The Ambassador in Belgium ( Morris ) to the Secretary of State

No. 124

Sir: I have the honor to refer to my despatch No. 37, of September 19, 1933,23 concerning the difficulties experienced by American business interests in Belgium under the increasing restrictions imposed on foreign trade by the Belgian Government and to your Instruction No. 24, of November 8, 1933,23 indicating that the Department would be glad to receive reports from the Embassy concerning any problems of importance.

Belgian restrictions affecting American import trade are extremely complicated; they include taxation, quotas and import duties. The present despatch will deal with the important question of the taxation of American firms in Belgium.

For background, the following résumé of the situation may be helpful:

Prior to 1932, Belgium followed a policy of taxing foreign firms which were operating in Belgium. Foreign firms were considered to be operating in Belgium when they maintained an office in the country, used a letter-head with a Belgian address on it, employed a resident agent in Belgium, or operated in any way which indicated that an actual establishment was being maintained in the country. When a foreign firm operated through a Belgian agent, however, it was not considered as operating in Belgium, and therefore was not subjected to Belgian taxation.

Toward the end of 1932, the Belgian Government began notifying foreign firms which had agents in Belgium that in addition to the taxes paid by their agents, they (the foreign firms) were subject to Belgian taxation on the grounds that they were operating in the country even though they maintained no establishment in Belgium. Since the agent’s books do not show the profits made by the principal, the foreign firm is arbitrarily estimated to be making a profit of 15 per cent of the turnover. These profits are subjected to the “taxe professionelle,” which in Brussels amounts to 22 per cent of the profits and varies between 20 and 24 per cent in other cities, according to the amount of the city taxation (the federal tax is always 16.5 per cent).

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The Belgian Government outlined its change in attitude very loosely, in a ministerial instruction, dated July 11, 1933, which stated that a foreign firm operating in Belgium, even through an intermediary, was subject to taxation, unless the intermediary was “really autonomous.” According to verbal statements of the Director General of Taxation and other tax officials, real autonomy on the part of the intermediary does not exist if the foreign firm consigns stocks to the intermediary; if the foreign firm fixes retail prices; or if the foreign firm participates in an advertising campaign. This ruling would subject American cotton, grain, and tobacco exporters to Belgian taxation on two grounds—consignments of stocks, and fixing of retail prices. As the actual profit on cotton and grain transactions amounts to 1 per cent or less, and as the Belgian “taxe professionelle” (varying between 20 and 24 per cent of an estimated profit of 15 per cent) would amount to over 3 per cent of the turnover, business would naturally become impossible, and the American firms would have to cease their Belgian operations. The sale of almost any American trade-marked article, such as razors, automobiles, prepared medicines, typewriters, etc., would also render the American exporting firms subject to taxation, as in almost every case the retail prices of these articles are fixed by the American company and the latter participates in advertising.

The fact that the Belgian Government will not give the Embassy a statement in writing outlining clearly and fully its new policy of taxation of foreign firms complicates the problem and renders it difficult for the Embassy to do anything to protect the interests of American firms, other than to advise them to use extreme caution in establishing trade connections in Belgium. With regard to some 2,000 American firms which are already selling their products in Belgium, the Embassy can do absolutely nothing except await developments.

The Belgian Government is attempting to collect the tax referred to above retroactively over a period of three years, but local attorneys have informed the Embassy that, in their opinion, this is illegal. The present tax claims of the Belgian Government with regard to past years are, therefore, perhaps more vexatious than dangerous, but the Belgian Government could draw up new laws in the future along the lines indicated above in such a way as to render our commercial relations with Belgium extremely precarious.

The importance of the vexatious situation outlined above for background purposes is illustrated by the case of the Goodyear Tire and Rubber Export Company, of Akron, Ohio. This American company is represented in Belgium by an independent Belgian corporation, the Belgian Tire and Rubber Company, which has its offices [Page 89] at 19, Place Simonis, Brussels. The American principal has no financial interest in the Belgian corporation, but simply sells its automobile tires to the latter. The goods are shipped on consignment, but must be paid for even if not resold after a period of six months. The Goodyear Tire and Rubber Export Company, of Akron, Ohio, sends an employee from its Paris subsidiary to check stocks in the hands of the Belgian Tire and Rubber Company twice a year. It also grants an advertising allowance to the Belgian company and, like all other tire companies whether Belgian or foreign, specifies the retail prices of its tires sold in Belgium. The Belgian company is entirely independent, and, if it refuses to follow the instructions of the Goodyear Tire and Rubber Export Company, the only recourse which the latter has is to withdraw the agency and to place it in other hands. In spite of this set-up, the Belgian tax authorities are not satisfied with the collection of taxes on the profits of the Belgian Tire and Rubber Company, but are endeavoring also to collect taxes on the profits of the Goodyear Tire and Rubber Export Company of Akron, Ohio, derived from the sale of their goods in Belgium. As indicated above, these profits are arbitrarily estimated by the Belgian Government at 15 per cent of the turn over. Under this arbitrary method of calculation, the profit for each of the years 1931 and 1932 is placed at 4,500,000 francs by a tax decision of October 5, 1933. Since the rate of the tax is 22 per cent, the tax claim of the Belgian Government against the Goodyear Company amounts to 990,000 francs for each year. If the tax is not paid within 40 days after the notification to pay, a fine of 200 per cent will be added.

