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