UNDERCUTTING FOREIGN ASSISTANCE: FURTHER RESTRICTING NGOS

UNCLAS SECTION 01 OF 04 ADDIS ABABA 001672 SENSITIVE SIPDIS DEPARTMENT FOR F: CCASEY; L/LFA: KMCMANUS, L/AF: CSANFORD, L/T: JKIM; AF/FO: JSWAN, AF/RSA: LTHOMPSON, AND AF/E: JWYSHAM USAID FOR GC; AFR: KALMQUIST; AFR/EA: CTHOMPSON AND LKELLEY; OFDA: KCHANNELL; FFP: PBERTOLIN HHS FOR WSTEIGER NAIROBI FOR USAID/EA/RLA E.O. 12958: N/A TAGS: EAID PREL ABUD ET SUBJECT: UNDERCUTTING FOREIGN ASSISTANCE: FURTHER RESTRICTING NGOS REF: A) ADDIS 1223; B) ADDIS 1593; C) U.S.-Ethiopia Agreement on Economic Cooperation of November 15, 1993 SUMMARY -------------- ¶1. (SBU) A series of recent Ethiopian Government (GoE) administrative requirements risk severely undercutting our foreign assistance operations. The now inevitable civil society organizations (CSO) law (Refs A and B) will likely force the end of all of our, and other donors', democracy and governance, conflict resolution, and small projects assistance programs. The recent GoE refusal to register additional USAID implementing partners in country effectively undermines new projects' ability to operate in country. A new GoE regulation stripping the U.S. Mission's and our implementing partners' VAT exemption in favor of a new VAT reimbursement scheme that does not yet have an established bureaucracy or procedures, effectively cuts Post's and our partners' purchasing power by at least 15 percent (the current VAT level) and potentially more if goods are subjected to excise taxes. The GoE's unilateral refusal to honor import duty and other tax exemptions for implementing partners appears to be in violation of the U.S.-Ethiopia bilateral Economic Cooperation Agreement signed in 1993 (Ref. C). Other donors' partners report that the GoE has begun implementing a provision of the still-draft CSO law by refusing to process NGO expatriate staff's work permits until the NGO has deposited two million Birr (approximately US$200,000) in a blocked, Ethiopian bank account. Furthermore, despite the clear on-set of drought and the spike in patients seeking therapeutic food relief, only on June 6 did the GoE suspend the 71 percent "luxury goods" tax on emergency therapeutic foodstuffs such as Plumpy Nut. ¶2. (SBU) Collectively, these duties, restrictions, taxes, and regulations have already begun to impose a significant cost increase on U.S. foreign assistance implementing partners. The passage of the CSO law will likely force the termination of all U.S. and other donors' foreign assistance for democracy and governance, human rights, conflict resolution, and our important advocacy programs, particularly on behalf of women's rights. It will also likely force the suspension of Post's Self-Help/DHRF programs. If not reimbursed, the imposition of these new duties and taxes also will certainly divert tens of millions of dollars of program funds from U.S. development and humanitarian efforts to GoE coffers. Even if implemented, but reimbursements are delayed until after the end of the fiscal year in which paid, these funds will be lost to Post's operating budget. Although the revised taxation procedures are likely driven more by the government and economy's dire financial conditions, their effects -- when combined with the other bureaucratic actions -- risk fundamentally undercutting a significant portion of our foreign assistance efforts in Ethiopia. ¶3. (SBU) The U.S. Embassy from the Ambassador to the management and political sections and USAID have coordinated with other donors, NGOs and organizations on confusion over and the affects of the new procedures. Post has raised this problem with the Foreign Ministry and the Ambassador will raise this with the Prime Minister and Foreign Minister after additional consultations with Ethiopia's legal advisors to the Prime Minister, as well as with other donors. If our efforts are not successful, we will coordinate with the Department on an approach to the GoE on resolving these impediments to our foreign assistance operations. End Summary. BREACHING THE BILATERAL ECONOMIC COOPERATION AGREEMENT -------------- -------------- ¶4. (U) The Ministry of Finance and Economic Development (MOFED) informed Post in December 2007 of a desire to renegotiate certain provisions in the Agreement. In particular, MOFED flagged the following three provisions which it sought to renegotiate: a) The exemption from profit tax granted to expatriate organizations financed by or under contract with the USG to execute projects in Ethiopia under the Agreement; b) The exemption from indirect taxes on goods of any kind locally ADDIS ABAB 00001672 002 OF 004 acquired for programs or projects financed by the USG under the Agreement, or for the Mission; and c) The disposition of goods including motor vehicles imported free of duty for programs and projects financed by the USG under this Agreement or by the Mission or employees of the USG who are not Ethiopian nationals or permanent residents, imported for personal use without payment of duty and taxes. ¶5. (U) On December 26, 2007, Post's Management Officer advised the Foreign Ministry that Section 579 of the Foreign Operations, Export Financing and Related Programs Appropriations Act of 2003 requires the Secretary of State to withhold from foreign assistance funds allocated to the taxing central government 200% of the amount of unreimbursed taxes assessed against commodities purchased with