INTEREST EQUALIZATION TAX ACT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP66B00403R000500200001-2
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 450
• Document Creation Date: December 16, 2016
• Document Release Date: April 28, 2005
• Sequence Number: 1
• Publication Date: June 29, 1964
• Content Type: REGULATION

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INTEREST EQUALIZATION TAX ACT
HEARINGS
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
EIGHTY-EIGHTH CONGRESS
SECOND SESSION
ON?
H.R. 8000
AN ACT TO AMEND THE INTERNAL REVENUE CODE OF 1954
TO IMPOSE A TAX ON ACQUISITIONS OF CERTAIN FOREIGN
SECURITIES IN ORDER TO EQUALIZE COSTS OF LONGER
TERM FINANCING IN THE UNITED STATES AND IN MAR-
KETS ABROAD, AND FOR OTHER PURPOSES
JUNE 29, 30; JULY 1 AND 2, 1964
Printed for the use of the Committee on Finance
U.S. GOVERNMENT PRINTING OFFICE
34-937 WASHINGTON : 1964
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IITTEE ON FINANCE
HARRY FOOD
RUSSELL B. LONG, Louisiana
GEORGE A. SMATHERS. Florida
CLINTON P. ANDERSON, New MIxlco
PAUL H. DOUGLAS, Illinois
ALBERT GORE, Tenno,ssee !
HERMAN E. TALMADGE. Georg4
EUGENE J. MPCARTHY. Mlant,ola
VANCE, BARTER. Indiana
1 W. FULBRIGHT, Arkansas i
ABRAHAM A. RIBICOEE, Gonne dent
II
BYRD. Virginia, Chairman
JOHN 1 WILLIAMS, Delaware
FRANK CARLSON. Kansas
WALLACE F. BENNurr, Utah
CARL T. CURTIS, Nebraska
TIIRCSToN B. MORTON, Kentucky
EVERETT McKINLEY DIRKSEN, Illinois
Ei.tz.In ill B. Sritistma. Chid Clerk
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Pap
Text of H.R. 8000 1
Letter of Hon. Douglas Dillon, Secretary of the Treasury to the chairman_ 22
Suggested amendments to the interest equalization tax bill (H.R. 8000)
proposed by the Treasury Department 23
WITNESSES
Barnes, William T., of Lybrand, Ross Bros. & Montgomery, on behalf of
the American Research & Development Corp 132
Burnham, I. W., II, senior partner, Burnham & Co.; accompanied by
Andries Woudhuysen, partner 263
Daniclian, N. R., president, International Economic Policy Association 149
Dillon, Hon. Douglas, Secretary of the Treasury 61
Feder, Arthur A., Fund of Funds, Ltd 224
Freeman, Harry L., of Janin Morgan, Brenner & Freeman 286
Gareiss, Herbert, executive director, Carl Marks & Co., Inc.; accompanied
by Dr. Forcade, international legal adviser 220
Gilbert, Robert A., Investors League, Inc 217
Haack, Robert W., president, National Association of Security Dealers,
Inc.; accompanied by H. L. Froy, chairman, foreign securities committee;
and Marc A. White, vice president and general counsel 259
Hanes, John W., Jr., partner, Wertheim & Co., New York, N.Y 161
Hodge, Charles J., on behalf of Tropical Gas Co 253
Javits, Hon. Jacob K., a U.S. Senator from the State of New York 235
King, Charles, member, Charles King & Co., New York, N.Y 177
Kearns, Henry, appearing on behalf of the Chamber of Commerce of the
United States; accompanied by Don Bostwick, Kearns International; and
John Donaldson, staff, Chamber of Commerce of the United States_ 136
Roe, Frederick, partner, Stein, Roe & Farnham 274
Samuels, Nathaniel, chairman, Foreign Investment Committee, Investment
Bankers Association of America 185
Sheets, William L., National Constructors Association; accompanied by
Loren Olson director, Fluor Corp., Ltd., Los Angeles; and John Clark,
of Davies, Olson,
& Schenck, New York 228
Smith, Dan Throop, professor of finance, Harvard Graduate School of
Business Administration 246
Waris, Michael, Jr., of Baker, McKenzie & Hightower; accompanied by
Alan Marchmant, president, Transamerica International S.A.; and
Robert Einzig, consulting economist 203
Warner, Adolphe J., partner, Model, Roland & Co., New York, N.Y 168
Winzenried, J. D., senior vice president, IIusky Oil Canada, Ltd 175
Woodfin, Gene N., general partner, Carl M. Loeb, Rhoades & Co 271
Woudhuysen, Andries D., partner, Burnham & Co., New York, N.Y.,
representing Association of Stock Exchange Firms; accompanied by
David Klee, chairman of the foreign securities committee of the asso-
ciation. James Lynch, assistant general counsel of the association; and
John Nevins, cashier of Model, Roland & Co 119
COMMUNICATIONS
American Chamber of Commerce in Japan, telegram of A. Lewis Burridge,
president, to the committee 328
American Life Convention, statement of Glendon E. Johnson, general
counsel 306
American Stock Exchange, statement of Edwin D. Etherington, president_ 357
ILI
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CONTENTS
00XL UNICATIONS?Gontirrued
Bache & Co., New York, N. , letter of Broderick Haskell, to the chair-
man 341
Brotherhood of Railroad Tr inmen, board of trustees, Cleveland, Ohio,
letter of J. II. Smith, alai min, to the chairman 352
Central Soya, Fort Wayne, I d., letter of Harold W. McMillan, chairman
of the board, to the chairn n, 315
Chemical International Finn cc', Ltd., New IOrk, N.Y., letter and en-
closure of Howard W. Mc all, Jr., president, to the chairman 290
Cochran, John D., Indianan? is, Ind., letter to the chairman 289
Davis Polk Wardwell Sunde and & Kiendl, New York, .N.Y., statement
of David A. Lindsay_ 343
First National City Bank, Ne v York, N.Y., letter and enclosure of Walter
B. Wriston, executive vice resident, to the chairman 354
Grolier, Inc., New York, N.Y, letter of John E. Goydan, controller-taxes,
to the committee 307
International Holdings Cord., New York, N.Y., letter and enclosures
of B. Alden Cushman, vice Ipresident, to the chairman 332
International Investors, Inc., tatement of John C. Van Eck, Jr., president_ 298
International Minerals & Ch mical Corp., letter of Caleb M. Edwards,
secretary, to the chairman 31.4
International Nickel Co. of ? nada, Ltd., letter of Richard A. Cabell, vice
president, to the chairman 353
Investment Bankers Associa ion of America, Foreign Investment Com-
mittee, letter and enclosur of Nathaniel Samuels, to the chairman__ _ _ 201
Joint Committee on Japan lnited States Trade, Marunouchi, Tokyo,
letter and enclosure of Tai Ishizaka, president, Federation of Economic
Organizations, Tadashi Ad chi, president, Japan Chamber of Commerce
and Industry, and Heita Inagaki, president, Japan Foreign Trade
Council, Inc., to the chairs an 296
Kaufman, Robert M., New ork, N.Y., letter and enclosure to the chair-
man 346
Life Insurance Association America, statement of Eugene M. Thor,
vice president and general ?ounsel 306
Machinery & Allied Produ is Institute, Washington, D.C., letter of
Charles W. Stewart, presit ?nt, to the chairman 329
Morgan, Stanley & Co., Ne York, N.Y., statement 336
National Foreign Trade C incil, Inc., New York, N.Y., statement of
Joseph B. Brady, vice pre dent 300
National Life Insurance C Montpelier, Vt., letter and enclosure of
L. Douglas Meredith, exec tive vice president, and chairman, committee
H G
on finance, to
on. eorg D. Aiken_ 293
New York Chamber of Com erce, New York. N.Y., statement of Mark E.
Richardson, executive vie. president.. 310
New York Stock Exchang New York, N.Y., statement of G. Keith
Funston, president 315
Nikko Securities Co., IAA., tie, letter of Toshio G. Ozeki, to the chairman__ 343
Potnerene, W. M., Newcome stown, Ohio, letter to Hon. Frank J. Lausehe__ 289
Price Waterhouse & Co., Ne York, N.Y., letter to the chairman. 328
Purvis, Ralph E., Seattle, nth., letter and enclosure to the chairman_ __ _ 345
Scharf, Henry, Weston, Con , statement 301
Smith, Barney & Co., Inc., ew York, N.Y., statement 325
Stein, Roe & Furnhain, letter of Frederick Roe to the chairman 280
Steiner, Walter V., New Yo k, N.Y., letter to the chairman 294
The Amos Tuck School of liusiness Administration, Dartmouth College,
Hanover, N.I1., letter ti J. Peter Williamson, associate professor of
business administration, to the chairman.. 295
Timmins, J. It. & Co., Newt York, N.Y., statement 312
United States Council of t ? International Chamber of Commerce, Inc.,
New York, N.Y., letter o Philip Young, president, to the chairman _ _ 350
U.S. Savings & Loan Leagu statement of Glen Troup, staff vice president_ 298
Westinghouse Electric Cork., Washington, D.C., letter and enclosure of
Claude E. Hobbs, calm 1, to the chairman _ 297
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EXHIBITS
Brief explanation of the five categories constituting private U.S. capital
exports 125
Constitutionality of the proposed Interest Equalization Tax Act 91
Foreign currency series securities (nonmarketable) issued to official institu-
tions of foreign countries 108
General description of the interest equalization tax 71
Long-term capital flows in the U.S. balance of payments, 1960 to first
quarter 1964 70
Net changes in claims on foreigners reported by U.S. banks 1960-63 and
first quarter 1964 104
Net purchases of foreign securities by U.S. residents and net changes in
bank credit extended to foreigners, 1960-63 and first quarter 1964 103
Net purchases of sales of foreign securities by U.S. residents, 1960-63 and
first quarter 1964 104
New issues of foreign securities purchased by U.S. residents by area,
1960 to first quarter 1964 70
Outstanding Treasury foreign currency security issues 110
Quarterly private U.S. capital exports by area 127
Representatives of the Joint Committee on Japan-United States Trade 142
Semiannual private U.S. capital exports by area 127
Supplementary note on the fiscal 1964 balance-of-payments deficit 75
Total outstanding short- and longrterm claims on foreigners reported by
U.S. banks 105
Total private U.S. capital exports by area 126
U.S. balance of payments, fiscal year 1963 and just three quarters of fiscal
year 1964 74
U.S. balance of payments, 1960 to first quarter 1964 69
U.S. transactions in foreign securities 9 months before and after in-
terest equalization tax 71
Validity of the effective date provision in H.R. 8000 88
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INTEREST EQUALIZATION TAX ACT
MONDAY, JUNE 29, 1964
U.S. SENATE,
COMMITTEE ON FINANCE'
Washington,D.C.
The committee met, pursuant to notice, at 10 :05 a.m., in room 2221,
New Senate Office Building, Senator Paul H. Douglas presiding.
Present: Senators Douglas (presiding), Smothers, Gore, McCarthy,
Williams, Carlson, Bennett, Morton, and Dirksen.
Also present: Elizabeth B. Springer, chief clerk.
Senator DOUGLAS. The committee will come to order.
In the absence of more senior members of the committee, I have
been asked to assume the temporary duty as presiding officer. I place
in the record a copy of the bill H.R. 8000 and a letter dated June 12,
1964, from the Secretary of the Treasury with accompanying amend-
ments recommended by the Treasury Department.
(The bill, letter from the Secretary of the Treasury, and amend-
ments recommended by the Treasury Department, follow:)
[H.R. 8000, 88th Cong., 2d sess.]'
AN ACT To amend the Internal Revenue Code of 1954 to Impose a tax on acquisitions of
certain foreign securities in order to equalize costs of longer-term dnancing in the United
States and in markets abroad, and for other purposes
Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled,
SECTION I. SHORT TITLE, ETC.
(a) Siloam TITLE.?This Act may be cited as the "Interest Equalization Tax
Act of 1963".
(b) AMENDMENT OF 1954 CODE.?Except as otherwise expressly provided, when-
ever in this Act an amendment is expressed in terms of an amendment to a
section or other provision, the reference shall be considered to be made to a
section or other provision of the Internal Revenue Code of 1954.
SEC. 2. INTEREST EQUALIZATION TAX.
(a) IMPOSITION OF TAX.?Subtitle D (relating to miscellaneous excise taxes)
is amended by adding at the end thereof the following new chapter:
"CHAPTER 41-INTEREST EQUALIZATION TAX
"See. 4911. Imposition of tax.
"Sec. 4912. Acquisitions.
"Sec. 4913. Limitation on tax on certain acquisitions.
"Sec. 4914. Exclusion for certain acquisitions.
"Sec. 4915. Exclusion for direct investments,
"Sec. 4916. Exclusion for investments in less developed countries.
"Sec. 4917. Exclusion for original or new issues where required for international
monetary stability.
"Sec. 4918. Exemption for prior American ownership.
"Sec. 4919. Sales by underwriters and dealers to foreign persons.
"Sec. 4920. Definitions.
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"SEC. 4911. IMPOSITION OF TAX.
"(a) IN GENEitAL?There Is hereby imposed, on each acquisition by a United
States person (us defined Insection 4920(0 (4)) of stock of a foreign issuer, or
of a debt obligation of a fort Ign obligor (1f such obligation has a period remain-
ing to maturity of 3 years or more), Et tax determined under subsection (b).
"(b) AMOUNT OF TAX..--
"(1) Soc.?The tax imposed by subsection (a) on the acquisition of
stock shall be equal to 15 percent of the actual value of the stuck.
"(2) DEBT onr.menoNa.?Tbe tax Imposed by subsection (a) on the
acquisition of a debt obLgation shall be equal to a percentage of the actual
value of the debt ohligatbm measured by the period remaining to its maturity
and determined in accordance with the following table:
"If the period remaining
to maturity Is:
The tax, as
a percentage of
actual value, is:
"At least 3 years, but les:: than 31/2 years 2.75 percent
At least 31/2 years, but less Ian 41/2 years 3.55 percent
At least 4% years, but less taan 51/2 years 4.35 percent
At least 5% years, but less Clan 61/2 years 5,10 percent
At least 61/2 years, but less ihan 71/2 years 5.80 percent
At least 71/2 years, but less ihan 8% years 6.50 percent
At least 81/2 years, but less than 91/2 years 7.10 percent
At least 91/2 years, but less than 10% years 7.70 percent
At least 101/2 years, but lesa then 11% years
8.30 percent
At least 11% years, but les! than 13% years
9.10 percent
At least 13% years. but less num 101/2 years 10.30 percent
At least 161/2 years, but less than 181/2 years 11.33 percent
At least 181/2 years, but less than 21% years 12.25 percent
At least 211/2 years, but less than 23% years 13.03 percent
At least 23% years, but less than 201/2 years 13.75 percent
At least 26% years, but less than 281/2 years 14.35 percent
28% years or more 15.00 percent
"(c) PERSONS LIABLE FOB TAX.?
"(1) Ix GENEHAL.?TIM tax imposed by subsection (a) shall be paid by
the person acquiring the s.nek or debt obligation involved.
"(2) CROSS REFERENCE.- -
"For imposition of 1i-clefts, on maker of fable certificate in lieu of or in addition to
las on acquisition in certain cases. see section 668L
"(d) TERMINATION OF TAX?The tax Imposed by subsection (a) shall not
apply to any acquisition made .ifter December 31, 196.1.
"SEC. 4912. ACQUISITIONS.
"(a) Ix GENERAL.?For put poses of this chapter, the term 'acquisition' means
any purchase, transfer, distribution, exchange, or other transaction by virtue
of which ownership Is obtain( d either directly or through a nominee, custodian,
or agent. A United States pzrson acting as a fiscal agent in connection with
the redemption or purchase for retirement of stock or debt obligations (whether
or not acting under a trust arrangement) sball not be considered to obtain
ownership of such stock or debt obligations. The exercise of a right to convert
a debt obligation (as defined In section 4920(a) (1)) into stock shall be deemed
an acquisition of stack from the foreign Issuer by the person_ exercising such
right. Any extension or renewal of an existing debt obligation requiring affirma-
tive action of the obligee sh ill be considered the acquisition of a new debt
obligation.
"(b) SPECIAL Rut-Ea.?For urposes of this chapter.?
"(1) CERTAIN TRANSFER/ TO FOREIGN 1RUSTS.?Any transfer (other than in
a sale or exchange for fall and adequate considertion) of money or other
property to a foreign trust shall, if such trust acquires stock or debt obliga-
tions (of one or more for .lign issuers or obligors) the direct acquisition of
which by the transferor would be subject to the tax imposed by section
4911, be deemed an acquisition by the transferor (as of the time of such
transfer) of stock of a ioreign issuer in an amount equal to the actual
value of the money or property transferred or, if less. the actual value of
the stock or debt ohligatit as RO acquired by such trust. Contributions to a
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foreign pension or profit-sharing trust established by an employer, made
'by an employee who performs personal services for such employer on a full-
time basis in a foreign country (and is not an owner-employee as defined in
section 401(c) (3) ), shall not be considered under the preceding sentence
as transfers which may be deemed acquisitions of stock of a foreign issuer.
"(2) CERTAIN TRANSFERS TO FOREIGN CORPORATIONS AND PARTNERSHIPS.?
Any transfer of money or other property to a foreign corporation or a foreign
partnership?
"(A) as a contribution to the capital of such corporation or partner-
ship, or
"(B) in exchange for one or more debt obligations of such corporation
or partnership, if it is a foreign corporation or partnership which is
formed or availed of by the transferor for the principal purpose of
acquiring (lathe manner described in section 4915(c) (1.)) an interest
in stock or debt obligations the direct acquisition of which by the
transferor would be subject to the tax imposed by section 4911,
shall be deemed an acquisition by the transferor of stock of a foreign cor-
poration in an amount equal to the actual value of the money or property
transferred.
"(3) ACQUISITIONS FROM DOMESTIC CORPORATION OR PARTNERSHIP FORMED
OR AVAILED OF TO OBTAIN FUNDS FOR FOREIGN ISSUER OR OBLIGOR.--The acquisi-
tion of stock or a debt obligation of a domestic corporation (other than a
domestic corporation described in section 4920(a) (3) (B) ), or a domestic
partnership, formed or availed of for the principal purpose of obtaining
funds (directly or indirectly) for a foreign issuer or obligor, shall be deemed
an acquisition (from such foreign issuer or obligor) of stock or a debt
obligation of such foreign issuer or obligor.
"(4) REORGANIZATION RICO HAN GES.?A ny acquisition of stock ' or debt
obligations of a foreign issuer or obligor in an exchange to which section
354, 355, or 356 applies (or would, but for section 367, apply) shall be deemed
an acquisition from the foreign issuer or obligor in exchange for its stock or
for its debt obligations.
"SEC. 4913. LIMITATION ON TAX ON CERTAIN ACQUISITIONS.
"(a) CERTAIN SURRENDERS, EXTENSIONS, RENEWALS, AND EXERCISES.?
" ( 1 ) GENERAL RULE.?If stock or a debt obligation of a foreign issuer or
obligor is acquired by a United States person as the result of--
"(A) the surrender to the foreign obligor, for cancellation, of a debt
obligation of such obligor;
"(B) the extension or renewal of an existing debt obligation re-
quiring affirmative action of the obligee; or
"(0) the exercise of an option or similar right to acquire such stock
or debt obligation (or a right to convert a debt obligation into stock),
then the tax imposed on such acquisition shall not exceed the amount de-
termined under paragraph (2) or (3).
"(2) GENERAL LIMITATION.?Except in cases to which paragraph (3) ap-
plies, the tax imposed upon an acquisition described in paragraph (1) shall
be limited to?
"(A) the amount of tax imposed by section 4911, less
"(B) the amount of tax which would have been imposed under section
4911 if the debt obligation which was surrendered, extended, or re-
newed, or the option or right which was exercised, had been acquired
in a transaction subject to such tax immediately before such surrender,
extension, renewal, or exercise.
For purposes of this paragraph, a defaulted debt obligation of the govern-
ment of a foreign country or a political subdivision thereof (or an agency
or instrumentality of such a government) which has been in default as to
principal for at least 10 years and which is surrendered in exchange for
another debt obligation of that government (or agency or instrumentality)
shall be deemed to have an actual value and period remaining to maturity
equal to that of the debt obligation acquired.
"(3) SPECIAL LIMITATION S.--
" (A) CoNvusslons OF DEBT OBLIGATIONS INTO STOCK.?The tax imposed
upon an acquisition of stock pursuant to the exercise of a right to con-
vert a debt obligation (as defined in section 4920(a) (1) ) into stock
shall be limited to?
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"(I) the amount of tax which would have been imposed by see-
don 4911 if the debt obligation, pursuant to section 4020(a) (2) (D),
had been treated as stock at the time of its acquisition by the person
exercising the right (or by a decedent from whom such person ac-
quired the right by bequest or inheritance or by reason of such dece-
dent's death), less
"(1i) the amount of tax paid by the person exercising the right
(or by such decedent) as a result of the acquisition of the convertible
debt obligation.
"(B) EXERCISE OF CERTAIN SITARF:ITOLDF,RS' abaraa.?The tax imposed
upon an acquisition of stock or a debt obligation of a foreign corporation
by a United States person who is a shareholder of such corporation,
where?
"(i) the stock or debt obligation is acquired pursuant to the exer-
cise of an option or similar right to acquire such stock or debt obli-
gation which was acquired by such person in a distribution by such
corporation with respect toils stock, and
"(11) such option or right by Its terms expires or terminates
within a period not exceeding 90 days from the date so distributed
to him,
shall be limited to the amount of tax which would have been imposcd by
section 4011 if the price paid under such option or right were the actual
value of the stock or debt obligation acquired.
" (C) CERTAIN EMPLOYEE STOCK OPTIONS.?The tax imposed upon an
acquisition of stock of a foreign issuer by a United States person pursu-
ant to the exercise of an option or similar right described in section
4014(a) (7) shall he limited to the amount of tax which would have
been imposed under section 4911 if the price paid under such option or
right were the actual value of the stock acquired.
"(b) CERTAIN TRANSFERS Wuicir ARE DEEMED ACQI7ISITIONS.?The tax imposed
upon an acquisition which is deemed to have been made by reason of a transfer
of money or other property to a foreign trust, or a foreign corporation or partner-
ship, as described in section 4912(b) (1) or (2), shall be limited to?
"(1) the amount of tax imposed by section 4911, less
"(2) the amount of tax paid by the transferor RS the result of the transfer
beiug otherwise taxable as an acquisition under this chapter.
"SEC. 4914. EXCLUSION FOR CERTAIN ACQUISITIONS.
"(a) TRANSACTIONS NOT CONSIDERED AcquIsmoNa.?The term 'acquisition'
shall not include -
"(1) any transfer between a person and his nominee, custodian, or agent;
"(2) any transfer described in section 4343(n) (relating to certain trans-
fers by operation of law from decedents, minors, incompetents, financial
institutions. bankrupts, successors, foreign govermeents and aliens, trustees,
and survivors) ;
"(3) any transfer by legacy, bequest, or inheritance to a United States
person, or by gift to a United States person who is an Individual;
"(4) any distribution by a corporation of its stock or debt obligations to
a shareholder with respect to or In exchange for its stock;
"(5) any exchange to which section 361 applies (or would. hut for section
367, apply), where the transferor corporation was a domestic corporation
and was engaged in the active conduct of a trade or business, other than as
a dealer in securities, immediately before the date on which the assets in-
volved are transferred to the acquiring corporation;
"(6) any exercise of a right to convert indebtedness, pursuant to its terms.
into stock, if such indebtedness is treated as stock pursuant to section 4920
(a) (2)(D) ; or
"(7) the grant of a stock option or similar right to a United States person
who is an individual, for any reason connected with his employment by a
corporation, if such option or right (A) Is granted by the employer corpora-
tion, or its parent or subsidiary corporation, to purchase stock of any of
such corporations, and (B) by its terms is not transferable by such United
States person otherwise than by will or the laws of descent and distribution,
and is exercisable, during his lifetime, only by him.
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"(b) EXCLUDED AcquisrrioNs.?The tax imposed by section 4911 shall not
apply to the acquisition?
" (1 ) THE UNITED STATES.?Of stock or debt obligations by an agency or
wholly owned instrumentality of the United States.
"(2) COMMERICAL BANE LOANS.?
"(A) Of debt obligations by a commercial bank in making loans in
? the ordinary course of its commercial banking business.
? "(B) Of stock or debt obligations by a commercial bank through
foreclosure, where such stock or debt obligations were held as security
for loans made in the ordinary course of its commercial banking
business.
"(3) ACQUISITIONS REQUIRED UNDER FOREIGN LAW.?Of stock Or debt obli-
gations by a United States person doing business in a foreign country to
the extent that such acquisitions are reasonably necessary to satisfy mini-
mum requirements relating to holdings of stock or debt obligations of for-
eign issuers or obligors imposed by the laws of such foreign country-; except
that if any of such requirements relate to the holding of insurance reserves,
the exclusion otherwise allowable under this paragraph with respect to
acquisitions made by such United States person during any calendar year
shall be reduced by the maximum amount of the exclusion which could be
allowed under subsection (e) with respect to acquisitions made by such
person during that year, or by the amount of the insurance reserves which
must be held in order to satisfy such requirements, whichever is less.
"(4) EXPORT CREDIT, ETC., TRANSACTIONS.?Of stock Or debt obligations
arising from the sale of property or services by United States persons, to
the extent provided in subsection (c).
"(5) LOANS TO ASSURE RAW MATERIALS SOURCES.?Of debt obligations by
United States persons in connection with loans made to foreign corporations
to assure raw materials sources, to the extent provided in subsection (d).
"(6) ACQUISITIONS BY INSURANCE COMPANIES DOING BUSINESS IN FOREIGN
COUNTRIES.?Of stock or debt obligations by insurance companies doing busi-
ness in foreign countries, to the extent provided in subsection (e).
"(7) ACQUISITIONS BY CERTAIN TAX-EXEMPT LABOR, FRATERNAL, AND SIMILAR
ORGANIZATIONS HAVING FOREIGN BRANCHES OR CHAPTERS.--Of stock or debt
obligations by certain tax-exempt United States persons operating in foreign
countries through local organizations, to the extent provided in subsec-
tion (f).
"(e) EXPORT CREDIT, ETC., TRANSACTIONS.?
"(1) IN GENERAL?The tax imposed by section 4911 shall not apply to
the acquisition from a foreign obligor of a debt obligation arising out of
the sale of tangible personal property or services (or both) to such obligor by
any United States person, if?
"(A) payment of such debt obligation is guaranteed or insured, in
whole or in part, an agency or wholly owned instrumentality of the
United States; or
"(B) the United States person acquiring such debt obligation makes
the sale in the ordinary course of his trade or business and not less than
85 percent of the purchase price is attributable to the sale of property
manufactured, produced, grown, or extracted in the United States, or to
the performance of services by such United States person (or by one or
more includible corporations in an affiliated group, as defined in section
1504, of which such person is a member), or to both.
The term 'services', as used in this paragraph and paragraph (2), shall not
be construed to include functions performed as an underwriter.
"(2) ALTERNATE RULE FOR PRODUCING EXPORTERS.?The tax imposed by see-
tion 4911 shall not apply to the acquisition by a United States person from
a foreign issuer or obligor of its stock in payment for, or of a debt obligation
arising out of, the sale of tangible personal property or services (or both)
to such issuer or obligor, if
"(A) not less than 30 percent of the purchase price is attributable to
the sale of property manufactured, produced, grown, or extracted in
the United States by such United States person (or by one or more
includible corporations in an affiliated group, as defined in section 1504,
of which such person is a member), or to be performance of services by
such United States person (or by one or more such corporations), or to
both, and
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"(B) not less than 50 percent of the purchase price is attributable to
the sale of property manufactured, produced. grown, or extracted in
the United States, or to the performance of services by United States
persons, or to both.
"(3) EXPORT-RELATED LOANS?The tax imposed by section 4911 shall not
apply to the acquisition from a foreign obligor by a United States person of
a debt obligation arising out of a loan made to the obligor to increase or
maintain sales of tangible personal property produced, grown, or extracted
in the United States by such United States person (Dr by one or more in-
cludible corporations in an affiliated group, as defined in section 1504, of
which such person is a member), but only if the proceeds of the loans will
be used by the obligor for the installation, maintenance, or improvement of
facilities outside the United States which (during the period the loan is
outstanding) will be used for the storage, handling, transportation, proces-
sing, packaging, or servicing of property a substantial portion of which is
tangible personal property produced, grown, or extracted in the United
States by such person (or one or more such corporations).
"(4) OTHER LOANS REI ATED TO CERTAIN SALES BY UNITED STATES PERSONS.?
The tax imposed by section 4911 shall not apply to the acquisition from a
foreign obligor by a United States person of a debt obligation of such obligor
if such debt obligation-
"(A) was received by such United States person as all or part of the
purchase price provided in a contract under which the foreign obligor
agrees to purchase for a period of 3 years or more ores or minerals
(or derivatives thereof) extracted outside the United States?
"(1) by such United States person;
"(11) by one or more ineludible corporations in an affiliated group
(as defined in section 48(c) (3) (0)) of which such person is a mem-
ber ; or
"(III) by a corporation at least 10 percent of the total combined
voting power of all classes of stock of which is owned by such
United States person. if at least 50 percent of such voting power is
owned by United States persons each of whom owns at least 10
percent of such voting power; or
"(B) arises out of a loan (made by such United States person to such
foreign obligor) the proceeds of which will be used by such obligor for
the installation. maintenance, or improvement of facilities outside the
United States which (during the period the loans is outstanding) will
be used for the storage, handling, transportation, processing, or servicing
of ores or minerals (or derivatives thereof) a substantial portion of
which IS extracted outside the United States by such United States per-
son or by a corporation referred to in clause (ii) or (Ili) of subpsra-
graph (A).
"(5) Caoss REFERENCE.?
"For I03. of exclusion otherwise allowable under this subsection in case of certain
subsequent transfers. see subaralon (R)?
(d) Los:ss To ASSURE RAW MA L FACIALS SOURCES.?
"(1) GENERAL RI-LE.? The tax imposed by section 4911 shall not apply
to the acquisition by a Vatted States person of a debt obligation arising out
of a loan made by such person to a foreign corporation, if?
"(A) such foreign corporation extracts or processes ores or minerals
the available deposits of which in the United States are inadequate to
satisfy the needs of domestic produces:
"(B) United States persons own at the time of such acquisition at
least 50 percent of the total combined voting power of all classes of
stork of such foreign corporation, and
"(C) such loan will be amortized under a contract or contracts in
which persons owning stock of surh corporation (Including at least one
of the United States persons referred to in subparagraph (B)) agree
to pay during the period remaining to maturity of such obligation, by
purchasing a part of the production of such corporation Or otherwise.
a portion of such corporation's costs of operation and costs of amortizing
outstanding loans.
"(2) LIMITATION.?The exclusion from tax provided by paragraph (1)
shall apply to the acquisition of any debt obligation of a foreign corpora-
tion only to the extent that?
