Upon Mr. King’s arrival here Mr. Hawks, of the Embassy staff, went over
with him the various taxation cases which are now before the Embassy. At
Mr. King’s suggestion the Embassy sent its wire No. 1007 of October 15,
4 p.m.65 requesting that
Mr. Francis de Wolf, Assistant in the Treaty Division of the Department
of State, be instructed to come to Paris on his way back to the United
States from Warsaw in order to discuss taxation matters with Mr. King
and the Embassy.
Mr. King and Mr. de Wolf, accompanied by Mr. Hawks, had an interview with
Mr. Bizot, General Director of direct taxes, and Mr. Barrau,
Administrator of the Directorate of direct taxes, and another with Mr.
Georges Picot, Director of Control. A memorandum outlining the
discussions whicli took place at these two interviews was prepared by
Mr. King and Mr. de Wolf and is transmitted herewith. These discussions
were entirely informal and the Foreign Office was verbally notified to
that effect.
[Enclosure]
Memorandum by Mr. Eldon P. King and Mr. Francis
Colt de Wolf of Conversations With Officials of the French
Ministry of Finance
[Paris,] November 2, 1936.
In its instruction of October 5, 1936, No. 1494,65 the Department directed Mr.
Eldon P. King Special Deputy Commissioner of Internal Revenue to
discuss informally with officials in the French Ministry of Finance
certain specialized phases of the tax difficulties outstanding
between the two governments with a view to arriving at an estimate
of the feasibility of settling these difficulties. In a telegraphic
instruction of October 2365 the Department directed Mr. Francis Colt de Wolf
[Page 121]
of the Treaty Division
to accompany Mr. King. Mr. King and Mr. de Wolf were accompanied by
Mr. Stanley Hawks, Second Secretary of Embassy, at the meetings with
the officials of the Ministry of Finance, M. Jean Bizot, Directeur
Général des Contributions directes (Director of direct taxes), M.
Auguste Barrau, Administrateur, Direction Générale des Contributions
directes (Administrator of the Directorate of direct taxes), and M.
Georges Picot, Directeur du Contrôle (Director of Control).
Two meetings were held at the Ministry of Finance on Friday, October
30 and Tuesday, November 3. At these meetings Mr. King made a survey
of the pending tax questions between the two countries. It will be
recalled that in a note of October 12, 193566 the French Foreign Office suggested the
negotiation of an addendum to the existing double taxation
convention between the two countries whereby nonresident French
citizens would not be subject to surtax imposed by the then existing
revenue acts or at least would be relieved from paying such tax on
dividends and nonresident American citizens would not be subject to
the French general income tax.
Subsequently when the Embassy took up with the French authorities the
question of reciprocal exemption of government employees from the
general income tax in France and from the income tax in the United
States the French authorities again pointed out that this matter
might be settled by its inclusion in the proposed addendum to the
double taxation convention between the two countries.67 At
a later date when the Embassy took up with the French government the
question of the French transactions tax on orders received in France
by representatives of American brokerage firms it was again
suggested to the Embassy that the question might be settled through
the conclusion of an addendum.
In view of the fundamental change in the taxation of non-resident
aliens and foreign corporations as embodied in the Revenue Act of
193668 it was not entirely clear whether a basis still
existed for the conclusion of an addendum as envisaged by the French
authorities in their note of October 19, 1935. At the two meetings
Mr. King outlined the tax cases now pending, namely:
- 1.
- Taxation of certain American officials in France,
- 2.
- The extra-territorial effect of the Patente tax as applied
to branches in France of American banks. The only case at
present pending is that of the Guaranty Trust
Company,
- 3.
- The transactions tax imposed by the French government on
the receipt of orders in France by representatives in France
of American brokerage houses.
As far as the tax of government officials is concerned we recognized
that under the double taxation convention French officials in the
United States were exempt from all income tax including the surtax
while in France certain officials of non-diplomatic status of the
American government were exempt from the schedular taxes but not
from the general income tax. This situation could, of course, be
rectified by the conclusion of an addendum.
With regard to the Patente tax the French officials while recognizing
that the matter might be settled by means of treaty provisions
indicated that it might be preferable to settle it through a change
in legislation or by an executive decree. However, they expressed
some doubt as to whether the situation could be remedied by means of
a decree in the absence of further legislation. They appeared to
recognize that the Guaranty Trust Company was being assessed
excessive taxes and that the situation called for a remedy through
one means or another.
