VZCZCXRO2842
PP RUEHROV
DE RUEHDS #1672/01 1710508
ZNR UUUUU ZZH
P 190508Z JUN 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC PRIORITY 1001
RUEAUSA/DEPT OF HHS WASHINGTON DC
RUEHPH/CDC ATLANTA
RUEHNR/AMEMBASSY NAIROBI 3528
INFO RUCNIAD/IGAD COLLECTIVE
RHMFISS/CJTF HOA
RUEAIIA/CIA WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC

UNCLAS SECTION 01 OF 04 ADDIS ABABA 001672 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR F: CCASEY; L/LFA: KMCMANUS, L/AF: CSANFORD, L/T: 
JKIM; AF/FO: JSWAN, AF/RSA: LTHOMPSON, AND AF/E: JWYSHAM 
USAID FOR GC; AFR: KALMQUIST; AFR/EA: CTHOMPSON AND LKELLEY; OFDA: 
KCHANNELL; FFP: PBERTOLIN 
HHS FOR WSTEIGER 
NAIROBI FOR USAID/EA/RLA 
 
E.O. 12958: N/A 
TAGS: EAID PREL ABUD ET
SUBJECT: UNDERCUTTING FOREIGN ASSISTANCE: FURTHER RESTRICTING NGOS 
 
REF: A) ADDIS 1223; 
B) ADDIS 1593; 
C) U.S.-Ethiopia Agreement on Economic Cooperation of November 15, 
1993 
 
SUMMARY 
------- 
 
¶1. (SBU) A series of recent Ethiopian Government (GoE) 
administrative requirements risk severely undercutting our foreign 
assistance operations.  The now inevitable civil society 
organizations (CSO) law (Refs A and B) will likely force the end of 
all of our, and other donors', democracy and governance, conflict 
resolution, and small projects assistance programs.  The recent GoE 
refusal to register additional USAID implementing partners in 
country effectively undermines new projects' ability to operate in 
country.  A new GoE regulation stripping the U.S. Mission's and our 
implementing partners' VAT exemption in favor of a new VAT 
reimbursement scheme that does not yet have an established 
bureaucracy or procedures, effectively cuts Post's and our partners' 
purchasing power by at least 15 percent (the current VAT level) and 
potentially more if goods are subjected to excise taxes.  The GoE's 
unilateral refusal to honor import duty and other tax exemptions for 
implementing partners appears to be in violation of the 
U.S.-Ethiopia bilateral Economic Cooperation Agreement signed in 
1993 (Ref. C).  Other donors' partners report that the GoE has begun 
implementing a provision of the still-draft CSO law by refusing to 
process NGO expatriate staff's work permits until the NGO has 
deposited two million Birr (approximately US$200,000) in a blocked, 
Ethiopian bank account.  Furthermore, despite the clear on-set of 
drought and the spike in patients seeking therapeutic food relief, 
only on June 6 did the GoE suspend the 71 percent "luxury goods" tax 
on emergency therapeutic foodstuffs such as Plumpy Nut. 
 
¶2. (SBU) Collectively, these duties, restrictions, taxes, and 
regulations have already begun to impose a significant cost increase 
on U.S. foreign assistance implementing partners.  The passage of 
the CSO law will likely force the termination of all U.S. and other 
donors' foreign assistance for democracy and governance, human 
rights, conflict resolution, and our important advocacy programs, 
particularly on behalf of women's rights.  It will also likely force 
the suspension of Post's Self-Help/DHRF programs.  If not 
reimbursed, the imposition of these new duties and taxes also will 
certainly divert tens of millions of dollars of program funds from 
U.S. development and humanitarian efforts to GoE coffers.  Even if 
implemented, but reimbursements are delayed until after the end of 
the fiscal year in which paid, these funds will be lost to Post's 
operating budget.  Although the revised taxation procedures are 
likely driven more by the government and economy's dire financial 
conditions, their effects -- when combined with the other 
bureaucratic actions -- risk fundamentally undercutting a 
significant portion of our foreign assistance efforts in Ethiopia. 
 
