VZCZCXYZ0002
PP RUEHWEB

DE RUEHVJ #0756/01 1011415
ZNY CCCCC ZZH
P 111415Z APR 06
FM AMEMBASSY SARAJEVO
TO RUEHC/SECSTATE WASHDC PRIORITY 3206
INFO RUEATRS/TREASURY WASHDC PRIORITY

C O N F I D E N T I A L SARAJEVO 000756 
 
SIPDIS 
 
SIPDIS 
 
EUR/SCE (FOOKS,RIEHL), EUR/ACE (VISOCAN), EB/IFD/OMA 
(VOLK,YOUTH), D (SMITH), P (BAME) 
TREASURY FOR GAERTNER 
 
E.O. 12958: DECL: 04/07/2016 
TAGS: ECON EFIN PREL BK
SUBJECT: BOSNIA: DISPUTE IN INDIRECT TAXATION AUTHORITY 
BOARD 
 
REF: A. SARAJEVO 297 
 
     ¶B. 05 SARAJEVO 2953 
 
Classified By: AMBASSADOR DOUGLAS MCELHANEY, REASON 1.4 (B) AND (D) 
 
¶1.  (SBU) Summary:  A long-standing dispute over allocation 
of Single Account revenues between the entities and Brcko 
came to a head following recent actions of Indirect Taxation 
Authority Governing Board Chairman Joly Dixon.  At the very 
end of his mandate, Dixon issued a unilateral decision, 
quickly rescinded after being found illegal by OHR, on the 
allocation of indirect tax revenues, which favored the 
Federation at the expense of the Republika Srpska (RS) and 
Brcko budgets.  We are told that this latest move has 
resulted in a total loss of confidence in Dixon in the RS. 
Despite this breakdown of Governing Board functioning, the 
Office of the High Representative (OHR) decided on April 6 to 
extend Dixon's imposed mandate.  It remains to be seen 
whether the Governing Board will be able to work while Dixon 
remains as Chairman.  End Summary. 
 
From Bad to Worse 
----------------- 
 
¶2. (U) Since mid-2005 the RS has disputed the calculation of 
the relative percentage distributions to the entities and 
Brcko from the Single Account (which holds all indirect tax 
revenues collected in BiH).  By the end of 2005 this dispute 
reached a very public crescendo (Ref B).  Since then, the 
Indirect Taxation Authority Governing Board (ITA GB) has 
approached complete gridlock (Ref A), and has been unable to 
come up with a new methodology and calculation for revenue 
distribution to the entities and Brcko for 2006. 
 
¶3. (C) Recent actions by ITA GB Chairman Joly Dixon have 
worsened the situation.  Dixon's mandate, imposed by OHR, was 
set to expire on March 31, 2006.  The GB held a session on 
March 28, after which Dixon issued a decision purportedly 
adopted by the GB that established a temporary allocation of 
revenues for April 2006.  Yet, the GB members never voted on 
this decision.  While the Chairman is able to issue decisions 
unilaterally in certain cases of gridlock, the Law on the 
Indirect Taxation System clearly states that any decision on 
the allocation of revenues must be voted on by a majority of 
the GB that includes all three Ministers of Finance.  As a 
result, OHR determined the decision to be illegal and it was 
subsequently withdrawn.  Additionally, Dixon changed the 
allocation percentages in favor of the Federation at the 
expense of the RS and Brcko.  In an email that discussed the 
decision, Dixon claimed that he needed to change the formula 
because enough value-added tax (VAT) data was now available 
to come up with a new calculation.  However, the GB has not 
agreed on a VAT-based methodology, much less agreed on data 
to be used as the basis of a new calculation.  For 
January-March 2006, the GB agreed only to use the 2005 
coefficients until a new formula could be agreed upon. 
 
Fallout 
------- 
 
¶4. (SBU) Calls from the Republika Srpska for Dixon's removal 
and/or resignation already existed because of his failure to 
address the problems with the 2005 coefficients.  Now RS 
Prime Minister Dodik has reportedly called Dixon "senile" and 
RS Finance Minister Dzombic asked the GB members on April 6 
to convene an extraordinary session of the GB to begin the 
process of appointing a new Chairman.  In the meantime, until 
an allocation decision is adopted, the entities and Brcko 
will receive no money from the Single Account.  (The State 
budget and external debt servicing are funded automatically.) 
 
OHR Still Re-Appoints Dixon 
--------------------------- 
 
¶5. (SBU) Despite these problems, OHR decided on April 6 to 
re-appoint Dixon for another three months, with the option to 
extend another four months after that.  The total of possibly 
seven months brings Dixon's term until the end of October, 
right after national elections.  As a result, if he stays 
that long OHR may decide he needs to stay even longer, until 
the new governments can be formed. 
 
Comment 
------- 
 
¶6. (C) Decisions on the allocation of revenues from the 
Single Account are one of the ITA GB's most basic functions. 
This topic is already inherently controversial, as the 
 
 
allocation coefficients are essentially a zero-sum game 
between the entity and Brcko budgets.  The RS has a 
legitimate basis for its claims that it has been 
short-changed in 2005 in this process.  While the attention 
has been drawn to the RS in this dispute, the basic problem 
can be traced back to the Federation government's blockage of 
any agreement on the validity of calculation data, because it 
knew that the allocation formula would not initially turn out 
in its favor.  As a result, the actions of the GB Chairman 
only make it more difficult for the entities to reach an 
agreement.  Now that OHR has decided to re-appoint Dixon, 
likely until after the October elections, gridlock is on the 
horizon for some time to come.  It is clear that for many 
parties, Dixon has worn out his welcome.  End Comment. 
MCELHANEY