STATEMENT OF DR. RICHARD P. MOMSEN, DIRECTOR, AMERICAN CHAMBER OF COMMERCE FOR BRAZIL, RIO DE JANEIRO, AND SÃO PAULO, BRAZIL

Dr. MOMSEN. My name is Richard P. Momsen. I realize how pressed the committee is for time and fully appreciate the opportunity that you have given me to say a few words on behalf of the American Chamber of Commerce for Brazil.

After an examination of the provisions of the proposed new Internal Revenue Code of 1954, our directors held meetings in Rio de Janeiro and São Paulo last Tuesday, and at their request I came to this country from Brazil on Saturday to explain our disappointment over certain provisions of the House bill.

My statements are based upon over 40 years of residence in Brazil, which is one of the most important areas of the free world for American trade and investment. It is my purpose to try to explain very briefly the practical effects of section 923, entitled "Business Income from Foreign Sources."

The exclusion of wholesale establishments from the proposed 14point tax differential will bar a very important sector of American business establishments abroad, which is the outlet for a large volume of American-manufactured machinery, chemicals, railway equipment, automobiles and trucks, airplanes, household and office equipment, steel and other metal products upon which our industrial prosperity depends.

I wish to emphasize that this type of business is today meeting ever-increasing serious competition from other countries. Our unique position after the last war of being the sole supplier to the world has ended and we must again face the realities of severest competition. Excessive taxation in this field in competition with other countries which favor their nationals with exemption or reduced taxation may mean the difference between success and failure to keep our markets and create new ones.

Countless examples of what is taking place could be given, but I merely give one for illustration: Coming up on the plane last Friday, a fellow American passenger, representing one of our large railway car manufacturers, who was returning home without an order, told me of a contract recently awarded by the Brazilian Governmentowned Central Railway. There were 13 bidders from 7 different countries. The contract was for $21 million, and was awarded to a British company which is receiving a $12 million financing through the World Bank and, my informant told me, a 27 percent tax advantage over his, the American bidder.

A second point in favor of American branches and subsidiaries abroad engaged in the sale of American products is that they almost invariably maintain American sales and American technical staffs which are necessary to obtain orders. They perform inestimable maintenance and repair services and keep stocks of spare parts on hand to assure foreign buyers and users of equipment efficient and continuous operation. I know this to be true in Brazil in many types of businesses, such as trucks and automobiles; tractors and agricultural machinery; machinery for the shoe industry; radios, motors, and many types of electronic equipment for the home, factory, and

public utilities; typewriters, adding machines, calculators, cash registers, and similar products; sewing machines for the home and for industry; elevators; printing and typesetting machines; and many others.

In all of these lines, American business has won for itself a vast market in Brazil and these results are in large measure due to the maintenance of permanent establishments with facilities which can give assurance to customers that guaranties of performance will be carried out. It seems anamolous to see them excluded from the benefits of the proposed tax revision.

Another important feature of the advantages to American interests from foreign branches and subsidiaries in the promotion of the sale of American manufactured products by reason of the facilities they have, being on the ground, is to evaluate and grant credits. In some cases, such credits are granted in dollars through the principal office in this country, but in many cases they involve the granting of credits in foreign currencies.

In Brazil, bank credits in local currency are only possible through locally established companies. It is common knowledge that one of the great obstacles which has always confronted American business. abroad is the long credits granted by European countries, particularly Germany and England. The granting of credits in foreign currencies abroad involves great risks in exchange fluctuations, a risk not assumed in transactions wholly performed in the United States. Yet, American business abroad must meet European and other competition if it is to survive.

The importance of granting better credit terms was emphasized in the report of Senator Capehart's Committee on Banking and Currency after the committee's recent trip to South America.

The allegation that sales branches and subsidiaries do not represent an investment of capital is unfounded. In almost every instance they carry stocks of merchandise which necessarily represent a considerable investment, and this is accentuated when, because of competition from European and other sources, they are required to sell on time. In such countries as Brazil, which have ever-changing regulations governing imports and dollar remittances, it is frequently necessary to carry ample stocks in anticipation of future restrictions. Because of the scarcity of suitable space for stocks, spare parts, and maintenance in an expanding economy, such as that of Brazil, American companies have been obliged to purchase or build their own warehouses and other facilities involving the employment of substantial amounts of capital. Those principally engaged in the importation and wholesaling of American products are subject to the same risks and handicaps as are manufacturing and retail establishments—such as monetary depreciation, import and exchange restrictions, local taxation, employees' indemnities, and other burdens. Why should they be singled out and not entitled to the benefits of the bill under consideration?

I am sure that an analysis of effects of the proposed section 923 will best illustrate how it will work if put into operation, and will be the most convincing proof of the injustices it will create.

