811.512351Double/32: Telegram

The Ambassador in France (Edge) to the Secretary of State

165. The following is a draft of proposals which were submitted by the French experts to our experts substantially as they stood at the time of Alvord’s cable to Treasury transmitted by my 160, June 4th, 1 p.m. I am advised informally that these proposals would be acceptable to the French administration.

First Chapter. French tax on industrial and commercial profits.

Section 1. American enterprises with branches in France.

First article. American enterprises possessing permanent establishments in France will be subjected there in accordance with the same rules as French enterprises to the tax on industrial and commercial profits on the basis of the profits that they realize by the exploitation of these establishments.

The term ‘permanent establishments’ means sales offices, agencies, workshops, factories, and other commercial or industrial exploitations having the character of a permanent productive organization.

American enterprises are likewise considered as having in France permanent establishments when they maintain there permanent [Page 18] representatives vested with powers of management (ayant les pouvoirs de gérants d’est [des] reprises).

Article 2. For the purpose of computing the tax, the American enterprises referred to in the first article above are required to produce the same declarations and the same justifications as French enterprises.

The tax administration has the right within the scope of French legislation and under reserve of the recourse provided for by this legislation to make in the declaration of profits realized by the establishments exploited in France such adjustments as may be necessary to bring out the exact amount of the profits.

Article 3. As a measure of reciprocity the tax will not be applied to American enterprises in respect to purchases in France of goods intended exclusively to supply the establishments that the said enterprises maintain outside of France.

Comments on article 3: Although the French representatives are willing to give up their present practice and meet the exemption of purchasing in the United States as provided in section 119 of the Revenue Act15 they desire to restrict the exemption of purchasing in France to cases where the purchase of goods is made in France to supply establishments in the United States. They therefore wish to replace the words ‘outside of France’ at the end of the last line by ‘in the United States.’

The principal reason for this attitude is the desire not to hamper their negotiations with other countries. They stated that in practice they would be willing to apply the provision to all American purchases for exportation from France.

The question was reserved for future discussion.

Section 2. American enterprises having business relations with French enterprises.

Article 4. American enterprises having relations with a French enterprise but not possessing in France any permanent establishment are not subject to tax on industrial and commercial profits which tax is applicable only to the French enterprise.

Article 5. When an American enterprise by reason of its participation in the management or in the constitution of the capital of a French enterprise makes or imposes on the latter in its commercial or financial relations with it, conditions different from those which would be made with a third enterprise, any profits properly attributed to the French enterprise which are diverted in this manner from the French enterprise to the American enterprise shall be incorporated in the taxable profits of the French enterprise.

Title II. French tax on income from securities.

Article 6. American corporations possessing in France permanent establishments in the sense of paragraphs two and three of article 1 may in derogation of article 3 of the decree of December 6, 1872, and on condition of conforming to the requirements of article 8 pay the tax on income from securities on three-fourths of the profits actually derived from these establishments. [Page 19]

Comments on article 6: Whether the fraction should be three-fourths or a fraction somewhat smaller has been reserved for future discussion.

Article 7. An American corporation shall not be subject to the obligations prescribed by article 3 of the decree of December 6, 1872, by reason of any participation in the management or in the capital stock of or any other relations with a French corporation if such [American] corporation and French corporation conform to the requirements of article 8 below.

In this case the tax on income from securities will continue to be levied in conformity with the French legislation in force on the dividends, interest, and all other products distributed by the French corporation; but it is moreover exigible if the occasion arises on the profits diverted to the American corporation from the French corporation under the conditions stated in article 5.

Article 8. American and French enterprises which elect to be taxed in accordance with article[s] 6 and 7 must make a declaration of such election to the Bureau of Registration.

For the purposes of article 6 the American enterprise must declare its election within six months after the ratification of this agreement or after the creation of its establishment in France.

For the purposes of article 7 the American corporation and the French corporation must jointly make a similar declaration within six months after the ratification of this agreement or after its relations with the French corporation become of such a nature as to give rise to the application of article 3 of the decree of December 6, 1872.

An election under this article shall be irrevocable.

American corporations which do not make such declaration and which are held subject to article 3 of the decree of December 6, 1872, shall enjoy the benefits of article 27 of the law of July 31, 1920, under the same conditions as French corporations.

Upon an election to be taxed in accordance with article 7 the American corporation shall be exempt from any application of article 3 of the decree of December 6, 1872, for every taxable year whether before or after the ratification of this agreement except that any amounts collected thereunder with respect to a taxable year before such ratification shall not be refunded.

Comments on article 8: The last paragraph of this article has not been agreed to by the French, their decision being reserved until the last moment before the convention is signed out of fear that on knowing of such a provision the French subsidiaries of American companies would cease paying their taxes in the meantime. It seems very probable that a satisfactory retroactive provision will be agreed to.

