CR–16. Letter from the Acting Secretary of State to the Secretary of the Treasury (Anderson)1
It is our understanding that the Treasury is about to make a decision on the matter of the proper allocation for tax purposes of profits derived from the production and sale of bananas, specifically in regard to the United Fruit Company and its Costa Rican operations.2 While it is recognized that the determination of an equitable and sound solution to this problem is clearly the responsibility of the Treasury, the matter is of such importance in our relations with Costa Rica and the other banana-producing countries that the Department of State is very much concerned.
As you know, President Echandi of Costa Rica discussed this problem with the Treasury in March, 1958 and was told that sympathetic consideration would be given to his view that a fair basis for taxation required that the present system of allocating profits should be changed to effectively provide that a larger share of the overall income would be recognized as deriving from the banana-producing countries. Subsequently, to provide the basis for a change in allocation, the Internal Revenue regulations were revised to permit consideration of appropriate factors other than investment and sales in determining the proper source of income.
[Facsimile Page 2]President Echandi has understandably interpreted this action as indicating that a change favorable to Costa Rica and the other banana-producing countries would be made in the system of allocating profits. Indeed, he has gone well beyond this to publicly and repeatedly assert that the present 50–50 division would be changed to an allocation formula of 75–25 in favor of the banana-producing countries, or better.
[Typeset Page 429]We do not know whether President Echandi’s claim for a 75–25 ratio is or is not soundly based. We do understand, however, that there are special circumstances relating to the trade in bananas between Latin America and the United States, and that because of these circumstances the Costa Rican case for an improved ratio is valid. Accordingly, we believe it reasonable, under the circumstances, for Costa Rice and the other banana-producing countries to expect a significant and favorable change in the present allocation formula.
We understand that the present 50–50 formula is based exclusively on investment and sales. However we believe that, at the least, in any new allocation formula the factor of payroll should also be given weight because it reflects the economic activity of the banana companies and because, we understand, there is ample domestic precedent. We do not believe that an allocation based on sales and costs alone, without regard to the investment and its situs, would be equitable. Certainly the very substantial investment of the banana companies in the producing countries constitutes a major income producing factor.
Should it be determined in Treasury that a 75–25 allocation formula is equitable and sound, it would represent a substantial contribution to good relations with Costa Rica and the other banana-producing countries. If this is [Facsimile Page 3] not fully consistent with Treasury’s judgment regarding an equitable formula, then we would hope that a formula of at least 70–30 could be carefully considered. A decision to continue the 50–50 allocation, under the circumstances referred to above, would be most harmful to good relations with Costa Rica and the other banana-producing countries of Latin America and would not only lead to higher tax rates in these countries, but would likely result in other harmful measures.
It is, therefore, our hope that a new formula which is equitably and soundly based and which is favorable to the banana-producing countries will be adopted. It is also our hope that this action can be taken promptly.
Sincerely yours,
Acting Secretary
- Source: Department of State, Central Files, 818.112/6–559. Confidential. Drafted by Thomas R. Favell, Economic Development Division, Office of International Financial and Development Affairs; and John M. Leddy, Special Assistant to the Under Secretary of State for Economic Affairs.↩
- Fred C. Scribner, Jr., Under Secretary of the Treasury, informed the Department of State on June 3, 1959, that the Internal Revenue Service had decided that the 50–50 formula was adequate and just for Costa Rica. Scribner advised the Department of State to make representations for a more favorable division of the profits for Costa Rica without delay, if it intended to do so. (Memorandum from Rubottom to Dillon, June 4, 1959; 818.112/6–459)↩