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"(A) the applicable percentage of (i) the actual value of the debt.
obligation acquired, plus (ii) the actual value (determined as of the
time of such acquisition) of all other debt obligations representing
loans which were theretofore made to the foreign corporation during
the same calendar year and which are amortizable under contracts of
the type described in paragraph (1) (0), exceeds
"(B) the actual value of the debt obligations described in subpara-
graph (A) (ii) representing loans made by United States persons, to
the extent that the acquisition of such obligations was excluded from
tax under this subsection.
As used in this paragraph with respect to the acquisition of a debt obliga-
tion, the term 'applicable percentage' means the lesser of (i) the percentage
of the total combined voting power of all classes of stock of the foreign
corporation which is owned by United States persons at the time of such
acquisition, or (ii) the percentage of the corporation's operating and
amortization costs for the calendar year which all such United States per-
sons have agreed to pay (as of the time of such acquisition) under con-
tracts of the type described in paragraph (1) (0).
"(e) ACQUISITIONS BY INSURANCE COMPANIES DOING BUSINESS IN FOREIGN
COUNTRIES.?
" (1) IN GENERAL.?The tax imposed by section 4911 shall not apply to the
acquisition of stock or a debt obligation by a United States person which
is an insurance company subject to taxation under section 802, 821, or
831, if?
"(A) such stock or debt obligation is designated (in accordance
with paragraph (3) ) as part of a fund of assets established and main-
tained by such insurance company (in accordance with paragraph (2) )
with respect to foreign risks insured or reinsured by such company
under contracts (including annuity contracts) which, by their terms,
provide that the proceeds shall be payable only in the currency of a
foreign country; and
"(B) the actual value of all of the assets held in such fund im-
mediately after the stock or debt obligation has been designated as a
part thereof does not exceed 110 percent of the applicable allowable
reserve determined in accordance with paragraph (4).
As used in this subsection, the term 'foreign risks' means risks in connec-
tion with property outside, or liability arising out of activity outside, or
in connection with the lives or health of residents of countries other than,
the United States.
"(2) ESTABLISHMENT AND MAINTENANCE OF FUND OF ASSETS.?EReh in-
surance company which desires to obtain the benefit of exclusions under
this subsection shall (as a condition of entitlement to any such exclusion)
establish and maintain a fund (or funds) of assets in accordance with
this paragraph and paragraph (3). A life insurance company (as defined
in section 801 (a) ) shall establish such a fund of assets separately for
each foreign currency (other than the currency of a country which quali-
fies as a less developed country) in which the proceeds or its insurance
contracts are payable and for which insurance reserves are maintained by
such company, and with respect to which it desires to obtain the benefits
of exclusions under this subsection; and the preceding sentence shall be
applied separately to each such fund in determining the company's entitle-
ment to exclude acquisitions of stock and debt obligations designated as a
part thereof. An insurance company other than a life insurance company
(as so defined) shall establish a single fund of assets for all foreign cur-
rencies (other than currencies of countries which qualify as less developed
countries at the time of the initial designation) in which the proceeds of
its insurance contracts are payable and for which insurance reserves are
maintained by such company.
"(3) DESIGNATION OF ASSETS.?
"(A) INITIAL DESIGNATION.?
"(i) REQUIREMENT OF INITIAL DESIGNATION.?AR insurance com-
pany desiring to establish a fund (or funds) of assets under para-
graph (2) shall initially designate, as part or all of such fund
(or funds), stock of foreign Issuers, or debt obligations of foreign
obligors haying a period remaining to maturity of 3 years or more,
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or both, which it owned on December 10, 1963, to the extent tint
such stock or debt obligations or both had an actual value as of
such date not hi excess in the ease of any such fund) of 110
percent of the applicable allowable reserve of such company as
determined in accordance with paragraph (4) (A). The designs-
nation or designations which an insurance company is required
Ii; make under the preceding sentence shall be made first from
stock and debt obligations which were acquired by such company
on or before July 18, 1063, and shall in no case include any stock
or debt obligation described in paragraph (1), (2), or (3) of
section 4916(a).
"(ii) TIME ANT) MANNER OF INITIAL DESIGNATION.?Any init;a1
designation which an insurance company is required to make under
this subparagraph shall be made on or before the 30th day after
the date of the enactment of this chapter (or at such later time
as the Secretary or his delegate may by regulations prescribe) by
the segregation on the books of such company of the stock or debt
obligations tor both) designated.
"(B) DESIGNATIONS TO MAIN. TAM FUNIL?To the extent permitted by
subparagraph, (C). an insurance company may claim an exclusion
under this subsection with respect to the acquisition of stock or a debt
obligation of a foreign issuer or obligor after December 10, 1903, if
such company designates such stock or debt obligation as part of a
fund of assets described in paragraph (2) before the expiration of 30
days after the date of such acquisition (and continues to own it until
the time the designation is made) except. that any such stock or debt
obligation acquired before the initial designation of assets to the fund
is actually made as provided in subparagraph (A) (ii) may be desig-
nated under this subparagraph at the time of such initial designation
without regard to such 30-tiny and continued ownership requirements.
"(C) LT:unarm:v.?No designation of stock or a debt obligation as
part of a fund of assets shall be made under this paragraph to the
extent that, immediately thereafter, the actual value of ail of the assets
held in such fund would exrectl 110 percent of the applicable allowable
reserve determined Iii accordance with paragraph (4).
"(4) DETERMINATION 01. RESERVES.--
"(A) GENERAL RULE.?For purposes of this subsection, the term
'allowable reserve' means
"(I) In the case of a life insurance company (as defined In
section 801(a)), the Items taken into account under section 810(c)
arising out of contracts of insurance and reinsurance (including
annuity contracts) which relate to foreign risks and the proceeds
of which are payable in a single foreign currency (other than the
currency of a less developed country) ; and
"WY In the case of an Insurance company other than a life
Insurance company (as so defined), the amount of its unearned
premiums and unpaid losses which relate to foreign risks insured
or reinsured under contracts providing for payment in foreign
currencies (other than currencies of less developed countries)
and which are taken into account in computing taxable income
under section 832(b) (-I) and (5) (for such purpose treating
underwriting income of an insurance company subject to taxation
under section 821 as taxable income under section 832).
The determination of an allowable reserve of an insurance company
for any calendar year shall be made as of the close of the previous
calendar year.
"(B) SeEctst, ELECTION wrrn RESPECT TO DETERMINATION OF ALLOWABLE
RESERVE.?Notwitlistandlog the last sentence of subparagraph (A), an
insurance company which has established a fund of assets under this
subsection may elect, In such manner and form as the Secretary or his
delegate shall by regulations prescribe and at the time It Is required
under section 0076 to file its return for the period in which the last
day of the calendar year occurs, to make the determination of the allow-
able reserve applicable to suet' fund with respect to such year as of the
close of such year. Upon making swat election the company may (if the
allowable reserve as so determined is higher than as determined under
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subparagraph (A) ) designate additional stock or debt obligations (or
both) as part of such fund, so long as the company still owns such stock
or debt obligations at the time of designation and the actual value of
all of the assets held in such fund is not increased to more than 110
percent of the allowable reserve applicable to such fund as determined
under this subparagraph. Any tax paid by such company under section
4911 on the acquisition of the additional stock or debt obligations so
designated shall constitute an overpayment of tax; and, under regula-
tions prescribed by the Secretary or his delegate, credit or refund
(without interest) shall be allowed or made with respect to such over-
payment.
"(5) NONRECOGNITION OF ARTIFICAL INCREASES IN ALLOWABLE RESERVE.?An
insurance or reinsurance contract which is entered into or acquired by an
insurance company for the principal purpose of artificially increasing the
amount determined as an allowable reserve as provided in paragraph (4)
shall not be recognized in computing whether an acquisition of stock or a
debt obligation of a foreign issuer or obligor can be excluded under this sub-
section.
? "(f) ACQUISITIONS BY CERTAIN TAX-EXEMPT LABOR, FRATERNAL, AND SIMILAR
ORGANIZATIONS HAVING FOREIGN BRANCIIES OR CIIAPTERS.?The tax imposed by
section 4911 shall not apply to the acquisition of stock or debt obligations by a
United States person which is described in section 501(c) and exempt froin
taxation under subtitle A, and which operates in a foreign country through a
local organization or organizations, to the extent that?
"(1) such acquisition results from the investment or reinvestment of
contributions or membership fees paid in the currency of such country by
individuals who are members of the local organization or organizations, and
"(2) the stock or debt obligations acquired are held exclusively for the
benefit of the members of any of such local organizations.
"(g) LOSS OF ENTITLEMENT TO EXCLUSION IN CASE OF CERTAIN SUBSEQUENT
TRANSFERS.?
? " (1) IN GENERAL ?
"(A) Where an exclusion provided by paragraph (1) (B), (2), (3),
or (4) of subsection (c), or the exclusion provided by subsection (d),
has applied with respect to the acquisition of a debt obligation by any
person, but such debt obligation is subsequently transferred by such
person (before the termination date specified in section 4911 (d) ) to
a United States person otherwise than?
"(i) to any agency or wholly-owned instrumentality of the
United States;
"(ii) to a commercial bank acquiring the obligation in the ordi-
nary course of its commercial banking business; or
"(iii) in a transaction described in subsection (a) (1) or (2), or
a transaction (other than a transfer by gift) described in sub-
section (a) (3),
then liability for the tax imposed by section 4911 (in an amount deter-
mined under subparagraph (D) of this paragraph) shall be incurred
by the transferor (with respect to such debt obligation) at the time
of such subsequent transfer.
"(B) Where the exclusion provided by paragraph (2) of subsection
(c) has applied with respect to the acquisition of stock by any person,
but such stock is subsequently transferred by such person (before the
termination date specified in section 4911 (d) ) to a United States person
otherwise than in a transaction described in subsection (a) (1) or (2),
or a transaction (other than a transfer by gift) described in subsection
(a) (3), then liability for the tax imposed by section 4911 (in an amount
determined under subparagraph (D) of this paragraph) shall be in-
curred by the transferor (with respect to such stock) at the time of
such subsequent transfer.
"(C) Where the exclusion provided by subsection (f) has applied
with respect to the acquisition of stock or a debt obligation by any per-
son, but such stock or debt obligation is subsequently transferred by
such person (before the termination date specified in section 4911 (d) ) to
any United States person, then liability for the tax imposed by section
4911 (in an amount determined under subparagraph (D) of this para-
graph) shall be incurred by the transferor (with respect to such stock or
debt obligation) at the time of such subsequent transfer.
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"(D) In any case where an exclusion provided by paragraph (1). (By,
(2), (3), or (4) of subsection (c) or by subsection (d) or (f) has
applied, but a subsequent transfer described in subparagraph (A),
(B), or (C) of this paragraph occurs and liability for the tax imposed
by section 4911 Is incurred by the transferor as a result thereof, the
amount of such tax shall be equal to the amount of tax for which the
transferor would bare been liable under such section upon his acquisition
of the stock or debt obligation Involved If such exclusion had not applied
with respect la such acquisition.
"(2) UNITED STATES PERSON TREATED AS FOREIGN PERSON ON DISPOSITION OF
CERTAIN ssomurtsa?For purposes of this chapter, if, after December 10,
1963, a United States person sells or otherwise disposes of stock or a debt
obligation which it?
"(A) acquired to satisfy minimum requirements imposed by forcigrt
law and with respect to which it claimed an exclusion under subsection
(b) (3), or
"(B) designated (or was required to designate) as part of a fund
of assets under subsection (e),
such person shall not, with respect to that stock or debt obligation, be con-
sidered a United Stales person.
"SEC. 4915. EXCLUSION FOR DIRECT INVESTMENTS.
"(a) IN GENERAL.?
" (1) EXCLUDED ACQUISITIONS.?Except as provided In subsections (c) and
(d) of this section, the tax Imposed by section 4911 shall not apply to the
acquisition by a United States person (A.) of stock or a debt obligation or
a foreign corporation if immediately after the acquisition such person (or
one or more ineludible corporntions in an affiliated group, as defined In sec-
tion 1504, of which such person is a member) owns (directly or indirectly) 10
percent or more of the total combined voting power of all classes of stock
of such foreign corporation, or (B) of stock or a debt obligation of a foreign
partnership It immediately after the acquisition such person owns (directly'
or indirectly) 10 percent or more of the profits Interest in such foreign
partnership. For purposes of the preceding sentence, stock owned (directly
or indirectly) by or for a foreign corporation shall be considered as being
owned proportionately by Its shareholders, and stock owned (directly or in-
directly) by or for a foreign partnership shall be considered as being owned
proportionately by its partners.
"(2) OVERPAYMENT WITH RESPECT TO CERTAIN TAXABLE ACQUISITIONS.?The
tax paid under section 4911 on the acquisition of stock of a foreign corpr?ra-
tion or foreign partnership by a United States person shall (unless this sub-
section is inapplicable by reason of subsection (c) or (d)) constitute an
overpayment of tax If such person continuously holds such stock from the-
time of its acquisition to the last day of the calendar year in which the acqui-
sition was made and as of such last day meets the ownership requirement
of paragraph (1). Under regulations prescribed by the Secretary or his
delegate, credit or refund (without interest) shall be allowed or made with
respect to such overpayment.
"(b) SPECIAL RULE FOR GOVERN MENT-CONTEOLLED ENTERPRISES.?A United
States person shall be considered to meet the ownership requirement. of subsec-
tion (a) (1) with respect to a foreign corporation or a foreign partnership if?
"(1) the government of a foreign country or any political subdivision
thereof, or any agency or instrinuentality of such a government, directly or
Indirectly through such corporation or partnership or otherwise. restricts to
less than 10 percent the percentage of the total combined voting power of all
classes of stock of such corporation, or the percentage of the profits interest
in such partnership, which may be owned by such United States person:
"(2) such person OWLIS at least 5 percent of the total combined voting
power of so much of such stock, or at least 5 percent of so much of such
profits interest, as is not owned by any such government, agency, or instru-
mentality;
"(3) a trade or business actively conducted In one or more foreign coun-
tries by such United States person (or by one or more corporations in an
affiliated group, as defined in section 48(c) (3) (C), of which such person is
a member) Is directly related to the business carried on by such foreign
corporation or foreign partnership; and
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"(4) such person, and one or more other United States persons each of
which satisfies the conditions set forth in paragraphs (2) and (3), together
meet the ownership requirement of subsection (a) (1).
"(c) EXCEPTION FOR FOREIGN CORPORATIONS OR PARTNERSHIPS FORMED OR
AVAILED OF FOR TAX AVOIDANCE.?
"(1) IN GENERAL.?The provisions of subsections (a) and (b) shall be
inapplicable in any case where the foreign corporation or foreign partner-
ship is formed or availed of by the United States person for the principal
purpose of acquiring, through such corporation or partnership, an interest
in stock or debt obligations (of one or more other foreign issuers or obligors)
the direct acquisition of which by the United States person would be subject
to the tax imposed by section 4911.
"(2) COMMERCIAL BANKS, UNDERWRITERS, AND REQUIRED HOLDINGS.?For
purposes of this subsection, the acquisition by a United States person of
stock or debt obligations of a foreign corporation or foreign partnership
which acquires stock or debt obligations of foreign issuers or obligors?
"(A) in making loans in the ordinary course of its business as a com-
mercial bank,
"(B) in the ordinary course of its business of underwriting and dis-
tributing securities issued by other persons, or
"(C) to satisfy minimum requirements relating to holdings of stock
or debt obligations of foreign issuers or obligors imposed by the laws of
foreign countries where such foreign corporation or foreign partner-
ship is doing business,
shall not, by reason of such acquisitions by the foreign corporation or foreign
partnership, be considered an acquistion by the United States person of an
interest in stock or debt obligations of foreign issuers or obligors,
"(3) LOSS OF ENTITLEMENT TO EXCLUSION OF REFUND WHERE FOREIGN COR-
PORATION OR PARTNERSHIP IS AVAILED OF FOR TAX AVOIDANCE.--In any case
where?
"(A) the exclusion provided by subsection (a) (1) has applied with
respect to the acquisition of stock or a debt obligation by a United
States person, or
"(B) a credit or refund of tax under subsection (a) (2) has been re-
ceived by a United States person with respect to acquisitions of stock
made during a calendar year,
but the foreign corporation or partnership is availed of by such person
(after the acquisition described in subparagraph (A) is made or the calendar
year described in subparagraph (B) has ended, but before the termination
date specified in section 4911(d) ) for the principal purpose described in
paragraph (1) of this subsection, then liability for the tax imposed by section
4911 shall be incurred by such person (with respect to such stock or debt
obligation) at the time the foreign corporation or partnership is so availed
of; and the amount of such tax shall be equal (in a case described in sub-
paragraph (A) ) to the amount of tax for which such person would have
been liable under such section upon his acquisition of the stock or debt
obligations involved if such exclusion had not applied to such acquisition,
or (in a ease described in subparagraph (B) ) to the aggregate amount of
tax for which such person was liable under such section upon his acquisi-
tions of the stock involved.
"(d) EXCEPTION FOR ACQUISITIONS MADE WITH INTENT TO SELL TO UNITED
STATES PERSONS.?The provisions of subsections (a) and (b) shall be inapplicable
in any case where the acquisition of stock or debt obligations of the foreign cor-
poration or foreign partnership is made with an intent to sell, or to offer to sell.
any part of the stock or debt obligations acquired to United States persons.
"SEC. 4916. EXCLUSION FOR INVESTMENTS IN LESS DEVELOPED COUN-
TRIES.
"(a) GENERAL RULE?The tax imposed by section 4911 shall not apply to the
acquisition by a United States person of?
"(1) a debt obligation issued or guaranteed by the government of a less
developed country or a political subdivision thereof, or by an agency or in-
strumentality of such a government;
"(2) stock or a debt obligation of a less developed country corporation;
or
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"(3) a debt oblIgallon Issued by an individual or partnership resident in
a less developed country In return for property which is used, consumed, or
disposed of wholly within one or more less developed countries.
"(b) LESS DEVELOPED COUNTRY DEFINED.?For purposes of this section, the
term 'less developed country' means any foreign country (other than an area
within the Sino-Soviet bloc) with respect to which, as of the date of an acquisi-
tion referred to in subsection (a). there Is in effect an Executive order by the
President of the United States designating such country as an economically
less developed country for purposes of the tax imposed by section 4911. For
purposes of the preceding sentence, Executive Order Numbered 11071, dated
December 27, 1962 (designating certain areas as economically less developed
countries for purposes of ,subparts A and F of part III of subchapter N, and
section 1248 of part IV of subchapter P, of chapter 1), shall be deemed to have
been issued and in effect, fur purposes of the tax imposed by section 4911, on
July 18, 1963, and continuously thereafter until there is in effect the Executive
order referred to in the preceding sentence. An oversea territory, department,
province, or possession of any foreign country may be designated as a separate
country.
No designation shall be made under this subsection with respect to any of the
following:
Australia Luxembourg
Austria Monaco
Belgium Netherlands
Canada New Zealand
Denmark Norway
France Republic of South Africa
Germany (Federal Republic, San Marino
Hong Kong Spain
Italy Sweden
Japan Switzerland
Liechtenstein United Kingdom.
After the President (under the first sentence of this subsection) has designated
any foreign country as an economically less developed country for purposes of
the tax imposed by section 4011. he shall not terminate such designation (either
by issuing an Executive order for that purpose or by issuing an Executive order
which has the effect of terminating such designation) unless, at least 30 clays
before such termination, he has notified the Senate and House of Representatives
of his Intention to terminate such designation.
"(C) LESS DEVELOPED CoUNTRY CORPORATION DEFINED.?
" (1) IN OENERAL.?For purposes of this section, the term 'less developed
country corporation' means a foreign corporation which for the applicable
periods set forth in paragraph (2)?
"(A) meets the requirements of section 955(e) (1) or (2) ; or
"(B) hns gross income 80 percent or more of which is derived from
sources within less developed countries, and has assets 80 percent
or more in value of which consists of property described in clauses
(lin, (iv), and (v) of section 9.53(e) (1) (13)
except that in applying this paragraph the determination of whether
a foreign country is a IPRS developed country shall be made in accordance
with subsection (b) of this section.
"(2) APPLICABLE essions.?The determinations required by subpara-
graphs (A) and (B) of paragraph ( I ) shall be made (A) for the annual
accounting period (if ally) of the foreign corporation immediately pre-
ceding its accounting period in which the acquisition involved is made,
(B) for thv annual aceounting period of the foreign corporation in which
such acquisition Is made, and (C) for the next succeeding annual accounting
period of the foreign corporation.
"(3) SPECIAL RULES FOR TREATMENT OF CORPORATIONS AS LESS DEVELOPED
COUNTRY CORPORATIONS. ?A foreign corporation shall be treated ns satis-
fying the definition in paragraph (1) with respect to the acquisition by a
United States person of stock or a debt obligation If?
"(A) before the acquisition occurs (or. in the case of an acqui-
sition occurring before or within GO days after the date of the enact-
ment of this chapter. pursuant to application made within such period
following such date as may be prescribed by the Secretary or his
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delegate in regulations), it is established to the satisfaction of the
Secretary or his delegate that such foreign corporation?
"(i) has met the applicable requirements of paragraph (1)
for the period (if any) referred to in paragraph (2) (A), and
"(ii) may reasonably be expected to satisfy such requirements
for the periods referred to in paragraph (2) (B) and (C) ; or
"(B) in the case of an acquisition occurring on or before Decem-
ber 10, 1963, the applicable requirements of paragraph (1) are met
for the annual accounting period of the foreign corporation immedi-
ately preceding its accounting period in which the acquisition
occurred.
"(4) TREATMENT OF CORPORATIONS AS LESS DEVELOPED COUNTRY CORPORA-
TIONS IN OTHER CASES.?A foreign corporation may also be treated as sat-
isfying the definition in paragraph (1) with respect to the acquisition by a
United States person of stock or a debt obligation (but subject to possible
subsequent liability for tax under subsection (d) (1) ), if?
"(A) such corporation has met the applicable requirements of par-
agraph (1) for the period (if any) referred to in paragraph (2) (A), and
"(B) such person reasonably believes that such corporation will
satisfy such requirements for the periods referred to in paragraphs
(2) (B) and (C).
"(d) SUBSEQUENT LIABILITY FOR TAX IN CERTAIN CASES.?
"(1) STOCK AND DEBT OBLTGATIONS OF CERTAIN CORPORATIONS.?Where a
foreign corporation is treated under subsection (c) (4) as satisfying
the definition in subsection (c) (1) and the exclusion provided by sub-
section (a) (2) has applied with respect to the acquisition of stock or a
debt obligation of such corporation by any person, but such corporation
fails to satisfy the definition contained in subsection (c) (1) for either of
the applicable accounting periods referred to in clauses (B) and (C) of
subsection (c) (2) (and it is not treated under subsection (c) (3) as
satisfying such definition), then liability for the tax imposed by section
4911 shall be incurred by such person (with respect to such stock or debt
obligation) as of the close of the earliest such applicable accounting period
(ending on or before the termination date specified in section 4911(d) )
with respect to which the corporation fails to satisfy such definition; and
the amount of such tax shall be equal to the amount of tax for which such
person would have been liable under such section upon the acquisition of
the stock or debt obligation involved if such exclusion had not applied with
respect to such acquisition.
"(2) DEBT OBLIGATIONS ISSUED IN RETURN FOR CERTAIN PROPERTY.?Where
the exclusion provided by subsection (a) (3) has applied with respect to
the acquisition by a United States person of a debt obligation issued in
return for property as provided in such subsection, but part or all of such
property is used, consumed, or disposed of (before the termination date
specified in section 5911(d) ) otherwise than wholly within one or more less
developed countries, then liability for the tax imposed by section 4911 shall
be incurred by such person (with respect to such debt obligation) as of
the time such property is first so used, consumed, or disposed of; and
the amount of such tax shall be equal to the amount of tax for which
such person would have been liable under such section upon the acqui-
sition of the debt obligation involved if such exclusion had not applied
with respect to such acquisition.
"SEC. 4917. EXCLUSION FOR ORIGINAL OR NEW ISSUES WHERE RE-
QUIRED FOR INTERNATIONAL MONETARY STABILITY.
"(a) TN GENERAL.---if the President of the United States shall at any time
determine that the application of the tax imposed by section 4911 will have
such consequences for a foreign country as to imperil or threaten to imperil
the stability of the international monetary system, he may by Executive order
specify that such tax shall not apply to the acquisition by a TTnited States
person of stock or a debt obligation of the government of such foreign country
or a political subdivision thereof, any agency or instrumentality of any
such government, any corporation, partnership, or trust (other than a com-
pany registered under the Tnvestment Company Act of 1940) organized under
the laws of such country or any such subdivision, or any individual resident
therein, to the extent that such stock or debt obligation is acquired as all or
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part of an original or new issue as to which there is filed such notice of acqui-
sition AR the Secretary or his delegate may prescribe by regulations. In the
case of acquisitions made during the period beginning July 19, 1963, and ending
with the date of the enactment of this chapter. the notice of acquisition may
be flied within such period following the date of such enactment as the Secre-
tary or his delegate may prescribe by regulations.
"(b) APPLICABILITY OF EXECUTIVE ORDER.--An Executive order described in
subsection (a) may be applicable to all such original or new issues or to any
aggregate amount or classification thereof which shall be stated in such order
and shall apply to acquisitions occurring during such period' of time as shall
be stated therein. if the order Is applicable to a limited aggregate amount
of such issues it shall apply (under regulations prescribed by the Secretary
or his delegate) to those acquisitions as to which notice of acquisition Was first
flied. provided that in the case of any such notice the acquisition described in
the notice is mnde before or within 90 days after the date of filing.
"(C) ORIGINAL OR NEW Isar---For purposes of this section. a debt obliga-
tion shall he treated as part of an original or new issue only if acquired not
later than GO days after the date on which interest begins to accrue on such
obligation, and stock shall be treated as part of an original or new Issue only
when it is acquired from the issuer by the United States person claiming
the exclusion.
"SEC. 4918. EXEMPTION FOR PRIOR AMERICAN OWNERSHIP.
"(a) GENERAL Ruts.?The tax imposed hr section 4911 shall not apply
to an acquisition of stock or a debt obligation of a foreign issuer or obligor if
it is established by clear and convincing evidence that the person from whom
such stock or debt obligation was acquired was a United States person through-
out the period of his ownership or continuously since July 18,1963.
"(b) CERTIFICATE OF AMFRICAN OWNERSHIP.- -For purposes of subsection (a).
certificate of American ownership received In connection with an acquisition
shall he conclusive proof for purposes of this exemption of prior American
ownership unless the person making such acquisition has RchIRI knowledge that
the certificate Is false in any material respect.
"(e) TRADING ON CERTAIN NATIONAL SECTIRITIER EXCIIANOEB.?For purposes of
subsection (a). a written confirmation received from a member or member or-
ganization of a national securities exchange registered with the Securities and
F,xchange Commission stating that an acquisition was made in the regular mar-
ket on such exchange (and not subject to a special contract) shall be conclusive
proof for purposes of this exemption of prior American ownership (unless the
person making such acquisition has actual knowledge that the confirmation is
false in any material respect). if such exchange has in effect at the time of the
acquisition rules providing that?
"(1) any stock or debt obligation, the acquisition of which by any United
States person would be subject to the tax imposed by section 4011 but for the
provisions of this section. shall he sold in the regular market on such ex-
change (and not subject to a special contact) only if the member or meraber
organization of such exchange who effects the sale of such stock or debt
obligation as broker has In his possession (A) a certificate of American
ownership with respect to the stock or debt obligation sold, or (B) a blanket
certificate of Amerierui ownership with respect to the account for which
such stock or debt obligation Is sold ; and
"(2) any member or member organization of such exchange effecting as
broker a purchase of any such stock or debt obligation subject to a spcial
contract (and not in the regular market) shall furnish the person making
such an acquisition a written confirmation stating that the acquisition was
made subject to such special contract.
"(d) TRADING IN THE OVER-THE-COUNTER MARKF:T.?For purposes of subsection
(a), a written confirmation from a member or member organization of a national
securities association registered with the Securities and Exchange Commission
received in connection with an Requisition made other than on a national securi-
ties exchange described In subsection (c) shall be conclusive proof for purposes
of this exemption of prior American ownership, unless the confirmation states
that the acquisition was made from a person who has not executed and filed
a certificate of American ownership with respect the stock or debt obligation
sold or a blanket certificate of American ownership with respect to the account
from which the stock or debt obligation is sold (or the person making such
acquisition has actnal knowledge that the confirmation is false in any material
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respect), if such association has in effect at the time of the acquisition rules
providing that any member or member organization of such association who
effects a sale as broker other than on a national securities exchange of any stock
or debt obligation, the acquisition of which by any United States person would
be subject to the tax imposed by section 4911 but for the provisions of this
section, must?
"(1) have in his possession (A) a certificate of American ownership with
respect to the stock or debt obligation sold, or (B) a blanket certificate of
American ownership with respect to the account for which such stock or debt
obligation is sold; or
"(2) furnish to the person acquiring such stock or debt obligation written
confirmation stating that the acquisition is from a person who has not
executed and filed a certificate of American ownership with respect to such
stock or debt obligation or a blanket certificate of American ownership with
respect to the account from which such stock or debt obligation is sold.
Any member or member organization of such an association who acquires any
stock or debt obligation for his or its own account other than on a national
securities exchange may treat a blanket certificate of American ownership with
respect to the seller's account as conclusive proof for purposes of this exemption
of prior American ownership, unless such member or member organization has
actual knowledge that such certificate is false in any material respect.
"(e) EXECUTION, FILING, AND CONTENTS OF CERTIFICATE.?A certificate of Amer-
can ownership or blanket certificate of American ownership under this section
must be executed and filed in such manner and set forth such information as
the Secretary or his delegate shall prescribe by regulations.
"SEC. 4919. SALES BY UNDERWRITERS AND DEALERS TO FOREIGN
PERSONS.
"(a) CREDIT OR REFUND.?The tax paid under section 4911 on the acquisition of
stock or debt obligations of a foreign issuer or obligor shall constitute an over-
payment of tax to the extent that such stock or debt obligations?
(1) PRIVATE PLACEMENTS.?Are acquired by an underwriter from the for-
eign issuer or obligor (or from a person or persons controlling, controlled by,
or under common control with such issuer or obligor) and are sold directly
by the underwriter to persons other than United States persons in transac-
tions not involving a public offering;
"(2) Puttmo OFFERINGS.?Are acquired by an underwriter for distribution
in connection with a public offering by a foreign issuer or obligor (or a
person or persons controlling, controlled by, or under common control with
such issuer or obligor) and are sold as part of such public offering by the
underwriter (including sales by other United States persons participating in
the distribution of the stock or debt obligations acquired by the underwriter)
to persons other than United States persons; or
"(3) CERTAIN DEBT OBLIGATIONS.?Consist of debt obligations acquired by a
dealer in the ordinary course of his business and sold by the dealer to persons
other than United States persons within 90 days after (or, in the case of
short sales, within 90 days before) their acquisition.
