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

CR–15. Memorandum from the Assistant Secretary of State for Inter-American Affairs (Rubottom) to the Acting Secretary of State¹

Washington, May 15, 1959

SUBJECT

• COSTA RICA: Re-Allocation of Profits for Taxation of United Fruit Company Subsidiary

I am deeply concerned over the status of the Treasury Department’s action on United Fruit Company’s request for an increase in the allocation of its profits for taxation to its subsidiary in Costa Rica. In March of 1958 President Echandi, while in Washington, approached U.S. treasury officials to inquire whether a revision in the allocation of profits for taxation could be made to the Costa Rican subsidiary of the United Fruit Company. Treasury officials informed him that sympathetic consideration would be given to his proposal. He was then informed it would be the responsibility of the United Fruit Company to make the request for a revision in the allocation. Since then United Fruit has been trying to obtain a favorable decision in its request to increase the allocation. In order that Treasury might consider a higher allocation of taxable profits to the Costa Rican subsidiary, the United States tax regulations were amended on January 3, 1959, providing a means whereby the present 50–50 allocation could be increased, retroactive to January 1, 1958, provided a U.S. taxpayer presented evidence to substantiate a change in the allocation. Immediately following the revised regulations, United Fruit presented its case for a revision of the profit split in favor of Costa Rica.

This problem has been dragging along for more than a year and until recently Treasury officials, without definitely committing themselves, had given the impression such a change could probably be effected. I have learned informally that Treasury tax experts now have completed a review of the data presented by United Fruit and have concluded that the present 50–50 split represents a fair, even generous, allocation of the profits so far as Costa Rica is concerned. While the discussions of these findings are still in the preliminary stage, it appears they will form the basis of a final Treasury decision denying any favorable re-allocation of United Fruit profits.

In presenting its case, it is understood that the United Fruit Company contended that the allocation should be increased from the present 50% to at least 75%. An allocation of taxable profits in a proportion of 75% to the United Fruit subsidiary in Costa Rica and 25% to the United States is in keeping with the type of allocation Costa Rican President Echandi expects. Echandi’s reason for this belief is that he knows that Standard Fruit Company has been paying on the basis of 77% for some years without U.S. objection.

The following factors have an important bearing on the need for favorable action by Treasury on this problem:

(1) The fact that Treasury has established an enabling regulation permitting a change in allocation of taxable profits is considered by Costa Rica, and the other countries concerned, as tantamount to granting the requested increase of the allocation. In this respect we are faced with the Latin American way of jumping to conclusions and at this juncture not to increase the allocation to the expected 75 percent will be considered as an act of bad faith on our part.

(2) In 1950, President Echandi, then serving as Costa Rican Minister in Washington, was successful in having the United Fruit Company obtain an increase in the allocation of profits from 35% to the present 50%. The United Fruit Company was able to convince the Internal Revenue Service that on the basis of its foreign investments, an increase in the percentage of taxable profit allocation to the Costa Rican subsidiary would be more equitable. Echandi believes the present allocation is still inequitable as 99% of the United Fruit Company’s Costa Rican investment, consisting of the land and all productive facilities, is actually in Costa Rica. He has expressed his intention of obtaining a greater tax return one way or another. Since he was successful in obtaining an increase in the allocation in 1950, it is difficult for him to understand why this can’t be readily done again.

(3) Any re-allocation of profits of United Fruit’s Costa Rican subsidiary will apply to the other banana producing subsidiaries in Guatemala, Honduras, Panama, Ecuador, the Dominican Republic and Colombia. This fact, admitted by Treasury, has been emphasized by President Echandi in various public pronouncements predicting a favorable re-allocation. This prospect of increased revenues has been the subject of comment in these various countries and has prompted an especially laudatory comment from President Ydígoras of Guatemala. Ydígoras said in effect “this action takes the sting out of Communist allegations that the U.S. is exploiting the Latin American countries”. To reverse the expectation will cause us trouble in the Caribbean at a most unfortunate time. We will certainly lose good will throughout the area and will be exploited by our enemies.

(4) The tax re-allocation has been an objective of primary importance to Echandi since he first suggested it during his visit to the United States. He has interpreted our willingness to cooperate by revising the pertinent Treasury regulations as an assurance that a favorable re-allocation will be made even though he has chafed at the delay in reaching a final decision as to how much. In this certainty he has made several public statements, the latest being on May 1, proclaiming his success in obtaining the re-allocation and commenting on the significance the increased revenues will mean not only to Costa Rica but to the other six countries in which United Fruit has banana producing subsidiaries. Our failure now to follow through with the re-allocation to which Echandi attaches so much importance and which is of relative insignificance for us from a loss of revenue standpoint will produce a situation of such embarrassment to Echandi that it cannot but fail to embitter his attitude toward us.

(5) If Echandi fails to secure additional revenue by means of a re-allocation of United Fruit profits he will undoubtedly resort to other measures, such as special legislation or pressures to renegotiate the Company’s contract. Should any of these measures result in additional revenues to Costa Rica then such advantages would immediately be sought by other producing countries, thus starting a chain of events which could not fail to affect our relations and those of a U.S. firm with seven countries.

Tab A contains a copy of my letter to Treasury setting forth the Department’s view of the importance of reaching a favorable decision on this tax problem.² Attached thereto is a chronological summary of events concerning the case.³

It will be seen from Tab B that Mr. Smith’s attitude was one of encouragement and I had hoped that a favorable decision might be made by March of this year.⁴ However, Mr. Smith resigned and his position was taken by Mr. Henry Wallich, who adopted a different attitude in the matter. On March 6, 1959, Mr. Stewart, Director of the Office of Central American and Panamanian Affairs, met with Mr. Wallich and his advisors and it was evident that this new group was unconvinced of the merits of United Fruit’s case (see Tab C).⁵ However, Mr. Wallich indicated that the case might be settled by a 60–40 division of the profits. In view of the political factors enumerated above, Mr. Wallich was informed that the Department thought this would not be satisfactory to the producing countries concerned.

Since that meeting the Treasury representatives with whom the Department has maintained contact have indicated that the study was progressing slowly and it was not until Mr. Samuel Baggett, Vice President and General Counsel of United Fruit Company, visited Under Secretary Scribner a few weeks ago that the matter was pushed.

In making its decision, Treasury has not called upon the United Fruit for any information other than that made in the original presentation by the company’s attorneys. This may be standard Treasury procedure but it seems to me that in a case of such obvious importance the company should be permitted to justify its case in additional conferences with the experts who have made an adverse recommendation.

Recommendation:

That you discuss this matter with Secretary Anderson in an effort to induce Treasury to render a decision on this matter that will benefit our relations with the Latin American countries involved.⁶

1. Source: Department of State, Central Files, 818.112/5–1559. Confidential. Co-drafted by Godfrey, Taylor, and Stewart.
2. The reference letter, dated March 16, 1959, is not printed. (818.112/3–1659)
3. A copy of the summary of events is in OAP Files, Lot 61 D 7, “United Fruit Company: Costa Rica, 1958.”
4. At Tab B was a copy of a memorandum from Stewart to Rubottom, June 19, 1958; see Document CR–7, footnote 1.
5. At Tab C was a memorandum of conversation between Wallich and Stewart, March 6, 1959; 818.112/3–659.
6. There is no indication on the source text of the Acting Secretary’s action on this recommendation, nor any record that the discussion actually took place, but see the letter of June 5, printed as Document CR–16.