Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

165. Memorandum of Meeting⁰

February 12, 1959.

SUBJECT

• Proposals for the Taxation of Foreign Investment

PARTICIPANTS

• Treasury Department
  • Secretary Robert B. Anderson
  • Under Secretary Fred C. Scribner, Jr.
  • Mr. David A. Lindsay
  • Mr. George N. Buffington, Jr.
  • Mr. Jay Glassmann
• Commerce Department
  • Secretary Lewis L. Strauss
• Department of State
  • Acting Secretary Douglas Dillon
  • Mr. Stanley Metzger
  • Mr. Hamlin Robinson

This meeting was called pursuant to Mr. Clarence Randall’s request that the Departments of State, Commerce and Treasury endeavor to reach agreed positions on the various proposals for the taxation of foreign investment, particularly those of the Straus Group and the Boeschenstein Committee. Mr. Lindsay summarized the various proposals which were discussed in general terms without getting into the details of each proposal. According to my notes, checked later with Mr. Buffington of the Treasury tax staff, the conclusions of the meeting can be summarized informally as follows:

1. Tax Deferral Through Foreign Business Corporation (FBC) Device

It was agreed that this proposal had merit and deserved further consideration. Secretary Anderson expressed concern at the potential revenue loss, particularly if income from exports is eligible for deferral treatment, in whole or in part.¹ He felt that the tax deferral proposal would have some impact on the budget, perhaps enough to unbalance it, and asked his staff to prepare an estimate of the revenue impact. Secretary Strauss suggested that few companies would be able to organize FBC’s immediately, so that the revenue impact on the present year’s budget would probably be slight. Under Secretary Scribner remarked that, even so, one should have an estimate of the possible budgetary impact in later years.

Secretary Strauss asked whether the tax benefit could be limited to new investment only, to which Secretary Anderson replied that such discrimination would be unconstitutional in his opinion.

The Treasury representatives expressed a preference for taxing the FBC when it distributes income, as in the Boggs Bill,² rather than taxing the dividends solely when received by shareholders of an FBC.

The Treasury representatives agreed that the tax-free transfer of assets to FBC’s should be permitted, but presumably not to foreign corporations as proposed by the Boechenstein Committee.

The Treasury representatives agreed that the FBC should have the option of the over-all limitation on foreign tax credits.

2. Tax Treatment of Foreign Capital Losses

Mr. Lindsay said that the recommendation for treating foreign capital losses as ordinary losses for tax purposes could involve significant revenue losses, particularly because the domestic tax base of the taxpayer would be affected. Secretary Anderson felt that this recommendation had merit if it could be limited so as to avoid abuse by providing, for example, that it was restricted to capital loss incurred during the first five years of an investment. He felt that this proposal should be thoroughly considered as it gave promise of providing an effective incentive.

3. Tax Deferral for Foreign Branch Banks

Mr. Lindsay referred to the complexity of legislation designed to defer the tax on foreign branches, and felt that its inclusion in a tax bill might jeopardize the bill as a whole. He was skeptical, therefore, of a special arrangement for branch banks abroad and wondered how much effect such a special arrangement would have on the willingness of American banks to extend their foreign operations. I pointed out that several banks had attached some importance to this matter, although I could not confirm that their expansion abroad would be greatly enhanced by the treatment suggested. It was agreed that the Treasury would consult representatives of banks operating abroad and banks which were becoming more interested in foreign operations, and that this matter would be considered further on the basis of such conversations.

4. Foreign Taxes “In Lieu Of” Income Taxes

Mr. Dillon emphasized that the percent interpretation of such taxes had raised difficult problems in some cases. He agreed that it probably could not be dealt with by legislation but hoped that it could be handled more effectively in treaty negotiations. Secretary Anderson asked his staff to take another look at this problem to see what further might be done.

5. Tax Treaties

Mr. Lindsay confirmed the Treasury’s support for tax sparing provisions in tax treaties, and doubted the efficacy of handling tax sparing by legislation as in the Boggs Bill.³

6. Regulated Investment Companies

Mr. Lindsay reported that he had talked again with representatives of some of the investment companies about passing through foreign tax credits to their shareholders. They felt the administrative problems were difficult and that, in most cases, the amount of credit was too small to be meaningful. Mr. Dillon said this was not one of the most important recommendations, and it was clear that an investment company established primarily to invest abroad could pass through its foreign tax credit under existing law.

7. Devaluation of Foreign Balances

Mr. Lindsay stated that foreign losses arising from the impact of currency devaluation on bank balances and accounts receivable can be treated as ordinary losses under present law, so he saw no need for additional action in this field.

8. Deferral of U.S. Tax on Investment of Property and Technical Services

Mr. Lindsay felt that tax deferral for technical services invested in return for stock in a foreign company, particularly where those services might be rendered in the United States, would constitute a difficult precedent and does affect the domestic tax base. Little was said about the similar investment of property although it seemed to present a less difficult problem for the Treasury which would give it further study.

9. Tax Deduction for Reserves to Guarantee Loans

Secretary Anderson remarked that this seemed to offer opportunities for abuse. The release of the guaranty and the return of the reserve to taxable income could be timed, for example, to occur when most advantageous to the taxpayer. Mr. Dillon said he felt this was an imaginative recommendation but did not press it.

Secretary Anderson reported that the House Ways and Means Committee had a full schedule until at least the end of March, and thus would not be in a position to take up the Boggs Bill or any Administration proposals regarding taxation of foreign investment until after that date. He suggested that, tactically, it would be advisable for the Administration’s proposals to be prepared in the form of a report upon the Boggs Bill. Mr. Dillon said this was quite agreeable to him as it would seem to offer certain advantages. At the conclusion of the meeting, Secretary Anderson requested his staff to prepare such a report along the lines of the conclusions summarized above, and to keep in touch with the State and Commerce staffs.

0. Source: Department of State, Central Files, 811.05100/2–1259. Confidential. Drafted by Robinson. Attached to a February 17 note from Robinson asking Dillon for his comments on it and stating Robinson hoped the Straus report would not be limited to the consensus reached at the meeting. The note bears Dillon’s handwritten response: “This is as I remember meeting. I certainly intend that Straus report be published as is to bring public light to bear on all recommendations. Could you keep in touch with Lindsey [sic] & let me know how he is doing. He should have something concrete by March 1.” Acting as Dillon’s special consultant, Ralph I. Straus had prepared a report, “Expanding Private Investment for Free World Economic Growth,” in accord with Section 413 (c) of the Mutual Security Act, as amended. The Department of State released the report April 1; for a summary, see American Foreign Policy: Current Documents, 1959, pp. 1688–1691.
1. There was little opportunity to discuss the effect of the exclusion in both the Straus and Boeschenstein recommendations of companies deriving more than half of their income from exports—i.e. in eliminating export companies and reducing the revenue impact. [Footnote in the source text.]
2. H.R. 5, the “Foreign Investment Incentive Tax Act of 1959.” For text, see Foreign Investment Incentive Act: Hearings Before the Committee on Ways and Means, House of Representatives, Eighty-sixth Congress, First Session (Washington, 1959), pp. 1–8.
3. There was no mention of the Straus Group’s suggestion that other countries be asked to defer their tax or undistributed (or reinvested) earnings as a counterpart of U.S. tax deferral through the FBC device. [Footnote in the source text.]