The United States Cuban Sugar Council consists of a group of companies producing sugar in Cuba, which are publicly owned and the majority of stockholders of which are American citizens.

We have a large investment in Cuba, and therefore, we are particularly interested in those sections of this bill which are designed to encourage new American investment abroad, because the encouragement of new American investment abroad naturally depends in a substantial measure on the welfare of existing American foreign investments. We are, therefore, particularly interested in sections 901, 903, and 923 of this bill.

I have prepared a statement which is before the committee, with suggested amendments to the bill, and with your permission I will merely say a few words here, in the interests of conserving your time this morning.

Senator CARLSON. We appreciate very much your trying to conserve our time, and your statement will be made a part of the record.

(The statement referred to follows:)

STATEMENT BY SHERLOCK DAVIS, GENERAL COUNSEL, UNITED STATES CUBAN

SUGAR COUNCIL

The United States Cuban Sugar Council, which I represent, is composed of a group of companies which own or operate sugar properties in Cuba, the stockholders of which are predominantly United States citizens. The securities of 11 of these companies are listed on securities exchanges in the United States, and their shares are widely distributed among investors in this country. These companies account for approximately 40 percent of the total output of sugar in Cuba. The names of the companies are listed at the end of this statement. Under the present United States sugar legislation, Cuba is granted a quota of sugar which may be sold in the United States markets. This quota amounts at present to about 40 percent of the total Cuban production. Every sugar mill is allotted by the Cuban Government a portion of that quota. Thus, in a general sense, part of the raw sugar and part of the refined sugar extracted by every mill and refinery in Cuba may be intended for use or sale in the United States. (Any mill is free to sell its United States export permits or certificates to another mill in exchange for that other mill's permits to export to some other destination).

As our companies have large investments in Cuba in the form of plantations, sugar mills, storage and transportation facilities, and refineries, they are interested in the provisions in the revenue bill which are intended to encourage American investments abroad, particularly the following:

Section 901, which allows a credit for Cuban taxes against the United States tax; and

Section 923, which allows a rate reduction of 14 percent on dividends received by a domestic corporation from a Cuban corporation, or income withdrawn by a domestic corporation from a branch in Cuba, under conditions specified in the bill.

CREDIT FOR CUBAN TAXES

The Cuban counterpart of the United States income tax on companies producing sugar is composed of at least three separate taxes, as follows:

1. The municipal tax on net income (renta liquida) determined on a statutory basis, with additional percentages of the tax for the benefit of the municipality and province, and a national tax on the same basis as the municipal tax.

2. A tax levied by reason of extraordinary war profits, but measured by 16 cents per bag of sugar; and

3. A national profits tax on net income in determining which of the two previous taxes are allowed as deductions.

At present our companies are allowed to take credit in the United States for only the greatly reduced income tax-reduced as the result of deducting the other taxes. This leaves an excess of the United States rate over the Cuban effective rate.

In 1942 the Senate Finance Committee sponsored an amendment in subsection (h) to section 131 of the Internal Revenue Code of 1939, which was intended to extend the scope of the section and allow a credit for taxes measured; for example, on gross income, gross sales, or the number of units produced which are imposed in lieu of an income tax otherwise generally imposed. This implied a broad interpretation of section 131 so as to give a more adequate relief from international double taxation.

We thought that the first two taxes enumerated above would be covered by the amendment. The municipal taxes are imposed on a statutory definition of income under which gross income is computed by multiplying the number of units produced by the official price per unit, and net income is determined by deducting 80 percent representing costs of growing and processing if the mill grinds cane grown on its own lands, or 60 percent representing costs of processing if it grinds cane bought from farmers. The formula gives a net income which corresponds to net income as computed under American concepts. It seems to us that credit should be allowed for such a tax as an income tax under subsection (a) of section 131, or as a tax in lieu of the income tax generally imposed, especially as corporations in general have been allowed a credit for the same tax on net income under another subsection of the same section of the Cuban law. (Havana Electric Railway, Light & Power Co., 34 B. T. A. 782).

