INTERNATIONAL DOUBLE TAXATION

FRIDAY, FEBRUARY 28, 1930

HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D. C. The committee met at 10.30 a. m., Hon. Willis C. Hawley (chairman) presiding.

The CHAIRMAN. This is a hearing on H. R. 10165, a bill to reduce international double taxation, proposing the simplification of procedure in relation to the taxes due from our citizens abroad and due from foreigners in this country. The Chair offers for the record a copy of the bill and a copy of the formal report of the Treasury on the subject. The Treasury has had charge of the negotiations generally in connection with this matter and the Secretary of the Treasury, Hon. A. W. Mellon, is here present, and we will be very much delighted, Mr. Secretary, to hear any statement you may desire to make. (The bill, H. R. 10165, and the report above referred to, are as follows:)

[H. R. 10165, Seventy-first Congress, second session]

A BILL To reduce international double taxation

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the income of an individual who is a resident of a foreign country, or of a corporation created or organized in or under the law of a foreign country, shall be exempt from taxation by the United States if the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, determines that such foreign country grants an equivalent exemption in respect of income of individuals who are residents of the United States, and of domestic corporations, except that the following shall not be exempt from taxation under this section:

(a) Income derived from any business, trade, or profession which is allocable to a permanent establishment in the United States;

(b) Compensation for labor or personal services performed in the United States;

(c) Income derived from real property located in the United States or from any interest in such property, including rentals and royalties therefrom, gains from the sale or other disposition thereof, and interest on obligations (other than obligations of a corporation) secured by such property.

SEC. 2. Compensation paid by a foreign country to its citizens for labor or ersonal services performed in the United States shall not be included in gross income and shall be exempt from taxation by the United States if the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, determines that such foreign country grants an equivalent exemption in respect of the compensation paid by the United States to its citizens for labor or services performed in such foreign country; and compensation paid by the United States which is thus exempt from taxation by a foreign country shall not be excluded from gross income under section 116 (a) of the revenue act of 1928.

SEC. 3. Pensions paid by a foreign country to an individual who is a resident of the United States shall not be included in gross income and shall be exempt from taxation by the United States if the Commissioner of Internal Revenue,

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with the approval of the Secretary of the Treasury, determines that such foreign country grants an equivalent exemption in respect of pensions paid by the United States to residents in such foreign country.

SEC. 4. The income of an individual who is a resident of a foreign country, or of a corporation created or organized in or under the law of a foreign country, which consists exclusively of earnings derived from the operation of aircraft shall not be included in gross income and shall be exempt from taxation by the United States if the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, determines that such foreign country grants an equivalent exemption to residents of the United States and to domestic corporations.

SEC. 5. (a) For the purposes of this act, a tax imposed in respect of the income of a corporation shall not be considered as imposed on the shareholder, whether or not such tax may be recouped by the corporation from the shareholder; but a tax imposed in respect of dividends distributed by a corporation shall be considered as imposed on the shareholder.

(b) If it is determined under this act that a foreign country grants an equivalent exemption and any income from sources within such country is on that account exempt from tax in such country, then such income shall not be considered as income from sources without the United States for the purposes of section 131 of the revenue act of 1928.

SEC. 6. The exemption under section 1 of this act shall be effected by the exclusion or deduction of the exempted items from gross income, in accordance with such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe. In the case of items of income which are subject to withholding at the source and which are exempt from taxation by the United States under this act, the Commissioner of Internal Revenue is authorized, if he determines to effect the exemption by way of deduction, to give effect to such exempton by refunding or crediting as an overpayment any tax paid in respect thereof, or by relieving the withholding agent of his obligation to withhold. There shall not be allowed as a deduction from gross income any deduction properly allocable to or chargeable against items of income which are exempt from tax by this act.

SEC. 7. Any determination under this act that a foreign country grants an equivalent exemption shall, unless revoked, be applicable to the taxable year in which such determination is made and to each taxable year thereafter.

SEC. 8. (a) Notwithstanding the fact that it is determined under section 1 of this act that a foreign country grants an equivalent exemption in respect of a taxable year, an individual shall not be granted, for any part of such taxable year, the exemption under section 1 of this act unless he has been, for at least six months during such taxable year, a resident of such foreign country.

(b) As used in this act the term "permanent establishment" includes real centers of management, statutory offices or seats, branches, mines, oil wells, factories, workshops, warehouses, offices, agencies, and other fixed places of business; but the fact that an individual who is a resident of a foreign country, or a corporation created or organized in or organized under the law of a foreign country, has business dealings in the United States through a bona fide commission agent or broker shall not be held to mean that such individual or corporation has a permanent establishment in the United States. Income allocable to permanent establishments in the United States shall be determined in accordance with regulations prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury. If, in the opinion of the commissioner, a corporation has its real center of management in a country other than that in or under the laws of which it was created or organized, such corporation may be treated as if organized where its real center of management is situated. (c) The terms used in this act shall have the same meaning as when used in the revenue act of 1928.

