Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

CR–11. Memorandum of Conversation, by the Director of the Office of Central American and Panamanian Affairs (Stewart)¹

Washington, September 30, 1958

SUBJECT

• Re-Allocation of Profits of United Fruit Company Subsidiaries for Taxation Purposes.

PARTICIPANTS

• Department of the Treasury:

  • Mr. Dan Throop Smith, Deputy to the Secretary;
  • Mr. Nathan N. Gordon, Chief International Tax Staff;
  • Mr. David A. Lindsay, Head, Legal Advisory Staff;

• Department of State:

  • Assistant Secretary Roy R. Rubottom, Jr.;
  • Mr. C. Allan Stewart. Director of the Office of Central American and Panamanian Affairs.

By previous appointment, Messrs. Smith, Gordon and Lindsay met in Mr. Rubottom’s office to discuss the allocation of profits for purposes of taxation to the Costa Rican subsidiary of the United Fruit Company. This problem arose as the result of a request by President Mario Echandi of Costa Rica for a greater participation by his country in the profits of the Cfa. Bananera de Costa Rica, a subsidiary of United Fruit Company.

Mr. Smith opened the discussion by stating that the Department of the Treasury had decided that it would be possible to undertake a study of the allocation of profits, now made under the 50–50 formula. He said that this could be done in one of two ways, namely, by (1) a change in the regulations, in which event the Internal Revenue Service would study figures presented by the United Fruit Company and determine whether the net profits could be allocated more favorably to Costa Rica, or (2) a change in the regulations for a different allocation conditioned on an Executive Agreement. He said the change in regulations would be a more simple procedure. Mr. Rubottom replied that a change in the regulations would be the preferable procedure, particularly in view of the time element.

Mr. Smith said that this then would be the procedure followed, and assured Mr. Rubottom that the change in regulations would be undertaken without delay. It might take between two weeks and a month to put through the amendment. He cautioned that following the change some time might ensue—possibly into the next year—before the Internal Revenue Service would reach a decision as to what the new allocation of profits would be, since it would call upon United Fruit Company to present figures justifying the change in favor of the banana-producing countries. Mr. Lindsay opined that the financial statements thus far made by United Fruit were slightly evasive as they did not reflect in their entirety profits from sales of fruit in countries other than the United States. Internal Revenue would need this additional information before reaching a decision on the new allocation of profits.

Mr. Rubottom inquired whether, in view of the fact that a delay might occur in determining the new allocations, the application of benefits would be made retroactive to January 1, 1958, and Mr. Smith responded that he could not answer the question at this time. He said that he and his associates would consult in the Department of the Treasury and inform Mr. Rubottom of a decision on this point.

Mr. Smith added that it would be impossible to predict at this time what the new allocation would be, since it would depend on the presentation made by United Fruit. He said it might be 60–40 or even 80–20, but emphasized that no guess should be hazarded at this time. It was pointed out that United Fruit would present a strong case favoring the banana-producing countries since the difference between the 50–50 formula and any new one would result in a saving to the Company in payment of United States income taxes; any difference in allocation favorable to Costa Rica would be taxable at the 38 per cent rate levied under the Western Hemisphere Trading Corporation set-up instead of the 52 per cent assessed on United States profits. He said he was not happy with this situation but it had to be faced. He said Treasury also was disturbed that the Dominican Republic would benefit by the new allocation, in view of the fact that United Fruit operates in that country.

(United Fruit, in its request to Treasury for a more favorable allocation of profits to Costa Rica, has pointed out that Treasury should be prepared to extend the benefits to other countries in which United Fruit has operations similar to those in Costa Rica.)

Mr. Rubottom said that public announcement of the Treasury decision should be made as soon as possible, realizing, of course, that there would be a delay in arriving at the new allocation formula. After a discussion it was decided that President Echandi and the United Fruit Company would not be informed of Treasury’s decision until the publishing of the amended regulations. Mr. Smith said Treasury would inform the Department if the benefits would be retroactive to January 1, 1958, and if this was permissible, President Echandi and the company could also be informed, upon publication of the amended regulations, of this fact.

1. Source: Department of State, Rubottom Files, Lot 60 D 553, “United Fruit Company, 1958.” Confidential. The source text is an unsigned carbon copy.