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Viewing cable 06LIMA2056, BACKGROUND ON DOE RUN'S TAX DISPUTE

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Reference ID Created Released Classification Origin
06LIMA2056 2006-05-25 13:09 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Lima
VZCZCXYZ0000
RR RUEHWEB

DE RUEHPE #2056/01 1451309
ZNR UUUUU ZZH
R 251309Z MAY 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 0640
INFO RUEHBO/AMEMBASSY BOGOTA 3422
RUEHQT/AMEMBASSY QUITO 0363
RUEHLP/AMEMBASSY LA PAZ MAY SANTIAGO 0544
RUEHCV/AMEMBASSY CARACAS 9482
RUEHBU/AMEMBASSY BUENOS AIRES 2404
RUEHME/AMEMBASSY MEXICO 3336
RUEHBR/AMEMBASSY BRASILIA 6762
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
UNCLAS LIMA 02056 
 
SIPDIS 
 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/AND, WHA/EPSC, EB/IFD/OFD, EB/CBA, EB/IFD/OIA 
TREASURY FOR OASIA/INL, DO/GCHRISTOPOLUS 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
USTR FOR BHARMAN 
 
E.O. 12958: N/A 
TAGS: EINV ECON ETRD PGOV PE
SUBJECT: BACKGROUND ON DOE RUN'S TAX DISPUTE 
 
Ref: 05 Lima 4228 
 
Contains Sensitive Business Information, not for Internet 
Distribution. 
 
1.  (SBU) Summary.   While the GOP has resolved many of the 
outstanding commercial disputes with U.S. firms, Doe Run 
Peru continues to have significant differences with SUNAT 
(the tax agency) over tax assessments.  The dispute focuses 
on three central points:  first, whether Doe Run was 
entitled to revalue its assets after its 1997 merger with a 
Peruvian company; second, whether the revaluation of assets 
was done correctly; and third, whether the company qualified 
for Value Added Tax (VAT) rebates on exported metal 
concentrates.  SUNAT claims that the company owes more than 
$160 million in back taxes.  The company disputes SUNAT's 
assessment.  This cable outlines the steps underway to 
promote resolution.  End Summary. 
 
Background on Tax Disputes 
-------------------------- 
 
2.  (SBU)  In 1997, Doe Run Peru entered the Peruvian metal 
market after it merged with a local metal refining company 
in La Oroya.  Since 2003, the company has faced challenges 
from SUNAT, Peru's tax agency, on three tax issues. 
 
3.  (SBU)  "Economic Substance" Issue: In December 2003, 
SUNAT conducted an assessment of Doe Run, claiming that the 
1997 merger had no economic substance.  As such, Doe Run 
Peru should not have revalued its assets for the purposes of 
calculating depreciation.  SUNAT assessed that Doe Run owed 
$9 million in fines and back taxes, reducing its income tax 
credit for 1998 from 32 million soles to 9 million soles. 
Doe Run contends that it has clearly demonstrated the 
economic substance of the merger and therefore was eligible 
to deduct for tax purposes.  In December 2004, SUNAT, after 
reviewing Doe Run's 1999-2001 income taxes, assessed the 
company with additional fines.  The company filed several 
appeals against SUNAT's assessments.  As of December 31, 
2005, Doe Run's tax liability for the 1998-2001 assessments 
was estimated to be more than $110 million. 
 
