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Cablegate: Helping American Schools

VZCZCXYZ0024
PP RUEHWEB

DE RUEHRB #1836/01 3471718
ZNR UUUUU ZZH
P 131718Z DEC 07
FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC PRIORITY 7877
INFO RUEHCL/AMCONSUL CASABLANCA PRIORITY 3744

UNCLAS RABAT 001836

SIPDIS

SIPDIS

DEPT FOR NEA, NEA/MAG, NEA-SA/EX, A/OS AND L

E.O. 12958: N/A
TAGS: ASCH AMGT EFIN PREL MO
SUBJECT: HELPING AMERICAN SCHOOLS

Sensitive but Unclassified - entire text. Please protect
accordingly.

1. (SBU) SUMMARY AND ACTION REQUEST: In recent weeks, the
clock has run out on the Embassy's eight-year attempt to
secure an agreement with the Government of Morocco (GOM) to
gain formal status and tax advantages for the five American
schools in Morocco. Though the GOM has not yet provided a
formal response to our July draft agreement, recent
enforcement actions by the Moroccan tax office and informal
comments from officials at the Ministry of Foreign Affairs
make clear that Morocco will not agree to anything that goes
beyond existing provisions in Moroccan tax law and Moroccan
legislation governing private educational institutions.

2. (SBU) Given this rebuff, post urgently requests
Department assistance in thinking of how we can "push the
envelope" to find solutions to help the schools. One
possibility suggested by MFA officials is that of granting
official status to expatriate teachers. END SUMMARY AND
ACTION REQUEST.

3. (SBU) Background: The five American schools in Morocco
have different histories and have adopted different
approaches with regard to the Moroccan government. The
American School of Tangier was created in 1950 and is
registered in the United States as a non-profit institution,
but has no independent legal identity in Morocco. It has
paid income tax for its employees since the levy was
introduced, but has never been obliged to pay the corporate
income tax. The Rabat and Casablanca American Schools were
created in 1962 and 1973, respectively, and also have no
formal status in Morocco beyond "agrement" from the Ministry
of Education. While they have paid local taxes and
Casablanca did start paying the "patente" (or business
registration tax) in 1993, they have never paid income tax or
corporate income tax, and were not requested to do so until
1999. The more recently created George Washington Academy
(GWA) in Casablanca was founded in 1998 and operates through
a formally registered Moroccan foundation. The school leases
its buildings from a for-profit subsidiary, which GWA created
and owns so that it could benefit from Moroccan investment
incentives for such companies. The school has paid income
tax for its employees, but has never been asked to pay
corporate income tax, though even associations must pay a
minimal rate (0.5 percent) on their total annual revenues.

4. (SBU) The Issue Emerges: Morocco has fitfully pursued
collection actions against the schools since 1999, prompting
the group to turn to the Embassy and support conclusion of a
bilateral accord based on the 1999 model school agreement
developed by the State Department. While the search for an
agreement continued, Morocco appeared to defer enforcement
actions against the schools. This occurred as recently as
June 2007, when Ministry of Finance officials directed the
Casablanca tax office to put off enforcement actions against
the Casablanca American School. The Embassy then delivered a
draft proposal to the Ministry of Foreign Affairs and other
ministries at the end of July. The draft, which was cleared
by the Department, including L, was based on the 1999
agreement and also included provisions based on the
Ambassador's discussions with then Prime Minister Jettou
regarding the absence of retroactive liability and a gradual
phase-in of tax obligations for the schools. After delivery,
however, and despite our efforts to gain traction for the
proposal in relevant Ministries (Foreign Affairs, Finance,
and National Education), the proposal languished, and the MFA
did not receive a formal response from any concerned office
except Moroccan Customs.