Under regulations prescribed by the Secretary or his delegate, credit or refund
(without interest) shall be allowed or made with respect to such overpayment.
"(b) EVIDENCE TO SUPPORT CREDIT OR REFUND?An underwriter or dealer
claiming credit or refund under this section shall file with the return required
by section 0011(d) on which credit is claimed, or with the claim for refund, such
information as the Secretary or his delegate may by regulations prescribe.
Credit or refund shall not be allowed with respect to stock or debt obligations
sold by a United States person participating in the distribution of the stock or
debt obligations acquired by an underwriter unless the underwriter establishes
by clear and convincing evidence that such stock or debt obligations were sold
to persons other than United States persons. For purposes of the preceding
sentence, a certificate of sales to foreign persons (executed in such manner by
the United States person making such sales, filed in such manner, and setting
forth such information, as the Secretary or his delegate may by regulations
prescribe) shall be conclusive proof for purposes of the credit or refund that
such sales were made to a person other than a United States person unless the
underwriter relying upon the certificate has actual knowledge that the certifi-
cate is false in any material respect. In any ease where two or more under-
writers form a group for the purpose of purchasing and distributing (through
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resale) stock or debt obligations of a single foreign issuer or obligor, the fling
of a certificate of sales to foreign persons by any one of such underwriters may,
to the extent provided by regulations prescribNi by the Secretary or his delegate,
constitute the filing of such certificate for all of such underwriters.
"(c) DEFINITIONIS.?For purposes of this section---
"(1) the term 'underwriter means any person who has purchased stock or
debt obligations from the issuer or obligor (or from a person controlling, con-
trolled by, or under common control with such issuer or obligor), or from
another underwriter, with a view to the distribution through resale of such
stock or debt obligations ; and
"(2) the term 'dealer' means any person who is a member of the National
Association of Securities Dealers and who is regularly engaged, as a mer-
chant, in purchasing stock or debt obligations and selling them to customers
with a view to the gains and profits which may be derived therefrom.
"SEC. 4920. DEFINITIONS.
"(a) IN GENERAL?For purposes of this chapter?
" ( 1 ) DEBT OBLIGATION.?
"(A) IN GENERAL?Except as provided in subparagraph (B), the
term 'debt obligation' means?
"(1) any indebtedness, whether or not represented by a bond,
debenture, note, certificate, or other writing, whether or not secured
by a mortgage, and whether or WM hearing Interest; and
"(11) any interest in, or any option or similar right to acquire,
a debt obligation referred to in this subparagraph, whether or not
such interest, option, or right Is in writing.
"(B) ExcemoNs.?The term 'debt obligation' shall not include any
obligation which---
(1) is convertible by its terms into stock of the obligor, if it is
so convertible only within a period of 5 years or less from the date
on which interest begins to accrue thereon; or
"(111) arises out of the divorce, separate maintenance, or support
of an individual who is a United States person.
" ( 2) STOCK.?The term 'stock' means?
"(A) any stock, share, or other capital interest in a corporation;
"(B) any interest of a partner in a partnership;
"(C) any interest in an Investment trust;
"CD) any indebtedness which Is convertible by its terms into stock of
the obligor, If it is so convertible only within a period of 5 years or less
from the dote on which interest begins to accrue thereon; and
"(E) any interest in, or option or similar right to acquire, any stock
described in this paragraph.
"(3) FOREIGN IRSUFAI oa OBLIGOR.?The terms 'foreign issuer', 'foreign ob-
ligor', and 'foreign issuer or abligor' mean any issuer of stock or obligor
of a debt obligation, as the case may be. which lx?
"(A) (I) an international organization of which the United States is
not a member.
"(11) the government of a foreign country or any political subdivision
thereof, or an agency or instrumentality of such a government,
"(ill) a corporation, partnership, or estate or trust which is not a
United States person as defined in paragraph (4) ; or
"(iv) a nonresident alien individual;
"(B) a domestic corporation which, as of July 18, 1983, was a man-
agement company registered under the Investment Company Act of
19-10 If?
"(I) at least 80 percent of the value of the stock and debt obliga-
tions owned by such corporation on July 18, 1963, and at least 80
percent of the value of the stock and debt obligations owned by
such corporation at the end of every calendar quarter thereafter
(through the quarter preceding the quarter In which the acquisition
involved is macie), consists of stock or debt obligations of foreign
issuers or obligors and other debt obligations having an original
maturity of DO days or less;
"(Il) such corporation elects to be treated as a foreign issucr or
obligor for purposes of this chapter; and
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"(iii) such corporation does not materially increase its assets
during the period from July 18, 1963, to the date of such election
through borrowing or through issuance or sale of its stock (other
than stock issued or sold on or before September 16, 1963, as part
of a public offering with respect to which a registration statement
was first filed with the Securities and Exchange Commission on
July 18, 1963, or within 90 days before that date).
The election under clause (ii) shall be made on or before the 60th day
after the date of the enactment of this chapter under regulations pre-
scribed by the Secretary or his delegate. Such election shall be effec-
tive as of the date specified by the corporation, but not later than the
date on which such election is made, and shall remain in effect until
revoked. If, at the close of any succeeding calendar quarter, the
company ceases to meet the requirement of clause (i), the election shall
thereupon (with respect to quarters after such calendar quarter) be
deemed revoked. When an election is revoked no further election may
be made. If the assets of a foreign corporation are acquired by a
domestic corporation in a reorganization described in subparagraph (D)
or (F) of section 368(a) (1), the two corporations shall be considered
a single domestic corporation for purposes of this subparagraph.
A foreign corporation (other than a company registered under the Invest-
ment Company Act of 1940) shall not be considered a foreign issuer with re-
spect to any class of its stock which is traded on one or more national
securities exchanges registered with the Securities and Exch9nge Commis-
sion, if the trading on such national securities exchanges constituted the
principal market for such class of stock during the calendar year 1962
and if, as of the latest record date before July 19, 1963, more than 50
percent of such class of stock was held of record by United States persons.
"(4) TINT= STATES PERSON.?The term 'United States person' means?
"(A) a citizen or resident of the United States,
"(B) a domestic partnership,
"(C) a domestic corporation, other than a corporation described
in paragraph (3) (B),
"(D) an agency or wholly-owned instrumentality of the United States,
"(E) a State or political subdivision, or any agency or instrumental-
ity thereof, and
"(F) any estate or trust?
"(i) the Income of which from sources without the United States
is includible in gross income under subtitle A (or would be so in-
cludible if not exempt from tax under section 501(a), section
521(a), or section 521(a), or section 584(b) ), or
"(ii) which is situated in the Commonwealth of Puerto Rico or
a possession of the United States.
"(5) DOMESTIC CORPORATION; DOMESTIC PARTNERSHIP.?The terms 'domestic
corporation' and 'domestic partnership' mean, respectively, a corporation or
partnership created or organized in the United States or under the laws of
the United States or of any State.
"(6) UNITED STATES STATE.?The term 'United States' when used in a
geographical sense includes the States, the District of Columbia, the Ciom-
monwealth of Puerto Rico, and the possessions of the United States; and
the term 'State' includes the District of Columbia, the Commonwealth of
Puerto Rico, and the possessions of the United States.
"(7) PERIOD REMAINING TO MATURITY.--
"(A) IN GENERAL?Subject to the modifications set forth in sub-
paragraph (B), the period remaining to maturity of a debt obligation
shall be that period beginning on the date of its acquisition and ending
on the fixed or determinable date when, according to its terms, the
payment of principal becomes due.
"(B) MODIFICATION s.?The period remaining to maturity?
"(i) of any interest in, or any option or similar right to acquire,
any debt obligation shall be the period remaining to maturity of
that debt obligation at the time of the acquisition of such interest,
option, or right;
"(Ii) of any debt obligation which is renewable without affirma-
tive action by the obligee, or of any interest in or option or similar
right to acquire such a debt obligation, shall end on the last day
of the final renewable period;
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"(ill) of any debt obligation which has no fixed or determinable
date when the payment of principal becomes due shall be consid-
ered to be 28% years;
"(Iv) of any debt obligation which is payable on demand shall
he considered to be less than 3 years; and
"(v) of a debt obligation which is subject to retirement before
its maturity through operation of a mandatory sinking fund shall
he determined under regulations prescribed by the Secretary or his
delegate.
"(b) CROSS REFERENCE.?
"For definition of 'acquisiLion', see section 4512."
(b) TECHNICAL AMENDMENT.?The table of chapters for subtitle D is amended
by adding at the end thereof the following Item:
"Chapter 41. Interust eqUallaation tax."
(C) EFFECTIVE DA1-E.?
(1) GENERAL RULE.--Except as provided by paragraphs (2), (3), (4),
(5), (6), and (7), the amendments made by this section shall apply with
respect to acquisitions of stock and debt obligations made after July 18,
1963.
(2) PREEXISTING COMMITMENTS.?Such amendments shall not apply to SD
acquisition?
(A) made pursuant to an obligation to acquire which on July 18,
1963?
( I) was unconditional, or
(ii) MIS subject only to conditions contained In a formal con-
tract under which partial performance had occurred;
(B) as to which on or before July 18. 1963, the acquiring United
States person (or, in a case where 2 or more United States persons are
making acquisitions as part of a single transaction, a majority in in-
terest of such persons) had taken every action to signify approval of
the acquisition under the procedures ordinarily employed by such per-
son (or persons) in similar transactions and had sent or deposited for
delivery to the foreign issuer or obligor written evidence of such ap-
proval in the form of a commitment letter, memorandum of terms, or
other signed document setting forth the principal terms of such acquisi-
tion, subject only to the execution of formal documents evidencing the
acquisition and to pustomary closing conditions; or '
(C) which would be excluded from tax under section 4915 of the
Internal Revenue Code of 1954 but for the provisions of subsection (c)
thereof, if (i) on or before July 18. 1963, the acquiring United States
person applied for and received from a foreign government (or an
agency or instrumentality thereof) authorig3tion to make such ac-
quisition and approval of the amount thereof, and (II) such authoriza-
tion was required in order for such acquisition to he made.
(3) l'unmc OFFERING.?Such amendments shall not apply to an acquisi-
tion made on or before September 111. 1963, If?
(A) a registration statement (within the meaning of the Securities
Act of 1933) was in effect with respect to the stock or debt obligalon
acquired at the time of its acquisition;
(B) the registration statement was first filed with the Securities and
Exchange Commission on July 18, 1963, or within DO days before that
ante; and
(C) no amendment was filed with the Securities and Exchange Com-
mission after July 18, 1963. and before the acquisition which had the
effect of increasing the number of shares of stock or the aggregate face
amount of the debt obligations covered by the registration statement.
(4) INVESTMENT OF PROCEEDS OF SUBSCRIPTION OFFERING.?Such amend-
ments shrill not apply to an acquisition of stock or debt obligations of a
foreign issuer or obligor by a corporation electing under section 4920(a) (3)
(II) of the Internal Revenue Cede of 1954 to be treated as a foreign issuer
or obligor for purposes of chapter 41 of such Code, to the extent that the
amount of consideration paid for all such stock and debt obligations does
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not exceed the proceeds received by such corporation from a subscription
offering (completed on or before September 16, 1963) as to which a regis-
tration statement was filed with the Securities and Exchange Commission
on July 18, 1963, or within 90 days before that date.
(5) LISTED SECURITIES.?Such amendments shall not apply to an acquisi-
tion made on or before August 16, 1963, if the stock or debt obligation in-
volved was acquired on a national securities exchange registered with the
Securities and Exchange Commission.
(6) OrrioNs AND FORECLOSURES.?Sueh amendments shall not apply to an
acquisition?
(A) of stock pursuant to the exercise of an option or similar right
(or a right to convert a debt obligation into stock), if such option or
right was held on July 18, 1963, by the person making the acquisition or
by a decedent from whom such person acquired the right to exercise such
option or right by bequest or inheritance or by reason of such decedent's
death, or
(B) of stock or debt obligations as a result of a foreclosure by a
creditor pursuant to the terms of an instrument held by such creditor
on July 18, 1963.
(7) DOMESTICATION.?Such amendments shall not apply to the acquisi-
tion by a donaestic corporation of the assets of a foreign corporation pur-
suant to a reorganization described in subparagraph (D) or (F) of section
368(a) (1) of the Internal Revenue Code of 1954 if the acquisition occurs
on or before the 180th day after the date of the enactment of this Act and
the foreign corporation was a management company registered under the
Investment Company Act of 1940 from July 18, 1963, until the time of
the acquisition.
(8) MEANING OF TERMS.?Terms used in this subsection (except as specif-
ically otherwise provided) shall have the same meaning as when used in
chapter 41 of the Internal Revenue Code of 1954.
SEC. 3. RETURNS.
(a) MAKING OF RErunNs.?Section 6011 (relating to general requirements of
return, statement, or list) is amended by redesignating subsection (d) as sub-
section (e), and by adding after subsection (c) the following new subsection:
"(d) INTEREST EQUALIZATION TAX RETURNS, ETC.?
"(1) IN GENERAL.?Every person shall make a return for each calendar
quarter during which he incurs liability for the tax imposed by section 4911,
or would so incur liability but for the provisions of section 4918. The return
shall, in addition to such other information as the Secretary or his delegate
may by regulations require, include a list of all acquisitions made by such
person during the calendar quarter which are exempt under the provisions
of section 4918, and shall be accompanied by clear and convincing evidence
showing that the acquisitions are so exempt. No return or accompanying
evidence shall be required under this paragraph in connection with any ac-
quisition with respect to which a written confirmation, furnished in accord-
ance with the requirements described in section 4918 (c) or (d), is treated
as conclusive proof of prior American ownership; nor shall any such acquisi-
tion be required to be listed in any return made under this paragraph.
"(2) INFORMATION RETURNS OF COMMERCIAL BANKS.?Every United States
person (as defined in section 4920(a) (4) ) which is a commercial bank shall
file a return with respect to loans and commitments to foreign obligors at
such times, in such manner, and setting forth such information as the Sec-
retary or his delegate shall by forms and regulations prescribe.
"(3) REPORTING REQUIREMENTS FOR MEMBERS OF EXCHANGES AND ASSOCIA-
TIONS.?Members of member organizations of national securities exchanges
and national securities associations registered with the Securities and Ex-
change Commission shall keep such records and file such information as the
Secretary or his delegate may by regulations prescribe in connection with
sales effected by such members or member organizations as brokers, and
acqusitions made for their own accounts, of stock or debt obligations as to
which a certificate of American ownership or blanket certificate of American
ownership is executed and filed as described in section 4918(e)."
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(b) TIME FOR FILING HETI RNS.?Part V of subchapter A of chapter 61 (relat-
ing to time for filing returns and other documents) is amended by adding at the
end thereof the following new section:
"SEC. 6076. TIME FOR FILING INTEREST EQUALIZATION TAX RETURNS.
"Each return made under section 6011(d) (1) (relating to interest equalization
tax) shall be filed on or before the last day of the first month following the period
for which it is made."
(c) Pusucrry or RETusss.?Section 6103(a) (2) (relating to public record
and inspection) Is amended by striking out "and subchapter B of chapter 37" and
inserting in lieu thereof "subchapter B of chapter ST, and chapter 41".
(1) CLERICAL AMENDMENT ?The table of sections for part V of subchapter A
of chapter 61 is amended by adding at the end thereof the following:
"See. 6076. Time for 61ing Interest equalisation tax returns."
(C) FIRST RETURN PERIOL).?NOCWRIIShilIdhlg any provision of section 6011
(d) (1) of the Internal Revenue Code of 1054, the first period for which returns
shall be made under such section 0011(d) (1) shall be the period commencing
July 19, 10C3, and ending at the close of the calendar quarter in which the enact-
ment of this Act occurs.
SEC. 4. DISALLOWANCE OF DEDUCTION FOR AMOUNT PAID AS IN-
TEREST EQUALIZATION TAX.
Section 263(a) (relating to capital expenditures) is amended by adding at the
end thereof the following new paragraph:
"(3) Any amount paid as tax under section 4911 (relating to Imposition
of interest equalization tax) except to the extent that any amount attribut-
able to the amount paid as tax is included in gross income for the taxable
year."
SEC. 5. PENALTIES.
(a) ASSESSABLE PENALTIES.?Subchapter B of chapter 68 (relating to assess-
able penalties) is amended by adding at the end thereof the following new sec-
tions:
"SEC. 6680. FAILURE TO FILE INTEREST EQUALIZATION TAX RETURNS.
"In addition to the penalty imposed by section 7203 (relating to willful failure
to file return, supply information, or pay tax), any person who is required under
section 6011(d) (1) (relating to interest equalization tax returns) to file a return
for any period in respect of which, by reason of the provisions of section 4918,
he incurs no liability for payment of the tax imposed by section 4911, and who
fails to file such return within the time prescribed by section 6070, shall pay
a penalty of $10 or 5 percent of the amount of tax for which he would incur
liability for payment under section 4911 but for the provisions of section 4918,
whichever is the greater, for each such failure unless it is shown that the failure
is due to reasonable cause. The penalty imposed by this section shall not exceed
$1,000 for each failure to file rt return.
"SEC. 6681. FALSE EQUALIZATION TAX CERTIFICATES.
"(a) FALSE CERTIFICATE OF AMERICAN OWNERSIIIP.?In addition to the crimi-
nal penalty imposed by section 7241, any person who willfully executes a certifi-
cate of American ownership or blanket certificate of American ownership de-
scribed in section 4018(e) which contains a misstatement of material fact stall
be liable to a penalty equal to 125 percent of the amount of tax imposed by sec-
tion 4911 on the acquisition of the stock or debt obligation involved which, but
for the provisions of section 4918, would be payable by the person acquiring the
stock or debt obligation.
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"(b) LIABILITY OF MEMBERS OF NATIONAL SECURITIES EXCHANGES AND A S SO-
CIATIONS .?A member or member organization of a national securities exchange
described in section 4918(c) or a national securities association described in sec-
tion 4918(d) shall be liable to a penalty equal to 125 percent of the amount of
tax imposed by section 4911 on the acquisition (in a transaction subject to the
rules of such exchange or association as described in section 4918 (c) or (d) ) of
stock or a debt obligation which but for the provisions of section 4918, would
be payable by the person acquiring the stock or debt obligation, if such
member?
"(1) willfully effects the sale of such stock or debt obligation or fur-
nishes a written confirmation with respect to the purchase or sale of such
stock or debt obligation other than in accordance with the requirements
described in section 4918 (c) or (d) ; or
"(2) has actual knowledge that?
"(A) the certificate of American ownership or the blanket certificate
of American ownership (referred to in section 4918) in his possession
in connection with the sale of such stock or debt obligation is false in
any material respect; or
"(B) the person who executed and filed the blanket certificate of
American ownership in his possession was not a United States person
at the-time of sale.
" ( C ) FALSE CERTIFICATE OF SALES TO FOREIGN PERSON addition to the
criminal penalty imposed by section 7241, any person who willfully executes a
certificate of sales to foreign persons described in section 4919(b) which contains
a misstatement of material fact shall be liable to a penalty equal to 125 percent of
the amount of the tax imposed by section 4911 on the acquisition of the stock or
debt obligation involved which, but for the provisions of section 4919(b), would
be payable by the underwriter acquiring the stock or debt obligation.
"(d) PENALTY TO BE IN LIEU OF TAX IN CERTAIN CASES.?Unless the person
acquiring the stock or debt obligation involved had actual knowledge that the
certificate was false in any material respect, the penalty under subsection (a) or
(c) shall be in lieu of any tax on the acquisition of such stock or debt obligation
under section 4911."
(b) CRIMINAL PENALTY.?Part II of subchapter A of chapter 75 (relating to
penalties applicable to certain taxes) is amended by adding at the end thereof
the following new section:
"SEC. 7241. PENALTY FOR FRAUDULENT EQUALIZATION TAX CERTIFI-
CATES.
"Any person who willfully executes a certificate of American ownership or
blanket certificate of American ownership described in section 4918(e), or a
certificate of sales to foreign persons described in section 4919 (b) , which is known
by him to be fraudulent or to be false in any material respect shall be guilty of
a misdemeanor and, upon conviction thereof, shall for each offense be fined not
more than $1,000, or imprisoned not more than 1 year, or both."
(c) CLERICAL A MEND MEN TS .?
( 1 ) The table of sections for subchapter B of chapter 68 is amended by
adding at the end thereof the following:
"Sec. 6680. Failure to file interest equalization tax returns.
"See. 6681. False equalization tax certificates."
(2) The table of sections for part II of subchapter A of ?chapter 75 is
amended by adding at the end thereof the following:
"Sec. 7241. Penalty for fraudulent equalization tax certificates."
Passed the House of Representatives March 5, 1964.
RALPH R. ROBERTS,
Clerk.
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THE SECRETARY OF THE TREASURY,
Washington D.C., June 12, 1964.
Hon. HARRY FLOOD BYRD,
Chairman, Committee on Finance,
U.S. Senate, Washington, D.C.
DEAR MR. CHAIRMAN: I am transmitting with this letter a series
of proposed amendments recommended by the Treasury Department
to the proposed interest equalization tax 'bill (H.R. 8000). This bill
occupies a central position in our total effort to achieve prompt and
lasting improvement in our balance of payments by reducing the
flow of long-term portfolio capital from this country. The purposes
of the bill are achieved through the imposition of a temporary excise
tax on the acquisition from foreigners of foreign stocks or debt obliga-
tions with maturities of 3 years or more.
The proposed amendments are fully consistent with the principles
of the bill as passed by the House. The changes embodied in these
amendments are directed at technical problems which have been
raised since House passage of H.R. 8000 and are designed for the most
part to extend or clarify exclusions contained in the House bill, without
at the same time weakening the effectiveness of the proposed legisla-
tion.
The Treasury Department believes it would be helpful to have
these proposed amendments made public at this time by your com-
mittee. Publication of the amendments would enable interested
persons to learn the Treasury's views on the various questions which
have been brought to our attention since House passage of the legis-
lation. This will permit them to focus on the proposed amendments
in framing any comments they may wish to submit in connection
with the bill.
Sincerely yours,
DOUGLAS DILLON.
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SUGGESTED AMENDMENTS TO THE INTEREST EQUALIZA-
TION TAX BILL (H.R. 8000) PROPOSED BY THE TREASURY
DEPARTMENT
GENERAL EXPLANATION
The Treasury Department recommends that the interest equali-
zation tax bill (H.R. 8000) be amend ed in accordance with the pro-
posed changes described in this statement. The bill is designed to
relieve pressure on the balance of payments by bringing the cost of
portfolio capital raised in the U.S. market by foreign persons more
closely into alinement with the costs prevailing in markets in other
industrial countries. This purpose would be achieved by imposing a
temporary tax on acquisitions by Americans of certain foreign securi-
ties from foreigners. The suggested amendments are fully consistent
with the intent of the bill as passed by the House and do not depart
from the basic provisions and framework of that bill.
In general, the changes resolve technical problems which have been
brought to the attention of the Treasury during the period since
House passage of H.R. 8000. Some of the suggested amendments
modify and extend certain exclusions so that the purposes of the bill
may be achieved without unnecessarily impeding use of normal sources
or techniques of financing. Other amendments simply clarify existing
provisions and provide for more effective administration of the pro-
posed tax.
EXPORT PROVISIONS
Amendments are being proposed to expand the export provisions
of the bill, in order to give further assurance that the tax does not
interfere with the legitimate export financing of U.S. goods and
services. One proposed change extends the exclusion for stock and
debt obligations arising from the sale of property produced in the
United States to intangible property (such as patents and copyrights)
as well as tangible property. A second proposed amendment liberal-
izes the rule permitting an exporter to transfer free of the tax a debt
obligation received in the financing of U.S. exports. Another change
makes clear that the exclusion provided by the bill where payment of
an export loan is guaranteed or insured in whole or in part by the
Export-Import Bank, remains available even if the loan gives rise to
separate obligations.
The suggested amendments propose an extension of the exclusion
contained in the bill for loans made in connection with the sale of
ores or minerals extracted outside the United States. The categories
of corporations which qualify as extractive companies would be
broadened, and ores or minerals obtained under a contract entered
into on or before July 18, 1963, would be covered by the provision.
These changes recognize additional situations in which U.S. persons
have a substantial economic interest in the extracted ore or mineral.
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INTEREST EQUALIZATION TAX ACT
INSURANCE COMPANY PROVISIONS
A series of changes are suggested in the provisions dealing with
insurance companies doing business in foreign countries so as to clarify
those provisions and to perfect their technical application. Under the
proposed amendments, insurance companies are permitted to include
short-term obligations payable in foreign currency within their initial
designation of exempt funds of assets of foreign securities, and to use
the adjusted basis of the securities, rather than actual value, as the
means of valuing the funds. The amendments require the companies
to fill up their designated funds of exempt assets annually to the limit
provided in the bill, to the extent of purchases made during the cal-
endar year of stock and debt obligations otherwise excluded from tax
under the new issue exclusion of section 4917 and the less-than-3-year
exemption. The amendments also clarify the method of determining
a company's allowable reserve for the year 1963, and permit insurance
companies for purposes of determining the size of the designated funds
to estimate the growth in their foreign business during a year. This
will avoid the necessity of paying tax throughout the year on acquisi-
tions in excess of the size of the fund at the end of the previous year,
and claiming a credit or refund at the end of the year.
AIIDITIONAL EXCLUSIONS
Amendments are being proposed which exclude certain types of
acquisitions from tax. The proposed new exclusions include pro-
visions relating to acquisitions of stock and debt obligations in lieu of
payment of foreign tax; purchases of stock in order to obtain the right
to occupy a dwelling; and acquisitions of obligations received in con-
nection with the sale of a wholly owned foreign subsidiary. Acquisi-
tions of these types are due to factors other than the relative return on
capital between the United States and foreign countries. It is also
proposed that the tax not apply to the acquisition of a debt obligation
which is part of the purchase price of real property located in the
United States, if the foreign buyer pays at least 25 percent of the pur-
chase price to the Amarican seller in tJ.S. dollars. Such a transaction
has a favorable impact on the U.S. balance of payments and the exclu-
sion is fully consistent with the purposes of the legislation.
DIRECT INVESTMENT
The changes in this section are designed to permit broader use of
the direct investment exclusion. One change permits a U.S. corpora-
tion holding a 10-percent or more interest in a foreign corporation to
acquire from the foreign corporation debt obligations which had pre-
viously been acquired by the foreign corporation in the ordinary course
of its business as a result of the sale or rental of products manufac-
tured or assembled by it or the performance of services by it. This
form of financing is an alternative to a direct investment by the U.S.
parent corporation in its foreign subsidiary. The suggested amend-
ments also make available a credit or iefund on purchases where a
10-percent or more interest is acquired over a 12-month period,
whether or not the period coincides with a particular calendar year.
In these situations, the credit or refund is made available with respect
to debt obligations as well as stock.
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LESS DEVELOPED COUNTRIES
The amendments propose that the less developed Country provisions
be expanded to permit the tax-free acquisition of stock and debt obli-
gations by a U.S. person who is required to reinvest in a less developed
country the payments received under a contract of sale (or indemni-
fication) with the less developed country, resulting from the actual or
threatened expropriation, nationalization, or seizure of the U.S.
person's property in that country. Under such circumstances, the
companies in which the U.S. person is required to invest presumably
would qualify as less developed country corporations, but the condi-
tions under which the investments are required to be made may make
it impossible for the U.S. person to obtain the requisite proof.
Changes are also proposed in the provision defining a "less developed
country corporation" to expand the number of companies which would
qualify under the provision. The amendments are directed primarily
at corporations doing business in less developed countries which may
hold U.S. assets, obligations of individuals resident in less developed
countries, or assets temporarily in foreign bank accounts (other than
in less developed countries).
EXCLUSION FOR NEW ISSUES WHERE REQUIRED FOR INTERNATIONAL
MONETARY STABILITY
One of the suggested amendments in this section clarifies the defini-
tion of what constitutes a new issue of debt obligations for purposes
of this exclusion to make clear that construction loans are eligible to
qualify. The other proposed change is designed to facilitate pro-
cedural operation of the exclusion by authorizing the President to
extend the period of time within which an acquisition must be made
after filing of the required notice.
SALES BY UNDERWRITERS AND DEALERS
One of the suggested amendments in the provisions of the bill
dealing with transactions by underwriters and dealers permits a
foreign underwriter participating in a public offering in the United
States with American underwriters to elect to be treated as a U.S.
person for purposes of his participation in the offering. This change
will facilitate uniform pricing of the offering and eliminate return
filing burdens for U.S. purchasers acquiring from the foreign under-
writer.
The suggested amendments also permit a dealer to claim a credit
or refund on the sale of debt obligations to foreigners within 90 days
of purchase if the obligations are sold to another dealer who in turn
sells to a foreigner on the date of purchase or the next business day.
This change recognizes certain trading practices in the securities
industry. The amendments also authorize the establishment of pro-
cedures by the stock exchanges and the over-the-counter market to
provide a dealer with proof that the security was sold to a foreign
person. Appropriate penalties are provided in the bill if these
procedures are abused.
The proposed changes also permit a credit if a dealer acquires foreign
stock in the ordinary course of his business and sells the stock on the
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same business day to a foreigner. This proposal is designed to permit
dealers to conduct certain types of arbitrage activities without at the
same time weakening the eftectiveliess of the tax.
LIMITATIONS ON TAX
Three amendments are suggested in the section of the bill which
limits the tax imposed on certain acquisitions so as to expand the
situations in which the special rules limiting application of the tax
-may be utilized. The first of these permits an American who acquires
a debt obligation from another American (free of the tax) and who
later exercises the right to convert the debt obligation into stuck to
offset against his liability the ['mount of tax which would have been
imposed if the obligation had been acquired in a taxable transaction.
The bill now permits an offset only with respect to tax which was
actually paid on acquisition of the obligation. A second change
permits an American, exercising a subscription right to acquire stock
or a debt obligation within 90 days from the date of the distribution
of the rights, to use the exercise price as his tax base, whether or
not he was the original distributee of the. rights. The bill presently
limits use of the exercise price to the original recipient of the rights
from the issuer. The third amendment avoids the possibility of a
double tax where a domestic corporation has been formed or availed
of for the benefit of a foreign borrower.
PREEXISTING COMMITMENTS
The suggested amendments propose a liberalization of the pro-
visions in the bill exempting certain transactions from the genet-Idly
effective date of the tax of July 19, 1963, because of the existence of a
preexisting commitment. They extend the exemption to situations
where application of the tax might involve hardship to the parties
because of the advanced state of negotiations on July 18, 1963. An
exemption is also provided if the acquisition was pursuant to a con-
tract of sale to a less developed country entered into on or before
July 18, 1963, if the contract requires reinvestment of the proceeds
in that country.
ORIGINAL ISSUE DISCOUNT
The proposed amendments suggest a change in the provisions of the
Internal Revenue Code dealing with the taxation of the difference
between the issue price of bonds and the stated redemption price at
maturity of such bonds, i.e., "original issue discount." The amend-
ment is designed to prevent the interest equalization tax from creating
adverse income tax consequences in the case of private placements of
bonds.