U.S. foreign assistance. The Foreign Ministry noted that it would respond to Post should the GoE seek to pursue renegotiation. Neither MOFED nor the Foreign Ministry again raised the issue of renegotiation of this Agreement until the GoE began unilaterally stripping tax and duty exemptions from foreign assistance-funded implementing partners in May 2008. ¶6. (U) Article 8(5) of the Agreement specifically exempts expatriate personnel who are in Ethiopia to perform work in connection with USG assistance from customs and import duties on personal effects within six months of their first arrival. Beginning in early May, however, the GoE began unilaterally imposing import duties on the personal effects of newly arriving staff-members of implementing partners. Those who do not pay these duties are presumably being assessed demurrage fees while their effects remain in customs. ¶7. (U) Article 8(1) of the Agreement establishes a blanket exemption on all taxes, duties, or similar fees for any supplies, materials, equipment or property purchased by the USG or funded organizations for the purposes of any Agreement-covered program. While USAID implementing partners have long enjoyed ex ante VAT, duty, and other tax exemption, Centers for Disease Control and Prevention (CDC) implementing partners have never received such VAT, duty, or tax exemptions in Ethiopia despite the fact that the Agreement pertains to all USG economic, technical, and related assistance. Furthermore, in early May the GoE also ceased to authorize ex ante VAT exemptions for official purchases from foreign assistance-funded implementing partners, instead requiring VAT payments to be reimbursed through a yet-to-be-determined process for which the GoE has established neither a bureaucracy nor procedures to accommodate. AS it is extremely likely that such procedures or bureaucracy will be in place to affect the reimbursement within the same U.S. fiscal year as the charge is incurred, those funds will likely be lost to Post and foreign assistance programs in country. ¶8. (SBU) UN agencies operating in Ethiopia report being subjected to similar taxes, duties, and fees despite having a similar agreement with the GoE. A joint UN task force will meet in coming days to devise an approach to address this issue with the GoE. The World Food Program (WFP) reports that despite having its own bilateral agreement with the GoE which is virtually identical to the U.S. Agreement, WFP is going ahead and paying the duty on imported equipment and supplies and VAT on all applicable local purchases and simply hoping that the GoE will reimburse these taxes at some point. BUREAUCRATIC IMPEDIMENTS TO NGO OPERATIONS -------------- ¶9. (SBU) While the imposition of previously-exempt taxes represents a fiscal assault on foreign assistance and our implementing partners, newly introduced registration and operational barriers represent a second front of attack. At the request of Ethiopia's Supreme Court, USAID funded the American Bar Association (ABA) to develop judicial capacity. Upon submitting its registration application materials to the Ethiopian Embassy in Washington for forwarding on to the Foreign Ministry, ABA was informed on April 21 by Minister Counselor Assefa Delil that the Foreign Ministry would no longer be registering USAID implementing partners. Instead, ABA was advised to sign an MOU with the relevant GoE partner entity. On May 12, the Foreign Ministry's Director for NGO Affairs Ajebe Lagaba informed ABA's Chief of Party that the Ministry "sees no reason to register the ABA" as it is "just a USAID consultant." As such, ADDIS ABAB 00001672 003 OF 004 Ajebe advised ABA that USAID would have to resolve ABA's challenges in getting a telephone line, internet access, bank accounts, etc. which otherwise require legal registration to secure. ¶10. (SBU) On May 2, the Ethiopian Embassy delivered the same message to Women's Campaign International (WCI) noting that the GoE would not register WCI as long as it received USAID funding. Further, Mr. Assefa informed WCI that if it could find other funding, it would have to transfer at least fifty percent of its budget -- including a minimum of US$225,000 -- to an Ethiopian bank account, before being considered for registration. British and French Embassy contacts report that their implementing partners have been told that the GoE will not process work permits for their expatriate staff unless and until each partner similarly deposits US$225,000 in blocked Ethiopian bank accounts. AN INCOME TAX ON EXPATS MAY BE TO COME? -------------- ¶11. (U) An AmCit employee of a non-USG funded NGO approached Post on June 7 to report that the GoE has begun posting notices in local newspapers advising expatriates that they too are subject to income taxes. On June 8, the Amharic edition of the Reporter newspaper ran the following notice: "Income Tax Proclamation 286/94 stipulates that all employees (Ethiopians and expatriates with no diplomatic privileges) who work at embassies, consulates, international organizations and non-governmental organizations must declare their income (salary as well as benefits) and pay their taxes to the city administration. Therefore, you are hereby advised to pay your income tax directly to sub-city where your work place is located; or, through third parties like banks, post offices and commercial nominees." While no implementing