VZCZCXRO4916
RR RUEHLMC
DE RUEHMU #0303/01 0782350
ZNY CCCCC ZZH
R 192350Z MAR 09
FM AMEMBASSY MANAGUA
TO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
INFO RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
RUMIAAA/CDR USSOUTHCOM MIAMI FL
RHEFDIA/DIA WASHINGTON DC
RUEAIIA/CIA WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 000303 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC AND EEB 
TREAUSRY FOR SARA SENICH 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
 
E.O. 12958: DECL: 03/18/2019 
TAGS: ECON EFIN ETRD PGOV PREL NU
SUBJECT: NICARAGUA'S TAX COLLECTING REGIME 
 
Classified By: CDA Richard M. Sanders for reasons 1.4 b & d. 
 
¶1.  (C) Summary.  Nicaragua,s income taxpayer base, despite 
impressive growth in collections during recent years, remains 
at less than 2% of the population.  Very few Nicaraguans file 
income tax returns, but all are subject to the 15% Value 
Added Tax (IVA).  Only 360 companies pay 90% of total income 
tax revenues collected.  President Ortega's appointee since 
2007, Walter Porras, who runs the Nicaraguan Tax 
Administration (DGI), has managed to politicize the agency in 
two short years.  Under his leadership, DGI has engaged in 
targeted audits against known supporters of the opposition, 
assessed arbitrary fines, and pressed employees to turn out 
at FSLN (Sandinista National Liberation Front) rallies.  DGI 
has transformed itself from a transparent, client-based 
service to one that intimidates and instills fear among its 
largest and most conscientious taxpayers.  End Summary. 
 
TAX REVENUES GROW, BUT FROM A SMALL BASE 
---------------------------------------- 
 
¶2. (C) The estimated total number of taxpayers (individuals 
and businesses) in Nicaragua who pay income tax to the 
National Tax Administration (DGI) is approximately 110,000, a 
figure which represents less than 2% of the population.  Of 
these taxpayers, the DGI collects 90% of its revenues from 
just 360 "large taxpayers," mainly in the Managua 
metropolitan area.  These individuals and businesses 
represent the top-tier of the Nicaraguan private sector, 
ranging from the Pellas family's sugar, rum and auto 
dealership empire to transnational corporations.  While the 
non-filing rate among all income taxpayers hovers around 33 
percent, 98 percent of the "large taxpayers" do file.  DGI 
maintains and staffs a separate "Large Collections Unit" 
which focuses exclusively on regularly auditing this pool of 
taxpayers, almost all of which retain fulltime accountants 
and are well-versed in tax law. 
 
¶3.  (C) In 2008, Nicaraguan tax revenues funded about 70% of 
the national budget, or about $750 million.  About $350 
million came from income taxes, while the rest came from a 
15% value-added tax (IVA) levied at points-of-sale, excise 
taxes (alcohol and tobacco) and petroleum taxes.  Since 2005, 
annual revenues have risen by approximately 75%, a dramatic 
increase even when offset by 37.5% inflation during this 
period.  A number of advisors and economists have encouraged 
the government to reduce the level of exemptions granted as 
investment incentives and political favors.  Part of the 
success that the DGI has experienced in recent years is due 
to the U.S. Department of Treasury's Office of Technical 
Assistance, which has conducted training and supervisory 
programs in both collections and audits for DGI since 2006. 
These programs are expected to close this year. 
 
DIRECTOR POLITICIZES DGI 
------------------------ 
 
¶4.  (C) In January 2007, President Ortega named Walter Porras 
as head of DGI, a relatively unknown FSLN party loyalist who 
first earned Ortega's confidence as a teacher of English to 
his children.  Prior to being named to the top job at DGI, 
Porras headed the DGI office in the city of Masaya, about 20 
kilometers south of Managua.  Upon taking over DGI, Porras 
promptly fired approximately 700 out of 1,200 DGI employees, 
often replacing former civil servants with FSLN partisans. 
He also centralized decision making in the agency, ordered 
politically motivated audits and approved questionable 
administrative decisions.  One result of the politicization 
of the DGI is that Nicaraguan businesses are increasingly 
tight-lipped when it comes to tax disputes lest they provoke 
unwanted attention. 
 
¶5. (C) Rene Vallecieo, former head of DGI under the Bolanos Administration and now a prominent tax consultant, told us that tax examiners routinely assess fines on companies based on fabricated errors. Firms that complain of discrimination or malfeasance may find themselves subject to snap audits or threats. Many companies are now taking extra measures to ensure that their books are bulletproof. One local officer of an international auditing firm told us that business has risen by more than 40% since Ortega's January 2007 inauguration. Preventive audits, costing as much as $12,000, have become one of its most popular services. Vallecieo also noted that DGI,s Administrative Review Board, which by law is required to be composed of impartial representatives drawn from the private sector, is instead composed entirely of FSLN loyalists. In two years, DGI has transformed itself from a transparent client-based service to one that intimidates and instills fear among its largest and most conscientious taxpayers.
 
¶6.  (C) Recently, Porras demonstrated his FSLN credentials by 
participating in street rallies (dressed in camouflage) to 
support the Sandinista electoral fraud following the November 
2008 municipal elections.  By most accounts, he has 
intimidated DGI employees into participating in pro-FSLN 
street rallies, turning his office into a logistical 
headquarters to organize DGI participation in such events. 
Porras regularly "releases" DGI employees early from official 
duties ahead of FSLN rallies.  Groups of DGI employees are a 
common sight at major traffic rotundas (roundabouts) in 
Managua during street protests, most wearing bright yellow 
shirts sporting pro-FSLN slogans (purchased by DGI employees 
at their own expense, under pressure from Porras). 
 
COMMENT 
------- 
 
¶7.  (C) With increased fiscal pressures stemming from the 
withdrawal of European budget support in the wake of 
fraudulent municipal elections and the effects of the global 
financial crisis, we expect that the DGI will increase its 
efforts to squeeze tax revenues out of the private sector. 
The fact that only 2% of the population pays income tax 
demonstrates the huge potential for expanding the country,s 
tax base.  Nonetheless, the top 360 taxpayers, many of whom 
are known supporters of opposition parties, are easy targets 
for a politicized DGI.  We expect that the government will 
seek to limit tax exemptions in the future, especially for 
opponents of the ruling party. 
SANDERS