Likewise, to avoid administrative difficulties, the Cuban extraordinary warprofits tax is reduced to the simplest terms of 10 cents per bag of sugar produced. Nevertheless, it takes the place of a war-profits tax such as might be imposed by the United States. It was introduced during World War I when income-tax administration in Cuba was very underdeveloped and, in fact, the administration has not made much progress since toward attaining the high proficiency of our internal revenue service. However, American taxpayers should not be penalized by not being allowed to credit these taxes as foreign income taxes. Full details concerning these two taxes can be supplied if desired. The justice of this contention was recognized in a letter dated May 29, 1952, from Senator Walter F. George, chairman of the Finance Committee in 1942, when section 131 (h) was sponsored by your committee, and still in 1952, when the letter was written and published in the Congressional Record June 27, 1952. Senator George protested against the restrictive regulations issued by the Treasury, enunciated certain criteria for carying out the intent of Congress as shown in the statement on section 131 (h) in the Senate Finance Committee report on the 1942 bill (S. Rept. 1631, 77th Cong., 2d sess., pp. 131, 132), and cited these two taxes as within the purview of the section.

Instead of liberalizing the regulations, the Treasury has brought forth a new concept known as a principal tax, which is to be allowed as a credit as an alternative to the income tax, so that if a corporation took a credit for such a tax it would lose the credit for the income tax. Furthermore, the principal tax is to be measured in terms of the amount paid as such tax by the taxpayer as compared with the amounts paid as other taxes. The principal tax may not be, on the one hand, an income tax or a social-security tax, or, on the other hand, a sales, property, turnover or excise tax which is generally imposed. These terms are broad enough to cover every conceivable type of tax, but the House report says that one of these latter taxes may be allowed as a credit if selectively imposed on a particular industry.

We are concerned because these taxes we have described are generally imposed on sugar companies, and, therefore, we hesitate to rely on the qualification of selectively imposed because the Treasury is not likely to grant the credit unless the criterion is in the law itself. Moreover, it seems to us that this criterion is too indefinite.

As the former chairman of this committee has advised the Treasury in his letter of May 29, 1952, that the original intent of section 131 (h) was to cover taxes such as these, we urge that the provisions in section 131 (h) of the Internal Revenue Code of 1939 be clarified to carry out this original intent and be incorporated in the proposed Revenue Code of 1954. The attached draft of an amendment suggests that the provision allow a credit for taxes imposed wholly or partially in lieu of an income tax and define the types of taxes intended to be covered as indicated in the letter from Senator George.

In order to carry out the original intent as expressed by Senator George, the credit would include these two empirical income taxes together with the profits tax, subject only to the limitation of the amount of the United States tax on income from Cuba, found in section 904 of the bill.

SUGAR MILLS SHOULD BE ENTITLED TO 14 PERCENT TAX REDUCTION

The bill contains in section 923 a provision for granting a 14 percent reduction in tax for income of certain classes, including dividends from a foreign corporation and income withdrawn from a branch which elects the deferral of income, provided in either case that it derives 95 percent of its gross income from sources without the United States, and 90 percent or more of its gross income from the active conduct of a trade or business, and not more than 25 percent from the sale of articles or products manufactured in such foreign country and intended for use, consumption or sale in the United States.

The foreign corporation or elected branch must derive at least 90 percent of its earnings from the active conduct of a trade or business through a factory, mine, oil or gas well, public utility facility, retail establishment, or other like place of business, but not through an establishment engaged principally in the purchase or sale of goods other than at retail, or through an office or agent to import or facilitate the import of goods or merchandise into a foreign country. Perhaps the principal American investment in Cuba is in sugar plantations, mills, and refineries. None of these terms is found in the recital of establishments which qualify. Yet any one of them might be assimilated to a factory so as to qualify for the 14 percent credit. Sugar is manufactured by nature and is in the cane through the action of sun and moisture. A raw-sugar mill separates, but not completely, the sugar from other materials and ingredients which make up a stalk of cane. A sugar refinery carries the cleaning process further so that what is left is practically 100 percent sugar.

