HMT STANDS FIRM ON NON-DOM TAX CHANGE

UNCLAS SECTION 01 OF 02 LONDON 000074 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD CASC UK EINV SUBJECT: HMT STANDS FIRM ON NON-DOM TAX CHANGE REF: A) 07 LONDON 004659 B) 07 LONDON 004547 C)07 LONDON 0004503 D)07 LONDON 004342 ¶1. THIS IS AN ACTION REQUEST. SEE PARA 08 ¶2. (SBU) Summary: HM Treasury (HMT) told us that the proposed non-domiciled tax changes will take effect in April 2008 as planned despite complaints from U.S. business and other groups. They say they have fully considered the concerns raised by British American Business (BAB)(Ref A), but will not extend the consultation period. However, HMT said that there is scope for adjusting the legislation to ease the pain of implementation for affected individuals. HMT will introduce the draft legislation in "about two weeks." HMT is also investigating how the proposed tax change might affect the pensions and incomes of middle class and lower income non-domiciled residents. HMT is very open to the idea of meetings with individuals and groups affected by the proposal for further discussions. HMT also briefed Staffdel Odintz on this issue. Post is seeking guidance and approval of its action plan. End Summary HMT NOT EXTENDING CONSULTATION PERIOD -------------- ¶3. (SBU) On January 7, 2008, Steven Effingham of HMT's International Direct Personal Tax Team told EconOff that HMT will almost certainly implement the proposed changes to the tax laws for non-domiciled residents of the UK in April as laid out in the pre-budget report and consultation paper. He said an extension of the consultation period is very unlikely (Ref B). (Note: Currently non-domiciled residents of the UK do not pay UK income tax on their foreign earned, unremitted income. The proposed change would require non-domiciled individuals, who are resident in the UK seven of ten years, to pay UK income tax on their entire worldwide income or pay a 30,000 GBP ($60,000) charge in addition to the taxes on their UK income. (Ref D) Effingham said that Chancellor Darling wishes to finalize this issue in hopes of removing any uncertainty about it. End Note) Effingham said that the favorable tax status for non-domiciled individuals has been under review by HMT since 2002. He said the issue is an "easy target" for the press, trade unions, and other individuals who wish to make an example of HMT's unfair taxation policies. To assist in the consultation process, HMT will introduce the draft legislation in "about two weeks." The consultation period ;will end on February 28, 2008. The law, which may not be enacted until Summer 2008, will nonetheless be effective from April 2008. ¶4. (SBU) Effingham said that HMT has carefully reviewed BAB's concerns raised in their recent letter to the Chancellor. (Ref A) He said that HMT understands that the changes will increase the UK tax burden for a number of long-term resident American citizens. However, he says that the substantial UK public support for removing tax advantages for non-domiciled residents outweighs concerns that these individuals might choose to leave the UK. Effingham reiterated the consultation paper's survey data which suggest that the vast majority of individuals seconded to the UK for a temporary assignment reside in the country for less than five years and will not be affected. Effingham said that for these reasons, HMT expects this proposal will not have a great impact on U.S. investment in the UK, attractiveness of seconding U.S. employees to the UK, nor will it render the UK an unattractive location for headquarters operations. HMT SEEKS USG INPUT -------------- ¶5. (SBU) Effingham said that HMT is very open to suggestions on how changes to the draft legislation might be altered to minimize unnecessary hardship for American citizens. He said that HMT is open to suggestions for the terminology used to describe the 30,000 GBP charge. He said that if U.S. Treasury had a suggestion for a term which might make it easier for Amcits to deduct the charge from their U.S. tax liability, HMT would seriously consider it. Effingham also said that HMT could possibly consider drafting the legislation so that Amcits could submit their financial data in calendar year format instead of the fiscal year format currently required. He said HMT understands this causes extra hassle and costs to tax compliance for not only Americans, but citizens of many other countries. Effingham said that after the draft legislation is introduced in two weeks, it will be easier for individuals to make constructive suggestions. LONDON 00000074 002 OF 002 ¶6. (SBU) HMT is also investigating how the proposed tax changes might affect the retirement pensions and other tax deferred retirement schemes. Effingham said that the legislation was not intended to overly burden middle and lower income non-domiciled residents. He said that HMT welcomes examples of how Amcits' tax deferred savings plans might be affected. He says they will study any examples and hope that the U.S. - UK Double Taxation Convention will prevent any individual from suffering undue hardship. HMT's goal was to ensure that long-term UK residents "pay their fair share," but not to wipe out anyone's savings or retirement plans. Amcits have previously told us that they are concerned that Independent Retirement Accounts (IRA's) and Roth IRA's could be especially impacted by the proposed tax changes. A tax expert at Deloitte and Touche told us that these retirement accounts would probably be covered under the Double Taxation Convention, and individuals might have to pay the higher UK tax rate, but nothing else. Post is trying to corroborate this. ¶7. (SBU) Effingham said that HMT would be very willing to discuss this issue with any groups or individuals the Embassy suggests. He believes many expatriates have heard untrue rumors and are unnecessarily panicking. Effingham said that he would be happy to participate in an Embassy outreach to resident Amcits. This outreach would allow Amcits to voice their concerns directly to HMT and also allow HMT to dispel myths and rumors. He suggested timing such an event after the publication of the draft legislation, but before it takes effect in April. ACTION REQUEST -------------- ¶8. (SBU) Given the UK's offer to discuss the issue and take into account U.S. concerns, post seeks assistance of USG tax experts to engage with HMG and simultaneously demonstrate USG support for American taxpayers resident in the UK. ---Post recommends the scheduled review of the U.S. - UK Double Taxation Convention take place before February 28, ¶2008. A meeting in February would give HMT sufficient time to alter draft legislation before its April implementation. Please advise ASAP whether U.S. Treasury officials would be available on that schedule. ---Post would like to hold a town hall meeting for resident Amcits on the non-domiciled tax changes. Post plans to invite HMT officials, USG tax experts, and private industry experts to address and answer questions from interested American expatriates. Post requests attendance by U.S. Department of Treasury tax policy officials. Failing that, post requests U.S. Treasury attendance via DVC. The town hall would ideally be timed to coincide with the review of the Double Taxation Convention. ---Post will continue raising the concerns of BAB and other American citizens with HMT as outlined in Ref A. LEBARON