ADMINISTRATIVE PROVISIONS
The proposed amendments provide that proof of the exemption
for prior American ownership must be in the form of a certificate of
American ownership or a confirmation received from a member of a
registered exchange or the National Association of Securities Dealers,
unless reasonable cause is submitted for the inability to produce such
evidence. This technical change is needed because of other pro-
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visions already contained in the bill which are designed to facilitate
trading in foreign securities. In the overwhelming majority of
purchases of foreign securities, a confirmation will be received by the
American buyer which satisfies the requirements of the bill, and no
return or filing is necessary. However, if no confirmation or certifi-
cate is obtained or submitted, a person claiming the exemption for
prior American ownership must file a statement explaining his in-
ability to submit the certificate, together with a summary of the
evidence establishing the exemption.
A second proposed administrative change relates to required
recordkeeping and information filing by members of stock exchanges
and the National Association of Securities Dealers. The present
bill requires recordkeeping and the filing of information by the seller's
broker in transactions where the exemption for prior American owner-
ship is claimed, since the action of the seller's broker in accepting
a certificate of American ownership results in no tax being due from
the purchaser. The suggested amendments apply recordkeeping and
filing requirements to transactions in which no exemption is available
(and tax is due), since such records and information are essential to
facilitate enforcement of the tax.
34-937 0-64----3
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PROPOSED AMENDMENTS AND TECHNICAL EXPLANATION
Section 4913. LIMITATION ON TAX ON CERTAIN
ACQUISITIONS
(a) CERTAIN SURRENDERS, EXTENSIONS, RENEWALS, AND EXERCISES.
Page 7, line 7.
(3) SPECIAL LIMITATIONS. Page 8, line 19.
(A) CONVERSIONS OF DEBT OBLIGATIONS INTO STOCK.
Page 8, line 20.
This subparagraph should be amended to read as follows:
The tax imposed upon an acquisition of stock
pursuant to the exercise of a right to convert a debt
obligation (as defined in section 4920(a)(1)) into
stock shall be [united to--
"(i) the amount of tax which would have
been imposed by section 4911 if the debt obliga-
tion (pursuant to section 4920(a) (2)(D),3 had
been treated as stock at the time of its acquisi-
tion by the person exercising the right (or by
a decedent, from whom such person acquired
the right by bequest or inheritance or by reason
of such decedent's death), less
"(ii) the amount of tax paid by the person
exercising the right (or by such decedent) as a
result of the. acquisition of the convertible debt
obligation or, if such acquisition was not subject
to the tax imposed by section 4,911, the amount
of tax which would hare been imposed as a result
of such acquisition if such acquzsition had been
subject to such tax.
The proposed change is designed to provide consistent, treatment
in the bill on the exercise of rights to convert foreign debt obligations
acquired by Americans from other Americans, and to facilitate trading
in these securities among Americans.
Section 4912 (a) of the bill provides that the exercise of the right to
convert a foreign debt obligation which is convertible for at least, 5
years after interest begins to accrue is a taxable acquisition of stock
by the person exercising the right.. The revised subparagraph will
permit a U.S. holder of such convertibles to offset against the tax
liability arising on conversion any tax which would have been pay-
able if the convertible obligations had been acquired in a transaction
subject to the tax, regardless of whether such a tax was actually paid.
The proposed change removes the distinction which would allow a
credit to U.S. persons acquiring foreign convertibles directly from
the foreign issuer in a private placement, but would deny the credit
to a purchaser in a publie offering, who acquires from the U.S. under-
writer and not, directly from the foreign issuer. The amendment
will make the credit available to both.
(B) EXERCISE OF CERTAIN SHAREHOLDERS' RIGHTS. Page
9, line 12.
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This subparagraph should be amended to read as follows:
"The tax imposed upon an acquisition of stock
or a debt obligation of a foreign corporation by a
United States person [who is a shareholder of such
corporation], where?
"(i) the stock or debt obligation is acquired
pursuant to the exercise of an option or similar
right to acquire such stock or debt obligation
which was acquired [by such person] by a
shareholder of such corporation in a distribu-
tion [by such corporation] with respect to
to its stock, and
"(ii) such option or right [by its terms
expires or terminates within a period not ex-
ceeding 90 days from the date so distributed
to him] is exercised within 90 days from the
date of its distribution by such corporation
shall be limited to the amount of tax which would
have been imposed by section 4011 if the price paid
under such option or right were the actual value of
the stock or debt obligation acquired.
The proposed changes are designed to extend the benefit of using
the exercise price as the tax base to subsequent holders of subscription
rights as well as shareholders, and to permit this limitation to be used
where exercise occurs within 90 days of the distribution, regardless
of any ambiguity in the terms of the offering which might make it
unclear whether the rights offering actually terminated, within 90
days Of issuance.
The balance-of-payments outflow in the case of the exercise of
subscription rights is no greater than the exercise price, whether the
rights are exercised by the original recipient or a subsequent purchaser.
The proposed extension of the use of exercise price as the tax base for
subsequent purchasers is thus consistent with the purposes of the bill,
and removes a possible impediment to the market in such rights.
"(c) Acquisitions by Certain Domestic Corporations and Partner-
ships. Following page 11, line 3.
This new subsection should provide as follows:
"If stock or a debt obligation of a foreign issuer or obligor is
acquired by a domestic corporation or a domestic partnership
with funds obtained as the result of an acquisition by a United
States person of stock or a debt obligation of such corporation or
partnership which under section 4912(b)(3) is deemed an acqui-
sition by such person of stock or a debt obligation of a foreign
issuer or obligor, the tax imposed upon the acquisition by the
domestic corporation or the domestic partnership shall be
limited to?
"(1) the amount of tax imposed by section 4911, less
"(2) the amount of tax paid by the United States person
from whom the funds were obtained on the acquisition by
such person which under section 4912(b)(3) is deemed an
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acquisition of stock or a debt obligation, of a foreign issuer
or obligor.
This proposed subsection is designed to prevent the imposition
of a double tax on the same transaction, where a foreign borrower
has made use of a domestic corporation or partnership as a conduit
to acquire funds from a U.S. lender.
Under section 4912(b)(3) of the bill, the legal entities of domestic
corporations and partnerships which are formed or availed of for
the principal purpose of channeling funds to foreign borrowers are
disregarded with respect to such transactions, and the U.S. lender
is taxed as if he were acquiring the stock or debt obligation directly
from the foreign issuer or obligor. The present bill could also be
construed to require a second tax to be imposed when the domestic
entity passes the same funds along to the foreign corporation or
partnership in exchange for the latter's debt obligation (or stock).
Such a double tax goes beyond the necessary scope of the bill, and
the proposed amendment will eliminate the possibility of that result.
Section 4914. EXCLUSION FOR CERTAIN ACQLTISITIONS
(b) EXCLUDED ACQUISITIONS. Page 12, line 18,
"(4) Acquisitions in lieu of payment of foreign tax. Following
page 14, line 4.
This is a new paragraph of subsection (b); present paragraph (4)
should be renumbered (6).
"Of stock or debt obligations by a United States person
doing business in a foreign country, to the extent such ac-
quisition is made, in conformity with the laws of such
_foreign country, as a substitute for the payment of tax to
.uch _foreign country.
This new provision excludes from tax the acquisition of foreign
securities if such securities are purchased in lieu of the payment by a
United States person doing busine,ss in a foreign country of tax im-
posed by that, country. Certain foreign countries permit taxpayers
to acquire foreign securities, generally housing bonds, instead of pay-
ing certain taxes imposed by the country. This paragraph recognizes
that such a purchase should not be subject to the interest equalization
tax since such an acquisition is not made in response to any interest
rate differential between the United States and the foreign country.
"(5) Acquisitions of stock in cooperative housing corporations.
Following page 14, line 4.
This is a new paragraph (5) of subsection (b).
"Of stock of a foreign corporation which entitles the
holder, solely by reason of his ownership of such stock, to
occupy for dwelling purposes a house, or an apartment in a
building, owned or leased by such corporation.
This proposed exclusion is designed to permit a U.S. person to
acquire stock in a foreign corporation for the purpose of obtaining the
right to occupy a house, or an apartment in a building, owned or
leased by the corporation. Under the bill as presently drafted such an
acquisition would be subject to the tax unless the U.S. person acquired
a 10 percent, or more interest in the foreign corporation. On the other
hand, the tax is not applicable to the rental of an apartment by an
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American living abroad, or to the purchase of a house abroad. The
proposed change provides equivalent treatment to stock in cooperative
housing corporations. The acquisition of stock in a corporation for the
purpose of obtaining a dwelling would normally not be motivated by
an interest rate differential between the United States and foreign
countries.
(C) EXPORT CREDIT, ETC., TRANSACTIONS. Page 15, line 1.
(1) IN GENERAL. Page 15, line 2.
This paragraph should be amended as follows:
"The tax imposed by section 4911 shall not apply to
the acquisition from a foreign obligor of a debt obligation
arising out of the sale of tangible personal property or
services (or both) to such obhgor by any United States
person, if?
"(A) payment of such debt obligation (or of any
related debt obligation arising out of such sale) is
guaranteed or insured, in whole or in part, by an
agency or wholly-owned instrumentality of the
United States; or
(B) * * 44.
This proposed change makes clear that if payment of part of a loan
is guaranteed or insured by an agency or wholly owned instrumentali
of the United States, such as the Export-Import Bank, that portion of
the loan which is not guaranteed or insured is excluded from the tax.
This is true even if separate debt obligations are given for the guaran-
teed and nonguaranteed portions of the loan. This exclusion is based
on the fact that the Export-Import Bank guarantees or insures a
portion of a loan only if the entire loan is attributable to the sale of
goods produced in the United States.
(3) Certain interests in intangible personal property. Following
page 16, line 20. This is a new paragraph. Present paragraph
(3) should be renumbered (4).
This new paragraph should read as follows:
"The tax imposed by section 4911 shall not apply to the
acquisition by a United States person from a foreign issuer
or obligor of its stock in payment for, or of a debt obligation
arising out of, the sale to such issuer or obligor of?
"(A) any interest in patents, inventions, models or
designs (whether or not patented), copyrights, secret
processes and formulas, good will, trademarks, trade
brands, franchises, or other like property (or any
combination thereof), or
"(B) any such interest together with services to be
performed, in connection with any such interest sold,
by such United States person (or by one or more
includible corporations in an affiliated group, as
defined in section 1504, of which such person is a
member),
if not less than 85 percent of the purchase price is attrib-
utable to the sale of any interest in property described in
subparagraph (A) which was produced, created, or devel-
oped in the United States by such United States person (or
by one or more such includible corporations), or is attrib-
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utable to the sale of any interest in such property so pro-
duced, created, or developed and to the performance of
services described in subparagraph (B).
This .new provision is designed to provide a U.S. person who is
selling intangible property, such as know-how, patents, and copy-
rights, treatment consistent with that already accorded to exporters of
.tangible property: . Frequently, the sale of intangible property
mvolves. the acquisition by the selling U.S. person of a 10-percent
interest in the foreign purchaser, which would be excluded from tax as
a direct investment. However, there are situations where a 10-percent
interest may not be acquired, particularly where the seller is a small
U.S. company selling to a large foreign corporation. This new
provision would permit a U.S. seller of intangible property to receive
stock or debt obligations in connection with the sale of property
which he produced, created, or developed, or in connection with the
furnishing of services related to the sale of such property.
"(5) OTHER LOANS RELATED TO SALES BY UNITED STATES PER-
SONS. Page 17, line 14.
This paragraph should be amended as follows:
"The tax imposed by section 4911 shall not apply to
the acquisition from a foreign obligor by a United
States person of a debt obligation of such obligor if such
debt obligation?
"(A) was received by such United States person
as all or part of the purchase price provided in a
contract under which the foreign obligor agrees to
purchase for a period of 3 years or more ores or
minerals (or derivatives thereof)?
(i) extracted outside the United States [(i)]
by such United States person ((ii)] or by one or
more includible corporations in an affiliated
group (as defined in section 48(c)(3)((J)) of
which such United States person is a member,
(ii) extracted outside the United States by a
corporation at least 10 percent of the total com-
bined voting power of all classes of stock of
which is owned, directly or indirectly, by such
United States person, by one or more such
includible corporations, or by domestic corpora-
tions which oum, directly or indirectly, at least 50
percent of the total combined voting power of all
classes of stock of such United States person, or
(iii) obtained under a contract entered into
on. or before July 18, 1968, by such United States
person, by one or more such includible corpora-
tions, or by such domestic corporations; or
[WO by a corporation at least 10 percent of
the total combined voting power of all. classes of
stock of which is owned by such United States
person, if at least 50 percent of such voting
power is owned by United States persons each
of whom owns at least 10 percent of such voting
power; or]
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"(B) arises out of a loan (made by such United
States person to such foreign obligor) the proceeds
of which will be used by such obligor for the installa-
tion, maintenance, or improvement of facilities out-
side the United States which (during the period the
loan is outstanding) will be used for the storage,
handling, transportation, processing, or servicing of
ores or minerals (or derivatives thereof) a substan-
tial portion of which is extracted outside the United
States by such United States person or by a corpo-
ration referred to in clause [(ii) or (iii)] (i) or (ii)
of subparagraph (A) or is obtained under a contract
described in clause (iii) of subparagraph (A).
This proposed change expands the exemption for ores and minerals
extracted and sold outside the United States to include the sale of
those ores and minerals in which the U.S. person has a substantial
economic interest.
This change would permit an exclusion if the ores or minerals being
sold by the U.S. person under a long-term sales contract are extracted
outside the United States by the U.S. person acquiring the debt obli-
gation, an affiliated company, or by a corporation in which the U.S.
person, domestic corporations owning at least 50 percent of the voting
stock of the U.S. person, or an affiliated company holds a direct in-
vestment (10 percent of the total voting stock), whether or not U.S.
persons own 50 percent of the total voting stock of the foreign corpo-
ration. The proposed change also qualifies ores or minerals obtained
under a contract entered into on or before July 18, 1963, by such U.S.
person, domestic corporations, or an affiliated company, whether or
not the extraction is performed by them. The bill also permits U.S.
persons to acquire debt obligations of foreign obligors tax free if the
proceeds of the loan are to be used by the borrower to install, main-
tain, or improve facilities for the storage, handling, transportation,
processing, or servicing of ores or minerals extracted outside the
United States which qualify under the proposed standards.
(e) ACQUISITIONS BY INSURANCE COMPANIES DOING BUSINESS IN
FOREIGN COUNTRIES. Page 21, line 6.
(1) IN GENERAL. Page 21, line 8.
This paragraph should be amended as follows:
"The tax imposed by section 4911 shall not apply to
the acquisition of stock or a debt obligation by a United
States person which is an insurance company subject to
taxation under section 802, 821, or 831, if [(A)] such
stock or debt obligation is designated (in accordance with
paragraph (3)) as part of a fund of assets established and
maintained by such insurance company (in accordance
with paragraph (2)) with respect to foreign risks insured
or reinsured by such company under contracts (including
annuity contracts) [which, by their terms, provide that
the proceeds shall be payable] the proceeds of which are
payable only in the currency of a foreign country[, and
(B) the actual value of all of the assets held in such fund
immediately after the stock or debt obligation has been
designated as a part thereof does not exceed 110 percent
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of the applicable allowable reserve determined in
accordance with paragraph (4)3. As used in this sub-
section, the term "foreign risks" means risks in con-
nection with properly outside, or liability arising out of
activity outside, or in connection with the lives or
health of residents of countries other than, the United
states.
The first change in the above provision is designed to makeTelear
that an insuranc.e contract qualifies as a policy insuring a foreign
risk if the company is obligated to make paymeni in a foreign currency,
whether the obligation to make such payment is stated in the policy
itself or is required under the law of the applicable foreign jurisdiction.
The second change eliminates a provision the substance of which is
found elsewhere in the subsection (pars. (3)(A)(i) and (3)(E)(i)).
(3) DESIGNATION OF ASSETS. Pace 23, line 8.
(A) INITIAL DESIGNATION. Page 23, line 9.
This subparagraph should be amended as follows:
"(i) REQUIREMENT OF INITIAL DESIGNATION.
?An insurance company desiring to establish a
fund (or funds) of assets under paragraph (2)
shall initially designate, as part or all of such
fund (or funds), stock and debt obligations
owned by it an July 18, 1963, a-s follows: First,
stock of foreign issuers, and debt obligations of
foreign obligors haying a. period remaining to
maturity (on July 18, 1963) of 5 years or more
and payable in foreign currency: second, if the
company so elects, debt obligations of foreign
obligors haring a period remaining to maturity
(on July 18, 1963) of less than 3 years and pay-
able in foreign currency: and third, debt obliga-
tions of foreign obligors haring a period remain-
ing to motorail (on July 18, 1963) of 8 years or
more and payable solely in. United States cur-
rency. The designation under the preceding
sentence with respect to any fund shall be made,
in the order set forth, to the extent that the adjusted
basis (within the meaning of secticrn 1011) of the
designated stock and debt obligations was (on
July 18, 1963) not in excess of 110 percent of
the allowable reserve applicable to such. fund
(determined in accordance with paragraph (4)
(B)(ii)), and shall in no case include any stock
or debt obligation described in section 4916(a).
[of foreign issuers, or debt obligations of
foreign obligors having a period remaining to
maturity of 3 years or more, or both, which it
owned on December 10, 1963, to the extent
that such stock or debt obligations or both had
an actual value as of such date not in excess
(in the case of any such fund) of 110 percent
of the applicable allowable reserve of such corn-
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pany as determined in accordance with para-
graph (4) (A). The designation or designa-
tions which an insurance company is required
to make shall be made first from stock and debt
obligations which were acquired by such com-
pany on or before July 18, 1963, and shall in
no case include any stock or debt obligations
described in paragraph (1), (2), or (3) of sec-
tion 4916(a).]
"(ii) TIME AND MANNER OF INITIAL DESIGNA-
TION.?Any initial designation which an insur-
ance company is required to make under this
subparagraph shall be made on or before the
30th day after the date of the enactment of this
chapter (or at such later time as the Secretary
or his delegate may by regulations prescribe)
by the segregation on the books of such com-
pany of the stock or debt obligations (or both)
designated.
This revised subparagraph is designed to give insurance companies
doing business in foreign countries a different method of establishing
their funds of assets. Under the method presently ,provided in the
bill, insurance companies cannot designate debt obligations as part
of the fund as an initial designation unless the obligations were owned
on both July 18 and December 10, 1963. This means that an obli-
gation which was held on July 18, 1963, and which matured before
December 10, 1963, could not be designated as part of the fund.
Moreover, debt obligations with less than 3 years remaining to
maturity cannot be initially designated. This prevents obligations
of less than 3 years maturity payable in foreign currency from being
the subject of an initial designation, despite the fact that they may be
attributable to the foreign business carried on by the insurance
company. These short-term obligations may have originally been
purchased as long-term obligations or as short-term obligations with
the intention by the insurance company of reinvestment in long-term
obligations payable in foreign currency. If these short-term obli-
gations payable in foreign currency cannot be designated as part of the
fund before long-term obligations payable in U.S. currency, the in-
surance companies would be unable to replace tax free those short-term
obligations which are attributable to their foreign operations.
The proposed subparagraph provides an alternative method of
establishing the fund of assets. The order of designation is as follows:
(1) Stock and long-term debt obligations payable in foreign currency;
(2) at the election of the company, short-term obligations payable
in foreign currency; and (3) long-term debt obligations payable in
U.S. currency. Ownership on December 10, 1963, is not required,
since inclusion of this date is not necessary for effective operation of
this provision as amended.
This subparagraph also includes a change directed at the valuation
of assets in the fund. Under the present provision in the bill, an in-
surance company would be required to ascertain the fair market value
of its fund of assets, including appraisals of mortgages and private
placements, at the time of each new acquisition of stock or debt obli-
gations, to determine if the new acquisition could be designated as part
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of the fund without exceeding the fund's 110-percent limit. In order
to eliminate the necessity of frequent revaluations of the fund's assets
and to simplify Government audit procedures, the proposed change
permits valuation of the fund of assets in terms of the adjusted basis
of the securities held. This is also the value used for purposes of
determining gain on sale or other disposition of securities under the
applicable provisions of the Internal Revenue Code relating to income
tax treatment of insurance companies.
(13) OIRREAT DESIGNATIONS TO MAINTAIN FUND. Page
24, line 17.
This subparagraph should be amended as follows:
"To the extent permitted by subpara,o-raph
[(C)] (E), stock of a foreign issuer or a debt obliga-
tion of a foreign obligor acquired by an insurance
company after July 18, 1963, may be designated as
part of a f and of assets described in paragraph (2), if
such designation is made before the expiration of 80
days after the date of such acquisition and the com-
pany continues to own the stock or debt obligation until
the time the designation. is made; (an insurance com-
pany may claim an exclusion under this subsection
with respect to the acquisition of stock or a debt
obligation of a foreign issuer or obligor after Decem-
10, 1963, if such company designates such stock or
debt obligation as part of a fund of assets described in
paragraph (2) before the expiration of 30 days after
the date of such acquisition (and continues to own
it until the time the designation is made);] except
that any such stock or debt obligation acquired before
the initial designation of assets to the fund is actu-
ally made as provided in subparagraph (A)(ii) may
be designated under this subparagraph at the time
of such initial designation without regard to such
30-day period and continued ownership require-
ments.
The changes in this subparagraph are intended to conform the
provision with the amendments proposed in subparagraph (A).
(e) Additional designations after close of year. Page 25,
line 9.
This is a new subparagraph (C); present subparagraph (C) is
deleted.
"if the adjusted basis of the assets held in. a fund of
assets described in paragraph (2) at the close of a cal-
endar year after 1963 is less than 110 percent of the
allowable reserve applicable to such fund at the close of
such year, the insurance company may, to the extent
permitted by subparagraph (E), designate additional
stock or debt obligations (or both) which were acquired
during 8u,ch calendar year as a part of such fund, 80
long as the company still owns such stock or debt obli-
gations at the time of designation. Any designation
under this subparagraph shall be made on or before
January 81 following the close of the calendar year.
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Any tax paid by such company under section 4911
on the acquisition of the additional stock or debt obliga-
tions so designated shall constitute an overpayment of
tax; and, under regulations prescribed by the Secretary
or his delegate, credit or refund (without interest) shall
be allowed or made with respect to such overpayment.
This new subparagraph embodies the procedure now contained
in paragraph (4) (B) of this subsection. This procedure permits
an insurance company to designate stock and debt obligations as
part of a fund of assets if the securities were acquired during the
calendar year (and are held at the end of the year) and if the adjusted
basis of the assets in the fund at the end of the year is less than 110
percent of the allowable reserve applicable to the fund. The securities
may be designated up to the 110-percent limit. A credit or refund
is available as to any tax which was paid on stocks or debt obligations
which are so designated.
(D) Supplemental required designations.
This is a new subparagraph (D) following new subparagraph (C)
added following line 8 on page 25.
If during any calendar year an insurance company
acquires stock or debt obligations which are excluded
from the tax imposed by section 4911 under an
Executive order described in section 4917, and if
at the close of the calendar year (and after the designa-
tion of additional assets under subparagraph (0))
the adjusted basis of all assets in a fund described
in paragraph (2) is less than 110 percent of the
allowable reserve applicable to such fund, such
company shall, to the extent permitted by subpara-
graph (E), designate as part of such fund stock and debt
obligations acquired by it during the calendar year
and owned by it at the close of the calendar year,
as follows: First, stock, and debt obligations having
a period remaining to maturity (on the date of
acquisition) of 8 years or more and payable in foreign
currency, which were excluded from the tax imposed
by section 4911 under such Executive order; second,
if the company so elects, debt obligations of foreign
obligors having a period remaining to maturity (on
the date of acquisition) of less than 3 years and
payable in foreign currency; and third, debt obligations
having a period remaining to maturity (on the
date of acquisition) of 8 years or more and payable
solely in United States currency, which were excluded
from the tax imposed by section 4911 under such
'Executive order. The designations under this sub-
paragraph shall be made on or before January 31
following the close of the calendar year.
This new subparagraph establishes an ordering process for designat-
ing securities at the close of a calendar year if the fund of assets is
not up to its 110-percent limit. The purpose of this provision is to
prevent creation of a gap in the fund of assets which could defeat the
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purposes underlying the imposition of a limit on the proposed exclusion
for new issues provided in section 4917, if it were found necessary to
impose such a limit. This gap could develop while the new issue
exclusion was unlimited, if the insurance companies were not required
to designate as part of the fund those securities which were excluded
from tax under this new issue exclusion. If the President at a later
time found it necessary to impose a limitation on this exclusion, in-
surance companies would then have room in their funds of assets
to continue to buy new issues at a substantial rate. The proposed
change prevents this result by requiring the designation at the end
of the calendar year (if the fund is not full) of stock and long-term
debt obligations (payable in foreign currency) which were originally
excluded from tax during the calendar year under the new issue
exemption; short-term debt obligations (payable in foreign currency),
at the election of the company; and long-term debt obligations
(payable in U.S. currency) which were originally excluded from tax
? 'during the calendar year under the new issue exemption.
(E) Limitations. Following new subparagraphs (C) and
(D) added following line 8 on page 25.
This is a new subparagraph (E).
"(0 IN OE.VERAL.?No designation of stock
or a debt obligation as a part of a fund of assets
described in paragraph (2) shall be made under
subparagraph (B), (C), or (D), to the extent that,
immediately thereafter, the adjusted basis of all
the assets held in such fund would exceed 110 per-
cent of the applicable allowable reserve (deter-
mined in accordance with paragraph (4)(B)(i)).
?(ii) TREATMENT OF EXCESS DESIGNATIONS. ?
To the extent that the adjusted basis of any stock
or debt obligation designated as a part of a fund
under subparagraph (B) during any calendar
year, when added to the adjusted basis of all other
assets held in. such fund at the close of such
calendar year, exceeds 110 percent of the allowable
reserve applicable to such fund for such calendar
year, the designation of such stock or debt obliga-
tion shall, for purposes of this subsection, be
treated as ineffective, and the provisions of this
chapttr shall apply with respect to the acquisition
of such stock or debt obligation as if such designa-
tion had not been made.
?(iii) SHORT-TERM onLiaArtoffs.--No desig-
nation may be made under subparagraph (B) or
(C) of any debt obligation which has a period
remaining to maturity (an the date acquired) of
less than 3 years.
Clause (i) of this subparagraph states the general principle that,
no designation of stock or debt, obligations may be made if the designa-
tion causes the, adjusted basis of the assets in the fund to exceed 110
percent of the allowable reserve applicable to the fund. A comparable
provision now appears in the bill as (3)(C).
Clause (ii) of this subparagraph permits an insurance company to
estimate the increase in its allowable reserve during a particular
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INTEREST EQ AIAA
I 1L1
0001-2
calendar year. As the bill is presently drafted, an insurance company
whose fund of assets is completely filled must pay the tax on acquisi-
tions even though its foreign business may increase during the calendar
year so as to permit designation of the securities at the end of the
year. Under present procedure, the company is required to pay the
tax, and at the end of the year, apply- for a credit or refund based upon
the actual increase in its reserve. The proposed change permits a
company to designate securities as part of a fund of assets based upon
its estimate of the allowable reserve applicable to the fund at the end
of the year. If the adjusted basis of the stock or debt obligations
designated as part of the fund during the year, together with all other
assets held in the fund at the end of the year, is less than 110 percent
of the allowable reserve applicable to the fund, no tax is due. If,
however, the adjusted basis of these assets exceeds 110 percent,
designations in excess of that figure are treated as ineffective, and the
company must pay the tax plus any interest which may be due on the
acquisitions which were the subject of ineffective designations.
Clause (iii) of this subparagraph is designed to prohibit mainte-
nance designations of short-term obligations during the calendar
year. The acquisition of these obligations is not subject to the tax,
and such maintenance designations could be utilized by insurance
companies as a method of avoiding the impact of a limitation which
might be placed on the exclusion provided in section 4917 for issues
orginating in a country where application of the tax to that country
imperils or threatens to imperil the stability of the international
monetary system (new issue exclusion). In anticipation of the estab-
lishment of such a limit, insurance companies could fill their funds
with short-term obligations and, after a limit were imposed, replace
them with new long-term obligations tax free. This would have the
effect of frustrating the purposes of the limit. Under proposed sub-
paragraph (D), at the close of the calendar year, short-term obligations
may be designated after new long-term obligations payable in foreign
currency which were excluded from tax under section 4917.
(4) DETERMINATION OF RESERVES. Page 25, line 16.
This paragraph should be amended as follows:
"(A) GENERAL RULE.--For purposes of this sub-
section, the term 'allowable reserve' means?
"(i) in the case of a life insurance company
(as defined in section 801(a)), the items taken
into account under section 810(c) arising out of
contracts of insurance and reinsurance (includ-
ing annuity contracts) which relate to foreign
risks and the proceeds of which are payable in
a single foreign currency (other than the cur-
rency of a less developed country) ; and
"(ft) in the case of an insurance company
other than a life insurance company (as so
defined), the amount of its unearned premiums
(under section 882(b)(4)) and unpaid losses
(ander section 832(b)(5)) which relate to foreign
risks insured or reinsured under contracts pro-
viding for payment in foreign currencies (other
than currencies of less developed countries)
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and which are taken into account in computing
taxable income under section 832[(b)(4) and
(5)] (for such purpose treating underwriting
income of an insurance company subject to tax-
ation under section 821 as taxable income under
section 832).
1[The determination of an allowable reserve of an
insurance company for any calendar year shall be
made as of the close of the previous calendar year.]
"(B) TIME OF DETERMINATION.?
"(1) IN GENERAL.?For purposes of para-
graph (3) (other than subparagraph (A) of such
paragraph), the determination of an allowable
reserve for any calendar year shall be made as of
the close of such year.
"(ii) I .r TIAL DESIGN .4 TION.?For purposes
of paragraph (3)(A), the determination of an al-
lowable reserve shall be made as of July 18, 1968.
If the insurance company so elects, the determina-
tion under this clause may be made by computing
the mean of the allowable reserve at the beginning
and at the close of the calendar year 1963.
Present subparagraph (B) is deleted.
The changes proposed in subparagraphs (A) and (B)(i) of this
paragraph make clear that. the determination of an allowable reserve
for a fund of assets for any calendar year shall be made at the end of
that year. Under the present bill, the reserve as of the close of the
previous calendar year is used, although the company may elect to
use the figure as of the close of the current year. This change recog-
nizes that the reserve figure which should govern is the figure at the
end of the current calendar year, which would reflect any increase in
business during the year.
The amendment suggested in (B)(ii) of this paragraph establishes
a new method for determining allowable reserve for the year 1963.
Under this proposal, the determination of allowable reserve shall
be made as of July 18, 1903 (the date on which securities which are
initially de,signatea must be owned). In the alternative, a company
may compute the mean of its reserve at the beginning and the close
of 1963. This figure, which can be readily ascertained, approximates
the actual reserve figure on July 18, 1963. (The substance of present
par. (4)(B) is now embodied in par. (3)(C).)
