Foreign Relations of the United States Diplomatic Papers, 1935, General, The Near East and Africa, Volume I

102.02 Taxation/200

The Secretary of State to the Chairman of the Committee on Foreign Affairs of the House of Representatives (McReynolds)

Washington, April 25, 1935.

My Dear Mr. McReynolds: I enclose a draft of a bill⁹ entitled “A bill to exempt from taxation, under certain conditions, on the basis of reciprocity official compensation of a Consular Officer, Non-diplomatic Representative, or Employee, of a Foreign Country”.

The proposed legislation is considered necessary on account of the ruling made by the Secretary of the Treasury in a letter dated August 7, 1934.¹⁰ Prior to that date the Treasury Department had granted exemption from the payment of income tax in respect to the official compensation of consular officers, non-diplomatic representatives or employees of foreign governments carrying on their official duties in the United States.

Article 641 of Income Tax Regulations¹¹ issued by the Bureau of Internal Revenue, Treasury Department, under the Revenue Act of 1932,¹² provided as follows respecting the exemption granted to foreign consular officers and employees in foreign consulates in the United States:

“All foreign consular officers and employees in foreign consulates in the United States who are nationals of the States appointing them are exempt from Federal income tax with respect to wages, fees, and salaries received by them in compensation for their consular services, provided the appointing State grants a similar exemption to citizens of the United States who are American consular officers or employees of the American consulates in such State. The income received by foreign consular officers and employees of foreign consulates from investments in the United States in bonds and stocks and from interest on bank balances as well as income from any business carried on by them in the United States is subject to Federal income tax.

“The compensation of citizens of the United States who are officers or employees of a foreign government is not exempt from income tax. (But see section 116 (a).¹³)”

I enclose extracts from the letter of the Secretary of the Treasury of August 7, 1934, from which you will note that the Treasury Department has granted exemptions from the payment of income taxes in respect to official compensation of such persons beginning with the Revenue Act of 1924¹⁴ and continuing under the Revenue Acts of 1926,¹⁵ 1928¹⁶ and 1932, but that “the practice is one which, however meritorious from the standpoint of administrative policy or expediency, is now regarded by this (Treasury) Department as indefensible from the standpoint of the law”. It is also stated in the Secretary of the Treasury’s letter that “in denying the right of exemption, the policy referred to was definitely repudiated and abandoned on the ground, there fully discussed, that this (Treasury) Department is without constitutional authority to formulate governmental policies with respect to exemptions of representatives of foreign governments from taxation not authorized by international law, by Congress, or by treaty”.

As I believed the decision of the Secretary of the Treasury with regard to this matter would cause foreign governments to subject consular officers, non-diplomatic representatives and employees of the United States, carrying on their official duties abroad, to the payment of income taxes, and possibly other charges, I persuaded the Secretary of the Treasury to postpone the issuance of a proposed amendment of Article 641 of the Income Tax Regulations 77 by striking out the exemption of foreign consular officers and employees in foreign consulates, pending the submission of the matter to the Congress for its determination whether the exemptions which have been granted on a reciprocal basis for more than ten years in respect to the official compensation of such officers and employees, should be continued by express enactment of the Congress.

I have obtained complete information from American missions abroad regarding the present practice of foreign governments respecting the exemption of such official compensation from taxation, and I shall be glad to submit it to you for the use of your committee if you desire it. The reports received indicate that exemptions are granted generally upon a reciprocal basis and consequently if the new ruling of the Treasury Department is put into effect American consular officers, non-diplomatic representatives and employees in many foreign countries will be obliged to pay income taxes there on their official compensation. You doubtless know that the rates of taxation in foreign countries are usually higher than those imposed in the United States, the exemptions from taxation are less, and the tax is imposed upon smaller incomes than is the case in the United States. I have no doubt that our consular officers, non-diplomatic representatives and employees abroad will suffer a substantial reduction in the amount of their income available for meeting their normal expenses. The difficulties already experienced by these American officers and employees have previously been recognized by Congress in the enactment of the Act approved March 26, 1934, entitled “An Act to authorize annual appropriations to meet losses sustained by officers and employees of the United States in foreign countries due to appreciation of foreign currencies in their relation to the American dollar, and for other purposes.” (48 Stat. 466).

I, therefore, believe that the draft legislation transmitted herewith should be enacted by Congress at an early date and thereby it will be possible to avoid the adverse effects of the ruling that has been deemed necessary by the Treasury Department. I shall be glad to furnish the committee, if you so desire, with lists of the officers and employees of this Government in foreign countries and information concerning the foreign laws, decrees, and regulations which would become applicable to them in the absence of some such provision as suggested in the draft bill.

Sincerely yours,

Cordell Hull

9. Not printed; its provisions were substantially embodied in H. R. 7998, approved August 27, 1935: “An Act to exempt from taxation official compensation of certain foreign representatives and to provide for the deductibility from income of certain dividends on preferred stock owned by the United States or instrumentalities thereof”, 49 Stat. 908.
10. Not printed.
11. U. S. Treasury Department, Regulations 77, p. 199.
12. 47 Stat. 173.
13. U. S. Treasury Department, Regulations 77, p. 197.
14. 43 Stat. 253.
15. 44 Stat. 9.
16. 45 Stat. 791.