The Ambassador in Germany (Dodd) to the Secretary of State

No. 130

Subject: Apparent Contravention of our Treaty of Friendship, Commerce and Consular Rights with Germany, by German Law of June 1, 1933, for the Decrease of Unemployment.

Sir: With reference to my telegram No. 137 of August 29, and prior communications concerning the above-named subject, I have the honor to report that an answer dated August 30, 1933, has now been received from the Foreign Office in the premises, copy and translation of which are herewith enclosed.

As predicted in my said telegram, the answer, to my mind in any event, is entirely unsatisfactory. Likewise, as foreshadowed in that telegram, the main contention of the German reply is to the effect that the provisions of the law in question only allow the cost of replacement equipment to be deducted from taxable profits in its entirety during the tax period in which the acquisition of such equipment occurred, instead of being spread over the life of such replacement material by way of annual depreciation deductions. In other words, the German Government takes the position that the taxes and duties mentioned in Article 8 of our treaty are not affected by the provisions of the German law in question.

It is to be noted, however, that the German answer fails to meet our contention that the effect of the provisions of the German law in question is to constitute a bounty for the benefit of German merchandise. The sense in which the word “bounty” is used in our treaty would seem to be a reward or premium given to encourage an industry, and the purpose of the present tax exemption is clearly to encourage certain branches of German industry, so that a bounty is created in this sense of the word. Accordingly, under Article 8 of the treaty, similar branches of American [Page 465] industry are entitled to the same bounty, which, however, they are not getting under the new law.

This point was elaborated by Mr. Gordon in his conversation with Dr. Dieckhoff on June 29, held pursuant to the Department’s telegraphic instruction No. 75 of June 22, but, as already stated, the present German answer avoids this issue.

The penultimate sentence of the German note is of interest and may be of importance later on if it should be sought to extend the underlying spirit and purpose of the present legislation in the sense of enacting further tax provisions which would discriminate against the products of American-owned factories in Germany. However, in the present instance we have recognized that there is no question of discrimination against the products of such American-owned factories; our contention is that the discrimination lies against an important branch of American exports, consisting principally of office equipment, machinery, and agricultural appliances which, to a large extent, are imported into Germany in a finished state for sale therein.

As American firms are continuously suffering material loss of business through the operation of the German law in question, I shall be glad if the Department concurs in the Embassy’s views and decides to send a vigorous note for me to transmit to the Foreign Office asserting treaty violation.

Respectfully yours,

William E. Dodd

P.S. Since writing the foregoing I have just received from the Swiss Legation a copy of a note which the Swiss Government had addressed to the German Government protesting against the provisions of the German law of June 1, which form the subject matter of this despatch, together with a copy of the answer of the Foreign Office. These notes are now being translated, but this can not be finished before the pouch closes two hours hence; they will be forwarded as soon as the translation is completed.3


The German Foreign Office to the American Embassy

No. 111A2622

Note Verbale

In reply to the inquiry addressed to Ministerial-Director Dieckhoff by the Chargé d’Affaires on June 29, relative to the “tax exemption for replacement acquisition” provided for in the “Law of June 1, 1933, for the Reduction of Unemployment”, the Foreign Office has the honor to inform the Embassy of the United States of America as follows:

[Page 466]

The Law governing Tax Exemption for Replacement Acquisition (i.e. Section II of the Law for the Reduction of Unemployment of June 1, 1933) is in the field of direct taxes. According to its provisions, the income tax, the corporation tax, and the trade tax for the tax periods ending after June 30, 1933, and before January 1, 1935, are reduced in that, when calculating taxable profits, certain expenditures may be deducted in full, contrary to the general principle.

Strictly speaking, this is not tax exemption but merely taking in consideration beforehand deductions for future depreciation. Normally, the expenditures for new equipment would have to be distributed over the years during which the new equipment in question is used. In order, however, to encourage entrepreneurs to renew extensively and immediately their equipment of machines and implements, they are allowed to write off in full the amount of the expenditures the same year in which such equipment is procured. In this way, the taxable profit for the year in which the equipment is acquired is reduced not only by the amount of the usual deductions for depreciation but by the full amount of the expenditures for the acquisition of such equipment. The profit of the concerns will be correspondingly higher or the loss correspondingly lower in the subsequent years during which the objects in question are used. In consequence, the measure of “tax exemption for replacement acquisition” means practically that the Reich, the States, and the associations of communes grant to entrepreneurs today a sort of loan subsidy for the acquisition of replacement equipment, which flows back to the Reich, States, and associations of communes, more or less, in that during the time in which the objects are utilized no more writing-off of any kind can be done.

Article VIII of the German-American Commercial Treaty of December 8, 1923, to which Mr. Gordon referred in his conversation with Herr Dieckhoff, does not apply to the above-mentioned taxes. By internal taxes, in the meaning of this treaty provision, obviously taxes on commodities are meant, i.e., taxes on the production, preparation, turnover, consumption of a commodity (consumption taxes, turnover tax). This would seem to be apparent from the whole content of Article VIII, which, in addition to internal taxes, deals with transit duties, charges for storage and the use of other facilities; moreover, in support of this interpretation is also the position of Article VIII in the treaty which follows immediately the article (Article VII) regulating commodity traffic in general, while the preceding provisions regulate the legal status of the citizens of either country.

However, even if one were to take internal taxes, mentioned above, as meaning also personal taxes—regardless of the fact that Article 1, paragraph 2, of the treaty contains an agreement concerning the taxation [Page 467] of persons—there would nevertheless exist no violation of our obligations under the commercial treaty, neither in accordance with the one nor with the other of the agreements reached on the basis of treatment accorded residents, because the law governing tax exemption for replacement acquisition does not distinguish between German and foreign citizenship in persons liable to taxation. The tax reduction provided for in the law can also be claimed by American citizens, if the conditions obtain.

In the law governing Tax Exemption for Replacement Acquisition there are no politico-commercial intentions whatever; it merely represents one of the measures of the Reich Government in the struggle against unemployment. From the intention directed towards a reduction in the number of unemployed there arose the urgent necessity of linking the tax concession with the condition of procuring finished products manufactured in Germany. In conformity with the purpose of the law it is immaterial whether or not the concern which manufactures the products is entirely or partly foreign-owned, or whether or not raw materials and auxiliary materials are imported from foreign countries. Through an increase of work an improvement in revenues of public budgets, a reduction of financial requirements for unemployment relief, and thereby an offset against the tax alleviation is achieved. At the same time, moreover, the additional employment of workmen in Germany, which is expected as a result of the execution of the law, will result in an increase of the purchasing power, which in turn will benefit the countries interested in exporting to Germany.

  1. Not printed.