VZCZCXRO2350
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR RUEHTRO
DE RUEHTU #0286/01 1321652
ZNY CCCCC ZZH
P 121652Z MAY 09
FM AMEMBASSY TUNIS
TO RUEHC/SECSTATE WASHDC PRIORITY 6275
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNMGH/MAGHREB COLLECTIVE
RUEHOT/AMEMBASSY OTTAWA 0241

C O N F I D E N T I A L SECTION 01 OF 04 TUNIS 000286 
 
SIPDIS 
 
STATE FOR NEA/FO, NEA/MAG, NEA/SCA/EX; 
STATE ALSO FOR A/OPR/OS, DS/OFM, L/DL 
 
E.O. 12958: DECL: 05/11/2019 
TAGS: ASCH OFDP PREL TS
SUBJECT: TUNIS AMERICAN SCHOOL NEGOTIATIONS FRUITFUL, BUT 
NO DEAL YET 
 
REF: TUNIS 243 AND PREVIOUS 
 
Classified By: Ambassador Robert F. Godec for reasons 1.4 (b) and (d) 
 
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Summary 
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¶1.  (C) On May 6-8, US and Tunisian delegations made 
substantial progress toward resolving the status and 
financial obligations of the American Cooperative School of 
Tunis (ACST).  The GOT offered formal status for the school 
and reduced its demand for back taxes from 9.1 to 4.2 million 
Tunisian dinars with a three-year, zero-interest payment 
schedule.  The GOT also insisted that the school pay new 
taxes going forward, but made concessions to keep those 
manageable.  ACST has determined that it can accept the new 
obligations and back tax settlement, although doing so will 
require an immediate increase in tuition and fees.  As a 
result of the talks, we are close to an agreement, but some 
issues remain, most importantly the status of ACST's lease. 
In paragraphs 19-21 we propose next steps and offer our 
analysis.  End summary. 
 
--------------- 
The Delegations 
--------------- 
 
¶2.  (U) The Tunisian delegation was led by Ministry of 
Finance Director General Noureddine Friaa of the National 
Verification and Fiscal Audits Unit accompanied by Director 
General Habiba Louati of the Fiscal Legislation Unit, Senior 
Auditor Maher Janhani and Director of Coordination and Follow 
up Maher Chikhaoui.  Friaa and Janhani had previously led 
direct talks with ACST that made no headway.  The one MFA 
representative was quite senior in the person of Director of 
Judicial Affairs Mondher Dhraief (equivalent to the 
Department's Assistant Secretary for Legal Affairs). 
 
¶3.  (U) The US delegation was led by DCM Marc Desjardins 
joined by Martin Hohe of NEA/SCA/EX, Beatrice Cameron of 
A/OPR/OS, Clifton Seagroves of DS/OFM/PTSB, Hollin Dickerson 
of L/DL, Management Counselor Christopher Dye and Information 
Officer (and ACST Board President) Matthew Long.  The 
negotiations took place at the offices of the Ministry of 
Finance's National Verification and Fiscal Audits Unit.  The 
GOT provided an appropriate setting and professional 
simultaneous interpretation to facilitate the talks. 
 
---------------------- 
Day 1 - Kabuki Theater 
---------------------- 
 
¶4.  (C) As the Ambassador had predicted to the delegation, 
the first day of the negotiations consisted of a four-hour, 
painfully exhaustive, point-by-point review of the Tunisian 
position as already stated in the audit and final tax decree. 
 At appropriate moments, the US side pointed out 
inconsistencies in GOT arguments, offered alternate 
interpretations of documents cited and repeated frequently 
the need for a clear status agreement to place the fiscal 
issues in context. 
 
¶5.  (C) The Tunisian delegation seemed unwilling to bend on 
the 9.1 million Tunisian dinar sum demanded or even on basic 
points such as the school's non-profit nature, continuing to 
classify the school as a for-profit service cooperative.  The 
first day ended with the Tunisian side having obviously 
exhausted their initial talking points.  The US side 
delivered a strong message that the problem required a focus 
on a comprehensive solution that acknowledged practical 
realities. 
 
------------------------------- 
Day 2 - Real Negotiations Begin 
------------------------------- 
 
¶6.  (SBU) The Tunisian delegation opened the second day of 
talks with a concrete offer on both past taxes and future 
status and obligations.  In recognition of the school's 
non-profit nature, the GOT offered exoneration of all 
corporate and municipal taxes, past and present.  On value 
added tax (VAT), the offer included exoneration from VAT of 
the school's cafeteria and bus services past and present, 
forgiveness of penalties but not principal for VAT on past 
purchases in a spirit of "shared misunderstanding," and a 
very limited VAT exoneration on future purchase of an 
 
TUNIS 00000286  002 OF 004 
 
 
educational nature. 
 
