VZCZCXYZ0014
RR RUEHWEB

DE RUEHSN #1238 3562008
ZNR UUUUU ZZH(CCY AD00AE7D TOQ 7201 - 641)
R 222004Z DEC 09
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 0179
INFO WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SAN SALVADOR 001238 
 
C O R R E C T E D   C O P Y - MISSING REFTEL 
 
SENSITIVE 
SIPDIS 
DEPT PLEASE PASS USTR 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV ETRD ES
SUBJECT: El Salavdor Passes Tax Reform Package 
 
REF: 09 SAN SALVADOR 1154 
 
¶1. (SBU) SUMMARY: On December 12 and December 16, El Salvador's 
National Assembly approved the Government of El Salvador's 
fiscal/tax reform package, with tax changes expected to enter into 
force January 1.  Only the alcoholic beverage tax changed 
substantially from the GOES's original proposal, though the changes 
did not address the WTO and CAFTA concerns with the law.  The 
reforms represent the economic cabinet's most substantial 
achievement to-date, but may not generate as much revenue as the 
GOES hopes.  END SUMMARY. 
 
¶2. (SBU) El Salvador's National Assembly passed the GOES's fiscal 
reform (reftel) in two separate packages on December 12 and 
December 16.  President Funes told the press he was "satisfied" 
with the package and is expected to sign the laws into effect by 
January 1.  The GOES projected $240-250 million will be captured in 
new revenues.  Visiting Standard & Poor's analysts privately told 
Emboffs that they expected the government to actually collect less 
than half of its projections. 
 
¶3. (SBU) The first tranche of reforms passed December 12 included 
mostly non-controversial, technical changes to the value-added tax 
and other tax laws, with the Assembly approving the GOES's proposal 
with few changes.  It also contained a new tax on gasoline (when 
oil is below $70/barrel) based on a complicated pricing formula. 
Petroleum Distributors Association (ASAPETROL) President and Esso 
Representative Jose Alfaro told Econoff the industry had no issue 
with a new tax, only its proposed implementation.  In ASAPETROL's 
view, the formula for calculating the tax and method for collecting 
the tax are very time consuming, while the government included 
harsh penalties for late or incorrect payments. 
 
¶4. (SBU) The Assembly approved the second tranche with 61 (out of 
84) votes just after midnight on the last session of the year.  To 
secure the votes of the smaller parties, especially the dissident 
(conservative) ARENA faction GANA, the Assembly made several small 
changes, such as reducing the new ad valorem tax on non-carbonated 
non-alcoholic beverages from 10% to 5%. 
 
¶5. (SBU) The tax on alcoholic beverages changed the most from the 
government's original proposal.  The Assembly cut the proposed ad 
valorem tax in half (to 5 percent), reduced a proposed tax increase 
on beer, and rejected the Finance Ministry's revised proposal for 
lower taxes on locally produced vodka and aguardiente (though the 
tax on aguardiente is still less than half of the tax on other 
alcohols).  The Assembly also accepted the Ministry's proposal to 
increase taxes on imported gin and whiskey to $0.16/liter, roughly 
double that of other types of alcohol.  Representatives from Diageo 
Latin America, the U.S.-based subsidiary of Diageo UK, told Emboffs 
they applauded the overall trend towards harmonization but remained 
concerned by the higher rates for imported liquors. 
 
¶6. (SBU) Minister of Finance Carlos Caceres told Econcouns December 
20 he was pleased that the reform had passed before the end of the 
year and more or less as he had proposed it.  Pressed on WTO 
inconsistency with the formula for taxing alcohol and imported 
liquors, Caceres replied that he was not overly concerned with the 
tax rates on whiskey and gin.  He was far more worried with the 
revenue "lost" by the Assembly failing to raise taxes on beer. 
 
¶7.  (SBU) COMMENT: The tax reform marks the most substantial policy 
achievement of the economic cabinet in the first six months of the 
Funes Administration.  The actual results of the reform, however, 
are unlikely to amount to much, especially if S&P is correct in its 
revenue projections.   The GOES owes the swift passage with minimal 
changes primarily to the 12 members of GANA; without their 
defection, ARENA would have had the power to force considerable 
changes and hold up the legislation until 2010.  We have heard from 
technical contacts in the GOES that efforts to collect data needed 
to implement a property tax are progressing and could be done by 
late 2010.  Passing this reform package, which was seen as 
non-ideological, still took the GOES months of negotiation with the 
private sector and Assembly, and while the process itself was 
transparent, the GOES has certainly created anxieties with the 
private sector along the way.  Passing a major reform like a 
property tax is unlikely to go as smoothly. 
BLAU