122. Letter From the Acting Deputy Under Secretary of State for Economic Affairs (Kalijarvi) to the Ambassador in Costa Rica (Woodward)1
Dear Bob: Upon looking further into your proposal for a reduction in the taxes on Western Hemisphere Trade Corporations I find that Treasury’s thinking tends in the opposite direction. We have been told, for example, that Treasury no longer supports an extension of the existing 14 point differential to foreign operations outside the Western Hemisphere as proposed in the late H.R. 7725.
A major reason for this change seems to be a reluctance to grant tax relief in special situations in view of the fact that the Administration has come out categorically against any general tax relief at this time. It is being argued that any discussion of tax benefits for the foreign operations of American companies might lead to a reopening of the discussion of the Western Hemisphere provisions themselves. As you know, the Congress approved the Western Hemisphere legislation under rather exceptional wartime conditions. Although this legislation is likely to remain undisturbed as part of our established tax system, even the 14 point differential might be in danger if the whole matter were laid open to attack.
I realize that what I have said so far is not addressed to the economic merits of your proposal, and in the long run they should be decisive. There are a number of possible steps in the field of taxation which would assist in the expansion of business activity in underdeveloped countries and of which we have not been making full use. Within the past few months we have had several approaches from Latin American countries that wish to negotiate tax treaties under which we would waive the collection of our income [Page 311] taxes in certain well-defined cases where the other country grants such a waiver temporarily in order to encourage industrial development. In many cases the result would be a greater reduction in the tax burden than you propose, but the reduction would be temporary. I believe that at the moment this “tax sparing” device stands a better chance of acceptance than a further widening of the Western Hemisphere Corporation differential.
We are going to review the whole field thoroughly with Treasury in the near future and at that time we shall go specifically into the matters raised in your despatch 119.2 I expect determined opposition to your proposal, but I hope that we shall accomplish at least part of your purpose, perhaps along tax sparing lines.