28. Memorandum From Secretary of the Treasury Kennedy to the President’s Assistant for AffairsNational Security Affairs (Kissinger)1


  • Taxation of U.S. Firms Doing Business in Berlin

This is in reply to your memorandum of September 15, 1969, asking for views and suggestions on the German request that the United States forego its share of tax on income derived from U.S. corporate investment in Berlin to the extent that such income is accorded preferential tax treatment under German law.2 The Germans raised this issue in NATO in 1968, and have raised it through our Embassy in Bonn on several other occasions. In essence, they seek a “tax-sparing” concession under which the United States would give a foreign tax credit for an [Page 75] amount of German tax which has not in fact been paid—for a tax which has been spared by virtue of the German tax subsidy. Treasury’s policy in the past has been to oppose any tax—sparing provision with respect to Berlin.

Such a provision would require legislation, or a treaty amendment approved by a two-thirds quorum vote of the Senate, and there is reason to believe that we would have great difficulty in selling this idea on the Hill, particularly in view of the fact that the Senate has previously refused to go along with tax-sparing proposals, or even with the extension of the investment tax credit-a more modest incentive than tax-sparing-to stimulate U.S. investment abroad in the context of our tax treaties with less-developed countries.

There are several factors which we feel militate against the German request. First, we believe the Federal Republic of Germany is in a sufficiently strong economic position to enable it to subsidize the Berlin economy in ways which would not, in order to be completely effective, require the United States to give up the tax normally due. The United States is being asked to make a questionable departure from established practice and policy which is not necessary to achieve the German objectives for the Berlin economy. In any case, given the U.S. balance of payments position vis-à-vis Germany, any special provision to encourage the outflow of U.S. capital to that country seems unwarranted. Second, the incentive effect of the lower corporate tax in Berlin is not necessarily nullified by our system of taxation, since under current law the U.S. tax is only applicable (except in certain abuse situations) to repatriated profits from U.S. subsidiaries in Berlin. Therefore, if profits are retained abroad, the Berlin corporate tax incentive remains viable. Third, where there are U.S. corporations doing business in Berlin with excess foreign tax credits generated through their other German operations (or, in the case of U.S. taxpayers using the “overall” foreign tax credit limitation, their worldwide operations) such excess credits can be applied to reduce the U.S. tax on income from investments in Berlin.

There are other considerations which reinforce the above arguments, including how we could justify this exception to countries such as Jamaica and Ireland that have already requested similar treatment. Our balance of payments program has generally distinguished between industrialized countries and LDC’s, with the latter receiving special consideration; if we willingly discriminate in favor of a strong industrialized country, we can certainly expect complaints from other countries and, based on past experience, perhaps from such international organizations as the OECD.

David M. Kennedy
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 682, Germany, Volume III, 7-11/69. Confidential.
  2. The memorandum was not found.