811.512351 Double/308
The Secretary of State to the Ambassador in France (Straus)
Sir: The Department has received your despatch No. 2673 of April 9, 1936,41a transmitting mimeographed copies of the French text of the instructions which the Direction générale de l’Enregistrement intends to issue for guidance in connection with the application of the Convention between the United States and France relative to double taxation, [Page 105] as well as an unofficial translation of these instructions. In view of your statement concerning the English translation of the regulations prepared in your Embassy, the translation has been revised in the Department and a copy thereof is enclosed42 herewith as of possible interest.
The Department has sent copies of the regulations both in the French and English texts to numerous firms and individuals43 who have indicated their interest in the matter. As of possible interest you are informed that the proposed Revenue Bill of 1936,44 which is at present being considered by the Congress, contains a section safeguarding the provisions of the Double Taxation Convention between the United States and France. Section 22b 7 of the Bill reads as follows:
“Exclusion From Gross Income—The following items shall not be included in gross income and shall be exempt from taxation under this title:
“(7) Income of any kind to the extent required by any treaty obligation of the United States.”
There is also appended herewith as of possible interest that part of the report of the Ways and Means Committee of the House (74th Congress, 2d Session, House of Representatives Report No. 2475) relating to those portions of the Bill concerning non-resident aliens and foreign corporations.
“It has also been necessary to recommend substantial changes in our present system of taxing nonresident aliens and foreign corporations. It appears obvious that an undistributed profits tax is not well adapted to taxing a foreign corporation with foreign shareholders in respect to its income from sources within the United States. In section 211, it is proposed that the tax on a nonresident alien not engaged in a trade or business in the United States and not having an office or place of business therein, shall be at the rate of 10 percent on his gross income from interest, dividends, rents, wages, and salaries and other fixed and determinable income. This tax (in the usual case) is collected at the source by withholding as provided for in section 143. Such a nonresident will not be subject to the tax on capital gains, including gains from hedging transactions, as at present, it having been found impossible to effectually collect this latter tax. It is believed that this exemption from tax will result in additional revenue from the transfer taxes and from the income tax in the case of persons carrying on the brokerage business. In the case of a nonresident alien engaged in trade or business in the United States, or having an office or place of business therein, the same tax is levied on his net income from sources within the United States as is levied on an American citizen, except for the disallowance of certain personal exemptions and credits for dependents.
[Page 106]“In the case of a foreign corporation engaged in trade or business within the United States or having an office or place of business therein, it is proposed to levy a tax at a flat rate of 22½ percent on the net income of such corporation derived from sources within the United States. The dividends of such foreign corporations are not taxable to the foreign shareholder unless 75 percent or more of its gross income is from sources within the United States, in which case they are taxable to the foreign shareholder to the extent that the dividends represent American income. In the case of a foreign corporation not engaged in trade or business within the United States and not having an office or place of business therein, it is proposed to levy a flat rate of tax of 15 percent on the gross income of such corporation from interest, dividends, rents, salaries, wages, and other fixed and determinable income (not including capital gains). This tax is to be collected in the usual case by withholding at the source. A special provision is made in the case of foreign banks carrying on the banking business in the United States whereby they will pay a tax of 15 percent on their net income from the banking business and 22½ percent on their net income from other sources within the United States. In addition to the above provisions, nonresident alien individuals are given a credit of $1,000 against income attributable to compensation for personal services. It is also provided that income of any kind shall be excluded from gross income to the extent required by any treaty obligation of the United States.
“It is believed that the proposed revision of our system of taxing nonresident aliens and foreign corporations will be productive or substantial amounts of additional revenue, since it replaces a theoretical system impractical of administration in a great number of cases.”
Very truly yours,