CR–8. Letter from the Secretary of the Treasury’s Deputy (Smith) to the Assistant Secretary of State for Inter-American Affairs (Rubottom)1
In your letter of June 19, 1958 you indicated the importance that the State Department attaches to a modification in the present allocation of income of the United Fruit Company and its subsidiary corporations so that a larger proportion of such income would be attributed to the operations of the company in Costa Rica and other Central American countries in which it is engaged in business.
As you know, President Echandi discussed this matter with us here in the Treasury on the occasion of his pre-inaugural visit to the United States. At that time we indicated that sympathetic consideration would be given to his request. In the intervening period, a thorough canvass was made of the law and the regulations governing the allocation of income where goods are produced in one country and sold in another. Despite our anxiety to reach a result which, as you indicated, would be in the national interest, this analysis led to the conclusion that there is no authority for modifying the present allocation of income.
Conceivably, the regulations could be changed so that other factors, in addition to the location of assets and the place where sales occur, would be taken into account in making income allocations and thus a larger proportion of the profits of the United Fruit Company would be attributed to Costa Rica. However, this is a time-consuming procedure, and could not be achieved within the necessary time limits. Moreover, this approach is complicated by the fact that the present regulations apply not only where goods are produced abroad and sold in the United States, but also in the converse situation, where goods are produced in the United States and sold abroad. A modification in the present regulations which would operate to advantage so far as United Fruit’s activities in Costa Rica are concerned might, by the same token, operate to the disadvantage of American firms selling American-made products in other countries.
In the light of all the factors involved, it is our conclusion that the most feasible approach to a solution of the problem with respect to Costa Rica, as well as other Latin American countries, would be to enter into bilateral income tax conventions in which, among other [Typeset Page 407] provisions, there would be an agreed-upon distribution of profits between the other signatory countries and the United States. Such a convention would have the advantage of producing a definitive solution to the problem and would presumably establish [Facsimile Page 2] other desirable conditions with respect to international trade and investment between the signatory countries and the United States. Accordingly, it is suggested that this approach be suggested in the course of the forthcoming discussions between Costa Rica and the United States on the occasion of Mr. Milton Eisenhower’s trip there.
If we can be of any further assistance in this matter, please let me know.
Sincerely yours,
- Source: Department of State, Central Files, 818.112/6–1158.↩