Foreign Relations of the United States: Diplomatic Papers, 1943, The American Republics, Volume VI

837.512/666

Memorandum by Miss Anna A. O’Neill, Assistant to the Legal Adviser ( Hackworth ), to the Assistant Chief of the Division of the American Republics ( Walmsley )

[ Washington ,] February 6, 1943.

Mr. Walmsley: A reply to your memorandum of January 21, 1943 has been delayed due to the inability of this office to find the letter from the War Shipping Administration of August 4, 1942 (September 4)³⁴ which was the incentive for the Department’s formal request of Cuba to discontinue the collection of taxes on revenue derived from the operation of vessels under the control of the United States.

I. As you will recall, the Department’s request was set out in instruction no. 754 of October 8, 1942³⁵ and the reply of the Cuban Government is contained in Foreign Office note no. 1124 of November 17, 1942 (with enclosure),³⁶ despatch no. 1567 of November 20, 1942. That reply reads in part:

“With regard to this matter I am pleased to enclose for Your Excellency’s information a communication sent by the Minister of Finance to the Prime Minister³⁷ of this Government, containing said Department’s official opinion in regard to this matter.

“At the same time I am pleased to inform Your Excellency that calculations are being made in order to ascertain to what extent the national economy would be prejudiced by the possible suppression of these taxes so that, in case it would not appreciably affect (revenue) collections, the request (of the Embassy) may be granted.”

The matter is thus being considered by Cuba apparently not on the basis of law but with a view to their national economy. Certain calculations are also being made by the War Shipping Administration (letter January 4, 1943—837.512/660³⁴).

The Department’s position is based on the well recognized principle of international practice (which in the United States is evidenced by statutory enactment) that the revenue of foreign countries [governments?] derived from whatever source in the taxing country should be exempted from the payment of taxes. The following provisions of the United States Revenue Code³⁸ have direct application to the problem in hand.

“Sec. 22. Gross Income.

• “(a) General Definition.—’Gross income’ includes gains> profits, etc.

• “(b) Exclusions from Gross Income.—The following items shall not be included in gross income and shall be exempt from taxation under this chapter:³⁹

. . . . . . . . . . . . . .

“(8) Miscellaneous Items.—The following items, to the extent provided in section 116:³⁹

. . . . . . . . . . . . . .

“The income of foreign governments;” (page 9–11)

“Sec. 116. Exclusions from Gross Income.

“In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this chapter.⁴¹

. . . . . . . . . . . . . .

• “(c) Income of Foreign Governments.—The income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys belonging to such foreign governments, or from any other source within the United States.”

“Sec. 212. Gross Income.

• “(a) General Rule.—In the case of a nonresident alien individual gross income includes only the gross income from sources within the United States.
• “(b) Ships Under Foreign Flag.—The income of a nonresident alien individual which consists exclusively of earnings derived from the operation of a ship or ships documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States shall not be included in gross income and shall be exempt from taxation under this chapter.”

“Sec. 231. Tax On Foreign Corporations.

• “(a) Nonresident Corporations.⁴¹—

. . . . . . . . . . . . . .

• “(d) Ships Under Foreign Flag.—The income of a foreign corporation, which consists exclusively of earnings derived from the operation of a ship or ships documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States, shall not be included in gross income and shall be exempt from taxation under this chapter.”

The Bureau of Internal Revenue informs this office that the following Latin American countries now grant equivalent exemption of taxes on revenues derived from the operation of ships by citizens of the United States: Argentina, Guatemala, Honduras, Panama, Paraguay, Uruguay and Venezuela. Before the present war certain European countries also granted the exemption, among them being Belgium, Poland, Denmark, France, Germany, Great Britain, Greece, Irish Free State, Italy, Norway, Sweden and Switzerland.

Section 116 (c) of the Internal Revenue Code, which is declaratory of international law, is the statutory authority for the full exemptions granted to foreign countries, while both foreign citizens and corporations on conditions of reciprocity are by Sections 212 (b) and 231 (d) exempted from taxation on incomes derived through the operation of ships documented under foreign laws.

II. The legal basis for this Government’s position concerning exemption from taxes on other United States Government activities in Cuba is set out in the first paragraph of the Department’s airgram A–293 of October 27, 1942 which reads:

“Your A–157, September 7, 9:30 a.m.⁴²

“The Department has consistently maintained that, in accordance with a recognized principle of international law, foreign governments should not be taxed on their personal property in the United States devoted to governmental purposes, and exemption from taxation has been granted to plant equipment and supplies used for the production of war materials by private American companies whose operations are financed and controlled by foreign governments.”

III. Commenting on the Department’s position regarding tax relief in Cuba, you conclude in your memorandum thus:

“In a nutshell, I cannot see how a foreign government can be expected to give up normal sources of revenue merely because the United States replaces private initiative for war purposes.”

If Cuba will recognize her obligation under international law, the revenue under consideration while derived from “normal sources” will nevertheless be entitled to the exemptions requested.

IV. As formal representations have already been made to the Cuhan Government (no. 754 of October 8, 1942 and airgram no. A–293 of October 27, 1942) with definitely favorable results on one group and the other group still pending, is this office to understand that your memorandum of January 21, 1943 with notations by Mr. Bonsai and Mr. Feis is to be regarded as a change or reversal of the Department’s present position, and if so, may Le⁴³ have the benefit of your views on an appropriate reply to the Embassy’s despatch no. 1567 of November 20, 1942, particularly page 3, and comments on War Shipping Board’s letter of January 4, 1943, also.

34. Not printed.
35. See footnote 23, p. 260.
36. Neither printed. Note No. 1124 was dated November 14 and registered for dispatch on November 17.
37. Ramón Zaydín.
34. Not printed.
38. U.S.C., title 26.
39. The following omission indicated in the original memorandum.
39. The following omission indicated in the original memorandum.
41. The following omission indicated in the original memorandum.
41. The following omission indicated in the original memorandum.
42. Not printed; the Ambassador requested clarification of the Department’s position regarding applicability of Cuban gross sales and revenue tax to various projects underwritten by the United States Government (811.20 Defense(M)/8960).
43. Office of the Legal Adviser.