(d) This act may be cited as the "International double taxation relief act of 1930."

Hon. WILLIS C. HAWLEY,

Chairman Committee on Ways and Means,

House of Representatives.

FEBRUARY 18, 1930.

MY DEAR MR. CHAIRMAN: In the annual report of the Secretary of the Treasury for the fiscal year ended June 30, 1929, some of the principles involved in the plans proposed for relief from international double taxation were dis

cussed (pp. 26-28). It was also stated that the Treasury would submit during the current session of the Congress its studies of the subject and its recommendations, which will permit our Government to participate in the movement to eliminate international double taxation.

The studies on the part of the Treasury, in which we have had the collaboration of Dr. T. S. Adams, have culminated in the draft of the bill transmitted herewith. The primary purposes of the bill are: (1) To transfer to other countries a part of the burden of relief now borne by the United States through the provisions in the revenue act of 1928 for crediting foreign taxes against the Federal income tax; (2) to free residents and domestic corporations from heavier rates of taxation in foreign countries in respect of interest, dividends, and certain other less important items of income through an offer of reciprocal exemption, and thus subject them solely to the United States tax; and (3) to secure for United States citizens and corporations various advantages similar to those which a number of important European Governments have granted their respective taxpayers in reciprocal understandings.

Even before the World War a number of European governments took measures to prevent the cumulation of taxes on the income derived from investments or business carried on in one country by a taxpayer resident in another. When the exigencies of post-war budgets caused a general increase in tax rates, the resulting burden on international commerce became almost unbearable. At the worst, the taxes paid by a person residing in one country in respect of income derived from another consumed almost all of the income involved. Even to-day the superposition of the rates of the country of residence on those of the country of source may in some instances absorb more than half of the income.

In order to prevent this double liability there have been concluded at least 18 agreements between European States, the parties thereto including such States as Great Britain, France, Germany, Italy, the Netherlands, Poland, and Sweden.

Practically all of these agreements are bilateral, and there is a great diversity in their form and content. In order to assure uniformity in international tax law, committees of experts of interested countries have been engaged for almost 10 years in studying the economic and practical aspects of double taxation and in devising standard methods for its elimination. Dr. T. S. Adams has collaborated with the representatives of other governments in drafting projects for preventing double taxation. The last step taken in the international movement was the adoption by the Congress of the International Chamber of Commerce, Amsterdam, July, 1929, of a uniform code of principles for eliminating double taxation. This code was originally drafted by the American section of the International Chamber of Commerce, and it takes into account the basic principles of the methods proposed by previous international gatherings, and also the interests of the United States.

The proposed legislation is based on this code, which assigns most items of income to the residence of the taxpayer for the purposes of taxation. Experience has shown that taxation at residence is not only the most practical, from an administrative viewpoint, but it is also the only place at which a highly progressive tax, such as our own, can be successfully levied.

Moreover the observance of this principle to the extent contemplated should increase tax revenues. In 1928 Americans received $817,000,000 from longterm investments abroad as compared with $252,000,000 paid in the United States to foreign investors. (See "The Balance of the United States in 1928," by Ray Hall, Department of Commerce, p. VI.) It has been roughly estimated by Mr. Ray Hall that in 1929, these figures have increased to $900,000,000 and $275,000,000, respectively, revealing a much larger augmentation of income derived by Americans from long-term investments abroad than by foreigners from such investments in the United States. One of the objects of the bill is to free from tax abroad' the income flowing into the United States and collect full tax thereon. As the income received by Americans is about three times that derived from the United States by foreigners, the excess of the gain from taxing inflowing income over the loss from exempting that flowing to persons abroad should be considerable in the long run, even taking into consideration items of income otherwise exempt by foreign governments.

The key provision of the bill is the first section which provides that the United States shall exempt, on condition of reciprocity, the income of individuals resident abroad or foreign corporations, exclusive of income from (1) a business, trade, or profession carried on in the United States through a permanent establishment; (2) compensation for personal services rendered in the United States;

and (3) income derived from real property located in the United States, rentals and royalties therefrom, gains from the sale or other disposition thereof, and interest on obligations (other than those of a corporation), secured by such property. These excluded items remain taxable in the United States.

The income exempted on condition of reciprocity embraces such items as dividends and interest, patent and copyright royalties, and such minor items as private pensions, annuities, and income from casual transactions and from sales through bona fide brokers. The present reciprocal exemption for shipping profits is extended to air navigation profits in order to facilitate the growth of international air transport.

The present exemption for remuneration of foreign government officials serving in the United States is placed on a reciprocal basis in order to secure an equivalent exemption for our officials serving abroad. A minor provision is the one relative to the reciprocal exemption of Government pensions. The effect of both these sections is to permit such income to be taxed only by the paying government if it chooses to do so.