(g) SALE OR LIQUIDATION OF WHOLLY OWNED FOREIGN SUBSIDIARY.
Page 28, line 23.
This is a new subsection (g). A revised subsection (g) appears
below as subsection (i).
"(1) IN GENERAL.?The tar imposed by section 4911
shall not apply to the acquisition. by a United States person
of a debt obligation of a foreign obll,gor if the debt obligation
is acquired?
"(A) in connection with the sale by such United
States person (or by one or more includible corpora-
tions in an affiliated group, as defined in section
48(c)(5)(C), of which such. United States person is a
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member) of all of the outstanding stock, except for
qualifying shares, of a foreign corporation; or
"(B) in connection with the liquidation by such
United States person (or by one or more such includible
corporations) of a foreign corporation all of the out-
standing stock of which, except for qualifying shares,
is owned by such United States person (or by one or
more such includible corporations), but only if such
debt obligation had been received by such foreign cor-
poration as part or all of the purchase price in a sale
of substantially all of its assets.
"(2) LIMITATION.?Paragraph (1) shall not apply to
the acquisition of a debt obligation if any of the stock sold
or surrendered in connection with its acquisition was
originally acquired with the intent to sell or surrender.
This new provision is designed to exclude from application of the
tax bona fide sales of wholly owned subsidiaries, where the transaction
is motivated by factors other than the interest rate differential between
American and foreign security markets. Debt obligations acquired by
a U.S. person in connection with such a sale would be excluded from
tax, regardless of whether the transaction involves a sale of stock or a
sale of assets. The particular form of the sale is usually determined
by the purchaser of the business involved, but the effect on the U.S.
person will be the same in either situation. In the case of a sale of
stock, the U.S. parent will acquire the debt obligations directly from
the issuer. In the case of a sale of assets, the U.S. person will acquire
the debt obligation upon the liquidation of its subsidiary, in exchange
for the latter's stock. The proposal requires that the sale or surrender
of stock involve all of the outstanding stock of a foreign corporation
(except qualifying shares) and excludes the acquisition from tax unless
the stock of the foreign corporation was originally acquired with the
intent to sell or surrender.
(h) CERTAIN DEBT OBLIGATIONS SECURED BY UNITED STATES
MORTGAGES, ETC. Following page 312 line 25.
This is a new subsection (h) of section 4914.
"(1) IN GENERAL.?The tax imposed by section 4911
shall not apply to the acquisition from a foreign obligor by
a United States person of a debt obligation of such foreign
obligor which is secured by real property located in the
United States, to the extent?
"(A) the debt obligation is a part of the purchase
price of such real property (or of such real property
and related personal property), or
"(B) the debt obligation arises out of a loan made
by such United States person to the foreign obligor the
proceeds of which are concurrently used as part of the
purchase price of such real property (or of such real
property and related personal property).
"(2) LIMITATION.?Paragraph (1) shall apply to the
acquisition of a debt obligation only if?
"(A) the owner of the property sold is a United
States person, and
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"(B) at least 25 percent of the purchase price of
the property sold is, at the time of such sale, paid in
United States currency to such United States person by
the _foreign obligor from funds not obtained from United
States persons for the purpose of purchasing such
property.
"(3) RELATED PERSONAL PROPERTY.?For purposes
of paragraph (I), the term 'related personal property'
means tangible personal property which is sold in con-
nection with tIt sale of real property for use in the opera-
tion of such real property.
This provision is designed to prevent application of the tax in
the case of a loan secured by real property located in the United
States to finance the purchase of such real property by a foreigner
involving a large cash downpayment (at least 25 percent of the sales
price) to the U.S. seller. A transaction of this type has a favorable
effect on our balance of payments, and would not have occurred if
the financing were not available. Since the obligation is secured by
U.S. real estate, there is no risk that the property involved will not
remain in the United Stales, as would be the case with respect to
personal property.
(i) Loss OF ENTITLEMENT TO EXCLUSION IN CASE OF CERTAIN SUB-
SEQUENT TRANSFERS. Following new subsection (L) added following
line 25 on page 31.
This is a revised subsection (g).
"(1) IN GENERAL.?
"(A) Where an exclusion provided by paragraph
(1)(B), (2), (3), [or] (4), or (5) of subsection (c), or
the exclusion provided by subsection (d), has ap-
plied with respect to the acquisition of a debt obli-
gation by any person, but such debt obligation is
subsequently transferred by such person (before the
termination date specified in section 4911(d)) to a
United States person otherwise than?
"(i) to any agency or wholly-owned instru-
mentality of the United Slates;
"(ii) to a commercial bank acquiring the ob-
ligation in the ordinary course of its commercial
banking business; [or]
"(iii) in the case of an exclusion provided by
paragraph (I)(B), (2), or (3) of subsection (c),
to any transferee where the extension of credit
by such person and the acquisition of the debt
obligation related thereto were reasonably neces-
sary to accomplish the sale of property or services
out of which the debt obligation arose, and the
terms of the debt obligation are not unreasonable
in light of credit practices in the business in which
such person is engaged; or
"Filo] (Join a transaction described in
subsection (a)(1) or (2), or a transaction (other
than a transfer by gift) described in subsection
(a)(3.),
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then liability for the tax imposed by section 4911
(in an amount determined under subparagraph (D)
of this paragraph)?shall be incurred by the transferor
(with respect to such debt obligation) at the time
of such subsequent transfer.
"(B) Where the exclusion provided by para-
graphs (2) and (3) of subsection (c) has applied
with respect to the acquisition of stock by any
person, but such stock is subsequently transferred
by such person (before the termination date speci-
fied in section 4911(d)) t?o a United States person
otherwise than in a transaction described in sub-
section (a) (1) or (2), or a transaction (other than a
transfer by gift) described in subsection (a)(3),
then liability for the tax imposed by section 4911
(in an amount determined under subparagraph (D)
of this paragraph) shall be incurred by the transferor
(with respect to such stock) at the time of such
subsequent transfer.
The proposed change in subparagraph (A) liberalizes the provisions
applicable to the transferability of debt obligations received by .an
exporter so as not to interfere with the legitimate export financing
of U.S. companies. The bill now provides that export paper may be
transferred only to an agency or wholly-owned instrumentality of the
United States, a commercial bank in the ordinary course of its com-
mercial banking business, or by operation of law. This proposal per-
mits transfer to other U.S. persons, provided the original extension of
credit by the exporter was reasonably necessary to accomplish the
export, and the terms of the debt obligation are not unreasonable in
light of credit practices in the exporter's business.
The proposed change in subparagraph (B) applies the restrictions
applicable to the transfer of stock received in connection with the
export financing of tangible personal property to intangible personal
property, in accordance with new section 4914(c)(3).
Section 4915. EXCLUSION FOR DIRECT INVESTMENTS
(a) IN GENERAL. Page 32, line 2.
(1) EXCLUDED ACQUISITIONS. Page 32, line 3.
This paragraph should be amended to read as follows:
"Except as provided in subsections (c) and (d) of this
section, the tax imposed by section 4911 shall not apply
to the acquisition by a United States person (A) of stock
or a debt obligation of a foreign corporation or of a debt
obligation from a foreign corporation which received such
obligation in the ordinary course of its trade or business
as a result of the sale or rental of products manufactured or
assembled by it or of the performance of services by it, if
immediately after the acquisition such person (or one or
more includible corporations in an affiliated group, as de-
fined in section 1504, of which such person is a member)
owns (directly or indirectly) 10 percent or more of the to-
tal combined voting power of all classes of stock of such
foreign corporation, or (B) of stock or a debt obligation
of a foreign partnership if immediately after the acqui-
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sition such person owns (directly or indirectly) 10
percent or more of the profits interest in such foreign
partnership. * * *
This proposed change extends the direct investment exclusion to the
acquisition by a. U.S. corporation of installment receivables acquired
by its subsidiary in connection with the sale or rental of products
manufactured or assembled by the subsidiary or the performance of
services by the subsidiary.
Under the bill as presently drafted a U.S. corporation can lend funds
to a foreign subsidiary and acquire a debt obligation in return tax
free. In certain instances, the U.S. corporation may be restricted
by trust indentures or other agreements in its ability to lend to a
subsidiary. If this is the case, the U.S. corporation may be permitted
under the trust indenture to finance its subsidiaries by acquiring the
installment receivables received by the subsidiaries in the ordinary
course of conducting their business. The proposed amendment, rec-
ognizes this practice as an alternative to a direct investment and
excludes acquisition of the receivables from the tax.
(2) OVERPAYMENT WITH RESPECT TO CERTAIN TAXABLE ACQUISI-
TIONS. Page 32, line 23.
This paragraph should be amended to read as follows:
"The tax paid under section 4911 on the acquisition
by a United States person of stock or a debt obligation of
a foreign corporation or foreign partnership, or a debt
obligation from a foreign corporation which received such
obligation in the ordinary course oj its trade or business
as a result oJ the sale or rental of products man,ufactured
or assembled by it or of the performance of services by it,
[by a United States person] shall (unless this subsec-
section is inapplicable by reason of subsection (c) or (d))
constitute an overpayment of tax if such person ? [con-
tinuously holds such stock from the time of its acquisi-
tion to the last day of the calendar year in which the
acquisition was made and as of such last day meets the
ownership requirement of paragraph M.]
"(A) meets the ownership requirement oj para-
graph (1) with respect to such corporation, or partner-
ship at any time within 12 months after the date of
.uch acquisition, and
"(B) holds the stock or debt obligation continuously
from the date of such acqusition to the last day of the
calendar year in which such ownership requirement
is first met.
Under regulations prescribed by the Secretary or his
delegate, credit or refund (without interest) shall be
allowed or made with respect to such overpayment.
This provision and proposed change are designed to avoid hardship
in a case where a U.S. person is unable to satisfy in a single acquisition
the 10 percent or more voting stock requirement of the direct invest-
ment provisions, but where he acquires the requisite 10-percent interest
over a 12-month period. It also extends the credit or refund pro-
visions to the acquisition of debt obligations under these circumstances.
The bill now provides an exclusion for acquisitions if a U.S. person
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acquires stock in a foreign corporation or partnership in a series of
transactions, if at the end of the calendar year involved the person
holds a 10-percent or greater stock interest. The proposed change
makes clear that the exclusion is available if the 10-percent interest is
acquired in any 12-month period, whether or not the 12-month period
coincides with a particular calendar year, and allows the credit or
refund in the case of debt obligations acquired in such situations.
Section 4916. EXCLUSION FOR INVESTMENTS IN LESS
DEVELOPED COUTRIES
(a) GENERAL RULE. Page 37, line 14.
Subsection (a) should be amended as follows:
"The tax imposed by section 4911 shall not apply to the
acquisition by a United States person of?
"(1) a debt obligation issued or guaranteed by the
government of a less developed country or a political
subdivision thereof, or by an agency or instrumentality
of such a government;
"(2) stock or a debt obligation of a less developed
country corporation; [or]
"(3) a debt obligation issued by an individual or part-
nership resident in a less developed country in return
for property which is used, consumed, or disposed of
wholly within one or more less developed countries[]; or
"(4) stock or a debt obligation of a foreign issuer or
foreign obligor, to the extent that such acquisition is re-
quired as a reinvestment within a less developed country
by the terms of a contract of sale to, or of a contract of
indemnification with respect to the nationalization, expro-
priation, or seizure by, the government of such less developed
country or a political subdivision thereof, or an agency or
instrumentality of such government, of property owned
within such, less developed country or such political subdivi-
sion by such, United States person, or by a controlled foreign
corporation (as defined in section 957) more than 50 per-
cent of the total combined voting power of all classes of stock
entitled to vote of which is owned (within the meaning of
section 958) by such United States person, but only if such
contract was entered into because the government of such
less developed country or political subdivision, or such
agency or instrumentality?
"(A) has nationalized or has expropriated or seized,
or has threatened to nationalize or to expropriate or
seize, a substantial portion of the property owned
within such less developed country or such political
subdivision by such United States person or such
controlled foreign corporation; or
"(B) has taken action which has the effect of
nationalizing or of expropriating or seizing, or of
threatening to nationalize or to expropriate or seize, a
substantial portion of the property so owned.
New paragraph (4) is designed to exclude from the proposed tax
the acquisition of securities of a company operating in a less developed
country with the proceeds from the payment by the government of
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that country or its instrumentality for the stock or assets of a business
previously operated in that country by the U.S. person. The U.S.
person must prove the payment, for his property is an indemnification
for the seizure of property or compelled under threat of expropriation.
The U.S. person seeking an exclusion under this provision must also
show that the reinvestment of the sales proceeds within the less
developed country was required by the contract terms.
In the circumstances contemplated by the proposed amendment,
the companies in which the U.S. person must reinvest presumably
would qualify as less developed country corporations under the re-
quirements of section 4916(c)(1), particularly in light of the interests
of the less developed country. However, the officers of these com-
panies are aware of the pressures on the U.S. person seeking reinvest-
ment in these circumstances, and they are under no compulsion to
reveal information regarding their assets and income which is re-
quired to establish less developed country corporation status. Such
information is not otherwise available. Moreover, the contract
generally requires reinvestment within a specified period of time,
which increases the pressure on the U.S. person.
(c) LESS DEVELOPED COUNTRY CORPORATION DEFINED. Page 40,
line 3.
(1) IN GENERAL. Page 40, line 5.
Paragraph (1) should be amended to read as follows and a new
paragraph (2) should be added. Present paragraph (2) should be
renumbered (3).
"For purposes of this section, the term 'less developed
country corporation' means a foreign corporation which
for the applicable periods set forth in paragraph [(2)]
(3)?
"(A) meets the requirements of section 9.55(c) (1)
or (2); or
"(B) [has gross income 80 percent or more of
which is derived] derires 80 percent or more of its
gross income, if any, from sources within less devel-
oped countries, or from deposits in the United States
with persons carrying on the banking business, or both,
and has assets 80 percent or more in value of which
consists
Of?
"(i) property described in clauses (ii), (iii),
(iv), and (v) of section 955(c)(1)(B),
"(ii) property described in section 950(b)(1)
(regardless of when acr,uirecl),
"(iii) debt obligations described in paragraph
(3) of subsection (a) of this section, and
"(iv) obligations of the United States;
except that in applying this paragraph the determination
of whether a foreign country is a less developed country
shall be made in accordance with subsection (b) of this
section.
"(2) SPECIAL RULES.?For purposes of subparagraphs
(A) and (B) of paragraph (1)?
"(A) income derived from property described in
section 956(b)(1) (regardless of when acquired) shall
not be taken into account, and
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"(B) obligations of any other less developed country
corporation shall be taken into account under section
955(c) (1) (B) (iii) without regard to the period remain-
ing to maturity at the time of their acquisition.
For purposes of subparagraph (B) of paragraph (1) de-
posits outside the United States (other than deposits in a
less developed country) with persons carrying on the
banking business, and income from such deposits, shall not
be taken into account.
The proposed changes in this subsection are designed to prevent
disqualification of less developed country corporations from the ex-
clusion from tax intended under this section because of investments
in U.S. property or income derived from U.S. sources, or because of
the fact that some of the corporation's assets consist of debt obliga-
tions of less developed country corporations which have a short-term
maturity, or debt obligations of individuals or partnerships resident
in less developed countries.
The criteria established in the present bill for determining less
developed country corporation status were derived primarily from
income tax concepts established in the Revenue Act of 1962. These
criteria have been expanded in the manner described to accommodate
them to the purposes of the interest equalization tax.
Section 4917. EXCLUSION FOR ORIGINAL OR NEW ISSUES
WHERE REQUIRED FOR INTERNATIONAL MONE-
TARY STABILITY
(b) APPLICABILITY OF EXECUTIVE ORDER. Page 35, line 13.
This subsection should be amended to read as follows:
"An Executive order described in subsection (a) may be
applicable to all such original or new issues or to any aggre-
gate amount or classification thereof which shall be stated in
such order and shall apply to acquisitions occurring during
such period of time as shall be stated therein. If the order is
applicable to a limited aggregate amount of such issues it shall
apply (under regulations prescribed by the Secretary or his
delegate) to those acquisitions as to which notice of acquisi-
tion was first filed, provided that in the case of any such
notice the acquisition described in the notice is made before
or within 90 days after the date of filing or such longer period
after such date as may be specified in such order.
This change is necessary so that in the event the President deems it
advisable to impose a limitation on the exclusion for original or new
issues originating in a particular country the procedural requirements
for administering such a limitation would be sufficiently flexible. If a
limitation is imposed, it may be deemed appropriate to permit a
longer period of time between the date of filing notice and the date of
acquisition as to certain types of acquisitions where a 90-day limit is
not feasible.
(C) ORIGINAL OR NEW ISSUE. Page 45, line 25.
This subsection should be amended to read as follows:
"For purposes of this section?
"(1) stock shall be treated as part of an original or new
issue only when it is acquired from the issuer by the
United States person claiming the exclusion; and
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:((2) a debt obligation shall be treated as part of an
original or new issue only if acquired not later than [60]
90 days after the date on which interest begins to accrue
on such obligation, except that a debt obligation secured by
a lien on. improvements on real property which are under
construction or are to be constructed at the time such obliga-
tion is issued (or if such obligation is one of a series, at the
time the first obligation in such series is issued) shall be
treated as part of an original or new issue if?
"(A) such obligation, is acquired not later than 90
days after the date on. which interest begins to accrue
on the total amount of such obligation. (or id* such obliga-
tion is one of a series, on the last issued of the obliga-
tions in. such series); and
"(B) the United States person claiming the ex-
clusion became committed to the acquisition of such
obligation not later than 90 days after the date on
which interest began to accrue on, any part of such
obligation (or, if such obligation is one of a series, on.
the _first obligation issued in such series).
The proposed change as to the definition of a new issue where a
construction loan is involved is necessary so that such loans are
eligible to qualify under this exclusion. Typically, the U.S. person
may not acquire the debt obligation involved until construction has
been completed and several months have elapsed since interest began
to accrue on the obligation. Accordingly, the proposed change
would commence the 90-day period after interest began to accrue on
the total obligation (or if a series of obligations is involved, the last-
issued obligation in the series), provided the U.S. person was com-
mitted to acquire the obligation within 90 days after interest began
to accrue on any part. of the obligation (or if a series of obligations
is involved, the first issued).
Section 4918. EXEMPTION FOR PRIOR AMERICAN OWNER-
SHIP
(a) GENERAL RULE. Page 46, line 9.
This subsection should be amended as follows:
"The tax imposed by section 4911 shall not apply to an
acquisition of stock or a debt obligation of a foreign issuer
or obligor if it is established in the manner provided in this
section by clear and convincing evidence] that the person
from whom such stock or debt obligation was acquired was
a. United States person throughout the period of his owner-
ship or continuously since July 18, 1963 and was a United
States person eligible to execute a certificate of American
ownership with respect to such acquisition.
This change, together with the amendment proposed in subsection
(f) below, is intended to make clear that in eases where a confirmation
received from a member of a national securities exchange or the
National Association of Securities Dealers does not serve as proof of
prior American ownership, a purchaser claiming an exemption based
on prior American ownership must produce a certificate of American
ownership to substantiate his claim, unless the failure to produce a
certificate is due to reasonable cause. In the overwhelming majority
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of acquisitions through American broker-dealers, a confirmation will
serve as proof of prior American ownership. In those cases where a
confirmation is not received, a certificate of American ownership
must be obtained in order to establish the exemption. It is proposed
that this certificate requirement be made mandatory in order to fore-
stall possible evasion of the tax by Americans who purchase from other
Americans who are being treated as foreigners for a particular purpose
under the bill. For example, a U.S. person purchasing from a dealer
who claims a credit or refund under section 4919 should not be per-
mitted to assert the exemption for prior American ownership since the
dealer can not execute the requisite certificate in connection with
the transaction.
(C) TRADING ON CERTAIN NATIONAL SECURITIES EXCHANGES. Page
46, line 23.
This subsection should be amended to read as follows:
"For purposes of subsection (a), a written confirmation,
received from a member or member organization of a national
securities exchange registered with the Securities and Ex-
change Commission [stating that an acquisition was made in
the regular market on such exchange (and not subject to a
special contract)] in connection with an acquisition on such
exchange, which does not state that such acquisition was made
subject to a special contract shall be conclusive proof for
purposes of this exemption of prior American ownership * * *
The proposed change conforms the language of the bill to the rules
adopted by national securities exchanges in connection with the
trading of foreign securities subject to the tax. Under exchange
rules, a purchaser in the regular market on the exchange is assured
that he is acquiring from another American and, accordingly, is not
liable for the tax or required to file a return. The purchaser's con-
firmation, which does not contain a statement that his acquisition is
subject to the tax, is considered conclusive proof of prior American
ownership.
(f) OTHER PROOF OF EXEMPTION. Following page 50, line 5.
This is a new subsection.
"For purposes of subsection (a), if a person establishes, with
respect to an acquisition, that there is reasonable cause for his
inability to establish prior American ownership under subsec-
tion (b), (c) or (d), he may establish prior American ownership
for purposes of this exemption by other evidence that the person
from whom such acquisition was made was a United States person
eligible to execute a certificate of American ownership with
respect to such acquisition.
This suggested amendment is proposed for the reasons set forth
above under subsection (a).
Section 4919. SALES BY UNDERWRITERS AND DEALERS
TO FOREIGN PERSONS
(a) CREDIT OR REFUND. Page 50, line 8.
(1) PRIVATE PLACEMENTS and (2) PUBLIC OFFERINGS. Page
50, line 12, and page 50, line 19.
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These two paragraphs should be deleted and a new consolidated
paragraph should be substituted to read as follows:
"(1) PRIVATE PLACEMENTS AND PUBLIC OFFERINGS.?
Are acquired by an underwriter in connection with a private
placement or a public offering by a foreign issuer or obligor
(or a person or persons, directly or indirectly, controlling,
controlled by, or under common control with such issuer or
obligor) and are sold as part of such private placement or
public offering by the underwriter (including sales by other
underwriters who are United States persons participatinp in
the placement or distribution of the stock or debt obligatwns
acquired by the underwriter) to persons other than United
States persons;
This proposed revision will equalize the treatment of foreign under-
writings, whether in the form of a public offering or private place-
ment, and prevent the loss of the credit or refund for resales to for-
eigners because of distribution practices prevailing in a particular
foreign country.
The bill presently requires that the underwriter in a private place-
ment sell directly to foreigners to qualify for the credit or refund while
in the case of public offerings, the sales to foreigners may be made by
selling group members. In some foreign countries, the concept of
"private placement" includes offerings where selling groups are util-
ized. The proposed change will eliminate the distinction between the
treatment, of private placements and public offerings and will allow
the credit or refund in all underwriting situations where the foreign
stock or debt obligations are placed with foreign investors, and U.S.
persons are only part of the distribution and placement process.
(2) Certain debt obligations. Page 51, line 4.
This paragraph which was formerly (3) should be amended to read
as follows:
"Consist of debt obligations?
"(A) acquired by a dealer in the ordinary course
of his business and sold by [the dealer to persons
other than United States persons within 90 days
after (or, in the case of short sales, within 90 days
before) their acquisition] him, within 90 days after
their purchase, to- --
"(i) persons other than United States persons,
or
"(ii) another dealer who resells them on the
same or the next business day to persons other
titan I 'nited States persons; or
"(B) acquired by a dealer in the ordinary course
of his business to corer short sales made by him, with-
in 90 days before their purchase, to-----
"(i) persons other than United States persons,
or
"(ii) another dealer who resold them on the
same or the next business day to persons other
Man United Stales persons.
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This proposed change will insure that the credit or refund available
to dealers in case of the sale of foreign bonds to foreigners within 90
days after acquisition is not lost because of the form of the transaction.
This provision now requires that in order to qualify for the credit
or refund the dealer must sell to a foreign person within 90 days after
acquisition. However, a substantial percentage of the transactions
of this type involve a sale by the U.S. dealer to another U.S. dealer
who in turn sells to a foreigner. The second U.S. dealer normally
does not buy unless he has a foreign customer prepared to purchase
from him. The proposed change recognizes this practice and permits
the credit or refund, provided the second dealer sells to a foreigner
on the same day as he purchases from the first dealer or the next
business day.
(3) Certain stock. Page 51, line 4.
This is a new paragraph (3).
"Consist of stock acquired by a dealer in the ordinary
course of his business and sold by him, on the same
business day on which they were purchased, to persons other
than United States persons.
Under regulations prescribed by the Secretary or his delegate,
credit or refund (without interest) shall be allowed or made
with respect to such overpayment. For purposes of para-
graphs (2) and (3) of this subsection and for purposes of para-
graph (3) of subsection (b), the day of purchase or sale of any
stock or debt obligation is the day on winch, an order to purchase
or to sell, as the case may be, is executed.
This new paragraph is designed to permit dealers in securities to be
able to conduct certain types of arbitrage transactions in stocks
without at the same time weakening the effectiveness of the tax.
The last sentence of the provision makes clear that the purchase or
sale date is the day on which the buy or sell order is executed, for
purposes of this provision and the bond provision of (2) above.
The present bill does not contain a provision allowing a credit or
refund where dealers acquire foreign stocks and sell to foreigners.
This has had the effect of limiting certain types of arbitrage activities
on exchanges. To alleviate this problem, the proposed change allows
a credit or refund where a dealer sells foreign stock to a foreign person
on the same day the stock is purchased. This proposal does not
contain a 90-day provision as in the case of bonds because of the
possibility that a broad dealer exclusion in stocks could become a
tax-free vehicle for speculation in foreign securities.
(b) EVIDENCE TO SUPPORT CREDIT OR REFUND. Page 51, line 13.
The contents of present subsection (b) are incorporated in para-
graphs (1) and (2) of new subsection (b). Paragraph (3) is entirely
new.
"(1) Iz GENERAL.?Credit or refund shall be allowed to
an underwriter or dealer under subsection (a) with respect
to any stock or debt obligation sold by him only if the
underwriter or dealer?
"(A) files with the return required by section 6011
(d) on which credit is clain- ed, or with the claim for
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refund, such information as the Secretary or his dele-
gate may prescribe by regulations, and
"(B) establishes that such stock or debt obligation
was sold to a person other than a. United States person.
In any case where two or more underwriters form a group
for the purpose of purchasing and distributing (through
resale) stock or debt obligations of a single foreign issuer
or obligor, any one of such underwriters may, to the extent
provided by regulations prescribed by the Secretary or his
delegate, satisfy the requirements of this paragraph on.
behalf of all such underwriters.
"(2) CERTAIN SALES BY UNDERWRITERS.?For pur-
poses of paragraph (1)(B), in the case of a claim for
credit or refund under subsection (a)(1) with respect to
stock or a debt obligation acquired by an underwriter
and not sold by him directly to a, person other than a bnited
States person, a certificate of sale to a foreign. person
(setting forth, such information, and fled in such manner,
as the Secretary or his delegate may prescribe by regula-
tions), executed by the underwriter who made such sale,
shall be conclusive proof that such stock or debt obligation
was sold to a person other than a Einited States person,
unless the underwriter relying upon the certificate has
actual knowledge that the certificate 28 false in any material
respect.
"(3) SALES BY DEALERS.?
"(A) SALES ON NATIONAL SECURITIES EN-
ANGES.? For purposes of paragraph (1)(B), in the
case of a claim for credit or refund under subsection
(a)(2), the sale by a dealer of a debt obligation on a
national securities exchange registered with the Se-
curities and Exchange Commission subject to a, special
contract (and not in the regular market) shall be
conclusive proof that such debt obligation was sold
to a person other than a Limited States person, if such
exchange has in effect at the time of the sale rules
providing that?
a member or member organization of such
exchange selling a debt obligation as a dealer, or
effecting the sale as broker of a debt obligation on
behalf of a dealer, on such exchange subject to a.
special contract (and not in the regular market)
skull furnish to the member or member organiza-
tion, purchasing such debt obligation as a dealer,
or effecting the purchase as broker of such debt
obligation on behalf of a dealer, a written con-
firmation or comparison stating that such sale
is being made as a dealer, or on behalf of a dealer;
and
"(ii) if the purchaser of such debt obligation
is a dealer (whether or not a member or member
organization of such exchange), the terms of the
contract applicable to such sale shall require the
purchasing dealer to undertake to resell such debt
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obligation on the day of purchase or the next busi-
ness day to a person other than a United States
person.
A dealer who acquires a debt obligation in a transac-
tion in which a written confirmation or comparison
described in clause (i) is furnished shall not be entitled
to a credit or refund under subsection (a)(2) with
respect to his acquisition of such debt obligation unless
he establishes that such debt obligation was sold by him
on the day on which it was purchased or the next
business day to a person other than a United States
person.
"(B) OVER-THE-COUNTER SAL ES .?For purposes
of paragraph (1) (B) , in the case of a claim for credit or
refund under subsection (a)(2) with respect to a debt
obligation sold in a transaction not on a national
securities exchange, a written confirmation furnished
by a member or member organization of a national
securities association registered with the Securities
and Exchange Commission stating that such member
or member organization--
"(i) effected the purchase as broker of a debt
obligation on behalf of a person other than a
United States person, or
"(ii) purchased a debt obligation which he
resold on the day of purchase or the next business
day to a person other than a United States person,
shall be conclusive proof that such debt obligation was
sold to a person other than a United States person
(unless the dealer relying upon the covfirmation has
actual knowledge that the confirmation is false in any
material respect), if such association has in effect at
the time of the purchase rules providing that a member
or member organization who effects a purchase of, or
purchases, a debt obligation from a dealer who notifies
such member or member organization that such debt
obligation is being sold by such dealer and that such
dealer intends to claim a credit or refund under sub-
section (a) (2), shall furnish to such dealer a written
confirmation stating that the purchase of such debt
obligation was (or was not) effected by such member or
member organization on behalf of a person other than
a United States person, or that such debt obligation was
(or was not) sold by such member or member organiza-
tion on the day of purchase or the next business day to
a person other than a United States person.
Paragraphs (1) and (2) of this subsection make clear that if two
or more underwriters form a group for the purpose of distributing
securities of a foreign issuer or obligor, any one member of the group
may claim the credit or refund provided in this section for sales to
foreign persons on behalf of the other members of the group. If
the underwriter filing the claim on behalf of the group has not himself
sold directly to foreigners, he may rely on certificates of sale to foreign
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persons executed by the other underwriters, unless the filing wider-
writer has actual knowledge the certificates are false in any material
respect. The essence id these two paragraphs now appear in sub-
section (b) in the present bill.
Paragraph (3) of this subsection is designed to provide a means
under which a dealer claiming a credit or refund under section 4919
(a)(2) for the sale of foreign bonds to foreigners within 90 days
after their purchase can establish the bonds were actually sold to
foreigners.
The proposed provision establishes separate procedures LI) prove sale
to a foreigner with respect to the over-the-counter and exchange
markets because of the different characteristics of these markets.