4.  (SBU) Correct Reevaluation of Assets:  SUNAT has lost 
several high profile cases where it argued that the merger 
of privatized companies with the new foreign operator's firm 
lacked economic substance.  For that reason, SUNAT offered 
to drop that claim against Doe Run if the company agreed to 
have CONATA, the Peruvian Appraisal Agency, conduct a 
binding valuation of the company's fixed assets.  According 
to Bruce Neil, President of Doe Run, the company decided in 
February 2006 to hire CONATA to evaluate 10 percent of the 
company's holdings as a test.  The results were lower than 
Doe Run's own appraisal by 30 percent.  Neil reported that 
the CONATA appraisal valued the company's assets 
individually (as one would do in a liquidation) rather than 
as part of an integrated profitable enterprise.    He has 
requested that CONATA conduct an integral assessment, which 
Neil believes would provide a higher value of Doe Run's 
assets.  Doe Run has not yet accepted SUNAT's offer of a 
binding CONATA appraisal.  Neil explained that the company 
is interested if CONATA falls within its ballpark because 
Doe Run is considering major new investments in Peru.  He 
does not believe the company's board will approve the 
investment plan until tax liabilities have been clarified; 
Using a CONATA appraisal would resolve the depreciation 
dispute faster than going through the courts.  (Note:  While 
the assessment of assets dispute is, on face, similar to Luz 
del Sur's case (reftel), Doe Run's situation is distinct. 
U.S.-owned Luz contracted for three separate independent 
evaluations and used the most conservative; Doe Run 
conducted one.  It is unclear whether the Doe Run appraisal 
is a conservative or aggressive valuation.  End Note.) 
 
5.  (SBU)  Application of VAT:  In September 2004, as a 
result of Doe Run's request for a VAT credit, SUNAT 
conducted a full audit of Doe Run's January-July 2004 tax 
documents, inquiring why the company did not pay VAT on some 
zinc and copper sales.  Doe Run used a different system for 
the sale of  concentrates and refined metals than most 
(though not all) refiners.  This gave rise to a highly 
technical dispute about whether the sales were "domestic" 
(which do not qualify for VAT rebate) or "export" (which 
do.)  In November 2004, SUNAT assessed that Doe Run owed 
more than $2.2 million in back VAT payments and offset this 
amount against the refund for VAT credit.  SUNAT then began 
an audit of Doe Run's VAT documents dating from 1999-2001. 
As of December 31, 2005, Doe Run has an assessed VAT 
liability of $44 million for the years 1999-2001.  In 
January 2006, SUNAT began another tax audit of Doe Run, this 
time for the 2002-2003 period.  This audit is still in 
process.  While the audits continue, SUNAT refuses to grant 
Doe Run credit on VAT refunds, which total more than $100 
million. 
 
Where The Cases Stand Now 
------------------------- 
 
6.  (SBU)  According to Patricia Paz Soldan, Doe Run Peru 
Vice President for Legal and Institutional Affairs, the 
company is not required to make any payments on the income 
tax assessments while the case is in administrative appeal. 
Doe Run, coordinating with Peru Disputes Coordinator Aurelio 
Loret de Mola, continues to work with CONATA on the 
methodology to assess Doe Run's assets. 
 
7.  (SBU)  The Ambassador, during a meeting with Prime 
Minister Pedro Pablo Kuczynski (PPK) on May 9, raised the 
Doe Run tax issues.  On the income tax issue, Ambassador 
Struble requested that CONATA consider Doe Run's proposal 
that the assessment value the company as a functioning, 
integrated business.  On the VAT issue, PPK noted that this 
may be the easiest problem to resolve, as many companies 
face the same VAT problem with SUNAT.  The Ministry of 
Finance is in the process of drafting a Supreme Decree that 
should resolve the issue. 
 
Timing Issues 
------------- 
 
8.  (SBU)  As noted earlier, Doe Run is considering a major 
expansion of its La Oroya smelting facilities and wants 
these tax issues resolved before it goes to the board for 
approval.  Bruce Neil informed the Ambassador that the 
company is trying to use the U.S. Congressional 
consideration of the free trade agreement to drive 
resolution by June.  Doe Run has urged the Missouri 
delegation to vote against the FTA unless the issue is 
resolved. 
 
9.  (SBU)  The Peruvian Government recognizes the urgency of 
the Doe Run case, but almost certainly cannot put it to bed 
in June.  Disputes coordinator Loret de Mola is working with 
CONATA to redo the appraisal of Doe Run's assets, which may 
take several months.  Once the appraisal is complete, the 
case goes back to SUNAT to determine any back taxes owed by 
Doe Run.  It is unclear whether SUNAT, an autonomous agency, 
will issue its decision in a timely fashion, although the 
GOP will urge a quick decision by SUNAT.  The Ministry of 
Finance is currently working on the Supreme Decree that will 
resolve the VAT issues; it is possible that the decree may 
be issued by June. 
 
 
STRUBLE