TUNIS AMERICAN SCHOOL FACES TAX CRISIS, STATUS

UNCLAS TUNIS 000156

SENSITIVE
SIPDIS

CORRECTED COPY

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. (SBU) SUMMARY AND ACTION REQUEST: The future of the
American Cooperative School of Tunis (ACST) is threatened by
a Tunisian tax assessment of US $6.5 million. The assessment
flies in the face of 50 years of practice and diplomatic
exchanges on the school,s status. A formal bilateral accord
is essential to secure the school,s future. In this
message, we summarize the school,s situation and Mission
actions to address the problem. We appreciate NEA Acting DAS
Hudson raising the issue with the Tunisian Charge recently in
Washington. We ask that the Department use future
opportunities, including the arrival of new Tunisian
Ambassador Mansour, to emphasize the importance of a fair and
amicable resolution of the ACST tax question and the need for
a clear bilateral accord to establish the school,s status
once and for all. END SUMMARY AND ACTION REQUEST.


2. (U) ACST began, literally, in a basement when a group of
parents came together to provide English-language education
to American children in 1959. A half-century later, it is a
well-established institution offering an accredited Pre-K -
Grade 12 American education to over 500 students including
Americans (20 percent),Tunisians (10 percent) and children
of 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 (AfDB) make up 40 percent of the
student body.


3. (SBU) Throughout its history, ACST has operated under the
auspices of the US 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 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 too vague to offer much guidance.
Some GOT officials, notably at the Ministry of Finance, say
that it does not apply to ACST, even though in writing they
refer to it as the basis for many of their past actions,
including VAT exoneration as recently as last year.


4. (SBU) 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 to
highlight previous Embassy efforts to resolve this issue,
including a draft bilateral accord submitted in 2001 that
went unanswered.


5. (SBU) 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 (MOF). Soon thereafter,
long-standing armed Tunisian police security details and
rush-hour traffic police support at the school were
discontinued without explanation. The school attempted to
postpone the audit until such time as the school,s status
was resolved, but the audit went ahead beginning November 24.


6. (SBU) In the meantime, in consultation with the
Department, 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 reached 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.


7. (SBU) The school received the MOF audit report December

26. The audit through the 2007 fiscal year determined that
the school owed, including penalties, some US $6.5 million
(9.1 million Tunisian dinars),or approximately one year,s
gross revenue. About half of this total was claimed for
withholding taxes from the salaries of overseas-hired
(foreign) employees, despite the 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 clearly stated as such)
in line with 50 years of past practice. The school 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.


8. (SBU) While the school pursued an appeals process in
consultation with its legal and financial advisors, the
Embassy increased efforts to engage the Tunisian authorities
on the issue, including the Ambassador raising the matter
with the MFA Chief of Staff on December 30 and with the
Minister of Foreign Affairs on January 18. The Ambassador
briefed AfDB President Kaberuka on February 6 and the German,
British, French and Canadian ambassadors on February 11,
asking all of them to raise the issue with the GOT. The AfDB
President was particularly concerned given the school,s
critical importance to his institution. He has raised the
issue with the Minister of Finance and other senior Tunisian
government officials. The DCM has also met with the Chief of
Protocol. The German Ambassador has indicated he will raise
the matter soon, as well. The Mission also raised the issue
via diplomatic note on February 12 and the Ambassador did so
again in a meeting with the Foreign Minister on February 18.


9. (SBU) In late February, 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 time
to reach an amicable settlement. Separately, the Ambassador
requested a meeting with Minister of Finance, which was held
March 3. At the meeting, the Minister restated the MOF
position that in the absence of a bilateral agreement the
school should be treated and taxed as any other private
school in Tunisia. The Ambassador replied that our bilateral
educational and cultural agreement did apply, and that the
GOT had recognized the school's status in 50 years of
diplomatic exchanges and practice. He added, however, that
the US believes a clear bilateral accord is needed on the
school to resolve these issues once and for all for the
future. The Minister agreed to postpone the final decree and
offered for a delegation from the school to meet directly
with the Director General of Fiscal Controls to come to an
agreement.


10. (U) At the March 10 meeting between a delegation from
the school and the Director General of Fiscal Controls, it
was clear 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. On March 17, the Embassy transmitted another
diplomaic note requesting discussions on an accord to setle
the school's status once and for all.


11. SBU) COMMENT: ACST will have serious financial
problems if it is com
pelled to pay $6.5 million in ack
taxes. It may even be compelled to close it doors. At a
minimum, tuition and fees would inrease dramatically and
school instruction and services would be curtailed. AfDB
President Kaberuka has suggested that the ank, at least,
would have great difficulty payin. The closure, or dramatic
downsizing, of ACST ould not only be a blow to the US
mission but to the America and international communities in
Tunsia as well. The Embassy appreciates NEA Acting DS
Hudson raising the school issue with the Tunisan Charge in
Washington. We ask that the Departent use all available
opportunities to continue t press the GOT to resolve the tax
issue fairly ad amicably and to negotiate a bilateral accord
o ACST. END COMMENT.
Godec