In the case of national securities exchanges, a dealer can establish sale
Eu a foreigner if he sells in the special "F" market for foreign securities
maintained by the exchange, provided the 0:change has adopted the
required rules. These rules must provide that a dealer acquiring
bonds on the exchange in the special "F" market from another dealer
who is claiming a credit or refund under section 4919(a)(2) must
receive a special con flim nation or comparison to this effect, and must
undertake to resell the bonds to a foreigner on the date of purchase or
the next business duty. In the over-the-counter market. Ivliere trans-
actions are on a negotiated basis, a dealer can establish sale to a
foreigner by a confirmation received from a member of the National
Association of Securities Dealers stating that the bonds were acquired
by the member on behalf of a foreigner, or were sold by the member to
a foreigmer on the date. of purchase or the next business day, provided
the selling dealer has no actual knowledge the confirmation is false in
any material respect and the association has adopted the requisite
rules.
Section 4920. DEFINITIONS; SPECIAL RULES
(b) Special Rule for Foreign Underwriters. Following page 60,
line 2.
The following is a new subsection (b). Present subsection (b)
should become. (c).
"(b) SPECIAL RULE FOR FOREIGN UN DER1F RIT
partnership or corporation which is not a United States person
and which participates, as an underwriter in an underwriting
group that includes one or more United States persons, in a pub-
lic offering of stock or debt obligations of a foreign issuer or obli-
gor shall, if such partnership or corporation so elects and subject
to such terms and conditions as the Secretary or his delegate may
prescribe by regulations, be treated as a United States person for
purposes of this chapter with respect to its participation in such
public offering.
This new subsection is designed to afford uniform treatment to
American purchasers of foreign securities in underwritings in which
a foreign underwriter is participating together with -U.S. under-
writers.
Under the present provisions of the bill, the managing underwriter
would be required to allocate to each U.S. purchaser the pro rata
share of his purchase attributable to the foreign underwriter's par-
ticipation. No certificate of American ownership could be given to
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the customer with respect to this portion of his purchase, and interest
equalization tax would be due. As a result, the underwriters would
have to make the taxable portion available to Americans at a dis-
counted price, in order to absorb the cost of the tax for the purchaser.
The proposed amendment will permit the foreign underwriter to
assume the tax burden directly, by electing to be treated as a. U.S.
person with respect to his participation, and thereby allow .uniform
pricing of the issue to U.S. purchasers. The proposal also will elimi-
nate the necessity for individual U.S. purchasers to file returns and
will simplify administration of the tax.
Section 2(c). Effective Date.
(2) Preexisting commitments. Page 60, line 13.
This paragraph should be amended as follows:
Such amendments shall not apply to an acquisition?
(A) made pursuant to an obligation to acquire
which on July 18, 1963?
(i) was unconditional, or
(ii) was subject only to conditions con-
tained in a formal contract under which partial
performance had occurred;
(B) as to which on or before July 18, 1963, the
acquiring United States person (or, in a case where
2 or more United States persons are making acquisi-
tions as part of a single transaction, a majority in
interest of such persons) had taken every action to
signify approval of the acquisition under the pro-
cedures ordinarily employed by such person (or
persons) in similar transactions and had sent or
deposited for delivery to the foreign [issuer or
obligor] person from whom the acquisition was made
written evidence of such approval in the form of a
commitment letter, memorandum of terms, draft
purchase contract, or other [signed] document set-
ting forth or referring to a document sent by the
foreign person from whom the acquisition was made
which set forth the principal terms of such acquisi-
tion, subject only to the execution of formal docu-
ments evidencing the acquisition and to customary
closing conditions;
(C) if, on or before July 18, 1963, the acquiring
United States person?
(i) had entered into a contract for the sale
to the government of a less developed country or a
political subdivision thereof, or an agency or
instrumentality of such government, of property
owned within such less developed country or
political subdivision by such person or by a con-
trolled foreign corporation (as defined in section
957) more than 50 percent of the total combined
voting power of all classes of stock entitled to
vote, of which is owned (within the meaning of
section .958) by such person, or of stock or debt
obligations of such a controlled foreign corpora-
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tion which was actively en9aged in the conduct of
a trade or business within such less developed
country; or had entered into a contract of indem-
71 with respect to the nationalization,
expropriation, or seizure of such property or of
such stock or debt obligations by the government
of. a less developed country or political sub-
dzinsion thereof, or an agency or instrumentality
of such government, or
(ii) had sent or deposited for delivery to the
government of a less developed country or political
subdunzicm thereof, or agency or instrumentality
of such government, a commitment letter, memo-
randum of terms, or other document setting forth
the principal terms of a contract described in
clause (i),
to the extent such acquisition is required by the terms
of the contract as a reinvestment within such less
developed country of amounts equal to part or all of
the consideration received under the contract; or
[C] ( D ) which would be excluded from tax
under section 4915 of the Internal Revenue Code of
1954 but for the provisions of subsection (c)
thereof, if (i) on or before July 18, 1963, the acquir-
ing United States person applied for and received
from a foreign government (or an agency or in-
strumentality thereof) authorization to make such
acquisition and approval of the amount thereof,
and (ii) such authorization was required in order
for such acquisition to be made.
The purpose of this provision and the suggested changes are to
exclude from tax acquisitions resulting from transactions which were
completed or in advanced stages of negotiation on July 18, 1963.
Application of tax to these acquisitions might create substantial
hardship.
The proposed changes in subparagraph (B) make clear that a
draft purchase agreement, which normally would not be signed by the
lender, constitutes sufficient evidence of approval by the lender of the
acquisition, provided that the draft purchase agreement was furnished
to the borrower on or before July 18, 1963, and the lender had ap-
proved the acquisition in accordance with its customary procedures on
or before. that date. The changes also clarify that the acquisition
need not be made directly from the foreign issuer or obligor, but can
be made from another foreign person, so long as the other require-
ments of the provision are satisfied.
Proposed subparagraph (C) excludes from application of the tax
the acquisition of stock or debt obligations pursuant to a contract or
commitment, entered into prior to July 18, 1963, under which a U.S.
person sells property located in a less developed country (or stock of a
company engaged in business in such a country) to, or receives
indemnification from, such a less developed country (or its agency,
instrumentality, or subdivision). This new provision is comparable
to new section 4910(a)(4). Under both provisions, the companies in
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which the U.S. person must reinvest would presumably qualify as less
developed country corporations under the requirements of section
4916(c)(1). However, these companies are aware of the pressures on
the U.S. person to reinvest the proceeds of sale, and they are not
compelled to reveal the information regarding their assets and in-
come which is necessary to establish compliance with the less de-
veloped country corporation provisions. This information is not
otherwise available.
(7) DOMESTICATION. Page 63, line 22.
This paragraph should be amended to read as follows.
Such amendments shall not apply to the acquisition
by a domestic corporation of the assets of a foreign cor-
poration pursuant to a reorganization described in
subparagraph (C), (D) or (F) of section 368(a)(1) of the
Internal Revenue Code of 1954 if the acquisition occurs
on or before the 180th day after the date of the enact-
ment of this Act and the foreign corporation was a
management company registered under the Investment
Company Act of 1940 from July 18, 1963, until the time
of the acquisition.
This proposed amendment makes clear that a foreign investment
company which domesticates within 180 days after enactment of this
bill may do so in a reorganization under subparagraph (C) of section
368(a) (1) of the Internal Revenue Code as well as subparagraph (D)
or (F) of that section.
Section 3. RETURNS
(a) MAKING OF RETURNS. Page 64, line 12.
(1) IN GENERAL. Page 64, line 19.
This paragraph should be amended to read as follows:
"Every person shall make a return for each calendar
quarter during which he incurs liability for the tax im-
posed by section 4911, or would so incur liability but
for the provisions of section 4918. The return shall, in
addition to such other information as the Secretary or
his delegate may by regulations require, include a list
of all acquisitions made by such person during the
calendar quarter which are exempt under the provisions
of section 4918, and shall, with respect to each such
acquisition, be accompanied either (A) by a certificate of
American ownership which complies with the provisions of
sectton 4918(e), or (B) in the case of an acquisition for
which other proof of exemption is permitted under section
4918(f), by a statement setting forth a summary of the
evidence establishing such exemption and the reasons for the
person's inability to establish prior American ownership
under subsection (b), (c), or (d) of section 4918 [be
accompanied by clear and convincing evidence showing
that the acquisitions are so exempt]. No return or
accompanying evidence shall be required under this
paragraph in connection with any acquisition with
respect to which a written confirmation, furnished in
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accordance with the requirements described in section
4918 (c) or (d), is treated as conclusive proof of prior
American ownership; nor shall any such acquisition be
required to be listed in any return made under this
paragraph.
This proposed amendment, like the suggested changes in section
4918 (a) and (b), is intended to facilitate the administration and en-
forcement. of the interest equalization tax by requiring the filing of a
certificate of American ownership with the quarterly tax return in
order to prove the exemption for prior American ownership, unless
the taxpayer can establish that his inability to file such a certificate
is due to reasonable cause. No return or submission of proof is re-
quired if the acquisition was made through a member of a national
securities exchange or the National Association of Securities Dealers
who furnishes a confirmation to the purchaser which does not state
that the purchase was subject to the tax. If a 1L".S. person is claiming
the prior American ownership exemption but does not have the requi-
site certificate or confirmation, this proposed amendment requires Lim
to attach a statement to his quarterly return setting forth a summary
of the evidence establishing the exemption and the reasons for his
inability to establish the exemption by means of a certificate or con-
firmation.
(3) REPORTING REQUIREMENTS FOR MEMBERS OF EXCHANGES
AND ASSOCIATIONS. Page 65, line 20.
This paragraph should be amended to read as follows:
"Erery member[s] or [of] member organization[s]
of a national securities exchange[s] or of a and
national securities association[s] registered with the
Seeurities and Exchange Commission shall keep such
records and file such information as the Secretary or his
delegate may by regulations prescribe in connection
with acquisitions and sales effected by such member[s]
or member organization[s] as a brokers], and
the ac-
quisitions made for [their own accounts, e account
5
of such member or member organization, of stock or debt
obligations?
"(.1) as to which a certificate of American
ownership or blanket certificate of American
ownership is executed and filed with such member
or member organization as prescribed under [as
described in] section 4918(e); and
"(B) as to which a written confirmation is fur-
nished to a United States person stating that the
acquisition- -
"(i) in the case ole transaction on a national
securities exchange, was made subject to a special
contract. or
"(ii) in the case of a transaction not on a
national securities exchange, was from a person
who had not _filed a certificate of American
ownership with respect to such stock or debt
obligation, or a blanket certificate of American
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ownership with respect to the account from which
such stock or debt obligation was sold.
The suggested additions to the recordkeeping requirements for
brokers are essential to provide necessary enforcement procedures for
collection of the proposed tax.
Under the bill, a broker who sells on behalf of a customer in the
regular market and who does not advise the purchasing broker that
he is acting on behalf of a foreigner, permits the purchasing broker to
supply a confirmation to the purchaser which is conclusive proof of
an exemption from the tax. Such selling brokers are required to
retain appropriate records in connection with these transactions.
In addition, brokers acting on behalf of the purchaser and seller in
taxable transactions should also be required to maintain necessary
records. Without such information and records, administration of
the tax would be seriously handicapped.
Section 5. Original Issue Discount
This is a new section which should begin on page 67, line 17. Present
section 5 (Penalties) should be renumbered section 6. Section 5 should
provide as follows:
"Section 1232(b)(2) (relating to definition of issue price) is
amended by inserting before the period at the end of the second
sentence thereof the following: 'increased by the amount, if any,
of tax paid under section 4911 (and not credited, refunded, or
reimbursed) on the acquisition of such bond or evidence of
indebtedness by the first buyer.'
This new section is designed to remove the possibility that the
purchaser of a debt obligation in a private placement might suffer
adverse income tax consequences because of the interest equalization
tax.
The purposes of the proposed tax have no relation to the treatment
under section 1232 of the Internal Revenue Code of the part of the
gain on a sale or exchange of debt obligations consisting of "original
issue discount," and allocable to the period the taxpayer held the
securities, as ordinary income. In the case of a private placement
of debt obligations of a foreign issuer, where the amount of tax pay-
able by a United States purchaser is reflected in a deduction from the
purchase price, the amount of the discount might produce original
issue discount and subject the purchaser and subsequent purchasers
to possible additional ordinary income taxes. The proposed new
section would avoid that unintended result.
Section 6. Penalties
Section 6681. FALSE EQUALIZATION TAX CERTIFICATES. Page 68,
line 13.
(d) False Confirmations or Comparisons Furnished by Dealers.
Page 70, line 11.
This is a new subsection (d) ; present subsection (d) becomes (e).
"(1) MEMBERS OF NATIONAL SECURITIES EX-
CHANGES.-A member or member organization of a
national securities exchange described in section
4919(b)(3)(A) who, in a transaction subject to the rules
of such exchange as described in such section, wilfully
furnishes a written confirmation or comparison which
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contains a misstatement of material fact or which fails to
state a material fact shall be liable to a penalty equal to
125 percent of the amount of the tax imposed by section 4911
on the acquisition of the debt obligation by the dealer
for whose benefit such confirmation or comparison is
furnished.
"(2) DEALERS.?Any person who sells as a dealer a
debt obligation in. a transaction subject to the rules of a
national securities exchange as described in section
4919(b) (8)(A), in which such sale is effected on his behalf
by a. member or member organization of such exchange, and
who wilfully fails to disclose to such member or member
organization that such sale is being made by him as a
dealer, shall be liable to a penalty equal to 125 percent of
the amount of the tax imposed on his acquisition of the
debt obligation with respect to which such confirmation or
comparison is furnished.
"(3) MEMBERS OF NATIONAL SECURITIES ASSOC' A-
rIoNs.?A member or member organization of a national
securities association. described in section 4919(b)(3)(B)
who wilfully furnishes a, written confirmation described in
such section (in a transaction subject to the rules of such
association as described in such section) which contains a
misstatement of material fact or which fails to state a ma-
terial fact shall be liable to a penalty equal to 125 percent
of the amount of the tax imposed by section 4911 on the ac-
quisition of the debt obligation by the dealer for whose
benefit such confirmation is furnished."
This new subsection provides penalties for members of national
securities exchanges and the National Association of Securities Dealers
who willfully violate the procedures set forth in section 4919(b)(3).
That section permits a dealer claiming a credit or refund under sec-
tion 4919(a)(2) (for the sale of foreign bonds to foreigners within 90
days after their purchase) to establish the bonds were actually sold to
foreigners. The procedures in the over-the-counter market and on
the exchanges require that the confirmations or comparisons furnished
to the dealer on which the claim for credit or refund are based be
truthful. This new subsection imposes a 125-percent penalty on a
member or dealer who wilfully furnishes a false confirmation or
comparison or who wilfully fails to disclose that he is. acting as a
dealer in a transaction described in section 4919(b)(3), since the false
document or statement permitted a credit or refund to be obtained
improperly.
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Senator DOUGLAS. It is a pleasure to welcome the Secretary of the
Treasury who is here at our invitation to discuss H.R. 8000, the
Interest Equalization Tax Act of 1963.
We are very glad to have you, Mr. Secretary; again I want to
say that I always admire the way in which you sit at the table and
present a complicated subject on your own initiative without being
flanked by enormous numbers of advisers and without being com-
pelled to turn to them on the questions which we ask.
This is really unique.
Senator CARLSON. Mr. Secretary, don't get carried away by this
praise early in this session.
Secretary DILLoN. We have had plenty around to date before, Mr.
Chairman.
Senator WILLIAMS It could be the quality of our questions.
[Laughter.]
STATEMENT OF HON. DOUGLAS DILLON, SECRETARY OF THE
TREASURY
Secretary DILLoiv. Mr. Chairman and members of the Committee
on Finance, I am appearing before you today in support of H.R.
8000, the interest equalization tax, which passed the House of Repre-
sentatives with a large majority on March 5 of this year.
This tax was originally proposed by President Kennedy last July
in his special message on the balance of payments. It has since been
fully supported by President Johnson. I also favor adoption of the
technical amendments suggested in my letter to the chairman of June
12, which have been reprinted by your committee and placed in the
record of this hearing.
A year ago, our balance of payments was deteriorating sharply.
That deterioration was due almost entirely to accelerating capital
outflows, and particularly to an unprecedented outflow of portfolio
capital. The rate at which new issues of foreign securities were being
purchased had more than tripled in the previous 18 months, and the
volume during the first 6 months of 1963 reached a total of $1 billion.
As a result, the deficit in our international accounts?apart from all
,special intergovernmental transactions?jumped from the already
high 1962 level of $3.6 billion to an annual rate of $5.3 billion in the
second quarter of 1963. If allowed to continue, that deficit would
have undermined the international stability of the dollar.
Today our balance of payments situation is much improved and the
dollar is strong. Judging from data at hand, the deficit for the fiscal
year ending tomorrow, calculated on the same basis?this is regular
transactions?will be well under half that of the preceding fiscal year.
Paralleling this improvement, confidence has been restored in our
ability to achieve a balance in our payments within a reasonable time.
This, in turn, has stanched the drain on our gold stock. After de-
clining by an average of $1.7 billion a year over the 1958-60 period,
and by roughly half that rate during 1961 and 1962, our total gold
stock today is virtually unchanged from 10 months ago?by far
the longest period of stability during the past 6 years.
However, we must not succumb to any illusion that the progress of
the past year means the end of our longstanding balance of payments
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problem or allows us in any way to relax our drive toward equili-
brium. The hard fact is that after 6 consecutive years of -arge
deficits?adding up to a total of $211/2 billion on the basis of regular
transactions?we face once again this year the unhappy task of
financing a sizable, even though substantially reduced, imbalance in
our payments.
Roughly half of our payments improvement for the past 12 months
can be traced directly to diminished outflows of capital into foreign
securities.
But the basic problems giving rise to the enormous capital outflow
in 1962 and early 1963 have not yet been solved. Were we not now to
proceed with enactment of the proposed interest equalization tax,
demands from abroad for port folio capital would once again quickly
converge on our market in a volume far larger than we could sustain.
We simply cannot afford to pay the price such an event would exact
in terms of dangers for the dollar and losses of gold and confidence--
thus undercutting our whole international financial position.
.rirr: NEED FOR THE TAX
? The need for the interest equalization tax has arisen out of El com-
bination of circumstances here-and abroad that led to a rapid accelera-
tion in foreign demands on our capital market.
In the short space of the first C months of 1963, purchases of new
foreign issues? the overwhelming hulk from other industrialized
countries?reached a seasonally adjusted annual rate of $1.9 billion.
That was $800 million higher than the already swollen 1962 total and
31/2 times the 1961 level.
In addition, the indications were that potential borrowers in
Europe and Japan, %rho had already increased their demands on our
market drama( were scheduling still larger borrowings in this
country.
This surging flow of foreign borrowings simply swamped the real
progress in other areas of our balance of payments. As a result, our
overall deficit on regular transactions rose to an annual rate of $5
billion during the first half of 1963, sharply above the totals of $3.1
and $3.6 billion in 1901 and 1962, respectively. These increases, as
shown by tables 1 and 2, paralleled the swelling outflow of portfolio
capital into new foreign securities.
This rise in the outflow of portfolio capital reflected neither
financing of U.S. exports nor the more general balance of payments
needs of the borrowing countries.
On the contrary, more and more of the new flotations in our market
were designed to finance local projects of businesses or governments
in countries already enjoying relatively strong or improving external
positions.
Many of the new borrowers did not require foreign exchange, but
only desired greater amounts of fresh capital to support their own
internal growth. Because their own capital markets were both
narrow and costly, those borrowers desiring funds were naturally
attracted by our relatively low long-term interest rates and by the
ease with which large amounts of funds could be obtained in our well-
developed market.
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INTEREST EQUALIZATION TAX ACT
As a result, a large portion of the outflow of portfolio capital, by
providing more dollars to those who simply wished to exchange those
dollars for their own currencies, was adding roughly equivalent
amounts to our deficit. The dollars in turn were flowing into central
banks and becoming a claim on our gold.
Appraising the same facts from a European vantage point, the
most recent annual report of the Bank for International Settlements,
which came out about 3 weeks ago came to the same conclusion. That
report, which is representative Of responsible and official European
opinion, noted, in speaking of 1963, that?
* * * instead of being a net exporter of capital, which would seem the appro-
priate structural position, Europe was a large net importer of capital?which in
the main has been flowing into reserves.
Purchases of foreign portfolio securities by Americans do in time
lead to a return flow of interest and dividend income. But this
potential return is spread over many future years, while the entire
outflow of principal is immediate.
For instance, during both 1962 and 1963, years when the outflow of
U.S. portfolio capital into foreign securities averaged about $114
billion, the increase in our income from such securities amounted to
only about $50 million a year.
Clearly, calculations of earnings possibilities many years in the
future cannot, in the situation we face, substitute for the urgent need
to protect the dollar by bringing the current portfolio capital outflow
within the limits of our immediate capacity to lend.
THE NATURE OF THE INTEREST EQUALIZATION TAX
In the light of these circumstances' prompt and effective action to
reduce the outflow of portfolio capital was essential. The proposal
before this committee is designed to achieve that result by means of
an excise tax levied on the American acquiring directly from a non-
resident foreigner a foreign stock or debt issue maturing in more than
3 years. While the tax is payable by the American purchaser, the
impact will be effectively passed on to the foreign issuer in reduced
prices for his securities.
The rate of tax is graduated so that its net effect is to increase by
about 1 percent the annual cost of capital to a foreigner raising money
in our market, thus bringing this cost to a level more comparable to
the costs he would face abroad.
The result of foreigners would thus be similar to an increase of 1
percent in our entire structure of long-term interest rates.
Finding our market more costly, many potential foreign borrowers
will seek the funds they require at home, or in other foreign markets,
instead of aggravating the strains on our own position.
Similarly, American investors will find the net yield on American
securities relatively more favorable than yields provided on outstand-
ing foreign securities purchased from foreigners, and will tend corres-
pondingly to reduce their purchases of such securities.
We view the proposed tax purely as a transitional measure. As our
own payments come into equilibrium, as the expansion in our own
economy reduces incentives to export our capital, and as the capital
markets of other advanced countries develop the capability of more
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INTEREST EQUALIZATION TAX ACT
adequately meeting their internal needs, this special tax can and
should be removed.
IT.R. 8000 contains a termination date of December 31, 1965, to
assure that it will not be prolonged beyond the time of need.
At the Same tune, because of the urgency of dealing with the prob-
lem, President. Kennedy proposed that this tax become generally
effective July 19, 1963, the day following its announcement in his
special message on the balance of payments. Any other course would
simply have been an open invitation for potential borrowers and
lenders to accelerate their plans and crowd into our market before
the effective date of the tax. Our balance of payments most certainly
could not have borne such a strain.
On the other hand: making that proposed effective date known to
the market has permitted careful congressional consideration of this
important piece of legislation without the atmosphere of haste and
urgency which would inevitably have developed in the face af acceler-
ating capital outflows.
The House, in approving this proposed date, recognized that any
other course would only have rewarded those few who have been
willing to gamble on the possibility that a later effective date would
be enacted, at the expense of the great majority who have already
adjusted their transactions in the light, of the proposed July 1963
effective date.
Transactions in foreign securities bet ween residents of the United
States would not be subject to tax, and Americans would, of course, be
able to sell foreign securities free of tax to foreigners in markets both
here and abroad.
Thus, active trading markets in the more than $12 billion of for-
eign securities already held by Americans will be maintained, and
these securities will fully maintain their value. The passage. of time
since last summer has clearly proved that the provisions of the tax
regarding outstanding securities are workable, and that they con-
tribute. substantially toward improving our payments position.
The proposed bill would exempt a variety of acquisitions from for-
eigners where this is possible without undermining the effectiveness of
the tax and where imposition of the tax would work at cross purposes
with other objectives.
The exclusion from the tax of obligations maturing within 3 years
assures that the great bulk of our export financing and normal re-
curring international business will not be impeded. Further to assure
unimpeded export. financing, longer term export paper is specifically
exempted, as are bank loans made in the ordinary course of busiress.
Other important exemptions would be provided for the governments
and businesses of less developed countries and for direct investn-tent.
hi addition, the President would be provided discretionary authority
to exempt in whole or in part new issues from a particular country in
those instances in which lie determines that application of the tax
would imperil, or threaten to imperil. the stability of the international
financial system. This exemption is designed as a kind of safety valve
for use only when it can be clearly established that, as a direct conse-
quence of the tax. a foreign country would be forced to take such drastic
measures that international financial stability would be imperiled.
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INTEREST EQUALI2AT
Any such showing would be dependent upon a highly unusual set of
circumstances, and in my opinion the necessary conditions are today
met only by Canada.
An annex to this statement describes the provisions of the bill more
fully, while a detailed summary and a technical explanation of the
bill are contained in the report of the Ways and Means Committee of
the House.
BALANCE-OF-PAYMENTS IMPACT
The effectiveness of the proposed tax in reducing the outflow of port-
folio capital?and the key importance of this in terms. of the entire
balance of payments?is clearly revealed by the results since last July.
After running at a rate of $5 billion during the 6 months prior to the
President's message in July 1963, the deficit on regular transactions
dropped sharply to a rate of $1.6 billion during the second half of 1963
and to $700 million during the first quarter of 1964.
The first quarter results reflect a number of special factors whi?h
had the effect of substantially but temporarily reducing the deficit.
Among these was an unusual and temporary short-term capital inflow
during March that was fully reversed early in April, thus adding to
the deficit being incurred during the current quarter.
A number of factors, including a sizable rise in exports, have con-
tributed to the improvement in our balance of payments since last
July. However, the single, largest element in this improvement is the
sharp decline in net purchases of foreign securities.
Comparing the 9 months before the tax was pronosed with the 9
months since that time for which full data are available, the outflow
into foreign securities dropped from $1,985 million to $290 million at
seasonally adjusted annual rates, a reduction of $1.7 billion in the
annual rate of outflow.
To some ex'ent, these gains were exaggerated by the initial uncer-
tainties regarding the precise provisions of the tax. These uncertain-
ties could not be expected to last, nor would this be desirable. Our
market will not be closed. Some foreigners will borrow in this country
and absorb the tax; others will enter our market in the knowledge that
their issues will be exempted. There are clear signs that activity re-
sumed on this basis during recent months, and the outflow into foreign
securities is therefore expected to increase moderately.
However, the experience of the past 9 months confirms our belief
that the proposed tax will be effective in confining this outflow to sub-
stantially lower levels than those of late 1962 and early 1963.
During the hearings before the Ways and Means Committee last
fall, the Treasury estimated that imposition of the tax would result
in an overall reduction in the net purchase of foreign securities of
$11/4 to $11/2 billion a, year. These savings were calculated from the
high levels of outflow during the 6 to 9 months preceding the tax.
The validity of these estimates is now strongly supported by the
figures at hand?a saving at an annual rate of $1.7 billion in the 9
months following announcement of the proposed tax as compared to
the preceding 9 months.
Such estimated savings are fully consistent with purchases of new
foreign issues at a rate of perhaps $600?$800 million a year?close to,
but still somewhat above, the rate that would have been considered
"normal" prior to 1962.
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Furthermore, such a total would be consistent with needed progress
toward equilibrium in our balance of payments, without putting undue
strain on the international financial system.
Already a sizable number of new issues have been diverted to Euro-
pean markets, where they have been absorbed by countries in a strong
balance-of-payments position. Under the stimulus of the tax, Euro-
pean markets have shown that they are capable both of handling
their own internal needs in more adequate fashion and of meeting a
larger portion of foreign needs.
I want to emphasize that an exemption for new Canadian issues
should not impair the effectiveness of the tax. Canadian authorities
have assured us that it is their intention that Canadian borrowing in
our market will not exceed amounts necessary to maintain reasonable
equilibrium in Canada's international reserve position.
This should mean a substantial reduction in Canadian borrowing
in this country from the exceptionally high levels of late 1962 and
early 1963 to the. more normal levels that. were characteristic of
earlier years. Certainly, over the period since the tax has been pro-
posed, the Canadian reserve position has not deteriorated despite a
sharply lower level of borrowings in our market.
We have, of course, also been closely following trends in bank lend-
ing, in view of the possibility that foreign borrowers might seek to
shift, to that kind of financing. While analysis of detailed informa-
tion supplied by the banks on their commitments for the first 5 months
of 1964 does not suggest any significant direct substitution for market
financing, the total volume of short- and long-term outstanding rose
sharply in 1963 and during the first quarter of 1964. The rise started
early in the spring of 1963 and became particularly noticeable during
the fourth quarter.
A good part of this increase is clearly related to the surge in Amer-
ican exports over the same period. But, in addition, it is possible
that, in adjusting to the tax, borrowers in a few countries under
ba a nee- o f - pay m en t s pressure notably Japan?have made greater
use of bank loans. While some initial reactions of this kind are not
surprising, and there are now some indications of a leveling off of the
loan volume, future trends will clearly require continuing surveil-
lance. We will promptly recommend to the Congress appropriate
changes in the bank loan exemption should it appear that such loans
are in fact. being utilized to any significant degree as substitutes for
market financing.
TGE TAX AND OUR OVERALL BALANCE-OF-PAYMENTS PROGRAM
This tax is only part?although a crucial part?of a comprehensive
balance-of-payments program. A satisfactory long-run solution for
our payments problem depends on a more vigorous and efficient domes-
tic economy, capable of sustained productive expansion with stable
costs and prices.
Major steps to sunport this objective were taken in 1962 with the
investment tax credit and the liberalization of depreciation allow-
ances. They were followed this year by the $11.5 billion reduction in
individual and corporate tax rates.
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Together with responsible wage bargaining and pricing policies,
these fiscal measures are now strengthening our basic competitive posi-
tion at home and abroad, and our basic trade outlook is favorable.
Greater prosperity at home, with greater profitability of investment
here relative to the returns available from foreign investment, will
reduce the incentive for direct investment abroad and encourage the
retention of funds at home where their investment in domestic projects
will create more jobs for Americans.
We have also placed great emphasis upon reducing the net flow of
dollars abroad as a result of Government programs. For example,
between 1960 and mid-1963, our annual rate of net military expendi-
tures abroad was reduced by more than $500 million.
That portion of our economic assistance provided by AID in the
form of U.S. goods and services rather than dollars has been raised
from less than one-third in 1960 to over SO percent for current
commitments.
President Kennedy last July scheduled an additional reduction of
$1 billion in the annual rate of oversea governmental expenditures
by the end of this year. President Johnson is determined to achieve
that target.
As you can see, visible gains are being made toward solving our
basic payments problem. But we must not permit them to be drained
away in a renewed outflow of portfolio capital.
ALTERNATIVES TO THE TAX
While appreciating the need to restrain the outflow of portfolio
capital, some have suggested that there are preferable alternatives to
the tax.
One would be an attempt to drive up our entire structure of. long-
term interest rates by about 1 --Jercent. Such a drastic tightening of
credit, if possible at all, woulc clearly work against all that we are
trying to achieve to reduce excessive unemployment and encourage the
investment that creates jobs and promotes efficiency.
