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UNCLAS SECTION 01 OF 03 LONDON 000475 
 
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SENSITIVE 
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E.O. 12958: N/A 
TAGS: ECON EFIN ETRD CASC EINV UK
SUBJECT: NON-DOM TAX ISSUE HEATS UP 
 
REF: A) 08 LONDON 74 B) 07 LONDON 004659 C) 07 LONDON 004547 D) 07 
 
LONDON 0004503 E) 07 LONDON 004342 
 
LONDON 00000475  001.4 OF 003 
 
 
¶1. This cable contains an action request. See paras 8 and 9. 
 
¶2. (SBU) Summary and Action Request: The proposed taxation of 
non-domiciled foreigners in the UK (including Americans) continues 
to roil the business world here.  Trade and Investment Minister Lord 
Digby Jones warned against implementing the proposed changes to the 
tax rules on the front page of the February 8 Financial Times (FT). 
David Lewis, Lord Mayor of London, also chimed in against the change 
as has the head of the American business association. On February 
12, Chancellor Darling, responding to public pressure, slightly 
modified the government's proposal, to allay fears that UK tax 
inspectors would probe into foreign assets, but without addressing 
the main concerns of U.S. taxpayers.  Resident Americans worry that, 
although the final legislation will not be approved by Parliament 
until summer 2008, the law will be effective as of April. This means 
that the U.S. Department of Treasury will not be able to determine 
if the new taxes are creditable against U.S. taxes until after the 
law is already in effect. An HM Treasury (HMT) official will be in 
Washington the week of Feb 19 to discuss this issue, among others. 
They have signaled their willingness to dialogue with U.S. 
counterparts about what might or might not be creditable. ACTION 
REQUEST: There are many competing U.S. interests entangled in this 
topic. We welcome the prompt consultations between U.S. and UK 
Treasury officials.  Meanwhile, post seeks clearance of talking 
points in paragraph 9. U.S. Department of Treasury Assistant 
Secretary Swagel and Deputy Secretary Kimmitt should be prepared to 
 
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answer questions on the non-dom issue when they visit London in 
February and March respectively. (End Summary and Action Request) 
 
Background 
---------- 
 
¶3. (SBU) HMG intends to require non-domiciled residents of the UK, 
who have lived in the country seven of the last ten years, to either 
pay UK tax on their worldwide income, or a flat 30,000 GBP ($60,000) 
per person charge. Currently, non-domiciled residents only have to 
pay tax on their domestically earned income and whatever monies they 
remit to the UK. Domicile is unique British concept: determined by 
one's father's place of domicile and a theoretical intention to one 
day depart the UK. It is not related to nationality. The changes 
will take effect in April. The American business community, 
represented by British American Business, has opposed these changes 
since their announcement in the October 2007 pre-budget report, 
(Reftel B). 
 
Front Page News 
--------------- 
 
¶4. (U) In a February 8 Financial Times interview that attracted 
considerable attention, Trade And Investment Minister, Lord Digby 
Jones, said that the proposed non-dom tax changes make it harder for 
him to sell Britain as a destination for skilled foreign workers and 
inward investment,.  Jones said that many individuals from the 
financial industry had told him this is a serious issue for the 
industry. Jones said he had not been consulted on the change before 
it was introduced in October's pre-budget report. David Lewis, Lord 
Mayor of London, has also weighed in.  He told the Chancellor he 
found real anxieties over the proposed changes in many meetings with 
the financial industry. The front page of the Financial Times ran 
another story on February 11 with the misleading headline "U.S. in 
tax clash with UK over non-doms." The article contained a quote we 
supplied noting that the Embassy was passing concerns it had heard 
to HMT.  The Times also issued an editorial which strongly opposed 
the non-dom tax change. In addition, Bloomberg, Forbes and the BBC 
have contacted us seeking comment. 
 
Some Adjustments 
---------------- 
 
¶5. (U) To damp down the media frenzy, on February 12, Chancellor of 
the Exchequer Darling announced slight modifications to the 
proposal, without addressing the core concerns of the U.S. 
community.  Darling said anyone paying the flat GBP 30,000 levy 
'will not be required to make any additional disclosures about their 
income and gains arising abroad' and the changes to the taxation of 
trusts will not apply to gains before April 6.  Also, money brought 
into the UK to pay the GBP 30,000 levy will not itself be taxable, 
nor would art works brought in for public display. 
 
But Continuing Concerns 
----------------------- 
 
¶6. (SBU) These changes will help quiet some of the more alarmist 
news stories in the UK (although they immediately gave rise to 
another set of stories about the Labour government's dithering.) 
 
