PM ADVISOR CATEGORICALLY REJECTS TAX CONCESSIONS

UNCLAS E F T O RABAT 000521

SIPDIS

NOFORN
SENSITIVE
SIPDIS

DEPT FOR A/OPR/OS BEA CAMERON, L/BA DAVID GALLAGHER AND
NEA/MAG

E.O. 12958: N/A
TAGS: PREL AMGT ASCH PGOV EFIN SCUL MA
SUBJECT: PM ADVISOR CATEGORICALLY REJECTS TAX CONCESSIONS
FOR U.S. SCHOOLS

REF: A. RABAT 264

B. RABAT 171


1. (SBU/NF) Summary: In a meeting to follow up on the
Ambassador's February 7 meeting with Prime Minister Jettou on
our desire to conclude a school tax agreement governing U.S.
schools in Morocco, the Prime Minister's Finance Advisor
Abderrezak Lazrak reiterated the Government of Morocco's
desire to find a mutually acceptable solution to the problem,
but stressed that this must include school fulfillment of
their "tax obligations" and cannot include tax concessions
for the schools. He termed the existing state of affairs,
whereby most of the U.S. schools do not pay payroll or social
security taxes for their expatriate employees, an
"aberration" that resulted from "errors in administrative
management." He rebuffed efforts to draw parallels between
American and Spanish and French schools, stressing that the
latter are government-affiliated entities, and are the
subject of explicit bilateral undertakings between the
respective governments. He did indicate that if imposition
of taxes imposed an undue burden on the schools, the
Government of Morocco would be open to negotiating some sort
of official government support for them to compensate. This
must be done through the budget, he said, and not through tax
concessions. End Summary.


2. (SBU/NF) DCM and Econ Counselor met with Lazrak to follow
up on the Ambassador's February 7 meeting with the Prime
Minister, where Prime Minister Jettou took on board our
concerns about the financial viability of the schools if they
were required to pay Moroccan taxes, and said he would ask
his financial advisors to explore possible options. Lazrak
made clear that while some sort of government support for the
schools could be envisaged, the government is not willing to
extend tax concessions or a special tax status to the
American schools. He reiterated Morocco's previous position
that expatriate teachers are protected from double taxation
by the bilateral tax treaty, but do not enjoy any other tax
privileges. He characterized the fact that most schools have
never paid payroll or social security taxes for such
employees as an "aberration," resulting from "errors in
administrative management." If it were possible, Morocco
would seek to hold responsible those officials who permitted
such a situation to develop.


3. (SBU/NF) The DCM rejected the notion that U.S. Schools
had received favored tax treatment for decades as an
administrative error. He noted the schools' historic linkage
to the U.S. diplomatic and military presence in Morocco,
emphasizing that the status quo resulted from clear,
high-level decisions by Moroccan authorities to assure the
schools' presence. He emphasized the need for U.S. schools
to be treated similarly to other schools, such as the French,
even though in the U.S. schools are not operated by the
federal government, as are the French schools.


4. (SBU/NF) Lazrak rebuffed the DCM's argument, noting that
the French and Spanish schools are government schools
benefiting from existing bilateral treaties, whose employees
have official government status. In contrast, American
schools are private, and their teachers have the same status
as a Moroccan professor who teaches in a private capacity in
the United States. Just as that professor must pay U.S.
taxes, so expatriate teachers here are subject to Moroccan
taxes. An agreement such as that desired by the U.S., he
argued, would spark a political uproar in parliament, and
would also lead to demands from private Moroccan schools for
similar privileges.


5. (SBU/NF) Lazrak conceded DCM's point regarding the
important contribution that American schools make to the
bilateral relationship, and to the private education system
in Morocco that the PM has sought to encourage. The DCM also
underscored the importance of the U.S. schools to other
diplomatic missions and to U.S. investors. Lazrak repeatedly
asked, however, why it should matter whether the teachers
paid tax in the United States or Morocco, since they were
protected from double taxation. DCM stressed that while all
Americans are subject to U.S. taxation on their worldwide
income, application of Moroccan taxes would force the schools
to increase salaries, threatening their financial viability.
Lazrak asked that we document this point by providing
information on just how heavy a burden the payroll taxes
would be on the school's budget. If the amount threatened
their viability, Lazrak said, the government could consider
providing some sort of assistance to compensate for it. He
stressed, however, that this would not be through the tax

system. Morocco, he said, is moving away from using such tax
benefits for policy purposes. If a cause is worthy of state
support, he explained, it must be proposed by a Ministry and
included in the national budget. Use of tax concessions or
"fiscality" is no longer possible. He added that it might be
possible to consider a transition period to permit the
schools to adjust to the new situation.


6. (SBU/NF) Lazrak was not receptive to the DCM's suggestion
that the bilateral tax treaty might be interpreted broadly
enough to exonerate teachers temporarily or permanently from
payment of Moroccan taxes. All such treaties are linked,
Lazrak argued, and if such a precedent were set, others would
seek to take advantage of it.


7. (SBU) Lazrak shared a copy of the paper prepared for the
Prime Minister before the February 7 meeting, which stated
inter alia that "American schools are subject to existing
fiscal legislation, in the same manner as are other
establishments carrying out the same activities in Morocco,
except as provided for in the application of the provisions
of the Convention for non-double taxation....Thus...these
schools are subject to taxes. However, they can claim all
the fiscal advantages accorded to private educational
institutions..., including exoneration from the patent tax
for five years, from the start of their activity, and a
reduction of 50 percent of the company tax (IS) or of the tax
on professional revenue. The note added that the bilateral
cultural agreement of 1967 does not provide for any fiscal
exoneration in favor of American schools, and went on to
explain that for these reasons, the tax office has been
seeking to secure payment by the Casablanca American School
(CAS) of payroll taxes.


8. (SBU/NF) At the conclusion of the meeting, Lazrak and Econ
Counselor joined the Prime Minister's meeting with the
Millennium Challenge Corporation and Ambassador Riley, which
had just begun. The Prime Minister emphasized that he has
given instructions that the tax office should take account of
the reality of the situation and not impose a change on the
schools without warning. He said that the schools should
pay, adding that if (as a parent of four children at CAS and
a former member of the CAS board) he had realized that they
were not, he would have "warned them to pay attention." Tax
authorities should not seek to collect taxes retroactively,
however, he added. In both meetings, we stressed that we
remain extremely preoccupied by the situation, and will be
meeting to review the government's position and follow up.

9 (SBU/NF) Comment: Lazrak's strong stance calls into
question whether an agreement of the sort we desire is
achievable. At the very least we will have to up the ante
and intensify our warnings about the threat to the schools'
viability and survival. To the extent that Lazrak did offer
the creative solution promised by the Prime Minister in the
February 7 meeting, it was the suggestion that some
compensatory assistance from the Moroccan government might be
provided to ease the burden taxes would impose on the
schools. Given the range of needs in the Moroccan
educational system, however, it is hard to imagine the
Ministry of Education supporting and including in its budget
an amount that would make a material difference, and that any
such "assistance" would likely be short-term (5 years was
mentioned in one discussion) and thus would simply defer the
problem. The Mission's school tax agreement goal team will
meet this week to consider next steps, and to prepare to
brief the schools on recent developments. End Comment.

Visit Embassy Rabat's Classified Website;
http://www.state.sgov.gov/p/nea/rabat


Riley