851.5123 Guaranty Trust Co./21
The Secretary of State to the Chargé in France (Wilson)
Sir: There is transmitted herewith a copy of a letter dated July 9, 1936,57 from the Guaranty Trust Company of New York, in regard to the “patente” tax on its capital (contribution des patentes) imposed by the French Government by reason of the operation of the company’s business in France. The Company states that although only a small percentage of its capital is used in the conduct of its business in France, the tax is imposed on its entire capital and it contends that this basis of taxation is unjust and contrary to the territorial principle of taxation underlying the Franco-American Double Taxation Convention.
The Company requests this Department’s assistance with a view to inducing the French Government to afford relief from the alleged excessive taxes by agreeing either by an exchange of notes or by treaty that the “patente” tax as applied to American banking companies in France be computed on the basis of the amount of the [Page 116] Company’s capital used in conducting its business in France instead of the present basis of computing the tax on its entire capital. A copy of the memorandum prepared by Mr. Mitchell Carroll,58 counsel for the Guaranty Trust Company, elaborating the views expressed in the Company’s letter, is also enclosed, together with a copy of a letter from the Acting Secretary of the Treasury dated September 28, 1936,58 discussing the French law and pertinent provisions of the tax laws of the United States and commenting on the suggestion of the Guaranty Trust Company that an effort be made to effect the adjustment of the matter by reciprocal agreement between the United States and France.
After careful consideration of the request of the Guaranty Trust Company and the views of the Treasury Department thereon, this Department has reached the conclusion that it would not be advisable to ask the French Government to agree either by an exchange of notes or by a treaty to adopt, as a basis for computing the tax on capital, the territorial basis agreed upon in the Franco-American Double Taxation Convention relating to profits and dividends. This decision is based on the consideration that any proposal for the conclusion of a treaty covering the specific question under reference would of necessity have to take into account a number of other questions involving double taxation which have been raised since the double taxation convention came into force, some of which are still under consideration by the Treasury Department and with respect to which this Government is not at this time prepared to propose negotiations looking to their adjustment by treaty. The Department is, of course, prepared to give appropriate consideration to any pertinent proposals which the French Government may desire to submit.
The Department is also of the opinion that it would not be advisable to ask the French Government to agree by an exchange of notes to apply the territorial principle of the Double Taxation Convention to the tax under reference. This opinion is based on the consideration that the proposal could hardly fail to be regarded by the French Government as a request for a definite formal commitment on the part of that Government to effect, by administrative action, a material amendment—apparently without advantage to France—of a treaty formally ratified by France only after serious opposition in the French Parliament.59 In the Department’s view such a proposal would likely be definitely rejected by the French Government particularly since it appears that the formal extension of the territorial principle of the tax on the capital of foreign companies operating in France has [Page 117] been effected in several instances by treaty. The Department would appreciate the comment and opinion of the Embassy on this point.
While the Department is of the opinion that it would not be advisable at this time to propose a formal agreement with the French Government on the subject under reference, the Department is, nevertheless, in substantial accord with the views expressed in the enclosed correspondence as to the unfairness of the basis on which the capital tax is computed in the case of American companies operating in France. It is also in accord with the view that the basis of computation of the tax is not consonant with the principle of territorial taxation given effect in the Franco-American Double Taxation Convention.
You are accordingly requested to communicate with the French Minister of Foreign Affairs substantially as follows:
My Government has been informed that the Guaranty Trust Company of New York, an American banking corporation, operating a banking business in France through branch establishments is required to pay the “patente” tax (contribution des patentes) on the basis of its entire capital although only a small portion of that capital is actually employed in conducting its business in France. In view of the fact that Article I of the Franco-American Double Taxation Convention which became effective January 1, 1936, establishes a just basis of taxation for enterprises of one country which operate in the other by providing that such enterprises shall not be subject to tax on the industrial and commercial profits except in respect of such profits allocable to their permanent establishment in the country where the tax is imposed, it is believed that, in consonance with this principle, which is also the general underlying principle of taxation, an American corporation should not be subject to taxation in France on the basis of capital except in respect of capital employed in the transaction of its business in France.
Your attention is invited to the fact that this principle is now given effect in the United States by Section 105 (b) of the United States Revenue Act of 1935,60 as amended, which provides that the tax on capital of a foreign company carrying on or doing business in the United States shall be computed on the “adjusted declared value of capital employed in the transaction of its business in the United States”.
United States Treasury Regulations 64 relating to the capital stock tax reads as follows:
“Art. 63. Capital employed in the United States.—Examples: (a) The phrase ‘capital employed in the transaction of its business in the United States’ means the portion of the total capital of the foreign corporation utilized in carrying on or doing business in the United States.
[Page 118]“(b) A foreign corporation may employ capital in the transaction of its business in the United States in various ways. For example, property in the United States used in its business; notes and accounts receivable, and other like assets, representing business done in the United States; merchandise kept in the United States for sale; and funds on deposit in the United States for use in the corporation’s business in the United States, are capital employed in the transaction of business in the United States.”
Thus under the capital stock tax law and regulations of the United States a foreign corporation organized under the laws of France and carrying on or doing business in the United States is taxed only with respect to the actual capital employed in this country, adjusted so as to reflect increases or decreases in its capital employed in its business in the United States, and in the administration of the law no attempt has been made to add to such capital any portion of the capital employed in France.
I am, therefore, instructed by my Government to inquire whether in view of the considerations set forth herein, the Government of the French Republic would find it possible to interpret the “patente” tax as applied to American corporations doing business in France through branch houses, in consonance with the territorial principle of taxation incorporated in the Franco-American Double Taxation Convention and now applied under the laws of the United States with respect to the tax on capital of French corporations doing business in this country.
The substance of this instruction has been communicated informally to Mr. Eldon P. King, Special Deputy Commissioner of Internal Revenue, Treasury Department, who, as the Embassy was advised by the Department’s instruction No. 1494 of October 5,61 is proceeding to Geneva on a special mission relating to double taxation questions and will call at the Embassy upon his arrival in Paris about October 25. Mr. Mitchell Carroll, counsel for the Guaranty Trust Company, has also been advised informally of the substance of the instruction.
In view of the fact that Mr. King may discuss this and cognate tax matters with French fiscal officials, you are requested to defer transmitting the above communication to the French Government until you have had an opportunity to discuss the subject with Mr. King. The Department is actuated by a desire to make the most effective representations in behalf of the Guaranty Trust Company, and therefore leaves to your judgment the exact time when this communication should reach the French Government.
Very truly yours,
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- See Foreign Relations, 1934, vol. ii, pp. 167 ff.; also ibid., 1935, vol. ii, pp. 247 ff.↩
- 49 Stat. 1017.↩
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