CONFIDENTIAL
A.
The second problem is that HKG have now discovered what they regard as a "fiddle" by the MOD. The details are complex. But as I understand it, there is an agreement that members of the garrison, including locally-engaged staff, do not pay Hong Kong salaries tax, but do pay a reduced level of the UK income tax. Apparently, the MOD have been paying this on behalf of all military and civilian personnel in the garrison, and loading the costs onto the DCA. HKG claim that this is a breach of the DCA. Since this has been going on for many years, the sums involved are pretty large. HKG's proposal is the obvious one: if the MOD agree to write off the overhang of Hong Kong contributions under the DCA from the current financial year, and scale down their requirements for the next financial year so as to achieve a declining trend, HKG will not pursue the matter of income tax. This would involve a large revenue loss to the MOD.
5.
I do not believe that there is any initiative we need to take at this stage. There is to be a further round of talks in Hong Kong in November. If at that stage the MOD are still holding out for their current figure in terms of a contribution from HKG, we can expect the matter to escalate rapidly. The Governor will no doubt be in touch with the Defence Secretary, and at that point I think we will need to weigh in with a minute from the Foreign Secretary. In the meantime, if you had the opportunity, it might be worth reinforcing the point with Mr Jackling that Hong Kong's political problems in getting money from the Legislative Council are real. If LegCo once got hold of the story that MOD had been swinging extra costs such as income tax onto the DCA, there would be an unholy row in LegCo, and the strong likelihood that LegCo would decline to vote any funds for the garrison next year. A negotiated solution is therefore in everyone's interest.
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PF Ricketts
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