862.504/353
The Ambassador in Germany (Dodd) to the Secretary of
State
No. 130
Berlin, September 7,
1933.
[Received September 16.]
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,
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
[Enclosure—Translation]
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.