¶7.  (SBU) On the other hand, citing the bilateral taxation 
treaty and "principle," the Tunisian side insisted on all 
past withholding taxes noted in the audit, and offered a 25 
percent flat rate withholding for overseas hire employees in 
the future.  However, overseas hire employees would be 
granted a "tax holiday" for the 16-month period between the 
December 31, 2007 end of the audit and the proposed May 1, 
2009 implementation date of the new agreement.  The total 
offer on the table was 5.6 million Tunisian dinars with 20 
percent down and the rest over three years without interest 
plus an amount to be determined to settle the local and 
miscellaneous withholding for the 16-month period. 
 
¶8.  (SBU) The US side acknowledged the great progress that 
had been made since the previous day but insisted on the need 
for the final solution to be based not only on principle, but 
on financial reality that would ensure the school's continued 
fiscal viability.  For the future, the Tunisian offer was 
generally acceptable, the only caveat being a request that 
the withholding rate on overseas hires be reduced to perhaps 
10 percent. 
 
¶9.  (C) On the past, the US counteroffer was to pay all the 
local and miscellaneous withholding due but no overseas hire 
withholding on the basis of the crucial 1984 diplomatic note 
that indicated the GOT intention to exonerate school 
personnel from taxation (an interpretation strongly disputed 
by the Tunisian side).  Also included was half the principal 
due on past VAT exonerations in a spirit of shared 
misunderstanding, for a total of 1.5 million Tunisian dinars 
plus settlement of the local and miscellaneous withholding 
for the 16-month period. 
 
----------- 
Land Issues 
----------- 
 
¶10.  (C) The US side raised another issue intimately linked 
to the school's financial health--a letter from the Ministry 
of Public Lands to the ACST Board President stating that the 
school's current lease (valid until 2025) would be revoked if 
the school did not agree to renegotiate the very favorable 
current terms and instead pay commercial rates.  Since the 
school's facilities would revert to the state if the lease 
were revoked, this represented a serious concern. 
 
¶11.  (C) The US delegation insisted that there could be no 
agreement on taxes and status that did not include, at the 
very least, guarantees that the lease would not change.  An 
unforeseen change in its terms or its revocation would throw 
the school into financial chaos, making any status and tax 
agreement untenable.  Indeed, the US delegation suggested 
that if the GOT were to donate the land to the school, the 
school would be in a better position to assume the tax 
obligations demanded since it would have then have the 
collateral to secure a loan.  A donation would also be a 
fitting recognition of the great economic benefit to Tunisia 
of the school's presence in attracting diplomatic missions, 
foreign investment and international organizations. 
 
¶12.  (SBU) The GOT did not accept the US proposal but agreed 
to look into the land issue and indicated that, in principle, 
the land question could be part of a comprehensive status 
agreement.  Both sides agreed to return the next day for an 
additional third day of talks.  The US side spent the 
afternoon and evening in consultation with ACST officials and 
the school's legal and financial advisors crunching numbers, 
reviewing scenarios and discussing the school's absolute 
financial red lines. 
 
------------------- 
Day 3 - Brass Tacks 
------------------- 
 
¶13.  (C) On the third day of talks, the Tunisian delegation 
restated their previous offer while correcting an error in 
calculation to adjust the total to 5.3 million Tunisian 
dinars plus the 16-months of local and miscellaneous 
withholding estimated by school officials at approximately 
600,000 Tunisian dinars.  Indeed, the Tunisian side 
essentially reviewed at great length the generosity of their 
previous offers and their magnanimity in not auditing and 
fining the individual teachers.  While noting the need to 
clarify the lease question, no insight was offered into the 
resolution of the land issue.  The MFA attorney, with a copy 
 
TUNIS 00000286  003 OF 004 
 
 
of the Ministry of Public Lands letter in hand, attempted to 
suggest that the letter was just an invitation for a 
"friendly discussion" but he did not insist when the US side 
declined to accept that interpretation. 
 