We have compiled a list of 166 of our chamber members with American corporate interests involved. Of these, approximately 80 percent are either non-Western Hemisphere branches, Brazilian corporations

or Brazilian limited companies, which would therefore have to qualify under sections 37 and 923 of the proposed new legislation.

The CHAIRMAN. What do you mean by a nonhemisphere branch? Dr. MOMSEN. They are those branches which do not qualify as a Western Hemisphere corporation.

Analyzing the activities of these 166 companies, without taking the Western Hemisphere angle into consideration, the following results have appeared:

Only 26, or 15 percent, would definitely qualify under the title of "factory." Only 3, or less than 2 percent, would qualify as a "mine.” None would qualify under the title of "oil or gas well" because these activities are reserved to the Brazilian Government. Only 2, or less than 1 percent, would qualify as a "public utility facility." When we come to the title of "retail establishment," the only other specific activity mentioned in the bill, we run into difficulties: 6 are importers and retailers, 2 are manufacturers, importers and retailers, 4 are manufacturers and retailers-which of these would qualify I would not attempt to answer. In any event, they are 12 in number and make up 8 percent of the total.

Now, 41, which are engaged solely in importing or exporting, or more than 25 percent, would clearly be disqualified as establishments engaged principally in the purchase or sale, other than retail, of goods or merchandise.

But the greatest number of all, 44, are both manufacturers and importers or exporters, representing 27 percent of the total.

I just have a few lines more, Senator.

The CHAIRMAN. Go ahead.

Dr. MOMSEN. This 27 percent might be disqualified from the benefits of the law. At the very best, their status is dubious and they could not rely upon being entitled to the benefits of the bill as it now reads.

While it is true that the Ways and Means Committee in its report has indicated that the phrase "or other like place of business" should be interpreted so that it may-and I repeat may—include a bank or an air transportation business, what is the tax destiny of 28 other companies operating in Brazil, representing 17 percent of the total, and which are engaged in communications, travel, insurance, film rentals, investment banking, publishing, advertising, and other unclassified activities?

From these figures it is evident that more than 50 percent are either specifically excluded from the benefits of the bill or are in a doubtful category.

The CHAIRMAN. What are you suggesting?

Dr. MOMSEN. I suggest that the restrictions in the bill, which now only cover factories, mines, oil and gas wells, public utilities and retail establishments, be extended so that wholesaling will be included, also transportation-and there are a number of other kinds of business-or that the provision be in more general terms, Senator.

Thank you very much. May I have the privilege of filing an additional statement with the committee?

The CHAIRMAN. Yes. Thank you.

Dr. MOMSEN. Thank you very much.

(The additional statement of Dr. Momsen, when received, follows:)

STATEMENT BY RICHARD P. MOMSEN IN BEHALF OF AMERICAN CHAMBER OF COMMERCE FOR BRAZIL (RIO DE JANEIRO AND SÃO PAULO)

The American Chamber of Commerce for Brazil, established in the cities of Rio de Janeiro and São Paulo, Brazil, which for many years has been advocating more favorable tax treatment by the United States Government on income from foreign sources, has noted with satisfaction the growing interest in this subject, particularly in the legislative and executive branches of our Government.

We have from time to time in recent years been favored with visits of eminent public officials, among them distinguished Members of the United States Senate and the House of Representatives. We have availed ourselves of these opportunities to bring to their attention the need, in the best interests of the United States, of certain changes in our tax policies to encourage American investments abroad and to stimulate our foreign trade. These contacts have been maintained by visits of our directors and members to Washington where they have invariably been well received by our officials, who have always indicated a sympathetic attitude to our representations. We recognize that a policy of taxation based upon citizenship rather than source of income can only be changed gradually and over a period of time, especially in periods when our Government is confronted with the problem of finding revenue to balance the budget and to maintain adequate appropriations for our national defense.

It is gratifying to know that the Ways and Means Committee of the House of Representatives in preparing H. R. 8300, 83d Congress, saw fit to include provisions for a 14 point rate differential for the purpose of encouraging foreign investments (sec. 37 and 923). We of course regret that the proposed tax reduction has been so restricted in the bill that in its present form it falls far short in the field of activities in which a large segment of American business abroad is engaged and that the language of the bill will bring about inequities and situations which will create grave doubts in many instances as to whether or not the proposed relief will be applicable or not. Some of these deficiencies have been pointed out in the verbal statement of our representation to the members of the Senate Finance Committee and it is unnecessary to repeat them here.

