping another channel of communications 
open, but expressed concern that the review process could 
distract Dole litigators or otherwise weaken its pending 
lawsuit.  Dole President David H. Murdock will also seek a 
meeting with Honduran President Ricardo Maduro, who has 
already been briefed on this issue by Chong. 
 
8. (C) Dole does not feel that the current tax suit is 
politically motivated, but is concerned that it is a 
"politically charged" issue, particularly in this Honduran 
election year.  Chong agreed with this point, but expressed 
his inability to halt the case, noting that if he were to 
halt a high-profile case like this one, the assumption would 
be that he had been bribed to do so.  In lieu of halting the 
case, Chong offered to arrange a meeting between Dole 
executives and the Attorney General.  In a sidebar with Dole 
representatives following the meeting, DEI Director Jose 
Manuel Carcamo also broached the subject of a negotiated 
settlement of the tax bill.  Dole reportedly did not 
explicitly reject the offer, but went to some pains to 
impress on the GOH that they had requested the meeting not 
out of weakness or a desire to settle, but rather out of what 
they hoped was a shared desire to avoid a difficult process 
of litigation.  Dole also said that they are not a firm that 
seeks to avoid taxes, noting both that they had paid taxes on 
this transaction in the U.S. and that they had paid over $90 
million in corporate income taxes to the GOH over the 
previous ten years. 
 
9. (C) Dole is also reviewing its options for actions to 
defend itself outside of Honduras.  In particular, they are 
considering whether this tax ruling could be considered "de 
facto expropriation" and whether the U.S.-Honduras Bilateral 
Investment Treaty (BIT) could be invoked.  (Note:  There is 
no bilateral tax treaty between the two countries.  End 
Note.)  Dole General Counsel Michael Carver raised the 
possibility of a similar recourse to the Central America Free 
Trade Agreement (CAFTA).  EconChief explained that CAFTA 
would not likely enter into force in time to offer a 
potential avenue to resolve this case.  (Dole tax advisor 
Lorenzo Pineda -- a former head of the DEI himself -- 
estimates that Dole's court case could be completed by 
mid-October, and any subsequent appeal within two more 
months.) 
 
10. (C) Asked what USG involvement Dole is seeking, Tesoriero 
requested:  a USG expression of gratitude to Chong for 
agreeing to meet; encouragement of Chong's continued 
involvement in the case (despite his Deloitte ties); 
assistance in getting a meeting with the Attorney General; 
assistance in getting a meeting with Special Envoy Norman 
Garcia; and a USG opinion on recourse to the BIT and the 
other "outside" options under consideration. 
 
11. (C) Action requested:  Post seeks Department views on the 
viability of recourse to the BIT, international arbitration, 
or claims to de facto expropriation as potential future steps 
by Dole that could then require Post or broader USG 
involvement.  Post would also welcome any views from L/CID 
regarding the merits of the case and suggested (or 
discouraged) Post actions.  Post is not/not requesting 
assistance with arranging meetings with any GOH officials at 
this time. 
 
12. (C) Comment:  This case involves extremely complex and 
legally technical issues involving both international tax 
treatment and securities regulation.  As such, Post is not 
qualified to express an opinion regarding the validity of 
Dole's complaints.  We agree with Dole that the case does not 
seem to be politically motivated, nor has there been any 
evidence of corruption on either side.  This appears to be an 
honest, if high-stakes, disagreement over a legal 
interpretation.  For these reasons, and unless otherwise 
instructed, Post intends to remain carefully neutral in this 
matter, encouraging only a transparent, just, and timely 
resolution. 
 
13. (C) Comment (cont'd):  Post also points out that the GOH 
has long been encouraged by the International Monetary Fund, 
the USG, and other bilateral and multilateral donors to 
strengthen tax collection as a means to improve fiscal 
sustainability.  A GOH move toward holding large firms 
accountable, if undertaken in compliance with appropriate 
regulations and practices, is an important step towards 
broader economic reform.  That said, the decision to make an 
early example of a foreign firm is not an especially 
politically courageous one, and we will continue to urge the 
GOH to look to its own largest firms when seeking targets for 
audits.  Whether Dole emerges victorious or not, Post will 
seek to leverage this case into future DEI actions to hold 
Honduran firms equally accountable.   End Comment. 
 
Tuebner 
 
Tuebner