NON-DOM TAX ISSUE HEATS UP

UNCLAS SECTION 01 OF 03 LONDON 000475

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ZFR -------------- PLEASE CANCEL THIS MESSAGE. PARAGRAPHS MISNUMBERED

SENSITIVE
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E.O. 12958: N/A
TAGS: ECON EFIN ETRD CASC EINV UK
SUBJECT: NON-DOM TAX ISSUE HEATS UP

REF: A) 08 LONDON 74 B) 07 LONDON 004659 C) 07 LONDON 004547 D) 07

LONDON 0004503 E) 07 LONDON 004342

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1. This cable contains an action request. See paras 8 and 9.


2. (SBU) Summary and Action Request: The proposed taxation of
non-domiciled foreigners in the UK (including Americans) continues
to roil the business world here. Trade and Investment Minister Lord
Digby Jones warned against implementing the proposed changes to the
tax rules on the front page of the February 8 Financial Times (FT).
David Lewis, Lord Mayor of London, also chimed in against the change
as has the head of the American business association. On February
12, Chancellor Darling, responding to public pressure, slightly
modified the government's proposal, to allay fears that UK tax
inspectors would probe into foreign assets, but without addressing
the main concerns of U.S. taxpayers. Resident Americans worry that,
although the final legislation will not be approved by Parliament
until summer 2008, the law will be effective as of April. This means
that the U.S. Department of Treasury will not be able to determine
if the new taxes are creditable against U.S. taxes until after the
law is already in effect. An HM Treasury (HMT) official will be in
Washington the week of Feb 19 to discuss this issue, among others.
They have signaled their willingness to dialogue with U.S.
counterparts about what might or might not be creditable. ACTION
REQUEST: There are many competing U.S. interests entangled in this
topic. We welcome the prompt consultations between U.S. and UK
Treasury officials. Meanwhile, post seeks clearance of talking
points in paragraph 9. U.S. Department of Treasury Assistant
Secretary Swagel and Deputy Secretary Kimmitt should be prepared to

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answer questions on the non-dom issue when they visit London in
February and March respectively. (End Summary and Action Request)

Background
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3. (SBU) HMG intends to require non-domiciled residents of the UK,
who have lived in the country seven of the last ten years, to either
pay UK tax on their worldwide income, or a flat 30,000 GBP ($60,000)
per person charge. Currently, non-domiciled residents only have to
pay tax on their domestically earned income and whatever monies they
remit to the UK. Domicile is unique British concept: determined by
one's father's place of domicile and a theoretical intention to one
day depart the UK. It is not related to nationality. The changes
will take effect in April. The American business community,
represented by British American Business, has opposed these changes
since their announcement in the October 2007 pre-budget report,
(Reftel B).

Front Page News
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4. (U) In a February 8 Financial Times interview that attracted
considerable attention, Trade And Investment Minister, Lord Digby
Jones, said that the proposed non-dom tax changes make it harder for
him to sell Britain as a destination for skilled foreign workers and
inward investment,. Jones said that many individuals from the
financial industry had told him this is a serious issue for the
industry. Jones said he had not been consulted on the change before
it was introduced in October's pre-budget report. David Lewis, Lord
Mayor of London, has also weighed in. He told the Chancellor he
found real anxieties over the proposed changes in many meetings with
the financial industry. The front page of the Financial Times ran
another story on February 11 with the misleading headline "U.S. in
tax clash with UK over non-doms." The article contained a quote we
supplied noting that the Embassy was passing concerns it had heard
to HMT. The Times also issued an editorial which strongly opposed
the non-dom tax change. In addition, Bloomberg, Forbes and the BBC
have contacted us seeking comment.

Some Adjustments
--------------


5. (U) To damp down the media frenzy, on February 12, Chancellor of
the Exchequer Darling announced slight modifications to the
proposal, without addressing the core concerns of the U.S.
community. Darling said anyone paying the flat GBP 30,000 levy
'will not be required to make any additional disclosures about their
income and gains arising abroad' and the changes to the taxation of
trusts will not apply to gains before April 6. Also, money brought
into the UK to pay the GBP 30,000 levy will not itself be taxable,
nor would art works brought in for public display.

But Continuing Concerns
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6. (SBU) These changes will help quiet some of the more alarmist
news stories in the UK (although they immediately gave rise to
another set of stories about the Labour government's dithering.)