Title III. Federal income tax.

Article 9. American citizens not residing in France are exempt from the general tax on their income in respect to their income from French sources.

By reciprocity French citizens not residing in the United States are exempt from surtax in respect to their income from American sources.

Article 10. On condition of reciprocity French citizens not residing in the United States and French corporations (not having a permanent [Page 20] establishment in the United States) receiving authorized royalties or amounts paid in consideration of the right to use patents, processes and secret formulas, trade-marks and other analogous rights are exempt from income tax in respect of these categories of income.”

Please refer to my 160, June 4, 1 p.m.; and your 117 June 5, 6 p.m. which are an exchange of telegrams between Alvord and Treasury. Particular reference is made to paragraph 1 of your telegram No. 160 [117] containing instructions to Alvord from Treasury that no agreement is to be signed or even initialed until he has returned to Washington and there has been time for study.

The present situation here is very much more serious than it appeared to be a few weeks ago. A large number of American business interests are seriously involved at the present and many more are threatened. In addition to the uncertainty, with [sic] the possibility of having to pay unknown but very large amounts in taxes is proving to be a serious deterrent to American business expansion here.

The present situation with France is not the normal double tax situation existing between the United States and most other countries. France feels that it has a tremendous club over other countries and gives no indication of abandoning it at least at this time. Meantime American business and financial interests will be severely penalized and their existence jeopardized. We are facing a practical problem to which a practical solution must be applied. Adherence to principles which are sound only in theory will be insufficient. Reciprocal legislation by France along the lines of Hawley bill is absolutely impossible. France will not accord to other countries under reciprocal legislation concessions similar to those she is apparently willing to give us. She has very practical and important tax problems with other countries and she will not accord relief from the double dividend tax unless their tax and other provisions which are highly objectionable to France and considered discriminatory against French enterprises are removed.

Our experts have worked out with the French experts concessions on the part of France much more satisfactory than anyone had supposed to be possible. Their entire time has been devoted to working out a program on the part of France. They have not undertaken to commit the United States nor themselves. It may well be that they will be unable to work out concessions which will be acceptable both to France and Washington but certainly every attempt to do so should be made.

I am amazed with our experts that Borduge, the leading French representative, has been very fair and has gone the limit in his concessions to us. I have very reliable information to the effect that Borduge is leaving and I do not know his possible successor. It is highly desirable to settle with him and the present ministry if possible. [Page 21] If reasonable concessions on our part acceptable to the United States and to France can be worked out I cannot state too strongly the urgent necessity of tentatively closing the matter at once and while our experts are here.

You may be sure that no final commitment on our part will be made in any way until it has received your approval. Nevertheless, I feel very keenly that it would be a grave mistake to lose the unquestioned advantages our experts have already obtained.

Regarding constitutional and political questions involved in dealing by treaty a special consideration should be given to Alvord’s suggestions to Mills16 that the Treasury press for action on the Hawley bill at the next session of Congress; that the Hawley bill be amended to permit an executive agreement of the kind contemplated with France; that the agreement with France not be submitted to the Senate until after the Hawley bill becomes law unless it becomes obvious that it cannot pass. Furthermore, our experts now think that conditions in some continental countries will probably require a settlement of double tax problems only by treaty even though confined to the provisions of Hawley bill.

No suggestion has been made on the part of France that we attempt to deal with state taxation in any manner and we will not do so. The points made in the Treasury communication to Alvord with respect to concessions on our part including articles 11 (b) and 7 (c) must have been based upon misunderstanding on the part of Treasury and are not now involved. To meet the political situation here France must have some popular provision in the proposal or its ratification by Parliament will be impossible. I am convinced that they are trying to deal very fairly with us and will accept the slightest concessions which will meet their political situation.

You of course understand the concessions which France is willing to make to us eliminate entirely the double dividend tax feature, give substantial relief to business operating through branches, is strongly indorsed by all American interests here and is considered not only of the greatest importance but much better than the business interests here believed possible to obtain.

In view of the receptive attitude of France at the present time it would be most unfortunate if the unexpected concessions obtained by our experts are not temporarily clinched at least subject to Washington’s further consideration.

We should exert every effort to work out satisfactory undertakings on our part now.

To restate, Treasury instructions to their experts now prevent any recommendations from them to me or to the Treasury Department. [Page 22] If we are to clinch the important concessions which the French are now willing to make, Treasury experts and myself must be permitted to reach at least a preliminary understanding. If this program is followed French authorities will probably be willing to postpone prosecute [sic] American business interests until Senate has definitely ratified or rejected proposed treaty.

  1. Telegram in eight sections.
  2. Approved May 29, 1928; 45 Stat. 791, 826.
  3. Ogden L. Mills, Under Secretary of the Treasury.