ate this policy. In our opinion, the language employed in sections 901, 903, and 923, as they probably will be interpreted by the Bureau of Internal Revenue, will fail to accomplish the desired result. As I have said, our suggested changes in these sections have been submitted to the committee.

I should merely like to point out that section 901, which allows credit for certain Cuban taxes against the United States tax, seems even more restrictive than the present 131 (h) of the Internal Revenue Code of 1939, which in itself merely gave us credits for a small proportion of the taxes which we actually pay in Cuba. In this connection, I should like to suggest to the committee that the strongest argument in favor of the justice of our position was a letter written by Senator George, under date of May 29, 1952, and published in the Congressional Record of June 27 of that year, on the subject of section 131 (h).

In this letter Senator George protested against restrictive regulations issued by the Treasury, and enunciated certain criteria for carrying out the intentions of Congress in the administration of this section. This letter, in our opinion, completely supports our position, and we do not intend to go beyond the four corners of Senator George's position.

Finally, we would like to say in this section that the new concept of a principal tax will present very serious problems of interpretation. Now, section 923 of the bill provides for the granting of 14-percent reduction in tax for income of certain classes, including dividends from foreign corporations and income withdrawn from a branch, which elects the deferral of income. Such corporation or branch, however, must derive at least 90 percent of its earnings, and I quote— 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.

We think it should be made clear that sugar refineries and sugar mills fall within that definition. We think it also should be made clear that our companies are not deprived of the 14-percent tax reduction because more than 25 percent of the gross income may be derived from the sale in the United States of sugar extracted from sugar cane in Cuba.

It is our respectful suggestion to the committee that these sections be referred, with our recommended changes, to the technicians of the staff for review. I would like the indulgence of the committee to read into the record one 3-line proposed amendment, which has occurred to me since our statement was prepared. With your permission, Mr. Chairman, we should like to suggest the following amendment to section 923 (b) (3):

(3) The term "articles or products manufactured" shall not include products or commodities which have been processed in such foreign country from the agricultural products or the natural resources thereof.

I thank you very much, Mr. Chairman.

Senator CARLSON. If there are no questions, we thank you.

The next witness will be Mr. Laurence A. Crosby, American Chamber of Commerce of Cuba. We are happy to have you with us, Mr. Crosby. You may proceed.

STATEMENT OF LAURENCE A. CROSBY, CHAIRMAN, TAX COMMITTEE, AMERICAN CHAMBER OF COMMERCE OF CUBA

Mr. CROSBY. My name is Laurence A. Crosby. I am an American citizen, a resident in Cuba, and chairman of the tax committee of our American Chamber of Commerce in Habana.

Our chamber of commerce includes American firms or representatives of American firms in the aggregate number of about 170. It has been established for more than 35 years.

We are, of course, very much interested in the foreign tax credit provisions of the bill, and particularly sections 901, 903, and 923, to which Mr. Sherlock Davis referred in his testimony.

I have filed a written statement with the committee, for the record. Senator CARLSON. It will be made a part of the record.

Mr. Crosby. And I do not intend to take the time repeating statements that are set forth therein.

Senator CARLSON. Do I understand, Mr. Crosby, that you are in complete concurrence with the statements made by Mr. Davis?

Mr. CROSBY. Yes, I am, Mr. Chairman. And I would like to be permitted to endorse the statements which he has made, and to add this further thought—and I am particularly anxious to add it because I happen myself to be in the sugar business in Cuba, the production of raw and refined sugar. I speak for a wider field than just the sugar industry in Cuba. I speak for our members of the chamber of commerce, who are representatives of many American corporations engaged in other business and trade in Cuba, who are also equally interested.

We have in Cuba establishments of the principal American rubber companies, establishments of drug companies, establishments of soap companies, establishments of oil companies, and they are all interested in the scope and application of section 923 and desirous of its clarification, as suggested by Mr. Davis.

They are also interested in the point which he made, that section 131 (h) of the existing Internal Revenue Code, should not be narrowed or omitted from the law as revised by the proposed bill, through the adoption of the principal tax concept suggested by section 901 and 903.

I thank you, Mr. Chairman.

Senator CARLSON. We thank you very kindly.

(The prepared statement of Mr. Crosby follows:)

STATEMENT OF LAURENCE A. CROSBY, CHAIRMAN, TAX COMMITTEE, AMERICAN CHAMBER OF COMMERCE OF CUBA

The American Chamber of Commerce of Cuba welcomes the declared intent to encourage American investments in Cuba in the pending reform of the Internal Revenue Code, but is deeply concerned over two of its features because they may nullify its intended benefits.