 
¶3. (SBU) The U.S. Embassy from the Ambassador to the management and 
political sections and USAID have coordinated with other donors, 
NGOs and organizations on confusion over and the affects of the new 
procedures.  Post has raised this problem with the Foreign Ministry 
and the Ambassador will raise this with the Prime Minister and 
Foreign Minister after additional consultations with Ethiopia's 
legal advisors to the Prime Minister, as well as with other donors. 
If our efforts are not successful, we will coordinate with the 
Department on an approach to the GoE on resolving these impediments 
to our foreign assistance operations.  End Summary. 
 
BREACHING THE BILATERAL ECONOMIC COOPERATION AGREEMENT 
--------------------------------------------- --------- 
 
¶4. (U) The Ministry of Finance and Economic Development (MOFED) 
informed Post in December 2007 of a desire to renegotiate certain 
provisions in the Agreement.  In particular, MOFED flagged the 
following three provisions which it sought to renegotiate: 
 
  a) The exemption from profit tax granted to expatriate 
organizations financed by or under contract with the USG to execute 
projects in Ethiopia under the Agreement; 
 
  b) The exemption from indirect taxes on goods of any kind locally 
 
ADDIS ABAB 00001672  002 OF 004 
 
 
acquired for programs or projects financed by the USG under the 
Agreement, or for the Mission; and 
 
  c) The disposition of goods including motor vehicles imported free 
of duty for programs and projects financed by the USG under this 
Agreement or by the Mission or employees of the USG who are not 
Ethiopian nationals or permanent residents, imported for personal 
use without payment of duty and taxes. 
 
¶5. (U) On December 26, 2007, Post's Management Officer advised the 
Foreign Ministry that Section 579 of the Foreign Operations, Export 
Financing and Related Programs Appropriations Act of 2003 requires 
the Secretary of State to withhold from foreign assistance funds 
allocated to the taxing central government 200% of the amount of 
unreimbursed taxes assessed against commodities purchased with U.S. 
foreign assistance.  The Foreign Ministry noted that it would 
respond to Post should the GoE seek to pursue renegotiation. 
Neither MOFED nor the Foreign Ministry again raised the issue of 
renegotiation of this Agreement until the GoE began unilaterally 
stripping tax and duty exemptions from foreign assistance-funded 
implementing partners in May 2008. 
 
¶6. (U) Article 8(5) of the Agreement specifically exempts expatriate 
personnel who are in Ethiopia to perform work in connection with USG 
assistance from customs and import duties on personal effects within 
six months of their first arrival.  Beginning in early May, however, 
the GoE began unilaterally imposing import duties on the personal 
effects of newly arriving staff-members of implementing partners. 
Those who do not pay these duties are presumably being assessed 
demurrage fees while their effects remain in customs. 
 
¶7. (U) Article 8(1) of the Agreement establishes a blanket exemption 
on all taxes, duties, or similar fees for any supplies, materials, 
equipment or property purchased by the USG or funded organizations 
for the purposes of any Agreement-covered program.  While USAID 
implementing partners have long enjoyed ex ante VAT, duty, and other 
tax exemption, Centers for Disease Control and Prevention (CDC) 
implementing partners have never received such VAT, duty, or tax 
exemptions in Ethiopia despite the fact that the Agreement pertains 
to all USG economic, technical, and related assistance. 
Furthermore, in early May the GoE also ceased to authorize ex ante 
VAT exemptions for official purchases from foreign assistance-funded 
implementing partners, instead requiring VAT payments to be 
reimbursed through a yet-to-be-determined process for which the GoE 
has established neither a bureaucracy nor procedures to accommodate. 
 AS it is extremely likely that such procedures or bureaucracy will 
be in place to affect the reimbursement within the same U.S. fiscal 
year as the charge is incurred, those funds will likely be lost to 
Post and foreign assistance programs in country. 
 