The interest equalization tax increases the cost of our money to
foreigners, just as would a sharp increase in our own rates. But it
will do so without the disrupting effects on the entire domestic economy
of an attempt to artifically force our long-term rates to unrealistically
high levels.
Another suggested alternative would abandon the market system
altogether by rationing credit to foreigners through a capital issues
committee. Proponents of that approach have failed to suggest what
kind of criteria could be used to cut back the heavy foreign demands
for capital, or whether any rational criteria could be consistently ap-
plied amid the conflicting pressures from at home and abroad that
would descend upon those administering the system.
To be successful, a capital issues committee would have to be Gov-
ernment controlled. This would mean that Government?substituting
case-by-case decisions by the Executive for the market effects of the
proposed tax?would have to intrude itself directly into the process
of individual decision making in a way that this country has never
found acceptable save in wartime.
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Moreover, selective rationing would clearly not be workable in the
case of outstanding securities. There are simply too many trans-
actions in this area, through too many channels, to make policing prac-
ticable on a case-by-case basis.
Substantial balance-of-payments savings would be sacrificed and, if
equal overall savings were to be achieved, the volume of new issues
would have to be held to a considerably lower figure than is expected
under the interest equalization tax.
CONCLUSION
The administration has proposed this temporary tax with reluctance,
but. the need for action to restrain the outflow of portfolio capital is
clear. The workability and effectiveness of our approach have been
demonstrated. It is far preferable to any alternative that has been
suggested.
Our international competitive position is strengthening, and other
measures to achieve lasting improvement in our payments are bearing
fruit.. But. these measures take time, and meanwhile our deficit re-
mains sizable.
Failure to enact this tax would stimulate a resurgence of capital
outflows with dire effects on our balance of payments.
Also, such failure could only be interpreted throughout. the world
as an unwillingness on the part of the United States to face up to
the hard decisions that are required to protect the dollar, and so the
financial health of the entire free world. I therefore strongly urge
your early approval of this vitally important legislation.
Thank you, Mr. Chairman.
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(The tables and annex accompanying Secretary Dillon's statement
follow:)
TABLE 1.-U.S. balance of payments, 11960 to 1st quarter 1964
[In millions of do]lars]
1960
1961
1962
1963
1964, 1st
quarter
(season-
ally ad-
justed
annual
rates)
Seasonaly adjusted
annual rates
Total
ist half
2d half
Commercial merchandise ex-
ports
17, 545
17, 693
18, 213
18, 098
20, 338
19,218
21, 880
Commercial merchandise im-
ports
-14, 723
-14,497
-16,134
-16 428
-17,414
-16,931
-17, 388
Commercial trade balance_
2, 822
3, 196
2, 079
1, 670
2,904
2, 287
4, 492
Commercial services, remit-
tances, and pensions
856
1,083
1, 739
1,200
1, 484
1, 342
2,490
Commercial balance 2
3,678
4. 779
3, 818
2,870
4, 388
3,629
6,952
Military expenditure (net) 3_ _
-2,712
-2,560
-2,375
-2,188
-2,360
-2,274
-1,088
Government grants and capital
dollar payments
-1,110
-1,139
-1,077
-1,010
-762
-886
-660
Government car ital receipts,
excluding prepayments, bor-
rowings and fundings
543
516
501
388
502
445
540
Private cal. ital:
Transactions in foreign se-
curities
-864
-910
-1,172
-2,112
-438
-1,275
8
Other long-term 4
-1,243
-1,267
-1,437
-1,784
-2,042
-1,913
-2,719
Short-term
-1,438
-1,492
-752
-998
-454
-726
-2, 528
Unrecorded transactions_
-772
-998
-1, 111
-164
-408
-286
-432
Balance on regular transactions_
-3,918
-3, 071
-3,605
-4,908
-1, 574
-3,266
-724
Special Government transac-
tions a
37
701
1,402
1, 258
1, 430
1, 344
556
Overall balance
-3,881
-2,370
-2,203
-3,740
-144
-1,042
-168
Memorandum: Gold sales (not
seasonally adjusted)
1, 702
857
890
8 227
a 234
461
a 46
I Excludes military transfers tinder grants.
2 Excluding exports and services financed by Government grants and capital.
Excludes advances on military exports.
Including direct investment.
Includes nonscheduled receipts on Government loans, advances on military exports, and sales of non-
marketable medium-term securities, including convertible securities of $502,000,000, let half 1963; $200,000,000,
2d half 1963.
a Not at annual rates.
Source: Survey of Current Business.
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TABLE 1?bong-1cm capital lbws In the U.S. balance of payments, 1960 to 1st
quarter 1964
fin millions of dollars)
Direct investment:
U.S. direct Investment
abroad
Foreign direct Investment
in United States.
Net direct investment _
Portfolio Investment:
purchases of new Is-
sues of foreign securities_ _
U.S. net purchases of out-
standing foreign securi-
ties
Total purchases foreign
securities
Redemptions of U.S.-hold
foreign securities
Other U.S. long term, net'..
Foreign long-tenn portfolio
investments in United
States
Net portfolio Investment .
Net long-term capital__
1960
1961
1962
1963
1961, 1st
quarter
(season-
ally ad-
lusted
annual
Seasonally adjusted
annual rates
Total
rates)
let half
24 half
?1,674
?1,609
?1,654
?2,06-4
?1,860
?1,862
?1.862
141
73
132
88
?54
17
96
?1533
?1,828
?1,622
?1,976
?1,714
?1,845
?1,786
?565
?523
?1,076
?1,968
?680
?1,249
?388
?302
?887
?96
?254
242
?6
396
?884
?910
?1,172
?2,112
?438
?1,276
8
201
148
203
186
204
125
176
?200
?283
?258
?312
?816
?564
?1,088
289
374
140
318
284
301
?48
?674
?651
?1,087
?1.920
?788
?1,343
?952
?2.107
?2,177
?2, 602
?3.896
?2,480
?3,168
?2,708
Mainly long-term bank loans.
Source: Survey of Current Business and Department of Commerce.
'DOME 3.?New issues of foreign securities purchased by U.S. residents by area,
1960 to 1st quarter 1964
Millions of dollars)
11160
1981
1962
1263
1964
1st
quarter
1st half
2d half
Total
Canada __ -
721
287
457
632
105
737
91
Western Europe
24
57
195
219
33
272
Japan
13
61
101
83
37
140
Other developed 1
77
43
60
17
17
Latin American Republics. _
107
18
'102
13
23
88
13
Other lest developed.._ __
64
95
77
38
32
67
24
International institutions __
27
12
84
4
Total new issues -
5.56
523
1,076
270
1,269
132
I Australia, New Zealand, South Africa.
t Includes 375,000,000 Issues by Inter-American lievelopment Bank.
Source. Survey of Current Busines, and Department of Commerce.
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TABLE 4.--T7.8. transactions in foreign securities, 9 months before and after
interest equalization tan
[Millions of dollars
Seasonally adjusted
annual rates
October 1962
to June 1963
July 1963 to
March 1964
Improve-
ment
U.S. net purchases of foreign securities:
New issues
Outstandings
Total
?1,853
?132
?583
+293
+1,270
+425
?1,985
?290
+1,695
Source: Department of Commerce.
ANNEX. GENERAL DESCRIPTION OF THE INTEREST EQUALIZATION TAX
NATURE OF TAX
The interest equalization tax is a temporary excise tax imposed on acquisitions
by Americans of foreign securities from foreigners regardless of where the
acquisition occurs. The tax applies to foreign stock and debt obligations, both
new and outstanding. It does not apply to purchases of foreign securities by
Americans from other Americans.
By bringing the costs to foreigners of raising capital in the U.S. market more
closely into line with costs prevailing in foreign capital markets, the tax will
substantially reduce the incentives to foreigners to raise capital in the U.S. mar-
ket because of lower interest rates in this country. The higher cost to foreigners
resulting from the tax, however, is not intended to eliminate all outflows of
portfolio capital; long-term U.S. capital will remain available to those foreigners
whose urgent need for such funds cannot be met on reasonable terms in foreign
capital markets.
Rate.?The rate of the tax in the case of foreign debt obligations is graduated
from 2.75 percent for obligations maturing in 3 years to 15 percent of those matur-
ing in 281/2 years or more. The schedule of rates is determined so as to increase
by roughly 1 percent the cost of borrowing to the foreigner. In the case of foreign
stocks, the rate of the tax is 15 percent, the same as for bonds of the longest
maturity.
New and outstanding securities.?The tax applies broadly to both new stocks
and debt obligations and outstanding stocks and debt obligations. Coverage of
transactions with foreigners in all of these categories is consistent with the in-
tent that the tax operate in a manner analogous to a general rise in U.S. long-
term interest rates, and assures that strong incentives and opportunities will not
arise for funds to flow out through tax-free channels, undermining the effective-
ness of the tax.
Short-term obligations.?No tax is imposed on the acquisition of debt obliga-
tions if the period remaining to maturity is less than 3 years. This exemption
will permit the wide variety of short-term credit transactions related to interna-
tional trade generally and U.S. exports in particular to continue unaffected.
Transactions in short-term instruments occur in enormous volume and take a
wide variety of forms, but most of them relate to trade financing and to normal,
reversible shifts of funds between markets in response to temporary needs and
short-term, interest-rate differentials. Since interest rates for short-term loans
In the United States can more readily be influenced by monetary policy, without
adverse effect on the economy in general, it has been possible to bring these rates
more closely into line with those prevailing in other important industrialized
nations.
EXCLUSIONS
In addition to the basic exemptions from the tax of acquisitions of short-term
obligations and acquisitions from other Americans, the bill provides various ex-
clusions so as not to interfere with certain vital national objectives, such as the
encouragement of U.S. exports, the avoidance of threats to the stability of the
international monetary system, and the growth of less-developed countries. The
major categories of exclusions are described below.
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Export financing.?One of the best methods of reducing the deficit in the U.S.
balance of payments is to increase exports from this country. Accordingly, the
bill provides for a series of specific exclusions for stuck and debt obligations
acquired in connection with various export transactions. These exclusions will
assure that American business firms have the ability to offer credit facilities
to their foreign customers, whether fur short- or long-term loans.
The acquisition of debt obligations is excluded from tax if they are guaranteed
or insured by the Export-Import Bank or other U.S. Government agencies or
instrumentulities. In addition, debt obligations acquired by Americans in con-
nection with the sale of U.S. goods ( tangible or Intangible) abroad are free of
I he tax, as is the acquisition of stock or debt obligations in connection with a
foreign project in which American firms pnrticipate to a 'substantial degree. The
bill also excludes from the tax deist obligations acquired by an American firm
from foreign customers when the proceeds are used for the installation or main-
tenance of facilities to service goods sold by the American firm which were pro-
duced, grown, or extracted in the United States. A similar exclusion has also
been provided where the U.S. firm is engaged in selling ores or minerals In which
it has a substantial economic interest, whether or not extracted In the United
States.
Commercial bank loans.--Commercial banks making loans In the ordinary
course of their commercial banking business would not be subject to lax. Most of
these loans would ordinarily be excluded because of their short maturities, and
much of short-term bank financing of foreigners involves exports. The exclusion,
besides permitting banks to continue freely their role in financing U.S. exports.
enables them to maintain their flexibility In meeting normal, recurring needs for
financing international business.
Experience under this exclusion will be closely observed. In order to provide
detailed information as to whether the exclusion for commercial bank loans
should be continued and, if not, the ways in which the exclusion should be changed.
the bill provides for authority to require banks to furnish relevant data on their
loans to foreigners.
International monetary stabilitx?The bill gives the President authority to
exempt. all or a portion of new security issues of a foreign country from tax
where he determines that application of tax to such securities imperils, or
threatens to imperil, the stobility of the International monetary system. This is
consistent with our treaty obligations to the International Monetary Fund.
Use of this exclusion would be justified only in highly unusual circumstances.
New issues of Canadian securities are the only ones which, under present cir-
cumstances, it is contemplated would be excluded under this provision.
Less-developed countries. --The tax is not applicable to the acquisition of secu-
rities issued or guaranteed by less-developed countries nor to the acquisition of
secnrities issued by less-developed country corporations. At the present time, it
is expected that this exclusion would apply to the securities of all Latin American
countries. African countries with the exception of South Africa, Asian cow-cries
except for Japan and Bong Kong. and to a few other nations outside the Sino-
Soviet bloc. This exclusion is designed to help those countries with chronic capi-
tal shortages, urgent development needs, and limited ability to borrow on normal
commercial terms. The United States bus long recognized a responsibility for
assisting these nations in their struggle to achieve improved standards of living,
and application of the tax to issues of these countries would work against thest
objectives.
Direct investments.?The tax Is not applicable to direct investments In oversea
subsidiaries and affiliates. Direct investment means the acquisition of stock or
a debt obligntiou in n foreign corporation or partnership by an American owning
at least 10 ipercent voting control after the transaction is completed. The exclu-
sion of these trausactions is based on the fart that the decision to make such
investments is usually grounded In such factors as market position and long-
range profit ability rather than Interest-rate differentials.
porrign corporations controlled by Americans and traded hem?The bill treats
as domestic a foreign corporation traded on an American stock exchange, if
trading on U.S. exchanges provides the principal market for the stock and if more
than 7i0 percent of the stockholders were Americans on July 18. 1903. Close asso-
ciation of these companies with the United States justifies their treatment as
domestic companies.
Insurance companies with foreign business.?The bill permits Insurance com-
panies to acquire stork and debt obligations of foreign issuers and obligors his:
free in an amount equal to 110 percent of their reserves against foreign risks in
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connection with their operations in foreign countries. This exemption is based
on the fact that U.S. insurance companies often engage in business in foreign
countries through branch operations, and in conducting this business, they receive
premiums in a foreign currency, invest the proceeds in that currency, and are re-
quired to pay liabilities on policies in that currency. Since the absence of an
exclusion of this character would expose the insurance companies to a foreign
exchange risk, it was believed desirable to provide this exclusion.
Labor unions, etc.?The bill exempts acquisitions by labor unions and certain
other tax-exempt organizations which hold clues or membership fees in foreign
currency for the benefit of local members located in foreign countries. This ex-
clusion, as with insurance companies, avoids exposing these organizations in the
ordinary conduct of their operations to a foreign exchange risk.
Underwriters and dealers.?To facilitate and encourage the placement of new
foreign issues abroad, American underwriters participating in the distribution of
new foreign issues would receive a credit or refund of the tax on any sales to
foreigners. Similarly, dealers maintaining markets in foreign bonds will be given
a credit or refund on such securities purchased from foreigners and resold to
foreigners within 90 days after their purchase. A similar provision has been
proposed to apply to arbitrage transactions by dealers in foreign stocks as long
as the dealer sells to a foreign person on the same day the stock is purchased.
The shorter time provision for stocks, as compared with bonds, is a recognition
of the fact that stocks could become a tax-free vehicle for speculation under any
wider exclusion.
The credit or refund provision for underwriters and dealers will provide
incentives to place a maximum portion of new flotations of foreign securities
in foreign hands, and will assure potential foreign buyers that an active second-
ary market will be available in this country for such new foreign bonds as
they may purchase.
Acquisitions required by foreign law.?The bill provides an exclusion from
tax in the case of securities acquired by an American firm doing business in a
foreign country to the extent the acquisitions are reasonably necessary to sat-
isfy minimum requirements relating to holdings of foreign securities imposed
by the laws of the foreign country. This exemption is provided because some
foreign countries require foreign businesses engaged in business locally to invest
a portion of their assets in securities of that country as a condition to doing
business there.
OTHER PROVISIONS
Liability for taw.?The tax is imposed on the U.S. person acquiring a foreign
security from a foreigner. The purchaser who is liable for the tax must file
a quarterly interest equalization tax return listing taxable purchases and enclos-
ing payment.
Administrative procedure.?A simple administrative procedure has been es-
tablished for determining when the tax is owed. If the U.S. purchaser is buying
through a U.S. broker and his purchase confirmation does not indicate that
his purchase is subject to the tax, the confirmation is proof of his exemption
and no return is required. If the purchase is not made through a U.S. broker,
the purchaser should receive a certificate of American ownership from the seller
if the seller is a U.S. person. The certificate is proof of the purchaser's exemp-
tion. Stock exchanges and over-the-counter markets have developed procedures
which readily permit the operation of these provisions.
Effective date and expiration date?The bill generally is effective with re-
spect to acquisitions by Americans of foreign securities from foreigners made
on or after July 19, 1963. This is 1 day after the date Congress received the
President's special message on the balance of payments and the public announce-
ment of the principal features proposed by the administration for this bill. A
special effective date of August 17, 1963, is provided for foreign securities traded
on an exchange so as to permit uninterrupted trading in foreign securities on
the exchanges, while they were adjusting their trading rules and procedures to
the requirements of the proposed bill. The bill also exempts certain trans-
actions which were in an advanced stage of negotiation on July 18, 1963, since
application of the tax to these transactions might have created substantial
hardships.
The tax would expire December 31, 1965.
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SEVEN luE EFFECT
It Is estimated that this hill will result in a revenue gain of up to PO million
on an annual basis.
Senator Dorm-AR. Thank you for a characteristically able statement,
Mr. Secretary.
You state that the deficit in the balance of payments for the fiscal
year which will end tomorrow. June 30, 1964, is about half that of
the preceding fiscal year. I wondered if you would give these figures
in absolute terms?
Secretary DII,Lox. Well, I stated it would be well under half be-
cause we don't have the figures for this year, and will not have them
in any really useful form for another month or so. and I was being very
conservative. The figure for the last fiscal year was about $41A billion,
and we expect to be very substantially under half of that during this
fiscal year.
Senator DormAs. To hazard a guess, would the deficit be around
S2 billion this year
Secretary DILLON. Around $2 billion, maybe a little less.
Senator Douor,As. I wondered if it would be possible for you to sub-
mit at a time convenient to von and, if possible. for the record, what
your estimates are on the balance of payments for the fiscal year end-
ing June 30, 1964, and to include with that an itemized list of the
factors which go into the total.
Secretary Dir,Lox. We can try to do this, but it will necessarily be
a rough estimate.
Senator Dot .0LAs. I understand.
(The following table and statement was supplied for the record:)
1 balance of payments, fiscal year 1663 and let 3 quarters of fiscal year 1964'
(In millions of &Maul
vlscal year
1953
'oily 1963
'arch 1116
leftsonall
&Untried
inual rate'
Change
Commercial merchandise exports
18,13'
20,8"
+2,713
Commercial merchandise imports
?15,251
?17, 41'
?1,167
Commercial trade balance.
1,888
3,43'
+1,546
Commercial services, remittances, pensions (net)
1, 69F
1,80'
4-210
Commercial balance'
2,487
5,243
+1,736
Military expenditures (net) ,
?2,284
?2,236
+48
Government grants and capital payments abroad
?1,059
?59'
+354
Government debt payments excluding fundings, prepayments
439
615
+76
Private capital:
Transactions In foreign securities
?1,692
?249
+1,403
Other long-term'
?1,745
?2, 257
?522
Short-term.
?798
?1,146
?348
Errors and omissions
?982
?418
+566
Balance on regular transactions
?4,634
?1,291
+3,343
Special Government transactions'
1,831
872
?959
Overall balance
?2,803
?419
+0,304
I Excluding military transfers under grants.
Excluding expvts and services financed by Government grants and capital.
Excluding adr,mces on military exports.
'Including dire.. investment.
, Includes nousclieduled receipts on Government loans, advances on military exports, and sales of non-
marketable medium-term securities.
Source: Survey of Current Busineas and Department of Commerce.
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SUPPLEMENTARY NOTE ON THE .FISCAL 1964 BALANCE-OE-PAYMENTS DEFICIT
" Data for the full final quarter of fiscal 1964 are not yet available, even in pre-
liminary form. Because large flows of funds are usual during the midyear pe-
riod, any projections for the full quarter On the basis of the earlier figures now
at hand must be highly conjectural. It is clear, however, that the second quar-
ter results will be substantially less favorable than during the January through
March peril:id, although the deficit on regular transactions for the year as a whole
should be substantially less than half of that for the fiscal year ending June 30,
1963, and possibly less than $2 billion.
The primary factor accounting for the larger deficit during the second quar-
ter was a reversal during April of a large inflow of short-term funds during
March. This temporary swing appears to have reduced the deficit during the first
quarter by roughly a quarter billion: dollars, and added a similar amount to the
deficit for the second quarter. This factor could account for a change of roughly
$2 billion from quarter to quarter when converted to a seasonally adjusted annual
rate. Purchases of foreign securities appear to have been Somewhat greater in
the second quarter. On the other hand, there are indications that the increase in
bat* lending abroad slowed. In addition the trade surplus in April was smaller
than the first quarter average, and it is possible that this trend continued, al-
though subsequent figures are not yet available.
Now, on the foreign securities which .were sold in this country, were
these exclusively bonds or did they. also include stocks of industrial
companies abroad? -
Secretary DILLON. They also included, stocks among the new issues
and, of course, the bulk of the transactions in outstanding securities
were in foreign stocks.
Senator DOUGLAS, Now, is a comparison between the earnings .rates
on ,foreign stocks and on American stocks really fair, for is it not true
that .American: stocks tend tobe overpriced and thus give a low yield.?
.Secretary DILLON. Well, it is difficult for me to say that American
stocks are overpricedsince their prices derive from millions of trans-
actions- in the open and free market. It is certainly clear that Ameri-
can stocks on an earnings basis are priced considerably higher than
European stocks and their .yields are considerably lower.
I think an argument can be made that there is at least some connec-
tion, we think there is a pretty close connection, between the general
level of interest rates and. this fact. The fact that long-term interest
rates are generally higher in Europe means that the return on stocks
generally has, to be higher to make them attractive.
- I think there is some connection in that way. German stocks, for
instance, sell 13 or 14 times earnings as against 18 or 19 times earn-
ings for American stocks. -
Senator DOUGLAS. IS that the present average?
Secretary'DmLoN. I think something of that nature, yes.
Senator DOUGLAS. Well, may not this low earnings ratio in the
United States be due to a greater degree of speculation rather than to
lower rates of actual earnings upon physical investment?
Secretary DILLON. Well, in view of the volume of transactions on
the New York Stock Exchange?and we can also assume the volume
of speculative transactions can be measured: at least by those that are
on margin?although there may be some outright speculation, it would
seem this is a relatively small part of the total.
I -think one of the reasons Why American stocks sell at a high price
is that pension funds and Qertain organizations of that type?iso mu-
tual funds who sell their new securities all over the country?have'
over the last decade, been .bringing into the market rather substantial
34-937L-64 '6
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INTEREST EQUALIZATIuN TAX ACT
amounts of money, and the supply of new stacks in the form of new
issues has not grown as rapidly as this demand from very solid
sources.
So, I think it: is probably a question of supply and demand: there
has been a bigger demand than supply.
Senator DOUGLAS. Mr. Dillon, you are probably too young to remem-
ber at firsthand the summer of 1929.
Secretary Dinwx. I remember it.
Senator l)ouoi..vs. You remember it ?
Do you remember that we were told then that we were in a new eco-
nomic era, in which interest rates were falling, as evidenced by the
very high ratio of stock prices to earnings. We were told that this
was an indication since the yield on stocks in terms of their prices
was low this was an indication that interest rates were down in this
country, and that. this was, therefore, to be heralded as a very good
thing.
Do you remember that ?
Secretary DiraoN. I remember that episode and I also remember
there was a very substantial number of stocks that were on margin at
that time. We didn't, have, of course, the controls and the Securities
Exchange Commission and that sort of thing. As I recall there were
times during that- year when call money 1 day call money in New
York borrowed to purchase stocks on margin?was as high as 10 and
12 percent. It, was because of this very large speculation.
Of course, there is speculation today. The big difference now is that
the great bulk of our securities, a much larger amount, are owned in
solid hands such as, as I was saying, pension funds, trust accounts, and
mutual companies that do not owe money and are not likely to sell
them.
That doesn't, mean the stock market can't, go down rapidly, as we saw
in 1962, just 2 years ago, but it is not the same. It doesn't get the
same kind of self-increasing momentum.
Senator Dotaluts. What. I am trying to suggest is the possibility
that the lower rates of return in the United States on industrial se-
curities as compared with those on the Continent of Europe may be
due to a greater degree of speculation permeating the American
securities market and the American stork market- relative to that
present in Europe. May not. the disparity in yields be distorted by
this fact?
Secretary Du.i,ox.. I think that. could be.
We. haven't- made any study of the amount of speculation in the
European markets. I don't know what. that situation is.
Senator Doroi??s. There is one statement of yours winch pleased
me very much and which I am sure will please my colleague, the
Senator from Tennessee.
You took a noble attitude in saying that you were opposed to driv-
ing up the. long-term structure of interest rates by 1 percent because.
it would work against?
an that we are trying to achieve to reduce excessive unemployment and encour-
age the investment that creates jobs and promotes efficiency.
Is that a permanent- pledge on the part of the Treasury?
Secretary Dimox. It has been our view right along, and certainly
I should think would continue to be, that. it would be highly unsound
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INTEREST EQUALIZATION TAA. Aur
by artificial means?which means a, very drastic restriction of credit?
to try to increase the lona-term rates of interest at which we finance
something approaching 40 billion of new investment in the United
States, including mortgages, State and local authorities and corpora-
tions, every year merely to have an effect on $1 or $2 billion of foreign
investment.
Senator DOUGLAS. Mr. Secretary, it is impossible for mere Members
of Congress to penetrate the mystic recesses of Federal Reserve and
Treasury policy on this -matter, or to make out what the policy is
from the somewhat Delphic utterances of the Treasury and the
Chairman of the Federal Reserve. Whisperings have been heard
about Washington, however, that it was the real inner design of the
Treasury and the Federal Reserve, in conformity with pressures
exerted by European banks, to false domestic interest rates.
Do you deny this?
Secretary DILLON. I never heard of it.
Senator DOUGLAS. Well, you should move in different circles.
Secretary DILLON. I read it in the press. I read it in the press
[Laughter.]
Secretary DILLON (continuing). But I have never heard of it in
the Treasury or Federal Reserve System.
Senator DOUGLAS. Do you disavow this as a purpose of the
Treasury?
Secretary DILLON. Certainly.
Senator DOUGLAS. YOU do.
Well, this is very encouraging, it is very encouraging. I hope you
persist in this virtuous attitude.
Secretary DILLON. I think the record of the past 3 years illustrates
this. Long-term interest rates have not moved much at all. On the
whole, they are just about the same as they were 3 years ago, in some
cases they are lower.
Mortgage rates are half a percent lower than they were 3 years
ago.
Senator DOUGLAS. Haven't you been under great pressure from the
European bankers to raise domestic interest rates? ?
Secretary Dir,LoN. No. We had to raise short-term rates from the
point of view of short-term outflows, but they have been pretty well
in balance or reasonably well in balance for the last year. We haven't
had the same pressure regarding our long-term rates at all.
Senator DOUGLAS. That is very encouraging.
Secretary Dthi,ow. I think many of the Europeans, if I may say
a little more on that, realize themselves that their long-term rates are
on the high side, compared to anything in past history. They are
way on the high side and should eventually, if they are going to
conform to the past, come down. I think this is due to the fact that
their markets, capital markets, are inadequately developed. They are
trying to improve them. They all recognize this is necessary, and I
think there is a general feeling that it is a very difficult job to do and
they don't know when it will be done but that, probably over a long
period of time, longer term interest rates should come closer together,
and the way should be more by a reduction in high European rates
than by an increase in ours.
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18 INTEREST EQUALIZATION TAX ACT
That certainly was the view of the man I. used to respect. a good.
deal in this area who is the former Chairman of the. International
Monetary Fund, Mr. dacobsson. who always felt our long-term rates
were about right and that the European rates should come down.
Senator Dot-m..ks. Iood.
Now, you speak of the exemption for new Canadian issues. This
is not in the act, is it?
Secretary Iht.i.ox. It is in the act in the general form described
earlier iii my statement. The President has the right, to provide an
exemption in the case of new issues from a particular country where
actions taken byI hat country as a result Of the tax would threaten the
monetary stability of t:w whole internal iffind monetary system, not
just- die one country.
Senator Doum..ks. lint you think that this exemption actually will
have exclusive reference to Canada ?
Secretary Canada is the only country that meets that
qualification.
Senator not-oi.As. Have you given administrative assurances to
Canada that they will be granted this exemption?
Secretary Dittos. We told the Ctuladians that last summer when
we asked for it that, if Congress enacted it, they would be granted it.
lowever, we have also pointed out as a very Important part of that
exemption that the President hits the right at any time should their
exemption be abused slum hi total outflow of money or total sale
of new issues in the United States from Canada grow and be too
large- -to limit, it or to revoke it entirely. We have told them very
plainly, and I repeat it here, that we would be fully prepared to use
that. nut twill v should they not be able for one reason or another to
live up to their commitment which was to take monetary action in
Canada of a kind that wouhl keep their demands on our market.
within the range of their needs for international reserves without
nib hug to their reserves.
Senator DoroLks. This was in response to the very heated protests
of Canada that. the interest equalization tax would make their prob-
lems more difficult?
Secretary Dit.box. It wasn't so much a question of protests. It
was a question of what happened in Canada when this tax was an-
nounced. There was a psychological react ion there which we have al-
ways felt was larger than the facts warranted but there was no doubt
of the reaction. In the financial field, psychology can create facts?
it had here---and there was a real panic. on the Canadian marxets.
There was no doubt that, if this exemption had not been promptly
!minted, the Can dollar, which had only recently had a firm par
value established, would have been devalued once more and that would
have been very bad for the whole international monetary system in-
cluding our own interests.
Senator Dorm..ts. Only a few months before had not the Finance
Minister of Canada proposed tax measures which would have redaced
the volume. of American investments in Canada?
Secretary DimAix. 1 think that was his objective, but his proposal
have been imxlified since then.
Senator I lourn..N.s. Iii of her words. Canada wanted to reduce the
amount of American investnwnt in Canada: yet when we took a step
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that Might work toward that 'end. Canada could not face ;what would
happen to it if we did reduce our investment. Is that true?
.1:Secretary DILLoN. I think that is true, yes.
Senator DOUGLAS. Immediately folloWincr our pledge that Canada
would be exempted from this tax, did not Canada then announce that
she would tax the importation of 'American automobile parts and that
any revenues thus collected would be used as :a bonus to stimulate the
export of Canadian automobiles into the American market? .
Secretary DILLON. That ,wasn't announced iminediately. It was,
some 3 or 4 months afterward; and it Was part of a program, appar?
ently, that the present Canadian Government had in mind prior to
their election. . .
We think that there is a serious question whether or not it is in.0011-
travention of our countervailing duty laws, so that the Iiureau- of
Customs has undertaken a formal investigation. Complaints are now
beim). formally receive.d and I. think there is a 30-day period, and Cus-
toms given:a 15-day extension to some people who Wanted to submit
more information, so all the information Shoidd be in about the middle
of July and we can have a ruling on it.
