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

CR–6. Memorandum from the Deputy Director of the Office of Middle American Affairs (Stewart) to the Assistant Secretary of State for Inter-American Affairs (Rubottom)¹

Washington, May 30, 1958

SUBJECT

• Tax Benefit for Countries in which United Fruit Company Operates.

In a conversation with President Echandi of Costa Rica on May 11,² he stated that the Costa Rican Government’s possibility of balancing its budget for the coming fiscal year depended on an increase in revenue from taxes on the United Fruit Company operations in his country. It will be recalled that Echandi appealed to the Treasury Department during his visit to the United States for a greater share of the tax returns from the United Fruit Company. At present the taxes collected by the United States are based on an arbitrary division of fifty-fifty which is explained briefly in Embassy San José telegram No. 303 of May 20.³ President Echandi told me that if Dr. Milton Eisenhower could inform him during his visit to San José that the Treasury Department had modified its determination in favor of the banana producing countries he would score, as he put it, a home run. Echandi claims to have obtained approval from the Governments of the other Central American countries where United Fruit operates to undertake to obtain increased tax returns from the Company. Whatever benefit Costa Rica received would, naturally, extend to Honduras, Guatemala and Panama among the countries that Dr. Eisenhower plans to visit.

Sam Baggett, Vice President and General Counsel of United Fruit Company, was a guest of Echandi at the inauguration ceremonies in San José. I had two talks with Baggett and he informed me that Mr. Dan Throop Smith, of the Treasury Department, who would be the person responsible for recommending a change in the tax system, appeared to be favorable toward Echandi’s request. I was present when Echandi talked with Smith in Washington and I was impressed by the Costa Rican’s reasoned arguments. Baggett told me that Smith also was favorably impressed at that time. Since then, Baggett informs me that he has talked with Smith and found him receptive to the idea of giving Costa Rica, and per se, the other banana countries, a better share of the tax returns. Since my return from Central America I have been told that the Echandi proposal is now under study by the Bureau of Internal Revenue.

I asked Mr. Baggett to send me a memorandum outlining in detail the Treasury Department’s system of assessing taxes on the United Fruit Company and he promised to do so after a brief vacation that he is taking in Costa Rica. However, we have correspondence from Ambassador Woodward on the whole matter and it is rather complete.

Mr. Baggett says that he does not believe that the basic principle used by the Treasury in assessing taxes on all foreign business done by American companies would be affected by a decision to change the percentage in so far as the United Fruit Company division of taxes is concerned. For this reason, he does not think that the Treasury Department would be setting precedent that would necessitate a revision of the whole 1950 arrangement. This has since been confirmed by Mr. Gordon, Legal Adviser in Treasury. However, if you concur, I should like to talk with Mr. Smith of Treasury to get his ideas on the matter.

Although President Echandi has made the request of the Treasury Department, I think a decision to grant the countries in which bananas are produced a greater share of the United Fruit Company’s taxes would be considered a voluntary gesture on our part if done around the time Dr. Eisenhower visits Central America. Actually, Costa Rica is the only country that has made the request. According to Mr. Baggett, the Costa Rican Government may anticipate a greater tax increase from the United Fruit Company than the Treasury is willing to give, and this might cause some disappointment to President Echandi. However, our taking the initiative in this action might prevent long, painful and unsatisfactory negotiations between the Governments. President Echandi indicated to Mr. Smith in his conversations in Washington that he preferred to discuss the matter with the Treasury Department and arrive at a mutual understanding rather than have the Costa Rican Government arbitrarily set a price on bananas delivered alongside ship at Costa Rican ports which would be the basis for taxing the Company. A move of this kind, I understand, might put United Fruit Company in the middle of a disagreeable tax situation.

An announcement of Treasury’s willingness to allow the banana producing countries to receive more of the tax revenues from United Fruit Company would undoubtedly assist in making Dr. Eisenhower’s visit to the Central American countries more successful if we decided to publicize the gesture.⁴

Recommendation:

That the Department favor the revision of the tax arrangement that will provide the countries in which United Fruit Company grows bananas to receive more tax returns, this revision to be made by Treasury through United Fruit Company and if necessary through consultation with the Costa Rican Government.⁵

1. Source: Department of State, Central Files, 818.11/5–3058. Confidential.
2. Stewart left Washington, May 5, to attend Echandi’s Inauguration at San José on May 8.
3. It reported that a Treasury Department determination in 1950 allowed the producing country to tax half the company’s profits. Willauer believed that the increased cost of capital equipment raised the producer’s share in the value of the marketed fruit, possibly justifying a revision of the 1950 determination. (961.6218/5–2058)
4. For documentation on Milton Eisenhower’s trip to Central America July 12–August 1, 1958, see Documents ETA–7; CO–1; CR–6–9; ES–2, 5–6; GT–8, 24; HO–3; NI–4, 7–9; PM–3; PA–7.
5. There is no indication on the source text of Rubottom’s action on the recommendation, but see his letter of June 19, printed as Document CR–7.