partners have yet informed Post that their staff has been subjected to income tax, and Article 8(3) of the Agreement grants an exemption thereto, the publicized notices may represent a harbinger of GoE actions to come. The provision also risks exposing expatriate staff members at the International Community School to a significant tax burden which could prove a significant disincentive to join the faculty in Addis Ababa. GETTING FAT OFF OF PLUMPY NUT -------------- ¶12. (SBU) In perhaps the most egregious case of extracting fiscal benefit out of the contributions of others, the GoE has maintained an exorbitant 71 percent tax on emergency supplementary foodstuffs, including Plumpy Nut, which it taxes as a luxury item. Despite the onset of drought, the steadily increasing evidence of famine-like conditions in parts of Ethiopia, and a spike in admissions to therapeutic feeding centers, the GoE only suspended the tax on June ¶6. POST'S RESPONSE -------------- ¶13. (SBU) A/DCM convened an interagency meeting on June 11 to discuss the various dynamics of new tax/duty provisions on USG operations and foreign assistance programs. Management Officer met with the Foreign Ministry's Acting Director General of Legal Affairs, Minelik Alemu, on June 12 to discuss several of these issues. Once presented with the provision in the Agreement that grants duty free importation of personal effects for implementing partners, Minelik agreed with Post's interpretation and called MFA Protocol to advise that such effects must again be permitted duty-free importation. Minelik also noted that the original Diplomatic Note request from MOFED in December has been "suspended" with no further action pending. Minelik conceded that the GoE must have a real VAT reimbursement scheme in place or else suspend the VAT reimbursement-vice-exemption scheme until such is in place. The USAID Regional Legal Advisor will visit Post this week to further explore this issue with the GoE. ¶14. (SBU) The Ambassador has called an internal meeting with all Mission components on the impacts of these new provisions on June 24, and will meet with implementing partners soon thereafter to verify whether these initial discussions with the Foreign Ministry have resolved these administrative impediments. If these consultations reveal that 1) a timely and functional tax reimbursement scheme has not been established, 2) that MOFED is ADDIS ABAB 00001672 004 OF 004 still not honoring the duty and non-VAT tax exemptions for implementing partners detailed in our bilateral agreement, and/or 3) the Foreign Ministry still refuses to register USAID implementing partners, Ambassador will to raise these issues with the Prime and Foreign Ministers and request a specific exemption for the United States in accordance with the existing Agreement and long-standing operational practice. If Post's efforts are not successful, we will coordinate with the Department on an approach to the GoE on resolving these impediments to our foreign assistance operations. COMMENT -------------- ¶15. (SBU) The combination of the now-inevitable CSO law, the imposition of bilateral agreement-exempted taxes on foreign assistance-funded programs and implementers, and the introduction of bureaucratic impediments to NGO operations will certainly have a huge impact on our foreign assistance programs in Ethiopia and our ability to leverage these programs to advance U.S. foreign policy objectives. While passage of the CSO law will likely force Post to end at least $3.4 million in key foreign assistance programs over the coming months, and will likely prompt the termination of our DHRF and possibly self-help program, the imposition of duties and taxes has already driven up implementing partner expenses and dramatically cut their purchasing power to implement programs. Unaddressed, the combined effect of these actions could easily be tens of millions of U.S. foreign assistance dollars being redirected from their intended development and relief activities and diverted to the GoE. While the positive comments by the Director General for Legal Affairs at the Foreign Ministry are welcome, they offer little promise of correcting the issue as MOFED has already unilaterally imposed these provisions throughout the donor community. ¶16. (SBU) The ruling party's ideological distrust of civil society, particularly in the political arena, explains the GoE's commitment to pushing through the CSO law. Still, actions such as subjecting WFP and OFDA partners to import duties, 15 percent VAT, and 71 percent tax on Plumpy Nut at a time of peaked drought, dramatic increases in cases admitted for therapeutic feeding, and when food prices are at historic highs appear intent to pad the government's skeletal coffers at the expense of its increasingly skeletal vulnerable population. ¶17. (SBU) At the same time, the GoE is confident that donors will not suspend or cut the over US$2 billion in foreign aid Ethiopia receives each year, regardless of what actions the GoE takes. Prime Minister Meles explicitly made that very argument to CSO representatives in June 4 consultations about the CSO law. With such as a base assumption and facing increasingly dire economic, foreign exchange, and budget deficit conditions, extracting a pound of flesh from the one reliable source of national income may be a rational decision from the GoE's perspective. End Comment. YAMAMOTO