Such operations all involve a considerable investment and should therefore entitle the domestic corporation receiving the income to the reduced rate thereon. However, a given establishment might sell raw or refined sugar at wholesale. Furthermore, more than 25 percent of the sugar produced is usually intended for use or consumption in the United States. The House report on page A255 says that the latter requirement is confined to manufacturing and would not apply, for example, to the mining or processing of metals or the extraction or refining of oil for consumption, use or sale in the United States. Surely the production of raw and refined sugar should be similarly treated.

RECOMMENDATION

Sections 923 and 951 should be amended so as expressly to allow the 14 percent credit to domestic corporations deriving dividends from a Cuban corporation, or income withdrawn from an elected branch situated in Cuba, which grows cane on a plantation, extracts raw sugar at a mill, or pure sugar at a refinery in Cuba and sells it wholesale in Cuba, or for consumption use or sale in the United States.

SUGGESTED AMENDMENTS TO SECTIONS 901 (b), 902, 903, AND 955, H. R. 8300

(1) Amend section 901 (b) (1) to read:

"(1) CITIZENS AND DOMESTIC CORPORATIONS. In the case of a citizen of the United States and of a domestic corporation the sum of—

"(A) the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to a foreign country or to a possession of the United States; and

"(B) the amount of any principal taxes described in section 903 for each separate trade or business of the taxpayer paid or accrued during the taxable year to a foreign country or possession of the United States." (2) Amend section 902 to read:

"SEC. 902. CREDIT FOR CORPORATE STOCKHOLDER IN FOREIGN CORPORATION.

"(a) TREATMENT OF TAXES PAID BY FOREIGN CORPORATION. For purposes of this subpart, a domestic corporation which owns at least 10 percent of the voting

stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of the sum of the following taxes as the amount of such dividends bears to the amount of the accumulated profits of such foreign corporation from which such dividends are paid:

"(1) any income, war profits, or excess profits taxes paid or accrued by such foreign corporation to any foreign country or to any possession of the United States, on or with respect to such accumulated profits; and

"(2) at the election of the domestic corporation, for each year involved in the computation of the credit permitted by this section, any principal taxes described in section 903 for each separate trade or business paid or accrued during such year to the government of any foreign country or any possession of the United States by such foreign corporation, but only in the proportion of such principal taxes which the accumulated profits of such foreign corporation for such year bear to its gains, profits, or income for such year; and not exceeding an amount computed by multiplying such foreign corporation's accumulated profits for such year by a percentage equal to the sum of the normal tax rate and the surtax rate prescribed in section 11 which apply to the taxable income of the domestic corporation for the taxable year of the domestic corporation in which such dividends are includible in its gross income; and

"(3) the taxes deemed to have been paid by such foreign corporation under subsection (b), but only in the proportion specified in paragraph (2) of this subsection.

"(b) FOREIGN SUBSIDIARY OF FOREIGN CORPORATION. If such foreign corporation owns 50 percent or more of the voting stock of another foreign corporation from which it receives dividends in any taxable year, it shall be deemed to have paid the same proportion of the sum of the following taxes as the amount of such dividends bears to the amount of the accumulated profits of the corporation from which such dividends are paid:

"(1) any income, war profits, or excess-profits taxes paid or accrued by such other foreign corporation to any foreign country or to any possession of the United States, on or with respect to such accumulated profits; and "(2) at the election of the domestic corporation, any principal taxes paid or accrued by such other foreign corporation to the government of any foreign country or of any possession of the United States, under the circumstances and subject to the limitations described in subsection (a) (2), but as if such other foreign corporation were the foreign corporation described in such subsection."

(3) Amend section 903 to read:

"SEC. 903. DEFINITIONS.

"(a) TAXES IN LIEU OF INCOME, ETC., TAXES.

"(1) For the purpose of section 131 (h), Internal Revenue Code of 1939, as amended, and sections 901, 902, and 955 and section 164 (b) (6), the term "income, war profits, and excess-profits taxes" shall include a tax paid wholly or partially in lieu of a tax upon income, war profits, or excess profits otherwise generally imposed by any foreign country or by any possession of the United States.

