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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a 14 percent reduction in tax for income of certain classes, including dividends from a foreign corporation and income withdrawn from a branch which elects the deferral of income, provided in either case that it derives 95 percent of its gross income from sources without the United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.

MEMBERS OF THE COUNCIL

Central Altagracia Sugar Co.
Central Hormiguero Sugar Co.
Central Violeta Sugar Co.
Cuban Atlantic Sugar Co.
Guantánamo Sugar Co.
Manatí Sugar Co.

Miranda Sugar Co.

Punta Alegre Sugar Corp.

The American Sugar Refining Co.
The Cuban-American Sugar Co.
The Francisco Sugar Co.

The New Tuinucú Sugar Co.
United Fruit Co.

Vertientes-Camagüey Sugar Co.

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."

45994-54-pt. 3-32

"(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

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 subImitted 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 inter

ested.

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

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