5. (SBU) The Boom Drops: Against this backdrop, the
Casablanca tax office, we suspect energized by its discovery
that the Casablanca American School had significant
investment and financial assets in Moroccan financial
institutions, pressed for action against the school. We
requested in early November that action again be deferred, as
in the past, until conclusion of negotiations on an
agreement, but the Ministry of Finance rebuffed us, stating
clearly for the first time that an agreement would only cover
the future, and that the schools remain liable for the past,
in the same way as all other institutions in Morocco. The
Casablanca Tax Office then froze the school's accounts,
compelling it to enter into negotiations with the tax office
that ultimately culminated in an agreement that will see it
pay 45.2 million MAD (approximately 6.5 million USD) to
settle all tax office claims through the end of 2007, with
the bulk up front and the remaining 10 million MAD over 18
months. The deal depletes the school's reserves but will
enable it to survive and adjust to the new tax realities.
Probably encouraged by this success, the tax office is now
pursuing the Rabat American School for both individual and
corporate income taxes, and the American School of Tangier
for corporate income tax. (COMMENT: In Morocco, it is
considered the company,s responsibility to withhold income
tax for its employees and pay directly to the Moroccan
Government. END COMMENT.) To our knowledge, however,
neither institution has the resources that would permit it to
make a settlement approaching the Casablanca example. (NOTE:
An initial approach on December 12 from the Ministry of
Finance regarding the Rabat school does hold out hope that a
workable solution can be found. END NOTE.)

6. (SBU) Morocco's Position: In meetings in recent days
with Econ Counselor, MFA officials responsible for handling
our proposed agreement have made clear that any school
agreement must be in conformity with existing Moroccan
legislation governing taxation and private educational
establishments. Cultural Affairs Director Karima Benyaich
and her chief lawyer, Ahmed Tazi, stress that Morocco is
eager to help the schools take advantage of any benefits that
Moroccan legislation conveys, but will not carve out a
special exception for them. The U.S. proposal, they
stressed, requires that Morocco either "change or violate its
laws," and it cannot do either. This message tracks with the
rebuff we have received in our high level approaches pressing
for support for the agreement. For his part, Tax Director
Bensouda remains adamant that Moroccan law is clear, and he
will enforce it. A "political decision" to do something for
the schools must come from elsewhere and would require
specific legislation, something for which the political will
clearly does not exist.

7. (SBU) ACTION REQUEST: In our meetings, Benyaich and Tazi
urged that the United States think creatively of what it can
do to help the schools, including revisiting proposals that
we rebuffed in previous negotiating rounds. They
specifically mentioned the idea of shielding expatriate
teachers from Moroccan taxation by granting them official PAT
status. This, they suggested, would enable Morocco not to
tax such personnel without violating Moroccan law. Post
urges Department to give serious consideration to this
possibility, as absent a decision to reopen the bilateral tax
treaty and grant special status to teachers (which is
unlikely to win Moroccan support), it appears to be the only
way in which the looming impact of Moroccan taxation on the
American schools can be softened. The issue is critical, as
together with financial settlement to cover past liability,
the schools will be faced with the full weight of Moroccan
taxes starting in January 2008. With income tax rates at 42
percent, this will be an onerous burden. Both the number of
teachers qualifying for PAT status, as well as the duration,
could be carefully limited and controlled, but this would
allow the schools to survive in the Moroccan environment,
while maintaining the American culture and flavor so
essential to preserving the American school experience. END
ACTION REQUEST.

8. (SBU) COMMENT: The schools' predicament stems from a
long tradition of benign neglect by Moroccan authorities. We
have argued that this approach constituted "tacit
recognition" that the schools were not subject to Moroccan
legislation, but have not won any traction with the argument.
Given that Moroccan officials at all levels insist they
value the schools and wish to see them continue to operate,
we also continue to argue that it is impossible for
educational institutions to produce five years of taxes in
one fell swoop. For his part, Tax Director Bensouda, who has
broad discretion in resolving past liabilities, insists he
desires to see the schools remain viable. The Casablanca
settlement is a tough one but does pass that test. A further
test will come with Rabat. As noted above, initial signs are
positive, and we will continue to press Moroccan authorities
for a realistic settlement. As we do so, however, we also
need to think about what the U.S. Government can do to help
ease the schools' transition to the new realities in Morocco.
END COMMENT.


*****************************************
Visit Embassy Rabat's Classified Website;
http://www.state.sgov.gov/p/nea/rabat
*****************************************

Riley

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