CZECH REPUBLIC: SOFA AND TAXES, THE FINAL HURDLE

C O N F I D E N T I A L PRAGUE 000347 SIPDIS E.O. 12958: DECL: 06/10/2018 TAGS: PREL PGOV EZ MARR MASS SUBJECT: CZECH REPUBLIC: SOFA AND TAXES, THE FINAL HURDLE REF: A. PRAGUE 264 ¶B. PRAGUE 322 Classified By: DCM Mary Thompson-Jones for reasons 1.4 B & D. ¶1. (C) Summary: Ambassador Graber met with Prime Minister Topolonek, the Finance Minister, and key Czech SOFA negotiators on the tax status of U.S. contractors and their employees on June 9. Topolanek faces a number of political challenges that could threaten the survival of his coalition and is worried the current U.S. proposal could imperil the passage of the agreements through Parliament. Despite this, Topolanek and his government remain committed to completing the SOFA negotiations and want to finish the agreement in time for Secretary Rice to sign both missile-defense related agreements in July. End Summary. ¶2. (C) Prime Minister Topolanek, joined by Finance Minister Kalousek, Deputy Finance Minister Chrenko, and First Deputy Defense Minister Bartak, met with the Ambassador on June 9 to discuss the last outstanding issue in the Supplemental Status of Forces Agreement (SOFA) negotiations: the tax status of U.S. contractors building, maintaining and operating the proposed U.S. ballistic missile defense (BMD) radar facility. The Prime Minister made clear his sincere desire to conclude the agreement in time for Secretary Rice to sign both the SOFA and the Ballistic Missile Defense Agreement (BMDA) in July. ¶3. (C) The Czech position on the tax status of contractors outlined in ref. a has not changed. The Czechs insist that U.S. contractors and their employees building, and operating the radar facility should pay taxes on their income generated in the Czech Republic, a position consistent with Topolanek,s focus on the economic benefits of missile defense and his government's tax reform agenda. Kalousek acknowledged that our latest proposal was "fiscally neutral and technically possible,8 but could imperil the chances of obtaining parliamentary approval of the SOFA. The Prime Minister said he believed radar opponents would see the tax-exempt status of U.S. contractors as disadvantaging Czech companies. Ambassador Graber responded that U.S. companies and contract employees would not enjoy any tax advantages and would have to pay taxes in the U.S. Topolanek said that, although true, perception would matter more than reality. Czech companies and members of Parliament would only see these tax exemptions as helping large U.S. defense contractors. The Prime Minister estimated the U.S. proposal on contractors would cost him three or four votes from the Greens and possibly three or four from the Christian Democrats. With these possible defections and increased political problems in his own party, Topolanek assessed that if the SOFA went to Parliament with the "Spanish-model tax provisions" in the text, he saw only a 20% chance of approval. ¶4. (C) Ambassador Graber reminded the Prime Minister that we have provided four proposals on this one issue and we are still waiting for the government to provide a formal reply or counterproposal to our "last and best offer." In response, Deputy Finance Minister Chrenko asked if the tax issue of contractors could be removed from the SOFA text and handled in a "side agreement." He also asked if the tax status of contractors could be dealt with on a "case-by-case basis." The Ambassador urged the Czechs to make a formal proposal as soon as possible. Deputy Finance Minister Chrenko expressed his readiness to work directly with Ambassador McDonald, the chief U.S. negotiator. (Note: Ambassador McDonald contacted Chrenko after this meeting to urge him to submit quickly a counterproposal. End Note) ¶5. (C) Comment: We welcome this meeting as a sign the Czechs are engaged and committed to coming to an agreement. The Prime Minister and his key ministers engaged in a very frank discussion on the tax issue and seemed to be looking for a solution. The Prime Minister also understood the need to move quickly if Secretary Rice is to sign both agreements in July. The meeting concluded without a firm sense of how to move forward. Topolanek was at pains to establish his sincerity and said "...please don,t view our lack of response as being rude or that we are waiting for another proposal. We just don,t have any room to maneuver." ¶6. (C) We view Topolanek's comment that the SOFA has only a 20% chance of passing as a reflection of his growing political difficulties, but see it as overly alarmist. Per ref b, Topolanek,s coalition is struggling with internal divisions that could threaten the three-party coalition's survival. He is now facing open rebellion within his own ODS. While these political difficulties may complicate the path to ratification, Topolanek remains committed to MD, as was clear during the June 9 meeting. Once the agreements are signed, the Czechs will be in a better position to plan their ratification strategy. End Comment. Graber