As previously indicated, taxes paid abroad on income from foreign sources may now be credited against the United States tax. If the régime contemplated in the attached draft of a bill is brought into effect, the United States Treasury would collect full American tax on such income but would forego taxes now collected on the designated classes of income derived from sources within the United States by persons living permanently abroad or by foreign corporations. We do not now, however, collect any normal tax on dividends paid to nonresidents and foreign corporations, and, in the course of time, the total amount of taxes withheld from other kinds of income together with the surtax collected on the basis of a return should be less in amount than the credits allowed against the American tax for taxes paid abroad on similar foreign income. In addition to the advantages accruing to American taxpayers as the result of being relieved of tax abroad, the Treasury should therefore benefit through increased revenues. The bill transmitted herewith has been drafted primarily for the purposes of presenting the policies involved in as simple a form as possible. Several technical amendments to the bill and to the revenue act of 1928 will probably be necessary prior to final action of your committee.

Very truly yours,

A. W. MELLON, Secretary of the Treasury.

STATEMENT OF HON. A. W. MELLON, SECRETARY OF THE TREASURY, ACCOMPANIED BY HON. OGDEN L. MILLS, THE UNDERSECRETARY, E. C. ALVORD, SPECIAL ASSISTANT TO THE SECRETARY, AND DR. THOMAS S. ADAMS

Secretary MELLON. In my annual report on the state of the finances for the fiscal year ended June 30, 1929, I outlined the general movement to prevent international double taxation and proposed to submit to you, during the present session of Congress, recommendations as to the manner in which this Government could participate in the world-wide effort to remove this barrier to the expansion of foreign trade and investments. These recommendations have been incorporated in the bill introduced by your chairman, Mr. Hawley.

The movement to mitigate the evils and burdens that arises from the taxation of the same income, profits, or property by two or more countries, has in recent years gathered considerable momentum, due to the high postwar tax rates and to the growing realization that double taxation of this character is unscientific and unsound. Since 1921 most of the European countries have entered into two-party agreements under which they preclude the double taxation of all kinds of income. These agreements embody reciprocal concessions. Instead of one State bearing the entire burden of relief, as is done in the credit provisions of the United States revenue act, each party to the European type of agreement shoulders its share. Unfortunately, these agreements differ widely in form and content.

While governments have been entering into various arrangements, international committees of experts-for the most part high government officials have been endeavoring to evolve a uniform scheme of relief from double taxation. Dr. T. S. Adams has been the American member of these committees.

The outcome of these efforts was the adoption, by the congress of the International Chamber of Commerce at Amsterdam, July, 1929, of a uniform code of principles for eliminating double taxation. This code was prepared by the double taxation committee, of the American section of the International Chamber of Commerce, and embodies those principles of taxation which are considered the most favorable not only for American interests but also for world commerce in general. It represents a consolidation, in so far as possible, of the model conventions for eliminating double taxation at the Geneva conference on double taxation, October, 1928, and embodies the substance of the model convention proposed by Doctor Adams at that conference. The principles contained in this code have been. followed in the proposed legislation.

As you gentlemen know, our revenue laws make partial provision against the evils of double taxation by crediting, against our Federal income tax, taxes paid in foreign countries, and in the case of shipping profits, by offering to exempt the profits derived in the United States by foreign companies if the country under the laws of which their ships were documented grants an equivalent exemption in respect of the shipping profits derived by American companies in its territory. Argentina, Canada, Denmark, France, Germany, Great Britain, and Northern Ireland, Italy, Japan, the Netherlands, Norway, and Sweden are among the countries which meet the requirements for reciprocal exemption. Thus, American ships to-day are exempt from tax in many countries in which they embark passengers or freight, and are, therefore, liable only to the income tax of this country. The benefits assured the shipping industry by this legislation are of very great value indeed. In so far as the credits for foreign taxes are concerned, at the time the legislation was first enacted the sacrifice involved was relatively unimportant, but as our foreign trade and investments expand the credits claimed for foreign taxes correspondingly increase, and in 1927 American citizens and corporations credited $26,534,807 in respect of the taxes imposed by other countries. Even so, full relief is not afforded to American enterprises abroad. Our credit for foreign taxes is limited. It permits the foreign tax to be credited, in effect, only up to the amount of the American tax. Because foreign tax rates are in general higher than our rates, Americans still pay, despite the relief afforded by our credit, a considerable tax to the foreign countries in which they do business.

There are, generally speaking, two lines of approach to the solution of the double taxation problem:

The first is by treaty with one or more countries, which involves mutual concessions in respect of the taxation of the nationals of the treaty-making countries. The objections to this method appear to me to be that the concessions are more likely to be based on bargaining than on sound principles of taxation, and that this method results in the taxation by the United States of the nationals of different countries on dissimilar bases.