The British Embassy to the Department of State


Considerable anxiety has been aroused in Great Britain as well as, it is understood, in other countries, by the proposal to levy United States income tax on non-residents who have made profits in the United States of America through brokers or other agents in stocks, bonds or commodities during 1929 and subsequent years. It is feared that the proposal, if carried out, would certainly have a cramping effect on the normal and salutary operations of world-wide commerce. It would, for instance, cripple hedging and straddling operations in the American market which are necessary for dealing in cotton and other commodities, and would thus have a very injurious effect on trade. As regards security transactions it is felt that since the tax liability could be escaped by foreigners by the method of carrying out the transactions outside the United States, the attempt to levy the tax would result in very considerable hindrance and inconvenience to business without any useful result to the United States Treasury.

In these circumstances His Majesty’s Government in the United Kingdom desire to call the attention of the United States Government to the following considerations:—

Under the British Finance Act of 19251 it is provided in effect that a non-resident in Great Britain is not liable for income tax in respect of any sales or transactions carried out by him through the medium of a broker in Great Britain in the ordinary course of brokerage business, in other words, the income tax charge of the United Kingdom does not extend to trading operations by foreigners of the kind now in question. In these circumstances it is suggested that consideration should be given to the question whether a similar exemption should not be conferred on trading operations of this kind in the United States by British nationals, rather than that liabilities should be placed on United Kingdom concerns for past years when no liability [Page 482] was believed to exist and when no action was taken by the United States Taxation Authorities to suggest that any liability did exist.
It is understood that the claims now made are based upon a law2 which has been in force for thirteen years but that no claim of the kind now made has hitherto been advanced under it. It is assumed therefore, that it was previously not considered to relate to these transactions. The Acts and Regulations referred to by the Taxation Authorities, though containing many provisions for the withholding of tax from salaries, dividends, interest, etc., contain no provisions for enforcing collection of tax on a charge of the kind now in question. It thus appears that advantage is now being taken of the wide terms of a taxing statute to lay new liabilities retrospectively on the trading operations of past years which were carried out in all good faith on the basis that no income tax liability attached to them. The proposal to raise assessments for past years is in substance to declare past transactions now to be liable to tax which were not regarded as liable at the time when the transactions were effected. This would be unjust to trade and inconsistent with the recognised canons of taxation.
As regards future years, it is hoped that the United States law may be amended so as to confer on non-residents in respect of brokerage transactions an exemption similar to that given by the law of the United Kingdom to United States concerns carrying out similar transactions through brokers in the United Kingdom. The firms in question generally have no branch in the United States and their transactions are brokerage transactions carried out through brokers in the United States markets. These transactions are essential for the marketing of cotton and other commodities, and any attempt to tax them will react to the prejudice of both producer and consumer by restricting transactions which experience has shown to be necessary for the successful working of produce markets. It is understood that the United States authorities have suggested that a distinction might be drawn between speculative and other transactions and that the liability to tax would be confined to the former. In actual practice it would be practically impossible to make any such distinctions but even if it were possible, it is not considered that the speculative transactions possess any peculiar characteristics that would warrant their taxation. The marketing of cotton must involve dealings in futures. It is in the interests of both producer and consumer that there should be prices for buying and selling in the future and the speculative transactions are an essential ingredient in the working of the market to provide a future price level for those interests that are concerned in handling the actual commodity.
It would be practically impossible to assess and collect a tax on these transactions in any manner that could claim to be a fair levy. These transactions are of an international character and are marked by the characteristic that as between any two countries a gain emerging from one end is associated with a loss emerging at the other end. The operations of the market extend over several countries and the transactions between the United States and the United Kingdom may be linked up directly or indirectly with transactions between other countries, so that the gain made at the United States end of a transaction cannot be regarded as a gain that really arises from a source within the United States.
Finally, it is believed that any attempt to tax these operations will gravely prejudice trading relations between the United Kingdom and the United States and will tend to drive business into other channels. From the point of view of the American interests it may be pointed out that straddling business will cease at once and business in futures for hedging purposes will tend to be diverted from American markets. Once it becomes the general practice to hedge in markets outside the United States it will take years for the American markets to regain the business. The increase in the cost of American cotton to the spinner will not have the effect of raising the price to the producer because exports will fall and American stocks increase with a consequent fall in price for the American farmer.

  1. British Law Reports … 15th and 16th Years of the Reign of George the Fifth (London, 1925), vol. ii, pp. 1106, 1119.
  2. Presumably the Revenue Act of 1921, 42 Stat. 227.