¶8. (SBU) UN agencies operating in Ethiopia report being subjected to 
similar taxes, duties, and fees despite having a similar agreement 
with the GoE.  A joint UN task force will meet in coming days to 
devise an approach to address this issue with the GoE.  The World 
Food Program (WFP) reports that despite having its own bilateral 
agreement with the GoE which is virtually identical to the U.S. 
Agreement, WFP is going ahead and paying the duty on imported 
equipment and supplies and VAT on all applicable local purchases and 
simply hoping that the GoE will reimburse these taxes at some 
point. 
 
BUREAUCRATIC IMPEDIMENTS TO NGO OPERATIONS 
------------------------------------------ 
 
¶9. (SBU) While the imposition of previously-exempt taxes represents 
a fiscal assault on foreign assistance and our implementing 
partners, newly introduced registration and operational barriers 
represent a second front of attack.  At the request of Ethiopia's 
Supreme Court, USAID funded the American Bar Association (ABA) to 
develop judicial capacity.  Upon submitting its registration 
application materials to the Ethiopian Embassy in Washington for 
forwarding on to the Foreign Ministry, ABA was informed on April 21 
by Minister Counselor Assefa Delil that the Foreign Ministry would 
no longer be registering USAID implementing partners.  Instead, ABA 
was advised to sign an MOU with the relevant GoE partner entity.  On 
May 12, the Foreign Ministry's Director for NGO Affairs Ajebe Lagaba 
informed ABA's Chief of Party that the Ministry "sees no reason to 
register the ABA" as it is "just a USAID consultant."  As such, 
 
ADDIS ABAB 00001672  003 OF 004 
 
 
Ajebe advised ABA that USAID would have to resolve ABA's challenges 
in getting a telephone line, internet access, bank accounts, etc. 
which otherwise require legal registration to secure. 
 
¶10. (SBU) On May 2, the Ethiopian Embassy delivered the same message 
to Women's Campaign International (WCI) noting that the GoE would 
not register WCI as long as it received USAID funding.  Further, Mr. 
Assefa informed WCI that if it could find other funding, it would 
have to transfer at least fifty percent of its budget -- including a 
minimum of US$225,000 -- to an Ethiopian bank account, before being 
considered for registration.  British and French Embassy contacts 
report that their implementing partners have been told that the GoE 
will not process work permits for their expatriate staff unless and 
until each partner similarly deposits US$225,000 in blocked 
Ethiopian bank accounts. 
 
AN INCOME TAX ON EXPATS MAY BE TO COME? 
--------------------------------------- 
 
¶11. (U) An AmCit employee of a non-USG funded NGO approached Post on 
June 7 to report that the GoE has begun posting notices in local 
newspapers advising expatriates that they too are subject to income 
taxes.  On June 8, the Amharic edition of the Reporter newspaper ran 
the following notice: "Income Tax Proclamation 286/94 stipulates 
that all employees (Ethiopians and expatriates with no diplomatic 
privileges) who work at embassies, consulates, international 
organizations and non-governmental organizations must declare their 
income (salary as well as benefits) and pay their taxes to the city 
administration. Therefore, you are hereby advised to pay your income 
tax directly to sub-city where your work place is located; or, 
through third parties like banks, post offices and commercial 
nominees."  While no implementing partners have yet informed Post 
that their staff has been subjected to income tax, and Article 8(3) 
of the Agreement grants an exemption thereto, the publicized notices 
may represent a harbinger of GoE actions to come.  The provision 
also risks exposing expatriate staff members at the International 
Community School to a significant tax burden which could prove a 
significant disincentive to join the faculty in Addis Ababa. 
 
GETTING FAT OFF OF PLUMPY NUT 
----------------------------- 
 
¶12. (SBU) In perhaps the most egregious case of extracting fiscal 
benefit out of the contributions of others, the GoE has maintained 
an exorbitant 71 percent tax on emergency supplementary foodstuffs, 
including Plumpy Nut, which it taxes as a luxury item.  Despite the 
onset of drought, the steadily increasing evidence of famine-like 
conditions in parts of Ethiopia, and a spike in admissions to 
therapeutic feeding centers, the GoE only suspended the tax on June 
¶6. 
 