In regard to the tax on stock brokers in France they recognized that
this was a clear case of double taxation inasmuch as the French
imposed the transactions tax on the receipt of the order and the
United States imposed the tax on the execution of the order on the
exchange in the United States. They also pointed out, however, that
to relieve American Brokerage concerns having representatives in
France from this tax would place them in a privileged position
compared with French brokers who are required to pay the tax upon
the receipt of orders in France for execution on American exchanges.
However, on account of the double taxation element involved in the
case they appeared to be of an open mind as to the possibility of
remedying the situation through appropriate treaty provisions. In
return for the inclusion of the three cases above-mentioned in an
addendum they indicated that they would have to insist on two
points:
- 1.
- The elimination of what they consider a discriminatory
feature of the Revenue Act of 1936 as applied to
non-resident aliens and foreign corporations and
- 2.
- The cooperation of the American government in preventing
tax evasion.
In regard to point one, they observed that non-resident French
nationals are taxed a 10% withholding rate while in the case of
residents of the United States the normal tax only amounts to four
per cent and the combined totals of the normal tax and surtax does
not represent an amount of ten per cent until the net income is
about $20,000. They added that in practically all cases incomes from
the United States of French nationals were under that figure. They
thus in effect proposed
[Page 123]
that we should return to the provisions of the former Revenue Acts
with regard to taxation of non-resident aliens and foreign
corporations. The American representatives expressed some doubts as
to whether the provisions of the Revenue Act of 1936 relating to
nonresident aliens and foreign corporations could be changed to meet
the views of the French authorities but they inquired whether the
French would consider a reciprocal treaty similar to that
contemplated in the Revenue Act of 1936 with Canada70 and
Mexico. The present French withholding rates range from 12 to 24%.
They expressed an inability to conclude a convention of this nature
contending that we should place non-resident aliens and foreign
corporations on the same basis as resident and domestic corporations
which is the basis employed in the French system of taxation.
The French authorities indicated that the present French government
is greatly interested in the subject of cooperation to prevent tax
evasion and added that such provision is now a sine qua non condition for the conclusion of any double
taxation treaty by France. In discussing the matter of mutual
disclosure of information to prevent tax evasion it developed that
under the French system as it now exists they are in a position to
give quite complete information upon the death of the taxpayer, also
in specific cases where request is made by a foreign government and
to disclose such information as they may find in carrying on their
own investigations, but that they do not have a general system of
information returns such as obtains in the United States, namely, a
periodic disclosure of stock and commodity transactions and dividend
payments over certain amounts and a disclosure through ownership
certificates of certain interest payments. On the whole the French
recognized that we are in a position to give more complete
information than they are and that since security investments in the
United States of French citizens are heavier than security
investments in France of American citizens a provision of this kind
would be of considerable advantage to them.
There was also discussed the possibility of broadening the scope of
the present double taxation convention to bring it in line with the
“Revised Text of the Draft Convention for the Allocation of Business
Income between States for the Purposes of Taxation” as set forth in
Annex 1 of the report of the fiscal committee for the League of
Nations dated June 17, 1935. It was explained that we had made no
detailed study of the draft convention but had noted that there were
certain provisions relating to methods of allocation of business
income and definitions of such terms as fiscal, domicile, agency
etc. which might be of mutual interest to the two countries in any
addendum to
[Page 124]
the existing
convention. It was also noted that in many of the conventions
existing between countries the model draft convention of the League
of Nations has been followed far more extensively than it has been
followed in the existing double taxation convention between the
United States and France. They expressed their willingness to give
further consideration to the possibility of broadening the existing
convention between the two countries to include matters set forth in
the Geneva draft which might be of mutual interest to the two
countries.
The American representatives indicated that if it were not found
possible to meet the French desire with regard to the treatment of
non-resident aliens and foreign corporations it might be possible to
embody in a treaty provisions freezing certain sections in the
Revenue Act of 1936 such as the capital stock tax provisions which
impose tax on foreign corporations doing business in the United
States only to the extent of the capital employed therein and the
provision which exempts non-resident aliens and foreign corporations
from tax on capital transactions executed through regular brokers,
commission agents or custodians.
The representatives of the United States during the course of these
conversations did not take up the case of the Durham Duplex Razor
Company concerning which there has been previous correspondence
between the Embassy and the Foreign Office inasmuch as this involves
merely an interpretation of Article 10 of the existing convention
and they deemed it preferable to hold it in reserve pending the
consideration of the possible conclusion of an addendum.
It was mutually made clear that these conversations were of a purely
informal and exploratory nature in no wise binding the two
governments and that upon their return to the United States the
representatives of the American government would take up with their
appropriate authorities the points brought out in the conversations
with a view to determining what action if any could be taken on
them.
- Eldon P. King
- Francis Colt de Wolf
