TUNIS AMERICAN SCHOOL FACES TAX CRISIS, STATUS

UNCLAS TUNIS 000149 SIPDIS NEA/MAG FOR WILLIAMS/NARDI/HAYES, A/OPR/OS FOR CAMERON E.O. 12958: N/A TAGS: ASCH PGOV PREL TS SUBJECT: TUNIS AMERICAN SCHOOL FACES TAX CRISIS, STATUS QUESTIONS REF: A. TUNIS 0001 ¶B. 08 TUNIS 1135 ¶C. CIRCULAR 175 ¶1. SUMMARY: The American Cooperative School of Tunis is threatened with an Tunisian tax assessment which could force the school to close its doors. The assessment flies in the face of 50 years of past practice and agreements via diplomatic note on the school,s status. A formal bilateral accord is essential for the school,s survival now and in the future. END SUMMARY. ¶2. ACTION REQUEST: Post thanks Acting DAS (and former U.S. Ambassador to Tunisia) Hudson for engaging the Tunisian Charg d,affaires in Washington on the ACST tax and status issues. Post requests that the Department seek every opportunity, including the upcoming arrival in Washington of new Tunisian Ambassador Mansour, to emphasize the USG wish for a fair and amicable resolution of the ACST tax question and the need for clear bilateral accord to establish the school,s status once and for all. END ACTION REQUEST. ¶3. The American Cooperative School of Tunis (ACST) began quite literally in a basement when a group of parents come together to provide English-language education to American children in 1959. A half-century later, ACST has grown to become a well-established institution offering an accredited Pre-K - grade 12 American education to over 500 students including Americans (20%),Tunisians (10%) and 67 other nationalities. As the only English-language school in Tunisia, the ACST serves the dependents of many diplomatic missions, international organizations and multinational companies. Notably, dependents of employees of the African Development Bank make up 40% of the student body. ¶4. Throughout its history, ACST has operated under the auspices of the U.S. Embassy in the eyes of both the Tunisian and American governments. Putting that general understanding into practice has sometimes been problematic, however, in the absence of any specific bilateral agreement concerning the school, unlike its counterpart institutions associated with other diplomatic missions. A 1963 educational and cultural accord, often cited by both sides in diplomatic notes and other correspondence concerning the school, can be interpreted to include the school but is really too vague to offer much guidance. ¶5. A call from a local official responsible for private schools led to an October 30 meeting to discuss the school,s status with representatives of the Ministry of Foreign Affairs (MFA) Protocol, Legal and Americas Desks, the Ministry of Finance (MOF) and the Ministry of Education. The school was represented by the Director, Business Manager, and Board President (Embassy Information Officer) accompanied by the DCM. That meeting underscored the murkiness of the school,s status and Tunisian concern for the implications of that status on the tax obligations of the school and its employees. The meeting also provided the opportunity for the DCM to highlight previous Embassy efforts to resolve this issue, including a draft bilateral accord submitted in 2001 which went unanswered. ¶6. The MFA meeting ended with the Chief of Protocol suggesting a period of reflection before the next of what was sure to be many future discussions. Nevertheless, the next day the school received written notice of a pending fiscal audit by the Ministry of Finance. Soon thereafter, long-standing armed Tunisian police security details and rush-hour traffic police support at the school were discontinued without explanation. In response the school increased its private guard presence as much as contractual constraints would allow. The school attempted to postpone the audit until such time as the school,s status was resolved, but the audit eventually went ahead beginning November 24. ¶7. In the meantime, in consultation with the Office of Overseas Schools and the Bureau of Legal Affairs, the Embassy dusted off the 2001 draft bilateral accord and submitted an updated and newly-cleared version to the MFA on November 26. The Ambassador and other Embassy officials also began to reach out to Tunisian officials and other diplomatic missions to encourage the Government of Tunisia (GOT) to resolve the school,s status questions quickly and amicably. ¶8. The school received the shocking report of the MOF fiscal audit on December 26. The fiscal audit through the 2007 fiscal year determined that the school owed, including penalties, almost US$7 million, or approximately one year,s gross revenue. About half of this total, or US$3.5 million, was claimed for withholding taxes from the salaries of overseas-hired (foreign) employees, despite that fact that a specific exoneration from such taxes was referenced in a 1984 diplomatic note. Another approximately US$1 million was claimed for VAT exemptions duly approved by the MFA via the Embassy for the American school (and so marked) in line with 50 years of past practice. The school readily admits to some errors and oversights in its withholding from local employee salaries, failure to charge VAT on cafeteria and bus services, and some other taxes totaling approximately US$1 million. However, ACST and the Embassy strongly contest the majority of the audit,s findings as a retroactive reversal of the privileges accorded to the school by the GOT for almost 50 years. ¶9. While the school pursued an appeals process in consultation with its legal and financial advisors, the Embassy ratcheted up efforts to engage the Tunisian authorities on the issue, including the Ambassador raising the police issue with the MFA Chief of Staff on December 30 and by phone with the Minister of Foreign Affairs on January ¶18. The Ambassador briefed the President of the African Development Bank on February 6 and the German, British, French and Canadian ambassadors on February 11. The ADB President was especially concerned given the school,s critical importance to his institution and he has gone on to raise the issue himself at the highest levels. The DCM has also raised the issue on multiple occasions with the MFA Chief of Staff and Chief of Protocol. The issue was again raised via diplomatic note on February 12 and by the Ambassador in a personal meeting with the Foreign Minister on February 18, all without apparent progress. ¶10. By February 27 it appeared that the school,s appeals process was reaching a point of no return at which the issuance of a final decree of taxation would relegate the issue to a subsequent court battle. At the school,s request, the Ambassador wrote a letter to the Minister of Finance asking that the final decree be postponed to allow the parties more time to reach an amicable settlement, which resulted in a March 3 meeting between the Minister of Finance and the Ambassador. At that meeting, the Minister restated the MOF position that, in effect, in the absence of a bilateral agreement the school should be treated and taxed as any other private school in Tunisia. The Ambassador emphasized the status accorded to the school by the GOT over 50 year of practice and exchanges of diplomatic notes, the school,s unique educational, cultural and economic role in Tunisia and the clear need for a bilateral accord to resolve these issues once and for all. The Minister agreed to postpone the final decree and offe red for a delegation from the school to meet directly with the Director General of Fiscal Controls to come to an agreement. ¶11. At the subsequent March 10 meeting between a delegation from the school and the Director General of Fiscal Controls, it became obvious that the tax issue cannot easily be resolved without a clear determination of the school,s status. In the absence of clarification from the MFA or a specific bilateral accord, the MOF is attempting to fit ACST into its existing tax categories, which do not take into account the language of diplomatic notes or 50 years of past practice. The school, for its part, seeks a comprehensive settlement that will serve to clarify its past, present and future status. Both parties agreed that it will be difficult to reach a solution without further guidance, but the MOF noted that the final taxation decree cannot be postponed indefinitely. ¶12. COMMENT: The Embassy is about to send a diplomatic note formally requesting discussions to resolve the questions of the school,s status and finalize the bilateral accord. In the meantime, the potential US$7.5 taxation decree continues to hang in the air, a decree which, if implemented, could seriously impact the financial health of the school or even force it to close its doors. Bankruptcy would be a sad and ironic way to mark the American Cooperative School of Tunis,s upcoming 50th anniversary since opening its doors in ¶1959. Such an outcome would not only be a blow to the U.S. mission but to the greater American and international communities in Tunisia as well. END COMMENT. Godec