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They do not however address the chief concerns of American
residents: double taxation and timing. As currently structured, the
UK proposals would probably not meet a U.S. legal definition of an
"income tax" and so payments would not be creditable under the
U.S.-UK Double Tax Convention. To our knowledge, Americans are only
major community in the UK that also has to pay taxes to their home
country.


7. The other major concern among expatriates in the UK, including
Americans, is the timing of the proposed changes. In the draft
legislation, the law would take effect in April 2008, the beginning
of the UK's financial year. However, the final legislation will not
be passed until late summer. U.S. Treasury officials are naturally
reluctant to voice an opinion on creditability until the final
legislation has been thoroughly analyzed. Post is concerned,
however, that many American residents of the UK will be unable to
properly adjust their financial affairs to account for the changes,
because they will have incomplete information at the beginning of
the tax year. British American Business (BAB),Germany Industry UK,
and many other organizations have requested that if HM Treasury
implements this law, it should at least give expatriates adequate
time to prepare their financial affairs. The head of BAB, Peter
Hunt, told the press February 11 "We don't believe that it is the
Government's objective... to reduce the attractiveness of investment
in the UK to its largest inward investor. Yet this is likely to be
precisely the outcome .... We shall be less likely to attract the
current high levels of U.S. investment to the UK. We shall reduce
the attractiveness of the UK both to U.S. companies sending staff to
the UK, and establishing headquarters operations here where such
operations require long-term senior management assignments."


6. (SBU) This is a multi-faceted issue with competing interests.
Business people, academics and others highlight the advantages of
maintaining the current high numbers of Americans in the UK, which
they say facilitate trade, investment and much more between the two
countries. The large number of Americans in the UK is also an
integral part of the special relationship between the two countries
and of our 'soft power'. Another side of the story is the importance
of maximizing tax income to the U.S. government, which would
militate against crediting the UK charges against U.S. taxes.

Plans for Consultations
--------------


7. (SBU) Steven Effingham, the lead on this issue at HMT, told us
his supervisor, Mike Williams, will travel to Washington the week of
February 19 to discuss this and other issues with counterparts at
U.S. Treasury. Effingham insists that HMT is willing to consider
altering the legislation in order to avoid double taxation of
Americans. He has also volunteered to speak at a town hall meeting,
where he can answer questions raised by American residents.

Seeking Guidance
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8. (SBU) HMG, American citizens, tax experts, and the press are
coming to the Embassy with questions in increasing numbers. We are
not in a position to answer those queries and thus welcome the news
that our respective Treasury experts to meet. The issues being
raised with us include:

---How likely is it that this tax will be creditable against U.S.
tax liability?
Option A: Will the 30,000 GBP ($60,000) charge be creditable?
Option B: If Americans choose instead to declare their worldwide
income to the UK, would taxes paid here be creditable?

--- What is the result of U.S. Government engagement with HMT on the
issue of creditability?

--- If Americans choose to make their place of domicile the UK,
would they then find relief from double taxation under the existing
double taxation convention?

Requesting Clearance
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9. (SBU) Post also requests clearance of the following talking
points for use with HMG.

--- The U.S. government respects the right of the United Kingdom to
tax its citizens and residents in any manner it sees fit. Many
long-term, resident American citizens however have expressed
concerns to us about the proposed timeline for implementation of
changes to the tax code for non-domiciled residents.

---The U.S. government supports its citizens' requests that they be
given a reasonable amount of time between the publication of the

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final legislation and the implementation of the law in order to
arrange their financial affairs to suit the new tax rules.

---A reasonable waiting period between the publication of the final
legislation and its implementation would also give the U.S. Treasury
time to analyze the changes fully and determine the creditability
against U.S. taxes of any new UK tax charges.

-- We are prepared to work with you discuss what kind of tax would
be deemed income tax consistent with the spirit of the U.S. UK
Double Taxation Convention, to mitigate adverse consequences on U.S.
citizens.


10. (SBU) Time is short. If we are to advise American citizens of
their likely tax exposure, they need to hear from us sufficiently
before April 1 to make arrangements. Also, U.S. Treasury Deputy
Secretary Kimmitt and Assistant Secretary Swagel are planning trips

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to the UK within the next month. They are very likely to receive
these same questions.

TUTTLE