LONDON 00000475  002.4 OF 003 
 
 
They do not however address the chief concerns of American 
residents: double taxation and timing. As currently structured, the 
UK proposals would probably not meet a U.S. legal definition of an 
"income tax" and so payments would not be creditable under the 
U.S.-UK Double Tax Convention.  To our knowledge, Americans are only 
major community in the UK that also has to pay taxes to their home 
country. 
 
¶7.  The other major concern among expatriates in the UK, including 
Americans, is the timing of the proposed changes. In the draft 
legislation, the law would take effect in April 2008, the beginning 
of the UK's financial year. However, the final legislation will not 
be passed until late summer. U.S. Treasury officials are naturally 
reluctant to voice an opinion on creditability until the final 
legislation has been thoroughly analyzed. Post is concerned, 
however, that many American residents of the UK will be unable to 
properly adjust their financial affairs to account for the changes, 
because they will have incomplete information at the beginning of 
the tax year. British American Business (BAB), Germany Industry UK, 
and many other organizations have requested that if HM Treasury 
implements this law, it should at least give expatriates adequate 
time to prepare their financial affairs.  The head of BAB, Peter 
Hunt, told the press February 11 "We don't believe that it is the 
Government's objective... to reduce the attractiveness of investment 
in the UK to its largest inward investor.  Yet this is likely to be 
precisely the outcome ....  We shall be less likely to attract the 
current high levels of U.S. investment to the UK.  We shall reduce 
the attractiveness of the UK both to U.S. companies sending staff to 
the UK, and establishing headquarters operations here where such 
operations require long-term senior management assignments." 
 
¶6. (SBU) This is a multi-faceted issue with competing interests. 
Business people, academics and others highlight the advantages of 
maintaining the current high numbers of Americans in the UK, which 
they say facilitate trade, investment and much more between the two 
countries. The large number of Americans in the UK is also an 
integral part of the special relationship between the two countries 
and of our 'soft power'. Another side of the story is the importance 
of maximizing tax income to the U.S. government, which would 
militate against crediting the UK charges against U.S. taxes. 
 
Plans for Consultations 
------------------------- 
 
¶7. (SBU) Steven Effingham, the lead on this issue at HMT, told us 
his supervisor, Mike Williams, will travel to Washington the week of 
February 19 to discuss this and other issues with counterparts at 
U.S. Treasury.  Effingham insists that HMT is willing to consider 
altering the legislation in order to avoid double taxation of 
Americans. He has also volunteered to speak at a town hall meeting, 
where he can answer questions raised by American residents. 
 
Seeking Guidance 
---------------- 
 
¶8. (SBU) HMG, American citizens, tax experts, and the press are 
coming to the Embassy with questions in increasing numbers. We are 
not in a position to answer those queries and thus welcome the news 
that our respective Treasury experts to meet.  The issues being 
raised with us include: 
 
---How likely is it that this tax will be creditable against U.S. 
tax liability? 
Option A:  Will the 30,000 GBP ($60,000) charge be creditable? 
Option B: If Americans choose instead to declare their worldwide 
income to the UK, would taxes paid here be creditable? 
 
--- What is the result of U.S. Government engagement with HMT on the 
issue of creditability? 
 
--- If Americans choose to make their place of domicile the UK, 
would they then find relief from double taxation under the existing 
double taxation convention? 
 
Requesting Clearance 
-------------------- 
 
¶9. (SBU) Post also requests clearance of the following talking 
points for use with HMG. 
 
--- The U.S. government respects the right of the United Kingdom to 
tax its citizens and residents in any manner it sees fit. Many 
long-term, resident American citizens however have expressed 
concerns to us about the proposed timeline for implementation of 
changes to the tax code for non-domiciled residents. 
 
---The U.S. government supports its citizens' requests that they be 
given a reasonable amount of time between the publication of the 
 
LONDON 00000475  003.4 OF 003 
 
 
final legislation and the implementation of the law in order to 
arrange their financial affairs to suit the new tax rules. 
 
---A reasonable waiting period between the publication of the final 
legislation and its implementation would also give the U.S. Treasury 
time to analyze the changes fully and determine the creditability 
against U.S. taxes of any new UK tax charges. 
 
-- We are prepared to work with you discuss what kind of tax would 
be deemed income tax consistent with the spirit of the U.S. UK 
Double Taxation Convention, to mitigate adverse consequences on U.S. 
citizens. 
 
¶10. (SBU) Time is short.  If we are to advise American citizens of 
their likely tax exposure, they need to hear from us sufficiently 
before April 1 to make arrangements.  Also, U.S. Treasury Deputy 
Secretary Kimmitt and Assistant Secretary Swagel are planning trips 
 
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to the UK within the next month. They are very likely to receive 
these same questions. 
 
TUTTLE