108. Letter From the Assistant Secretary of State for Economic Affairs (Waugh) to the Special Assistant in the Department of the Treasury in Charge of Tax Policy (Smith)2

Dear Mr. Smith: On December 9, 1954, you were kind enough to forward for our information and comment a revised version of the proposal for tax legislation dealing with foreign corporate income.3

It is clear, I believe, that the revision is a great improvement over the corresponding sections of last year’s House Bill (H.R. 8300), although I was not sufficiently close to the controversy which developed on these sections last year to judge whether the revised proposal will meet the problem presented by the foreign wholesaling activities of United States enterprises. However, the revision would appear to exclude some kinds of enterprises having substantial interests abroad whose activities are significant in terms of our foreign economic policy objectives.

In this connection, I think there has been some misunderstanding of the position of this Department. We are not opposed to extending the benefit of a reduced income tax rate to an American firm operating abroad solely because part of its income is derived from the sale of commodities or products of United States origin. Where such an enterprise has a permanent establishment abroad involving a substantial investment, its eligibility for a reduced rate designed to facilitate foreign investment would seem to be justifiable. Clearly, as the Randall Commission stated, “the reduced rate should not apply to income from exports which do not involve the risks of investment abroad”. I quite understand the difficulties of [Page 276] definition and legislative drafting, but on the question of principle I felt our position should be clarified.

It has been a matter of some regret that the foreign tax proposals advanced by the Treasury have been limited principally to corporate income and have not extended similar treatment to individual investment income. It is my understanding that you now have under consideration a proposal for permitting regulated investment companies to pass along to shareholders their proportionate share of the credit for foreign taxes paid on the dividends received by the company on its foreign securities—now permitted only if the company has over 50% of its assets in foreign securities. It seems to me that such a proposal warrants your sympathetic consideration, as these investment companies have great potential importance as a source of capital for overseas investment. It does not seem equitable for individual investors to be denied the foreign tax credit on investments made through such companies, and I am hopeful that practical proposals can be developed for meeting this situation.

We continue to be greatly interested in the development of tax policy with respect to foreign income since it is one of the positive and constructive aspects of the Administration’s foreign economic policy recommendations. I hope you will keep me informed of developments from time to time, and will call upon me or my staff whenever we can be of any assistance.

Sincerely yours,

Samuel C. Waugh4
  1. Source: Department of State, Central Files, 811.112/2–755. Drafted by Robinson, and concurred in by Jack C. Corbett, Director of the Office of International Financial and Development Affairs, and Isaiah Frank, Deputy Director of the Office of International Trade and Resources.
  2. Not printed. (Ibid., 811.112/12–954)
  3. Printed from a copy which bears this typed signature.