CONFIDENTIAL
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5. The Governor's public position on this issue is that he was advised upon appointment of his remuneration; that this was not a matter on which there was any negotiation; and that it will be for others to decide in the light of the Memorandum of Understanding whether there are any implications for the tax position of Governors of Dependent Territories, including Hong Kong. He has made clear that when the Memorandum is published, the Hong Kong Government should review it carefully to see if there are any implications for his own tax position under Hong Kong law.
6.
It should be clear from the Memorandum that The Queen's decision has no direct relevance to Governors of dependent territories. However, this may not quell the political debate in Hong Kong on whether it is fair for the Governor to retain his tax free status given that all other Hong Kong residents
(except diplomats) are subject to salaries tax. If the issue does not die down it is possible that a member of LegCo may introduce a motion demanding that the Hong Kong Government introduce legislation repealing the Governor tax exemption.
7. We have considered whether there is anything we can do to offer political support from here. As the Governor's tax exemption is derived from Hong Kong legislation we have no direct role. One possibility would be an inspired PQ, making clear that The Queen's decision is not relevant to the question of taxation of the salaries of Governors of Dependent Territories, whose conditions of service are regulated by local legislation. But this is a bit weak, and Southern European Department are opposed to a PQ on these lines, on the grounds that it would be likely to stir the issue up in Gibraltar (the only other comparable case), where there is at present no controversy about the Governor's tax-free status.
8.
My conclusion is that this is an issue which will have to be resolved in Hong Kong. If pressure in Hong Kong continues and if in due course the Governor concludes that he should pay tax, the Hong Kong Government will consider whether his salary should be enhanced accordingly. But any decision to do so would attract criticism and it is doubtful whether the Finance Committee would vote the necessary funds.
I would wt rule out X (an inspect PQ) %
the pressure mounts. We will heever have to
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