SECTION 131 (H) SHOULD BE RETAINED AND CLARIFIED

The first is the repeal of the credit for taxes in lieu of income taxes in section 131 (h), Internal Revenue Code of 1939, as amended, and replacing it by a credit for a new and uncertain concept of "principal tax," which is defined so as to exclude a sales, property, turnover, or excise tax-in other words, every conceivable tax-which is generally imposed (sec. 903, H. R. 8300). Contrary to the statement in the President's budget message of January 21, 1954, to the

effect that the credit should be broadened, this measure would narrow the credit in two ways:

(1) The principal tax would be allowed as a credit only as an alternative to the national income tax so that if credit were taken for it, the taxpayer would lose the credit for the income tax.

(2) Whereas under section 131 (h) credit is allowable for an in-lieu tax generally imposed, under the "new concept" credit would be allowed only for a principal tax which is not generally imposed-or, as the House report says, which is selectively imposed, e. g., on a particular industry.

The report also indicates that a reason for adopting the new concept is that it should avoid inducing foreign countries to increase thier income-tax rates so as to absorb the full allowable credit. However, the principal tax concept may induce foreign governments to adopt any kind of tax not related to income which is selectively imposed on industries belonging primarily to Americans— thus placing them in a worse position than they are now.

In any event, the American Chamber of Commerce of Cuba urges the retention of section 131 (h) in the Internal Revenue Code of 1954, with a retroactive clarifying amendment to carry out the original intent of this provision as set forth in the Senate Finance Committee report on the 1942 bill, and as further interpreted in the letter of May 29, 1952 (Congressional Record, June 27, 1952), sent to the Treasury by Senator Walter F. George, chairman of the Finance Committee, when the subsection was enacted in 1942, and when he wrote the letter. He suggested certain criteria that would be incorporated in the regulations and mentioned three Cuban taxes that should come within the subsection, as follows:

1. Municipal and national taxes paid by sugar mills which are based on a statutory definition of income, whereby gross income is computed by multiplying the number of units produced by the officially fixed price per unit, and net income by deducting a percentage of 80 percent or 60 percent representing costs;

2. A tax levied on sugar companies by reason of extraordinary war profits but measured by 10 cents per unit produced;

3. A tax which is levied on certain other enterprises at so much per unit produced in lieu of the profits tax, but is supplemented by a special income tax. The letter from Senator George states that all three of these taxes were within the original intent of Congress on the scope of section 131 (h), as they come within the examples of taxes measured by gross income, gross sales, or the number of units produced which are levied in lieu of an income tax that would otherwise be imposed.

The Treasury, however, embodied in the regulations only one type of tax, namely, a tax at a fixed rate on gross income in complete substitution for a tax at a higher rate on net income, which had been held even prior to the enactment of section 131 (h) to be an income tax allowable as a credit under subsection (a) of section 131. (Seatrain Lines, Inc.. 46 B. T. A. 1076.) Hence, the regulations did not extend the scope of the section.

However, it has been recognized in the Internal Revenue Service that credit should be allowed for a tax partially in lieu of an income tax. This should mean that it would cover a tax whether allowed as a credit or a deduction.

RECOMMENDATIONS

The foreign tax credit provisions of section 901, etc., in H. R. 8300, should be amended by including in the credit with retroactive effect the existing provisions in section 131 (h), IRC of 1939, but with the insertion of "wholly or partially" before "in lieu of," and possibly other clarifying language to cover the indicated Cuban taxes. It should be made clear that the credit is allowable for the aggregate of such taxes in addition to the income tax, so as to realize the original intent of section 131 (h) as shown in the Finance Committee report on the 1942 bill and the letter from Senator George to the Treasury.

DISCRIMINATION IN THE 14-PERCENT REDUCTION SHOULD BE REPEALED

The American Chamber of Commerce of Cuba is composed of subsidiaries and branches of United States corporations which are competing with Cuban-owned companies as well as subsidiaries and branches of various European countries which pay only the Cuban taxes. The Cuban tax system is composed of several levies of different kinds-some dating back to the period of Spanish sovereignty-and includes empirically determined income taxes, taxes on a unit basis in lieu of profits taxes or by reason of extraordinary war profits, profits taxes,

a combination of excess-profits tax and capital stock tax, and a remittance tax. However, by and large, the effective rate is perhaps about the same as that applicable to western hemisphere trade corporations, i. e., 38 percent.

Hence, the proposal to reduce to 38 percent the rate for dividends from Cuban corporations and income withdrawn from elected branches in Cuba was welcomed with enthusiasm until the conditions were fully understood (sec. 923 of H. R. 8300). The restriction that the reduction could not be enjoyed if the income of the subsidiary corporation or branch was derived to the extent of more than 10 percent from wholesale transactions appears sufficient to deprive many of the parent corporations of the benefit. The sales establishments in Cuba represent considerable investments, yet for some unknown reason they would continue to be subjected to the competitive disadvantage suffered from having to bear the excess of the United States rate over the credit allowed against the United States tax for Cuban taxes.