¶14.  (C) In recognition of the Tunisian delegation's clear 
fixation on withholding taxes above all else, the US side 
upped its offer to a total of 2.4 million Tunisian dinars 
calculated to include all local and miscellaneous withholding 
and half of the withholding on overseas hires in a spirit of 
shared misunderstanding.  That number would, however, be a 
lump sum payment for all obligations, effectively exonerating 
all past VAT purchases and including local and miscellaneous 
withholding in the 16-month tax holiday.  The US side also 
again requested that the future withholding rate on overseas 
hires be lower.  The Tunisian side, after an exhaustive 
discussion on foreign withholding, rejected that offer. 
 
¶15.  (C) After the US side implied that that we seemed to be 
at an impasse, the Tunisians withdrew for consultations and 
returned with their "best and final offer."  Full exoneration 
for past VAT would be granted, local and miscellaneous 
withholding would be included in the tax holiday, and the 
future withholding rate would be dropped to 20 percent, the 
same rate offered as an investment incentive to 
fully-exporting offshore companies.  All withholding taxes 
noted in the audit remained due, however, reducing the 
one-time settlement amount to 4.2 million Tunisian dinars at 
20 percent down and the rest over three years without 
interest. 
 
¶16.  (C) The Tunisian delegation intimated that more 
favorable terms might be worked out if the US delegation 
would commit to the 4.2 millQn Tunisian dinar sum.  The US 
side was unable to accept, however, as the amount was 
substantially more than the red line previously established 
with the school and it was unclear whether or not the school 
could actually honor such terms.  The talks ended amicably, 
with both sides open to future discussions to bridge the gap 
on this last critical point. 
 
--------------------------- 
ACST Agrees, Requests Terms 
--------------------------- 
 
¶17.  (SBU) In a May 11 special executive session, the ACST 
Board of Governors, Director and key administrative personnel 
were briefed on the status of negotiations and reviewed 
financial implications of the deal now on the table.  ACST 
agrees that the proposal outlined for the school's future 
status, while requiring substantial increases in tuition and 
fees to fund, is not unreasonable and would offer the school 
clear legal and fiscal status for the future.  The proposed 
4.2 million Tunisian dinar settlement for past tax liability, 
while painful in the short term, actually has less impact on 
the school's overall financial health than the long-term 
obligations depending on the payment terms. 
 
¶18.  (C) In order to secure that future status and in the 
context of a comprehensive agreement which includes 
resolution of the land issue, the Board voted unanimously to 
authorize the US negotiating team to accept the 4.2 million 
Tunisian dinar GOT offer on two conditions:  First, that the 
payment terms be extended to 10 percent down and the rest 
over ten years to soften the economic blow to this non-profit 
institution.  Second, that the implementation date and tax 
holiday be extended by 60 days to July 1, 2009 to allow the 
school to put into place the procedures to be in compliance 
and to coincide with the school's July 1-June 30 fiscal year. 
 If the school were granted ownership of the land, however, 
the GOT offer and terms would be acceptable outright. 
 
---------- 
Next Steps 
---------- 
 
¶19.  (C) Post believes that the Ambassador should approach 
the Minister of Finance and the Minister of Foreign Affairs 
with a non-paper recapping what has been agreed to at the 
negotiating table, stating that the deal could be closed with 
the points in paragraph 18 provided that the land issue is 
unequivocally resolved.  The Mission will send a draft 
non-paper to NEA/MAG for appropriate clearance.  Once agreed, 
we believe it would be useful for the Department to deliver 
the same paper to Ambassador Mansour in Washington. 
 
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TUNIS 00000286  004 OF 004 
 
 
Comment 
------- 
 
¶20.  (C) Despite initial bluster and regardless of any other 
motivations behind the scenes, the GOT has come a long way 
from its initial position that the school was a for-profit 
cooperative with no claim to any special status.  On issues 
such as import/export of personal effects, vehicles or other 
common benefits, the GOT has cited language already 
implemented in bilateral agreements with the French and 
Italian governments.  In light of ASCT's willingness to bite 
the bullet in the short term in exchange for clear status in 
the long term, and as long as the land issue is resolved and 
the GOT continues to engage constructively, a bilateral 
accord seems within reach to ensure ACST's continued service 
to the community for another 50 years. 
 
¶21.  (C) Clearly, the improved outlook for the future of ACST 
is the result of efforts by many people across the 
Department.  Special thanks go to the Washington-based 
members of the negotiating team for their efforts and 
insights and to their offices (NEA/SCA/EX, A/OPR/OS, 
DS/OFM/PTSB, L/DL) for allowing them to travel to Tunis for 
the negotiations.  Post would also like to thank the NEA 
Front Office and NEA/MAG for their staunch support throughout 
this crisis.  End comment. 
Godec