351. Memorandum from Dillon to President Kennedy, February 281
As I mentioned to you on the telephone, the Ways and Means Committee has completed action on the tax bill by adopting provisions on foreign income. What they have done essentially is to tax all income of whatever sort accruing to tax haven companies anywhere in the world with the sole exception that if such income is promptly reinvested in an underdeveloped country it will not be subject to tax. This provision will probably cause great pain and anguish among American manufacturers who have been using tax havens abroad, particularly in Switzerland.
The action of the Committee was violently attacked by John Byrnes as isolationism and as unfair to American business operating abroad. I believe the legislation is moderate and long overdue. The fact is that other countries, with very few and limited exceptions, do not permit their industrialists to make use of tax haven techniques. This is largely an American invention of the last few years and is not at all necessary for the successful operation of our investments abroad.
(1) These measures do not prevent a United States company from competing abroad through a foreign subsidiary on equal terms with the local competitors in the line of business and the country chosen for its operations—it does not eliminate the deferral of United States tax on the foreign operations so long as it is not tax haven income or unreasonably accumulated income. For example, the nontax haven United States foreign subsidiary in Germany can defer paying tax to the United States on profits on its German operations provided it does not accumulate those earnings excessively—and then it can avoid the tax by investing them in the line of business it has chosen in Germany or in Western Europe or in any line of business in any of the less developed countries.
[Facsimile Page 2](2) Nor do these measures confuse the legitimate foreign subsidiary with the tax haven. They do not affect adversely the legitimate foreign subsidiary if less than 20 percent of its income is in the form of income usually regarded as tax haven income (either passive income such as [Typeset Page 1527] dividends, interest, etc., or trading profits on transactions outside the country of incorporation), and if it does not excessively accumulate profits.
(3) These changes will deter the company which invests abroad largely because of tax haven advantages.
This action should have a substantial favorable effect on our balance of payments. We estimate that it will bring in at least $75 million a year out of operations currently under way abroad and that it will remove a substantial part of the tax incentive for new investments abroad, thereby reducing the accumulation of capital for new direct investment overseas. It is not possible to estimate how much this will be.
Finally, if Mr. Byrnes decides to try to make this a political issue, I am confident that he has the wrong end of the issue as long as we continually make it crystal clear that what we are doing is attacking tax havens and not legitimate American business.
- Hill action on tax bill adopting provisions on foreign income. No classification marking. 2 pp. Kennedy Library, Dillon Papers, Memos to President, 1/62–4/62, Box 8.↩