During the past 18 months the Embassy, in conversations with members of the Belgian Foreign Office and with Belgian tax officials, has continually pointed out that in its opinion the new departure of the Belgian Ministry of Finance in taxing foreign firms is not only unjustified by existing regulations but is in every way harmful to the best interests of the two countries, since if the new program is enforced a large number of American firms will undoubtedly be obliged to sever their Belgian connections and withdraw from Belgium. The Embassy has also pointed out the impracticability of attempting to collect taxes from firms which have no physical establishment in Belgium. The Belgian Foreign Office informed the Embassy on January 4, 1934, that it has adopted the Embassy’s point of view in the above matter and that the entire question of the taxation of foreign firms would be reconsidered by a commission composed of officials from the Ministries of Foreign Affairs and Finance. Since the Ministry of Finance is the Ministry directly concerned in this matter, I felt that it would be advisable for me to see Mr. Jaspar, Minister of Finance, in order to present to him the Embassy’s view-point with the [Page 90] object of counteracting as far as possible the influence of some of his subordinate officials who are believed to be responsible for the new Belgian tax policy. The Foreign Office agreed that this was a desirable move. Accordingly, on February 8, 1934, I called on Mr. Jaspar and acquainted him with my views. Mr. Jaspar indicated clearly that his chief concern was to increase Belgian tax returns. He promised that he would give the matter consideration, but he declared that he would have to place Belgian interests above American interests. At first, Mr. Jaspar stated that his administration was a fiscal one, the duty of which was to collect taxes in accordance with existing regulations, but that it was willing to study separately each individual case involving the taxation of a foreign firm. At the close of our conversation, Mr. Jaspar intimated that if a study of the results to be expected from the new Belgian tax policy should show that it was not calculated to increase Belgian revenues sufficiently to offset any disadvantages accruing to Belgium from it, he would abandon it, but that if tax returns should increase materially under the application of the new policy, it would be maintained.

In my conversation with Mr. Jaspar, I gathered the impression that his attitude was prompted not only by a desire to develop a new source of revenue, but by a desire to improve the position of Belgium in forthcoming negotiations with foreign countries in various matters relating to Belgium’s foreign trade. It is also my opinion that despite the fact that the Belgian Foreign Office professes to accept the Embassy’s point of view in regard to the taxation of foreign firms the former is encouraging Mr. Jaspar to appear to assume an intransigeant attitude in the matter. In this connection, it is of interest to note that various other foreign Missions in Belgium, notably the British, Dutch, Swiss, Swedish and Danish, are also protesting to the Belgian Government concerning similar taxation of firms of their nationality.

In view of the present bargaining mood of the Belgian Government, it seems not unlikely that the Belgian Embassy in Washington, in conversations with the Department, may offer to settle satisfactorily the question of the taxation of American firms in Belgium in return for trade concessions by the United States. If this offer is made, I feel that the Department should refuse categorically to negotiate on such a basis, because:

the new tax policy outlined above is unsound from a legal point of view, and
strenuous opposition against it has developed among Belgian importers and also among influential Belgian institutions, such as the Antwerp Chamber of Commerce, which feel that such taxation will drive business away from Belgium. This opposition is being further strengthened by protests from foreign governments, and it seems very [Page 91] unlikely that, in the long run, the present unsound policy of the Belgian Government concerning the taxation of foreign firms can be maintained.

Consequently, I feel that any attempt on the part of the Belgian Embassy at Washington to use the question of the taxation of American firms in Belgium to secure trade concessions from the United States should be promptly squelched, with an indication that trade advantages can only be secured by giving trade advantages in return.

Respectfully yours,

Dave H. Morris
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