POST'S RESPONSE 
--------------- 
 
¶13. (SBU) A/DCM convened an interagency meeting on June 11 to 
discuss the various dynamics of new tax/duty provisions on USG 
operations and foreign assistance programs.  Management Officer met 
with the Foreign Ministry's Acting Director General of Legal 
Affairs, Minelik Alemu, on June 12 to discuss several of these 
issues.  Once presented with the provision in the Agreement that 
grants duty free importation of personal effects for implementing 
partners, Minelik agreed with Post's interpretation and called MFA 
Protocol to advise that such effects must again be permitted 
duty-free importation.  Minelik also noted that the original 
Diplomatic Note request from MOFED in December has been "suspended" 
with no further action pending.  Minelik conceded that the GoE must 
have a real VAT reimbursement scheme in place or else suspend the 
VAT reimbursement-vice-exemption scheme until such is in place.  The 
USAID Regional Legal Advisor will visit Post this week to further 
explore this issue with the GoE. 
 
¶14. (SBU) The Ambassador has called an internal meeting with all 
Mission components on the impacts of these new provisions on June 
24, and will meet with implementing partners soon thereafter to 
verify whether these initial discussions with the Foreign Ministry 
have resolved these administrative impediments.  If these 
consultations reveal that 1) a timely and functional tax 
reimbursement scheme has not been established, 2) that MOFED is 
 
ADDIS ABAB 00001672  004 OF 004 
 
 
still not honoring the duty and non-VAT tax exemptions for 
implementing partners detailed in our bilateral agreement, and/or 3) 
the Foreign Ministry still refuses to register USAID implementing 
partners, 
Ambassador will to raise these issues with the Prime and Foreign 
Ministers and request a specific exemption for the United States in 
accordance with the existing Agreement and long-standing operational 
practice.  If Post's efforts are not successful, we will coordinate 
with the Department on an approach to the GoE on resolving these 
impediments to our foreign assistance operations. 
 
COMMENT 
------- 
 
¶15. (SBU) The combination of the now-inevitable CSO law, the 
imposition of bilateral agreement-exempted taxes on foreign 
assistance-funded programs and implementers, and the introduction of 
bureaucratic impediments to NGO operations will certainly have a 
huge impact on our foreign assistance programs in Ethiopia and our 
ability to leverage these programs to advance U.S. foreign policy 
objectives.  While passage of the CSO law will likely force Post to 
end at least $3.4 million in key foreign assistance programs over 
the coming months, and will likely prompt the termination of our 
DHRF and possibly self-help program, the imposition of duties and 
taxes has already driven up implementing partner expenses and 
dramatically cut their purchasing power to implement programs. 
Unaddressed, the combined effect of these actions could easily be 
tens of millions of U.S. foreign assistance dollars being redirected 
from their intended development and relief activities and diverted 
to the GoE.  While the positive comments by the Director General for 
Legal Affairs at the Foreign Ministry are welcome, they offer little 
promise of correcting the issue as MOFED has already unilaterally 
imposed these provisions throughout the donor community. 
 
¶16. (SBU) The ruling party's ideological distrust of civil society, 
particularly in the political arena, explains the GoE's commitment 
to pushing through the CSO law.  Still, actions such as subjecting 
WFP and OFDA partners to import duties, 15 percent VAT, and 71 
percent tax on Plumpy Nut at a time of peaked drought, dramatic 
increases in cases admitted for therapeutic feeding, and when food 
prices are at historic highs appear intent to pad the government's 
skeletal coffers at the expense of its increasingly skeletal 
vulnerable population. 
 
¶17. (SBU) At the same time, the GoE is confident that donors will 
not suspend or cut the over US$2 billion in foreign aid Ethiopia 
receives each year, regardless of what actions the GoE takes.  Prime 
Minister Meles explicitly made that very argument to CSO 
representatives in June 4 consultations about the CSO law.  With 
such as a base assumption and facing increasingly dire economic, 
foreign exchange, and budget deficit conditions, extracting a pound 
of flesh from the one reliable source of national income may be a 
rational decision from the GoE's perspective.  End Comment. 
 
YAMAMOTO