Very few American-owned establishments in Cuba sell at retail, as that business belongs almost entirely to Cubans. Many American-owned establishments in Cuba do sell at wholesale to distributors in Cuba, whether the goods are imported into Cuba or produced in whole or in part in Cuba. A number began by importing finished products from the United States, and, because of tariffs or competitive conditions, changed to importing parts and assembling them in Cuba, or using local materials in manufacturing there. Few, if any, American-owned factories have been set up in Cuba to manufacture for sale in the American market.

The American-owned sugar mills extract raw sugar from cane grown in Cuba. Refineries buy the raw sugar and refine it into pure sugar. The raw sugar mills and refineries sell wholesale in part to Cuban distributors or users, in part to American importers, and in part to importers of third countries.

Will the fact that, before selling wholesale, a sugar mill first produces raw sugar, or that a refinery produces pure sugar, be sufficient to qualify the recipient of the income for the 14-percent credit because of deriving income from a factory?

Or, as the same establishment both produces and sells wholesale, will there have to be some arbitrary allocation as between the part of the profit attributable to wholesale activities? If so, what will be the measure? One can be sure that, as a 14-percent differential in rate is involved, the Treasury will try to decide the question against the taxpayer.

RECOMMENDATIONS

In short, we urge that this arbitrary discrimination against wholesaling in sections 923 and 951 of H. R. 8300 be removed and that the 14-percent reduction be granted wherever there is involved an investment in the form of a permanent establishment of any kind in Cuba, or of substantial equipment or machinery used by an engineering or construction company. Only in this way can Americanowned enterprises in Cuba be placed in a position of competitive equality with the enterprises of Cuba and of third countries.

Moreover, will the Treasury classify as "articles or products manufactured" in Cuba and "intended for use, consumption, or sale in the United States," the two principal natural products of Cuba, namely, sugar and tobacco. Neither ought to be considered "manufactured" in the proper sense of that term. But it is highly important that this legislation be clear and unambiguous, and nondiscriminatory. Therefore, we urge the Senate to delete the limitation in sections 923 and 951 that an American corporation may not enjoy the 14-percent rate reduction if its Cuban subsidiary or elected branch derives more than 25 percent of its gross income from the manufacture of goods for use or consumption in the United States.

Senator CARLSON. Is Mr. Maytag in the committee room?

Mr. MAYTAG. Yes, sir.

Senator CARLSON. Mr. Maytag, we are very happy to have you present this morning, and you may proceed.

STATEMENT OF FRED MAYTAG, CHAIRMAN, TAXATION COMMITTEE, NATIONAL ASSOCIATION OF MANUFACTURERS, ACCOMCOMPANIED BY JOHN C. DAVIDSON, DIRECTOR, GOVERNMENT FINANCE DEPARTMENT OF THE NAM, AND DONALD H. GLEASON, MEMBER, SUBCOMMITTEE ON GENERAL TAX REVISION OF THE NAM

Mr. MAYTAG. My name is Fred Maytag. I am president of the Maytag Co., Newton, Iowa. I am a director and chairman of the taxation committee of the National Association of Manufacturers, and appear here in behalf of the association. I ask that this statement and attached exhibits be accepted for the record.

Senator CARLSON. It will be made a part of the record.
Mr. MAYTAG. Thank you, sir.

If I may, I would like to introduce two associates. Mr. John C. Davidson, director, Government finance department of the National Association of Manufacturers, and Mr. Donald H. Gleason, general tax executive, Corn Products Refining Co., of New York, and member of the subcommittee on general tax revision of the National Association of Manufacturers Taxation Committee, which has made a general study of this bill.

Senator CARLSON. We are pleased to have them with us.

Mr. MAYTAG. We appreciate this opportunity to present our views in connection with H. R. 8300, which will become the Internal Revenue Code of 1954. This legislation is of tremendous importance to American taxpayers, individual and business. A rewriting of the Internal Revenue Code is long overdue. We congratulate and applaud those who have brought this legislation to its present state: Chairman Reed and his associates on the House Ways and Means Committee, the fine staff of the Joint Committee on Internal Revenue Taxation which so ably serves both this committee and the House committee, and the officials of the Treasury Department concerned with tax policy. We heartily endorse the statement of Secretary of the Treasury Humphrey before this committee:

** that a modernization of our tax structure, as provided in part by the present tax revision bill, is something which this Nation must have for continued growth and prosperity.

In short, we give our enthusiastic support to this bill as a whole. In doing so, we know that those who have framed it, and members of this committee, are most anxious to provide the fairest and soundest tax structure possible, consistent with the present revenue needs of the Government. Therefore, we think it appropriate for our association to suggest changes, revisions, or additions where we are convinced improvement in the substance or operation of the law will result.

The tax policies of the National Association of Manufacturers are incorporated in a Federal tax program, the specific recommendations from which are attached as exhibit A.

We covered many of these recommendations in our presentations to the House Ways and Means Committee last summer, and I will not repeat them here, except as necessary to make clear our attitude in regard to specific provisions of H. R. 8300. For example, we then stated our hope that a proper solution to the problem of double taxation of corporate income would be found.