We have also noted that in the bill (sec. 911 d) in the case of individual bona fide nonresidents when a taxpayer is engaged in a trade or business in which both personal services and capital are material income-producing factors, the maximum allowance as compensation for personal services has been increased from 20 percent to 30 percent, same to be considered as earned income. Although this indicates a definite trend to encourage Americans to engage in business abroad, in the same manner as corporations, it still leaves our citizens in a very unfavorable tax position as compared with the citizens of other countries which grant either complete exemption from such taxation or very substantial reductions of their normal rates. And this is particularly true because of the present high tax rates on individual citizens of the United States. We hope that the policy of placing our citizens abroad in a better competitive tax position will be continued in the future in order to further reduce and to eventually eliminate the handicap under which they now operate.

There is another area of taxation on income derived from foreign sources which thus far has received little or no attention and that is the matter of investments abroad by individual American citizens, whether residing in the United States or abroad. This type of unearned income is now fully taxable by the United States excepting that the taxpayer, with certain limitations, is permitted to credit the foreign tax against the United States tax. It appears to be a logical inference by studying H. R. 8300 (83d Cong.) and House Report 1337 of the Ways and Means Committee, which accompanied the bill, that in the field of taxation on income from foreign sources, it is now the policy of our Government to encourage investments abroad by giving certain tax incentives. We consider this to be a sound measure because it will stimulate the substitution of Government aid in the form of grants or loans by greater private investments abroad, especially in the underdeveloped areas.

Various studies which have been made by others on this subject appear to take the position that American investments abroad in the past, and that this will also occur in the future, are and will continue to be almost confined to those of large American companies and that but inconsequential foreign investments can be expected of individual American citizens. Based on our experience and

knowledge of conditions in Brazil, we disagree with these conclusions as far as that country is concerned.

Brazil, during the past few years has been rapidly changing its general overall economic structure and although agricultural products still account for the major part of its total production, industries of every kind have been springing up. As an example, the Volta Redonda Government-owned steel mill (in part financed with loans from the Export-Import Bank) which started with an initial capacity of about 400,000 tons is now doubling its production and in addition to producing rails, it also produces sheet and bar steel, as well as tinplate, thereby providing materials for subsidiary industries such as the manufacture of refrigerators, the canning industry, automobile and truck spare parts, tanks and other equipment for chemical plants, etc. There are already several companies which are not only mining bauxite ore but smelting it for subsidiary aluminum industries. As a result of these and other developments the need for new capital in industry shows a constantly growing demand.

Until a few years ago about the only outlet for surplus capital was real estate The same pattern of change which occurred in the United States at the turn of the century is now taking place in Brazil: closely held family enterprises are now being transformed into corporate entities and their securities are being offered to the public. Two American groups in the investment banking field of underwriting and distributing securities have been established and these have been followed by others entirely Brazilian-owned in the same field.

During the past few years successful public distributions of securities have been accomplished. One large American public utility company which has been expanding its output as rapidly as possible to keep up with the ever-increasing demand for power has sold substantial blocks of common stock in several of its operating subsidiary companies thereby supplying additional capital needed for capital expenditures in local currency. Two tire manufacturing companies, one British and one American, have recently sold issues of stock. A Europeanmanaged concern engaged in the manufacture of motors and household equipment has been financed through the public sale of its stock and a substantial block of stock was sold in a cement plant which is being operated by American equipment and for the first time employing Brazilian natural gas as fuel. Several investment trusts with portfolios of Brazilian securities have been formed. These few examples are mentioned to illustrate that there are exceptional opportunities in Brazil for the American investor who now has facilities in Brazil, through locally established investment firms, to place private capital in remunerative industries with great possibilities for future development and expansion. However, under our present laws which tax American citizens on their investments abroad there is no incentive to enter the foreign field. The credit for foreign-income taxes, being merely a deduction from the American tax, is no inducement because the tax rate remains the same. At the same time the American investor is subject to currency depreciation and other risks which do not occur in dollar investments made in the United States.

President Eisenhower in his budget message to Congress (Congressional Record, Jan. 21, 1954) stated:

"Our tax laws should contain no penalties against United States investment abroad, and within reasonable limits should encourage private investment which should supplant economic aid."

As far as we are aware. the proposed new Internal Revenue Code, although making provision for some tax inducements to corporate investments makes no provision whatsoever for the individual investor. It would appear to be an appropriate time for the Senate to initiate the extension of some tax advantage to foreign income derived from individual investments. This could be done on an experimental basis in order to establish the degree to which the President's recommendations are a factor in having private capital supersede Government aid. A reasonable tax incentive would not mean any substantial loss of revenue and, in fact, because of larger earnings in most foreign areas, would probably mean even greater revenue to our Government. We earnestly hope that some incentive in this direction may be included while the present bill is still in legislative channels.

Now that we have discussed some of the specific tax areas in which relief is needed, it may be appropriate, even though some of these observations have been made by us before, to repeat a few of the basic reasons for our concepts of taxation on foreign income.

Prior to the First World War most of our country's problems were domestic. Although these have not diminished those related to international affairs have

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