HELPING AMERICAN SCHOOLS

UNCLAS RABAT 001836 SIPDIS SIPDIS DEPT FOR NEA, NEA/MAG, NEA-SA/EX, A/OS AND L E.O. 12958: N/A TAGS: ASCH AMGT EFIN PREL MO SUBJECT: HELPING AMERICAN SCHOOLS Sensitive but Unclassified - entire text. Please protect accordingly. ¶1. (SBU) SUMMARY AND ACTION REQUEST: In recent weeks, the clock has run out on the Embassy's eight-year attempt to secure an agreement with the Government of Morocco (GOM) to gain formal status and tax advantages for the five American schools in Morocco. Though the GOM has not yet provided a formal response to our July draft agreement, recent enforcement actions by the Moroccan tax office and informal comments from officials at the Ministry of Foreign Affairs make clear that Morocco will not agree to anything that goes beyond existing provisions in Moroccan tax law and Moroccan legislation governing private educational institutions. ¶2. (SBU) Given this rebuff, post urgently requests Department assistance in thinking of how we can "push the envelope" to find solutions to help the schools. One possibility suggested by MFA officials is that of granting official status to expatriate teachers. END SUMMARY AND ACTION REQUEST. ¶3. (SBU) Background: The five American schools in Morocco have different histories and have adopted different approaches with regard to the Moroccan government. The American School of Tangier was created in 1950 and is registered in the United States as a non-profit institution, but has no independent legal identity in Morocco. It has paid income tax for its employees since the levy was introduced, but has never been obliged to pay the corporate income tax. The Rabat and Casablanca American Schools were created in 1962 and 1973, respectively, and also have no formal status in Morocco beyond "agrement" from the Ministry of Education. While they have paid local taxes and Casablanca did start paying the "patente" (or business registration tax) in 1993, they have never paid income tax or corporate income tax, and were not requested to do so until ¶1999. The more recently created George Washington Academy (GWA) in Casablanca was founded in 1998 and operates through a formally registered Moroccan foundation. The school leases its buildings from a for-profit subsidiary, which GWA created and owns so that it could benefit from Moroccan investment incentives for such companies. The school has paid income tax for its employees, but has never been asked to pay corporate income tax, though even associations must pay a minimal rate (0.5 percent) on their total annual revenues. ¶4. (SBU) The Issue Emerges: Morocco has fitfully pursued collection actions against the schools since 1999, prompting the group to turn to the Embassy and support conclusion of a bilateral accord based on the 1999 model school agreement developed by the State Department. While the search for an agreement continued, Morocco appeared to defer enforcement actions against the schools. This occurred as recently as June 2007, when Ministry of Finance officials directed the Casablanca tax office to put off enforcement actions against the Casablanca American School. The Embassy then delivered a draft proposal to the Ministry of Foreign Affairs and other ministries at the end of July. The draft, which was cleared by the Department, including L, was based on the 1999 agreement and also included provisions based on the Ambassador's discussions with then Prime Minister Jettou regarding the absence of retroactive liability and a gradual phase-in of tax obligations for the schools. After delivery, however, and despite our efforts to gain traction for the proposal in relevant Ministries (Foreign Affairs, Finance, and National Education),the proposal languished, and the MFA did not receive a formal response from any concerned office except Moroccan Customs. ¶5. (SBU) The Boom Drops: Against this backdrop, the Casablanca tax office, we suspect energized by its discovery that the Casablanca American School had significant investment and financial assets in Moroccan financial institutions, pressed for action against the school. We requested in early November that action again be deferred, as in the past, until conclusion of negotiations on an agreement, but the Ministry of Finance rebuffed us, stating clearly for the first time that an agreement would only cover the future, and that the schools remain liable for the past, in the same way as all other institutions in Morocco. The Casablanca Tax Office then froze the school's accounts, compelling it to enter into negotiations with the tax office that ultimately culminated in an agreement that will see it pay 45.2 million MAD (approximately 6.5 million USD) to settle all tax office claims through the end of 2007, with the bulk up front and the remaining 10 million MAD over 18 months. The deal depletes the school's reserves but will enable it to survive and adjust to the new tax realities. Probably encouraged by this success, the tax office is now pursuing the Rabat American School for both individual and corporate income taxes, and the American School of Tangier for corporate income tax. (COMMENT: In Morocco, it is considered the company,s responsibility to withhold income tax for its employees and pay directly to the Moroccan Government. END COMMENT.) To our knowledge, however, neither institution has the resources that would permit it to make a settlement approaching the Casablanca example. (NOTE: An initial approach on December 12 from the Ministry of Finance regarding the Rabat school does hold out hope that a workable solution can be found. END NOTE.) ¶6. (SBU) Morocco's Position: In meetings in recent days with Econ Counselor, MFA officials responsible for handling our proposed agreement have made clear that any school agreement must be in conformity with existing Moroccan legislation governing taxation and private educational establishments. Cultural Affairs Director Karima Benyaich and her chief lawyer, Ahmed Tazi, stress that Morocco is eager to help the schools take advantage of any benefits that Moroccan legislation conveys, but will not carve out a special exception for them. The U.S. proposal, they stressed, requires that Morocco either "change or violate its laws," and it cannot do either. This message tracks with the rebuff we have received in our high level approaches pressing for support for the agreement. For his part, Tax Director Bensouda remains adamant that Moroccan law is clear, and he will enforce it. A "political decision" to do something for the schools must come from elsewhere and would require specific legislation, something for which the political will clearly does not exist. ¶7. (SBU) ACTION REQUEST: In our meetings, Benyaich and Tazi urged that the United States think creatively of what it can do to help the schools, including revisiting proposals that we rebuffed in previous negotiating rounds. They specifically mentioned the idea of shielding expatriate teachers from Moroccan taxation by granting them official PAT status. This, they suggested, would enable Morocco not to tax such personnel without violating Moroccan law. Post urges Department to give serious consideration to this possibility, as absent a decision to reopen the bilateral tax treaty and grant special status to teachers (which is unlikely to win Moroccan support),it appears to be the only way in which the looming impact of Moroccan taxation on the American schools can be softened. The issue is critical, as together with financial settlement to cover past liability, the schools will be faced with the full weight of Moroccan taxes starting in January 2008. With income tax rates at 42 percent, this will be an onerous burden. Both the number of teachers qualifying for PAT status, as well as the duration, could be carefully limited and controlled, but this would allow the schools to survive in the Moroccan environment, while maintaining the American culture and flavor so essential to preserving the American school experience. END ACTION REQUEST. ¶8. (SBU) COMMENT: The schools' predicament stems from a long tradition of benign neglect by Moroccan authorities. We have argued that this approach constituted "tacit recognition" that the schools were not subject to Moroccan legislation, but have not won any traction with the argument. Given that Moroccan officials at all levels insist they value the schools and wish to see them continue to operate, we also continue to argue that it is impossible for educational institutions to produce five years of taxes in one fell swoop. For his part, Tax Director Bensouda, who has broad discretion in resolving past liabilities, insists he desires to see the schools remain viable. The Casablanca settlement is a tough one but does pass that test. A further test will come with Rabat. As noted above, initial signs are positive, and we will continue to press Moroccan authorities for a realistic settlement. As we do so, however, we also need to think about what the U.S. Government can do to help ease the schools' transition to the new realities in Morocco. END COMMENT. ***************************************** Visit Embassy Rabat's Classified Website; http://www.state.sgov.gov/p/nea/rabat ***************************************** Riley