New York City Wins Right To Sue Foreign Governments Over Unpaid Tax

by Leroy Baker, Tax-News.com, New York

02 May 2006

A decision by a US Appeals court last week has opened the way for the New York City tax authorities to sue foreign governments for non payment of tax on diplomatic buildings located in the city.

Although embassies, consulates and diplomatic missions are customarily tax exempt, New York tax rules state that parts of such buildings used for non-diplomatic purposes, such as restaurants or housing, may be taxed.

As a result, the city has been pursuing the diplomatic missions of several countries for non-payment of tax on property that is not used solely for official diplomatic purposes.

Two governments which have challenged the city include India and Mongolia. According to New York, India owes $27.8 million tax on its 26-floor tower near the United Nations building as only six of its twenty floors are used for diplomatic offices. The rest contain residential apartments. Mongolia meanwhile owes $3.4 million on part of its six floor building in Manhattan.

Other countries from which New York has so far failed to collect unpaid tax include Hungary, Libya, Rwanda, Nigeria and Uganda.

India argues that it has immunity from being pursued in US courts under diplomatic protocol.

However, a three-judge panel of the 2nd US Circuit Court of Appeals last Wednesday affirmed a lower-court decision that US federal courts had the power to resolve such disputes.

According to US Judge Robert A. Katzmann, a foreign country can't "assume the benefits of ownership...while simultaneously disclaiming the obligations associated with them."

"When owning property here, a foreign state must follow the same rules as everyone else," he wrote.

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