Summary
Reports from the Dominican government and US Embassy in Santo Domingo indicate that Verizon and the government have reached an agreement on the amount of sales tax to be paid on the $2bn sale of earlier this year. Reports are that both sides agreed to a sales tax payment of approx. $200m rather than the $518m originally requested by the Dominican government.
While the settlement obligates Verizon to pay the sales tax on the transaction (the company argued that since the holding company was Canadian the sales tax did not apply), it does serve to uphold investor-state agreements and buttress investor confidence in the Dominican Republic.
The resolution of this tax settlement will not pave the way for the settlement of the sale of Verizon DR to Mexican America Movil which has been aggressive in its telecomm expansion in the region, including recent purchase of Verizon in Puerto Rico as well.
However, other service investors will now be very cautious as to how they structure financial transactions in the Dominican Republic so as to avoid a similar conflict and/or a similar tax burden.
Analysis
The Dominican economy will reach double-digit economic growth rates in 2006, spurred in no small part by massive FDI injections and by the IT and financial sectors.
With the tax settlement in place Verizon's sale to Mexican America Movil will proceed and serve to consolidate the national and regional telecomm market and America Movil's rapid growth and dominance in this sector.
