811.512356 Double/51
Memorandum by Mr. Horace G. White, Jr., of the Office of the Adviser on International Economic Affairs
My memorandum of June 18 [17] had as its main topic the turning point reached in our negotiations with the Netherlands on Friday, June 17. At that time Mr. King told the Netherlands delegates that a concession on American withholding rates was simply out of the question unless a substantial disclosure and enforcement concession could be obtained from the Netherlands. He proposed that the whole question of rates and administrative cooperation with respect to movable capital be eliminated from further discussion and that the negotiations be confined to a narrow treaty comprehending the subject of double taxation of business income, and certain minor classes of income, together with administrative cooperation directly related to this field.
On Monday afternoon we met again with the Netherlands delegation, which had spent the weekend to itself attempting to formulate the maximum concession that could possibly be made in regard to disclosure [Page 612] and enforcement of taxes on income from movable capital. Their memorandum14 on this subject was received Monday morning and was rather surprising in the extent to which the Netherlands delegates had modified their position from the preceding week. However, the modified disclosure and enforcement proposal still falls short of what Mr. King thinks would be attractive to the United States as compensation for a withholding rate concession.
Our afternoon conference with the Netherlands delegates was opened by Mr. King’s proposal that the next step in the negotiations might follow one or the other of the following courses: (1) to draft a narrow convention devoted primarily to double taxation in the business income field and excluding rates, and enforcement and disclosure in the movable capital field; or (2) to draft a broad convention covering the whole sphere of interest of both parties, including rates and administrative cooperation in connection with movable capital.
With respect to the first alternative, the idea was that such a convention would be certain to meet with no obstacles, either from Congress or executive departments. Thus one way of dissolving the present impasse would be to conclude a convention which would be certain of acceptance on this side even though its scope might be unsatisfactory. The Netherlands delegation said that this alternative was worthless to them, partly because The Hague would never ratify a convention not containing provision for reduced rates of withholding on income from movable capital.
After Mr. King had clarified the idea of his second alternative the Netherlands delegation accepted it as a mutually satisfactory basis for further discussion. The theory of our present plan is to draft a comprehensive convention containing everything of interest to both parties, including rates and cooperation in the movable capital field.
Such a convention would be sent to Mr. Magill and Mr. Taylor15 for consideration of the policy questions that it would involve—particularly the rate angle. If Magill and other appropriate officials should concur in making this convention a test of Congressional intent in regard to rates of tax applicable to nonresident aliens, the convention would be signed and sent to the Senate. However, if there should be hesitancy about the policy angle, the convention would be held unsigned, and the executive officials would confer informally with Congress in the premises. Should it then turn out that Congressional approval might be obtained, the Convention would be signed and transmitted in the regular way.
In as much as the Netherlands delegates submitted their memorandum of proposed cooperation in the movable capital field without [Page 613] consultation with their Government, they have cabled the proposal to The Hague in the expectation of receiving an expression of approval or disapproval within a few days. If the reaction of their Government is unfavorable, then the negotiations will be discontinued. A favorable reply will be regarded as a signal to go ahead along the lines noted above.
The absence of Messrs. Magill and Taylor is a complicating factor. Mr. King has pointed out to the Netherlands delegation that the rate question is a big item of tax policy and depends on action in the upper offices of the Government and then upon what Congress wants to do. Mr. Molekamp asked Mr. King what his personal views were as to the likelihood that a favorable response would eventuate—noting that if he was not hopeful, then it would not be worth while for the delegation to stay over here. In reply Mr. King made some comments designed primarily to stall the matter along rather than have the negotiations cease without further discussion. He told Mr. Molekamp that he thought the prospects were sufficiently hopeful to warrant continuation of negotiations and the completion of a draft convention to be presented as the definitive views of the two delegations. He asserted that the non-resident alien provisions, particularly the contiguous-country parts, of our revenue legislation are not altogether satisfactory to Congress or to the Treasury. In 1936 the question of extending the 5-percent rates to noncontiguous countries by treaties was considered, and although the legislation took the opposite turn, he thinks that Congress might be led to reverse its present position if the inducements can be made sufficiently attractive. This fact, he thought, made it worth while to use the Netherlands convention for a test of administrative and Congressional will.
Consequently beginning Tuesday morning the two delegations will set to work drafting a definitive convention and hope to turn out their product within a week or so unless unfavorable news comes from across the water, or from Mr. Magill.
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