By Haggai Carmon

The Vienna Conventions on Diplomatic and Consular relations exempt foreign missions from taxes in the receiving states.

            Article 23 of the Vienna Diplomatic Relations Convention:

1. The sending State and the head of the mission shall be exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased, other than such as represent payment for specific services rendered.

Similar language was used by Article 32 the Vienna Convention on Consular Relations:

            Article 32

1. Consular premises and the residence of the career head of consular post of which the sending State or any person acting on its behalf is the owner or lessee shall be exempt from all national, regional or municipal dues and taxes whatsoever, other than such as represent payment for specific services rendered.

The City of New York sued the Philippines in April 2003 in the United States District Court for the Southern District of New York, seeking $37 million in unpaid real property taxes on the Philippine Center Building. The City sought the taxes on portions of the Philippine Center occupied by Maharlika, a Philippine restaurant, by the Philippine National Bank, and by Philippine Airlines.  Also named in the lawsuit were India and Mongolia over similar tax issues.

The federal district court ordered the Philippines to pay $10.9 million for the operations of PNB and PAL which the court determined they were commercial in nature and not exempt from local taxation under international law. The Maharlika restaurant was found by the court to have served consular purposes and was therefore exempt from New York City taxes. The court ruled that only the home of the head of a mission is exempted from taxes under the Vienna Conventions. The court has also ordered India to pay $42.4 million and Mongolia to pay $4.3 million to the City of New York.

The Philippine government, India and Mongolia and New York City appealed the judgment. Last week, the Philippine government settled and agreed to pay $9 million, saving $1.9 million and a potential loss of $27 million, if it lost its appeal. However the appeal of India and Mongolia over similar issues is still pending before the United States Court of Appeals of the Second Circuit in New York City.

The legal issues involved are complex. In May 2006, a United States Court of Appeals for the Second Circuit sitting in New York cleared the way for New York City to sue foreign governments for nonpayment of taxes on diplomatic buildings within the city. In addition to the City’s attempted to collect taxes from India the Philippines and Mongolia on portions parts of diplomatic and consular buildings used for non-diplomatic purposes, such as restaurants or housing. New York has also been trying to collect also from Hungary, Libya, Rwanda, Nigeria and Uganda. The Second Circuit affirmed a U.S District Court’s decision that it had jurisdiction to hear the City’s lawsuits. The Court said that a foreign country cannot “assume the benefits of ownership…while simultaneously disclaiming the obligations associated with them.” The Court also said that “When owning property here, a foreign state must follow the same rules as everyone else.”

On appeal to the Supreme Court the respective parties disagreed whether U.S court have jurisdiction over foreign countries’ taxes. The Supreme Court in a 7-2 decision ruled that U.S. courts can decide New York City’s property tax disputes with foreign governments. Federal law “does not immunize a foreign sovereign” in such cases, the court said. Under the Foreign Sovereign Immunities Act, the jurisdictions of U.S. courts do not extend to foreign governments, subject to an exception when “rights in immovable property” are at issue. The Supreme Court found that the exception applies in the New York case.

If India and Mongolia will decide to resist collection of the judgment, the City of New York could be faced with significant difficulties due to the very restrictive nature of the Foreign Sovereign Immunity Act when attachment is concerned. One interesting avenue would be through the Foreign Operations Appropriations Act, which enables the U.S. government to withhold 110 percent of any unpaid taxes from a country’s foreign aid.