"(2) In determining whether a tax is wholly or partially in lieu of an income tax such as, for example, by reason of being imposed on a statutory definition of income, or by being based on gross income, gross sales, or the number or price of units produced, or by including in its base the assets which produce the income, or by being allowed as a credit or deduction in computing an income tax, or in any way reducing the amount or the rate of such tax, or although replacing the general profits tax is supplemented by an income tax, and whether or not such tax is shown by its legislative history to reach income in its broad sense, the Secretary or his delegate shall take into account the terms of the law of the country which imposes the tax.

(b) PRINCIPAL TAX. For purposes of this subtitle, the term "principal tax" means any tax paid or accrued during the taxable year to the government of a foreign country or of a possession of the United States which is attributable to the operation of a trade or business regularly carried on by the taxpayer and which constitutes a principal source of tax revenue to such government from such trade or business, except that

"(1) no general sales or real property tax imposed by such government, and,

"(2) no income, war profits, or excess profits tax, shall be included as a principal tax or be considered for the purpose of determining such principal source of tax revenue."

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"(c) FOREIGN COUNTRY OR POSSESSION. For the purpose of sections 901, 902, 903, and 955, the term 'foreign country or any possession of the United States' includes any political subdivision of such country or possession." (4) Amend section 904 to read:

"SEC. 904. LIMITATIONS ON CREDIT

"(a) LIMITATIONS. The amount of the credit in respect of all taxes, including those defined in section 903, paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken (computed without regard to the credit under section 37 relating to credit with respect to business income from foreign sources) which the taxpayer's taxable income from sources within such country (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year. In the case of a corporation allowed a credit under section 37, the amount determined under the preceding sentence shall be reduced by the amount of such credit in respect of income from sources in such country."

(5) Amend section 955 to read:

"SEC. 955. FOREIGN TAX CREDIT

"For purposes of section 901, a domestic corporation which has withdrawn branch income from an elected branch under section 954 for any taxable year shall be deemed to have paid the same proportion of the sum of the following taxes as the amount of such branch income withdrawn bears to the amount of the branch income (as determined under section 954 (c)) from which such branch income is withdrawn

"(1) any income, war profits, or excess profits taxes or accrued by such branch to any foreign country or to any possession of the United States, on or with respect to such branch income; and

"(2) at the election of the domestic corporation, for each year involved in the computation of the credit permitted by this section, any principal taxes described in section 903 for such trade or business paid or accrued during such year to such government by such branch, but only in the proportion of such principal taxes which the branch income of such branch for such year bears to such branch income (computed without the deduction for any income, war profits, and excess profits taxes paid or accrued to any foreign country or to any possession of the United States) allocable to such branch for such year; and not exceeding an amount computed by multiplying the branch income of such branch for such year by a percentage equal to the sum of the normal tax rate and the surtax rate prescribed in section 11 which apply to the taxable income of such domestic corporation for its taxable year in which such branch income withdrawn is includable in its gross income."

The reference to the opening sentence of the proposed amendment to section 903 (a) (1) inserts the language "For the purpose of section 131 (h), Internal Revenue Code of 1939, as amended" so as to indicate with maximum clarity and directness the retroactivity of the restored provision. As an alternative to such method of showing retroactivity, a similar result could be achieved by amending section 7851 (a) (1) A to read as follows (additional language indicated by italics):

"(A) Chapters 1, 2, 4, and 6 of this title shall apply only with respect to tax able years beginning after December 31, 1953, and ending after the date of enactment of this title, and with respect to such taxable years, chapters 1 (except sections 143 and 144) and 2, and section 3801, of the Internal Revenue Code of 1939 are hereby repealed, except that section 109 of such Code is clarified by section 921 of Subtitle A and section 131 (h) of such Code is clarified by section 903 (a) of Subtitle A of the Internal Revenue Code of 1954."

Mr. DAVIS. Now, Mr. Chairman, the President, in several messages to Congress, notably his message on the budget and his message on foreign economic policy, has pointed out the desirability of encouraging American investments abroad. And he has stated that one method of encouraging this form of investment is by relaxing the provisions of the tax law pertaining to tax credits in the United States for taxes paid by American companies abroad to foreign governments.

Testifying before this committee, the Secretary of the Treasury has pointed out that, in his opinion, H. R. 8300 is designed to effectu