: Senator DOUGLAS. I :feel very friendly toward our: neighbor to the
north but couldn't you say this was an action on Canada's part of re-
turning evil for good?
Secretary DILLON. Well, the Canadian idea in this area?they don't
feel that.
Senator DOUGLAS. No, of course not, but what you say
Secretary DILLON. They look at it as a desire to balance their trade,
their current account, more fully in the world'so she won't need to have
this very substantial capital inflow which has been taking plaee over.
the last 10 to 15 years, which lilisleen what has balanced their accounts.
? Senator DOUGLAS: :At least it: is not an indication .of hemispherical
solidarity on the part of.Canada ; isn't that true? .
:,:Secretary DILLON. I think they would not agree that it was directed
against it but certainly' it :was against !mil! - There was a dif-
,
ference of opinion..
Senator DOUGLAS: In other words, we made a concession t9 them, in
exempting them from the interest equalization tax, and shortly after-
ward they replied by discouraging our exports of automobile parts
to them and encouraging their export of automobile to us.
:Seeretary DILLON. I think that is a simplified way of putting it or
looking at it. 1:
. Senator DOUGLAS. Isn't that substantially tine?
Secretary DILLON. Well, you say concession to them. It was .a con-
cession to them, but it also was certainly in our own interests. It is
very important that we maintain general stability in the international
monetary system and to have a country as important as Canada devalue
its currency could have had all sorts of repercussions, including-reper-
cussions against the dollar.
Senator DOUGLAS. And this was accompanied at the same time by
Canada's sale of food, specifically wheat to Cuba, and Canada's trading,
With Cuba against the national policy of the United States.
Secretary DILLON. Well, they have in some ways cooperated quite
well. They sell no strategic items. They don't sell any parts to Cuba
that are bought from the United States. They don't try to replace
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that trade, but they have sold food and things of that nature, and they
did sell some wheat.
Of course, they have a different, idea regarding trade. They sell
wheat to Communist China which we don't.
Senator DoroLits. Mr. Dillon, I want to say I think you have cari ied
out the injunction of the Bible to walk the second mile, and to turn the
other cheek. I believe in this up to a limited degree. I don't think
it ran be carried on forever, and I wish our friends to the north would
recognize that we have been tried, really, almost to the bounds of
ordinary patience in accommodating them.
want to commend you for your self-restraint, and only hope that
the bread which is cast upon the waters may sometime return.
You join me in that wish ?
Secretary DILLON'. That is fine, yes.
[Laughter.]
Senator DOUGLAS. One final question and then I will stop.
American banks can still make long-term loans to industrial enter-
prises abroad even though this does not involve the purchase of se-
Puri lies, is that right.?
Secretary Dur.ox. Yes, if that is in the ordinary course of their
business they can do so.
Senator DorfoLas. Now, this provides an opportunity to evade or
to avoid the interest equalization tax, isn't that true?
Secretary DimAr.N. That was a possibility, and there was a good deal
of concern and discussion about that when we were considering this bill
in the House.
We did not. feel that the banks would avail themselves of that op-
portunity because they have limitations on the amount of foreign
loans they can make, part icularly longer term ones. But as a result
of this discussion, we suggested, and the house accepted and put into
the bill, n provision for reporting in detail on all foreign bank loans,
and we asked the banks to commence that reporting without legal
obligation, on a voluntary basis beginning the first of this year. They
have complied very well with that, and we have gotten very complete
reports up through the first 5 months of the year. In analyzing
t hose reports, which we have done carefully, we can't see that there
is anything in the way of any significant avoidance taking place.
Bank loans have been rather high?at least through the first quarter
they were increasing rather rapidly. The increase apparently is
rather less, and the total may even decrease during this second quar-
ter?this present. quarter. But if there is any evasion in that area,
it. can't be more than about 5 percent of the total bank loans. It is a
very small amount.
Senator DOUGLAS. Do you have any estimates as to what occurred
before you required reporting?
Secretary Dirr,ox. T would think about the same thing. There
was one specific loan we knew about in August that was rather large,
t bat may ?have changed the picture a little bit. It WaS a $20 million
borrowing, which I think was nearly ready to he done in the public
market, but didn't quite get under the. effective date, and that was
converted into a bank loan. But that was the only specific case that
I know of.
Senator DOUGLAS. Thank you very much.
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I am going to ask Senator Smathers to take over.
Senator SMATHERS (presiding). Senator Williams, do you have
some questions?
Senator Gore?
Senator GORE. Mr. Secretary, the overall problem of outflow of
capital and outflow of jobs, which has been a very severe one, is a
subject on which I had extensive conversations with the late President
Kennedy both before and after his inauguration.
It is a subject upon which, as you know, he had and he held very
strong convictions.
This problem, as I recall from our conversations, was one. which
he thought could and should be approached?I will not attempt to
say what he thought; my recollection might not be entirely accurate.
At least it was my view! that it should be approached both from a
standpoint of tax policy and through direct regulation of outflow.
I. thought his recommendation, in which you concurred, with re-
spect to the taxation of direct investment and the return on that invest-
ment?the bearing this would have upon repatriation of earnings?
was quite far reaching and commendable.
I helped as best I could. to bring that proposal into legislative en-
actment and I resisted the nibbling away process.
Unfortunately, the original administration recommendation suf7
fered from considerable nibbling:
I wish to, commend the administration upon this current proposal.
As far as it goes, it is good. I shall help you secure its passage.
But, two things disturb me. First, the nibbling away process with
respect to this bill is led by the Treasury itself. This is not to say
that all of your proposed amendments are in that category; but a great
many of them are.
Instead of leading the way toward weakening your proposal, it
seems to me that it should be strengthened by positive Treasury
recommendations.
The second thing that disturbs me is what appears to be your abhor-
rence of, and reluctance to use, the power within the Government to
regulate capital outflow if that regulation is needed. In your state-
ment you set up a good, not a strong, strawman?a rather fragile one,
really, and that is a political tactic not unknown to a Senator.
Rather than ask you a whole series of questions, and taking the
time of the committee to make these points, I thought I would briefly
state them and I now solicit your response.
Secretary DILLON. Thank you, Senator, I appreciate it, and I appre-
ciate your offer of support in this bill which I think is most important.
Our feeling on the first point you made about our amendments has
been that we have maintained very strongly, after quite extensive dis-
cussion and argument in the Ways and Means Committee in the House,
since that time?and we do maintain now?the principles with which
we originally started which were that this should apply to all portfolio
transactions of new securities or securities which are new or out-
standing.
There have been all sorts of attempts to get us to modify our point
of view in one way or another on that, either by exempting stocks or
by exempting outstanding issues or by allowing various switchino?
privileges, things of that nature. We have not agreed to a single one
of those.
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INTEREST EQUALIZATION TAX ACT
We believe. however, it is important to be very careful and not bring
into the ambit of the tax things that we dichiL mean to cover in the
first place, and that is largely what these particular amendments have
to do with. This is true with the amendments in the export field, the
operations of illStiralleC companies abroad, things of that nature_ which
were essentially technical, and which we do not think will have any
balance-of-paymelits effect.
But I want to assure you (kat we will resist here, as we did in the
House, any change which affects any of these basic fundamentals.
As to the second question, which is the question of capital control,
we have felt that this interest equalization tax was the fairest and
best way to operate because we see lots of problems with capital con-
trols, a capital issues conu t ee, as we-have pointed out
NeVertheless, there has been ft lot of discussion about this in the
(tine since this tax was originally suggested. Certainly I don't mean
to imply that if this approach should turn out, as sonic fear, not to
work, and we should need to take further action sometime in the
-future, that a capital issues committee wouldn't be a proper way to
approach the problem, even though it does have difficulties.
But I want to make our position very clear about one- thing. There
has been 11 lot of rather nebulous talk about the capital issues com-
mittee on the assumption that it would be a voluntary arrangement.
We. have looked into that and we are convinced it will not work.
Wherever there are capital controls abroad it is the Government that
has to make the final decision. That is the only way it- would work,
and it is the only way it would work here. So we. do not feel that
any sort of voluntary control mechanism asking investment bankers
to control themselves would be able to work, even though they had a
desire to make it. work.
So. it would have to be a Government control arrangement. and -,xe
just felt, because of that, we would not start off with it.
We think (lie interest equalization tax approach Will work and do
he job that is needed. It certainly has thus far.
If it. doesn't after its actual enactment. assuming enacttnent some-
time. in the future, as I do. and we then feel a capital control com-
mittee run by the Government, is necessary, I think it should be under-
I alien.
Senator Goar.. Well, that is an encouraging statement. One of the
principal exceptions that 1 would take to the statement you have Fist
made is that since it may become necessary for the. Government, for its
own protect mu, to have and to exercise regulatory authority, it seems
to TOO that- the course of prudence would be to enact a measure provid-
ing for standby regulatory procedures.
I agree fully that the measure which you now recommend, which is
already actually in effect, has had beneficial results, but it is at best a
halfway measure: and if all the amendments which you have proposed
are adopted it will be less effective than it has already been. And I
have sonic concern about the possibility of even further weakening
amendments being adopted.
So. on and I are in substantial anTeement except -that I think it
would be prudent and wise to enact sIandhy authority now, while you
seem to be reluctant in that regard.
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Secretary Dmir,oN. We haven't felt the Capital Issues Committee
was necessary. I would say we are reluctant since we hope it would
not be necessary to use it, and We would not want to give the appear-
ance we are asking for it.
However, if the Finance Committee in its wisdom decided it was a
good thing to have as a standby measure in addition to the present
provisions of the bill, I don't think Treasury could very well have any
objection to that.
Senator GORE, Thank you very much.
Thank you.
Senator SlNIATIIERS. Senator Williams.
Senator WiLmAms. I am going to yield to Senator Pirksen.
Senator DnucsE_*. I will yield to Senator Bennett.
Senator BENNETT. Mr. Secretary, I have had many, many questions
about this bill and about this action since the day it was proposed, and
as the year has gone on my doubts have increased rather than decreased,
so if I ask some of these questions now, I hope you will feel I am not
trying to embarrass you but just trying to get at the facts.
. When you were talking with Senator Douglas you were talking
about the result of the effects of the announcement on the Canadian
markets. I have heard that the Canadian, the value of the Canadian
market, shrank a quarter of a billion dollars within 24 hours after this
announcement was made; is that a pretty good estimate?
Secretary DILLON. I haven't made such an estimate, but I couldn't
take any exception to it because there was real panic in the Canadian
Markets in the 24 hours following annoUncement of the proposed tax.
Senator BENNETT. How soon after that did you announce the ex-
emption for Canada?
Secretary DILLON. As 1 recall, the President's message was - on a
Thursday, and the Canadian markets had their problems on a Fri-
day. We made the announcement of the exemption over the weekend
when the markets were closed, so it was made prior to the reopening
on Monday. We were convinced, and I think it was true, that if there
has been no such action it would have been necessary to devalue the
Canadian dollar on Monday.
Senator BENNETT. Were there similar reactions on other world
markets?
Secretary DILLON. No, not similar. There were. reactions in all the
Markets to some minor extent, particularly in Europe, but these were
overcome very shortly.
In Japan the reaction was a little greater although after a period
of time that subsided, too. The Japanese were considerably concerned
about this, but again history has shown that they have been, able
to get 'along all right so far, and we felt that in their case the tax
really would not hurt their operations since their interest rates' at
home were so high that they could still borrow in this comitry and pay
the tax, and got money at a. far cheaper rate than was available in
Japan, and we think they would.
. Senator BENNETT. The Japanese. asked for an exception and it was
rejected.
Secretary DILLON. That is right.
- Senator BENNETT. IS my memory correct?
? Secretary DILLON. That is correct.
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INTEREST EQUALIZATION TAX ACT
Senator Brxxrrr. Do you have any knowledge to the extent to
which there is a backlog of need in Japan for foreign capital which
is still stacked up hoping that. this bill will not pass?
Secretary Du.i.ox. I don't think it. is as large by any means as the
Japanese expected it %Iould be because they have had much greater
success in selling their issues in Europe than they thought they would
last year.
This is one. of the good things that has happened and one of the
things we hoped would happen is that European capital markets
would .become more active and carry a larger share of the burden.
During the first half of this year the indications are that the Eu-
ropeans will have taken foreign issues at an annual rate of twice the
volume that- they have been taking before; and Japan has had a very
huge share of that. So they are. I think. in a reasonably good posture.
I still think that the Japanese will conic into the U.S. market after
the tax is passed and pay the tax, and we hope they do, because we
think they need some. long-term capital and we should supply it but
in reasonable amounts.
Senator BENNETT, But they haven't been coming in and trading on
the assumpt ion that the lax was going to be applied.
Secretary Dn.box. No, they have not made any issues on that basis.
Senator BEN xETT. I have just been handed a copy of the Japan
Stock Journal of June 22, and this is apparently the- lead editorial,
this is June 22 of this year.
Almost a year has passed since July 9, 19G3, a tiny that has gone down in
Japanese stock market history as black Friday. It was on that day. after the
late President Kennedy announced his proposal for the correction of no in-
terest equalization lax on American purchases of foreign securities that the
Dow-Jones Index for the first section market of the Tokyo Stock Exchange
plunged 0-1.41 points from the previous day's closing level to 1.4-19.DO. It was
the biggest absolute decline ever recorded In a single day's trading on the
Tokyo Stock Exchange.
So it. hind a very substantial effect iii Japan as well.
Do you think, Mr. Secretary, that it was this, the proposal of this
interest equalization lax that this is the chief reason or maybe the
only reason, there. was a falling off of sales of foreign securities in
tIto United States particularly from Western Europe.
Secretary Dna.oN. Olt, yes, sir; I very much do, and from Japan.
Senator BEN NETT. I am leaving Japan out of may question because
r i
in the last. yea we have seen situations arise n Western .Europe that
in my opinion would suggest to a prudent American investor that
that wasn't the. place to put his money. We have. seen the situation
in Italy, we have seen De Gaulle and his actions in France. and we
see the prospect now of a return to power in Britain of a labor gov-
ernment- talking again about the nationalization of some parts of
Indust ry.
Don't. you think those were. psychological factors that had some
effect on die scene?
Secretary Dmi.os. I would like to modify my reply.
I don't- think such factors had any effect on the overall volume. of
new issues, largely debt_ issues, corning from Europe, that would have
been sold in tins country, but. I do think that they did have an effect
on the desire of Americans to continue holding European stocks, and
I think (hat they, in combination with its tax?and its impossible
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INTEREST EQUALIZATION ' TAX ACT 85
to weigh the relative weight of each?led to the very: remarkable.
turnabout in trading in outstanding securities from an annual. out-
flow of about $250 million at an annual rate inflow of about the same
amount. So it resulted in a benefit to. , our payments .of over .$500
million on outstanding issues, largely with Europe. . ? -
Senator BENNETT. Well, there would have, been a partial effect then
in view of the changes that had occurred.
Secretary DILLON. A partial effect on the purchase of.. stocks, I
think that is very right. Certainly the tax, as such, provides no rea-
son ,for an American to decide he .wanted ? to . sell ,a European. stock.
It might prevent him from buying a new one but_ our actual American
sales or,liquidations of European stock which had been bought earlier
did increase and so that must have been for some other reason, and
I think it was for the general, reasons that you have outlined.
Also you have got to add to that?and I think equally important is
the fact that?inflationary pressures and sharp increase in costs in
Europe over the past few, years have substantially narrowed the profit
margins of European industries. European stocks themselves were
no longer as attractive relative to American stocks as they had been
before, even in the absence of these political considerations.
Senator BENNETT. So these were considerations that were working
on the problem outside of the effect of this particular bill
Secretary DILLON. Yes, that is on outstanding stocks.
? Senator BENNETT. Has any study been made of the, capacity of the
European markets to supply their own needs, plus those of Japan
since we have put this barrier in their way.
Secretary DILLON. The Treasury made, at the request of the Joint
Economic Committee, a very detailed study of a? number. of European
markets to point out problems that existed in each one of them and
how they operated. That has been submitted and printed, and 1
think is generally looked upon as the most comprehensive statement
of the problem that has ever been made, either in the United States
or abroad. It does not make an estimate of what ean,be done. and that
is very difficult to do in the absence of much more effort,.
However, I can point to what has happened. I think that is the
only interesting thing to look at. In the first half of 1964, there
were foreign issues sold in the European market amounting to about
$600 million. Now, in the first half of 1963 there were only about
$200 million, and in the whole year 1963 there were about $480 million.
The whole year 1961 which was the previous high point, there were
also $480 million and in other years there were under $300 million,
why I say it doubled, and that is a very gratifying development.'
It shows that the European capital markets can carry a greater
share of the load. I think that will increase' too. For instance, in
Germany they ha.ve now introduced a law that will be helpful. They
have had a 21/2 percent tax on the principal of any new bond issue
sold. After a good deal of study and .problems?it was it difficult
tax to repeal because the proceeds of the tax were given to the states;
it didn't go to the Federal Government?they have now reached agree-
menton trying to repeal it and a, bill is in the -Bundestag and the gen-
eral impression is that it will be repealed in the next few months.
That will improve those markets because it will reduce the cost of
getting capital in Germany.
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86
INTEREST EQUALIZATION TAX ACT
Senator liElsiNErr, On the 25th of June, the New York Times had
an editorial which has one sentence in it that I think is very inter-
esting. IL says:
Yet, as we have previously pointed out, the proposed interest equalization tax
is an effective control only in it present uncertain form.
IL raises the interesting question, isn't it a more effective control if
if it is a threat. than it would be if it were enacted into law
Secretary Dit.i.ox. That is an interesting question, and up to a point.
I would say the answer is "yes." As far as outstanding securities
are concerned there should be no difference, because. trading in them
has been proceeding on the same basis as if the tax were law. Any
trading in outstandings that was done was done with the idea they
would have to pay the tax.
However, for new issues, I think that if was somewhat more effec-
tive, certainly in the latter part of last year, for instance, because there
were pract ieally no new Canadian issues, In the first quarter of this
year, and again the second quarter, the Canadians, apparently rely in!,
on the hope that this exemption--the authority to the President?
would be included in the bill, have reentered our market and there
have been some new Canadian issues, so to that extent I think the situ-
ation will not change too much a' fter the tax is enacted.
Certainly in the case of Japan, there is a big difference because the
Japanese haye not been in our market at all, and I am sure that once
the tax is enacted?and they know it is necessary to pay it--a number
of Japanese. issues will come to this market whereas they have been
operating under the hope that it might i oil come into effect.
So, as I mentioned in my statement, the effect in the first l months
has been somewhat exaggerat Ni by the uncertainties as to \vhether the
bill would act ually become law or not.
We do expect that, if the tax becomes law, them will he it greater
volume of t ransaei ions but still within the total that we think is proper.
and we think that is fine because we don't have any desire or intent to
put the New York market entirely out of business. Many of our ln:nk-
ers have gone to Europe, and are now taking part in offerings in
Europe, which is a good thing. Jim they also should have business and
will have business in New York once the tax is passed.
Senator IIENNKrr. Well, you have said to the committee in your
statement in effect that Ilw proposal of the tax has had a very defi-
nite beneficial effect on Our balance of payments.
Now, we write the tax into law and we do two things: Ti becomes
rip-id. Men operating out of the European markets can begin to look
for the ways by which they can get around its provisions, and appar-
ently you see (lie existence of such possibilit ies because you have sent
up to the committee a list of proposed amendments which have come
to its so late that we haven't had a chance to know what they are.
The statement is that they are I echnieal, and when you talk about
iechnieal amendments you are talking about means of closing "loop-
holes."
Secretary 1 nnox. These are generally the other way.
Senator IIENNETT. They open, t hey are liberalizing them.
Secretary Ibt.t.ox. Generally, because they generally affect very
part icular sit mit ions that we only learned ?of after the bill had passed
the House or during consideration by tin' I louse after the Ways and
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Means Committee had finished with the bill and it was too late to make
any changes. There were cases where certain transactions which were
not intended to be caught under the tax were caught under it, and these
changes make clear they were not meant to be. That is what the great
bulk of them are.
Senator BENNETT. Is it your intention before we get through to have
someone explain these exemptions to us ?
Secretary DILLON. Yes. I think they are less by far than the exemp-
tions already in the bill. Many of them merely clarify existing ex-
emptions of the bill as it came from the House. But we would be glad,
to the extent you want an executive session or by some other _means,
to take them one by one, if that is what you are interested in..
It can be done very quickly. I think the first 4- or 5 pages of that
committee print with a general description of the-amendments; maybe
it is the first 10 pages, gives a very clear picture of what they are.
Senator BENNETT. We are going to have witnesses who will follow
you who probably- should know what the Treasury is aiming at with
these exemptions? -
Secretary Duir,om. That is why we sent those up on the 12th of
June. They were printed so they could have a couple of weeks to look
at them and study them and be able to comment on those particular
amendments.
Senator BENNETT. One final area, Mr. Secretary, and then I have
had more than my share, in the annual report of the bank -for inter-
national settlements thi.s statement appeared:
However, a firm equilibrium has not yet been secured and hence efforts to
achieve it cannot be relaxed. The immediate need is to decrease. the Government
expenditures abroad which was announced in last July's program. -
To what extent have we succeeded in these last 12 months in carry-
ing; out that objective? ?
. Secretary . Du-,Low. Well, I have been following that regularly and
carefully, and I am. convinced that it will be met on time, .
. The greater portion of that planned reduction was in, reduced mili-
tary expenditures, and those are all scheduled. They are largely re-
deployment of support troops and closing various installations abroad,
some of which have already taken place and others of which are def-
initely scheduled. The orders have been issued and they will be taking
place over the next 6 months.
When we get to the end of the year, they will all. be in effect, and my
feeling is that We will meet that billion dollar total.
Senator BENNETT. When you say the end of the year you are talk-
ing about the end of the calendar year of 1964?
Secretary T)0-,Low. The July statement was that we -would be run-
ning at a rate of expenditures abroad, beginning the first of January
1965, of a billion dollars less than we were running in 1.962.
Senator BENNETT. Under those circumstances if this bill were to be
passed why shouldn't it terminate January 1, 1965, and throw the bur-
den back on the public sector where it belongs rather than expect the
private sector to carry it -for an additional 12 months?
Secretary DILLON. Well, that billion dollars isn't enough. We have
to do other things. We have to improve our exports, which- are im-
proving. We have to, by means of better business here and less at-
tractive opportunities in Europe, improve our balance on direct in-
vestment. I think that is improving.
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But as 1 said at the end of my statement, all this takes time, and
we felt that the first time that would be prudent for ending this tax
was after we had a full year at this lower rate of Government ex-
penditure and that little extra time for our own economy to move
iii ways that will help our [silence of payments.
We think that that is only prudent. It woultl not be prudent to
end it so rapidly as the end of this year.
Senator BEN N LW. Do you have any worries about- the constitu-
tionality of a proposal ii Inch is at least I full year retroactive?
Secretary DILLoN. No. We have looked into that very carefully.
There. have been a series of court opinions, including Supreme Court
opinions, and there is no doubt about the authority to levy a retro-
active excise tax as long as the- period of retroactivity is reasonable.
Generally the Court has found that the entire year preceding the
year in which the tax is etittet ed is reasonable.
We have, two opinions by General Counsel of the Treasury Depart.
went, which I would be glad to furnish for the record. I think they
should be in the record. They deal with that subject, and I think
they would be. helpful. If I way? I would like to offer them for the
record.
Senator SIIATit Ens. Without objection, (hey will be par( of the
record.
(The opinions referred to follow:)
toonton Ole No. 7651
THE GENERAL COUNS.111. or THE TICEAFH7RY.
Waglington, 1).C., May 22, 1904.
To: Secretary Dillon.
From d'Amdelot
Subject: Validity of the effective date provision in H.R. 8000.
Section 2te) of U.R. 5000 provides that the interest equalization tax amend-
ments to the Internal Revenue Code shall apply, except for designated exclu-
sions, "with respect to acquisitions of stuck and debt obligations made af:er
July 18, 1963." H.R. 8000 passed the Douse on March 1964. If its enact-
ment is completed In tlw latter half of 1964 its period if retroactivity will be
approximately a year and possibly a few months more. The question is whether
such retroactivity would be held to be unreasonably long and therefore a viola-
tion of the fifth amendment.
This memorandum is directed solely to the time factor in those Federal and
State court cases In which the retroactivity of La legislation has been held
valid or invalid. I assume the recognition of the established principle of law
covered in my Opinion No. MD of August 6. 1963, that a tax law may be retNi-
autive to a reasonable extent, that its reasonableness depends on the circum-
stances involved, and that among these circumstances an important factor is
the extent of notice to the taxpayer. See Milliken v. United State, 283 U.S.
15 (1931) ; Welch v. Henry, 305 U.S. 134 (1938), and Uniicd States v. Mara-
faelurors National Bank, 363 U.S. 194 (1960). The important element of notice
In the taxpayer was provided with respect to the interest equalization tax in the
President's message on the balance of payments sent to the Congress on July 18.
1963, and in the notice on the effective date of 11.11. 8000 promulgated in the
Pederal Register of August 16,1903, 28 F.R. 8426.
Concerning the reasonableness of the period of retroactivity there is a signifi-
cant body of law holding that iLtax act may constitutionally he applied at least
to events occuring in the year preceding the year of its enactment. This mem-
orandum will discuss first those cases which support this principle, noting that
the prineiple extends at least to the 2 preceding years of n biennial legis-
lature. It will then discuss those eases upholding retroactivity within lesser
periods and, filially, those cases which consider certain long-extended periods
of retroactivity to be unreasonable.
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I. PERIODS Or RETROACTIVITY HELD REASONABLE
Title X of the Revenue Act of 1918 which was enacted February 24, 1919
(40 Stat. 1057, 1126), provided that "on and after July 1, 1918" every domestic
corporation should pay annually "a special excise tax" with respect to carrying
on business based on the value of its capital stock for the preceding year ending
June 30. The retroactive provision of this law was upheld in Hecht v. Malley,
265 U.S. 144 (1924).
Section 404 of the Revenue Act of October 21, 1942 (56 Stat. 798, 944) provided
that there should be included in the gross estate of a subsequent decedent for
estate tax purposes that proportion of life insurance received by beneficiaries
which was purchased with premiums paid directly or indirectly by the decedent
although the decedent possessed no incidence of ownership in the policies. The
retroactive feature of this amendment of the prior law relating to life insurance
proceeds was the provision (at 945) that in determining the proportion of the
premiums paid directly or indirectly by the decedent the amount paid on or
before January 10, 1941, should be excluded if after that date the decedent
possessed no incident of ownership. In United States v. Manufacturers National
Bank (363 U.S. 194 (1960) ) the Supreme Court determined that the amendment
could validly relate back to the premiums paid in the 1 year and 9 months be-
tween January 10, 1941, the date specified in the statute, and October 21, 1942,
the date of the enactment of the statute. The date specified in the statute was
the effective date of a Treasury regulation (T.D. 5032, 1941-1 Cum. Bull. 427)
which had provided for such proportionate inclusion of life insurance proceeds
from previously divested policies. The Supreme Court said that the existence
of this regulation gave "fair notice" of the likelihood of the tax consequences
and thus contributed to the validity of the statute which enacted the substance
of the regulation.
The Manufacturers National Bank case is, thus, a reeent assurance that legis-
lation is valid which attaches tax consequences to transactions occurring after
the date of a promulgation of the probable tax consequences by the executive
branch if Congress adopts that date in a statute enacted within a reasonable
time thereafter, and that a reasonable time at least includes the year following
the year of the executive action.
The 81st Congress in its 2d session and the 82c1 Congress in its 1st session
provided for excess profits taxation in the acts of January 3, 1951 (64 Stat. 1137),
and October 20, 1951 (65 Stat. 452, 562), which were to be applied to all taxable
years ending after June 30, 1950. The reasonableness of this legislation was
upheld as established law in Neil v. Phinney (245 F. 2d 645 (5th Cir. 1957) ).
Some warning of this retroactivity had been given taxpayers by the provision in
the act of September 23, 1950 (64 Stat. 906, 967), which directed the House Com-
mittee on Ways and Means and the Senate Finance Committee to report a bill
for corporate excess profits taxes with retroactive effect to October 1 or July 1,
1950.
In this discussion belongs the landmark case of Welch v. Heniry (305 U.S. 134
(1938):), which became the precursor of a number of State cases upholding tax
legislation retroactive to the preceding legislative year. This case involved the
validity under the due process clause of the 14th amendment of a law enacted
by the Legislature of Wisconsin in 1935 taxing previously untaxed dividends
received by the taxpayer in 1933. The State supreme court in upholding this
tax observed that a legislature may measure a tax by the income of a year suffi-
ciently recent so that there was some relation to the ability of the taxpayer to
pay the tax (Welch v. Henry, 223 Wis. 319, 271 N.W. 68 (1937), affirmed on
reconsideration 226 Wis. 595, 277 N.W. 183 (1938) ). In the Supreme Court,
Justice Stone observed that one criterion was whether the taxpayer could rea-
sonably have anticipated the tax and this required consideration of the circum-
stances in each case (at 147). He concluded that while there was a period
beyond which a taxing statute would be unconstitutional in its backward reach
a legislature generally could tax prior but recent transactions, including trans-
actions occurring in the 2 years preceding the next session of a biennial
legislature.
This Supreme Court decision provided the rationale expressed by the New
York Court of Appeals in permitting the application of the State utility tax law
of 1941 to sales of electric current subsequent to January 1, 1940, while rejecting
the application of the law to sales subsequent to May 1937 (Lacklem Realty
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corp. v. Greens, 288 N.Y. 351. -13 N.E. 2d 440 (1912)). The Welch v. Henry
decision was also Ow basis for the holding in National Can Carp, v. State Tax
commission 220 Md. 418, 1:1:3 A. 24-1 287 (1959). appeal dismissed, 361 U.S. 534
(1060) ). The 1958 State statute there upheld had the effect of ratifying the
practice of assessing real property differently from personal property subsequent
Ii, Jamiary 1. 1957. In Land Holding Corp. v. Board of Finance and Rcvahna
1388 Pa. 61, 130 A. 20 700 (1957)1, the State supreme court upheld the appli-lt-
lion if an net of June 1. 19571, %%inch atmlied the tax on tile reei)rding of deeds
to (10(.111)1(.1as executed outside the State which had been offered for recording
during the 2 years after May 31, 1953. The court relied on Shirks Motor Express
corp. V. Messner (375 Pa. 450. 100 A. 20 913 (1953)1, discussed further belcw,
which had followed Welch v. Henry.
Since tax legislation has been held retroactive to the first and even the sec-
ond year prior to the year of enactment, it is not surprising that there are many
Federal and State rases upholding tax legislation which was retroactive to the
beginning of the year in which the act was passed, or to the first of sonic month
within that year, or to some specific prior date within the year considered appro-
priate. Among the various Federal eases the earliest is Flint v. Stone Tracy Co.
(220 U.S. 107 (11)11)). Here the corporation excise tax imposed by the Tariff
Act of August 5, 1909, was upheld although it was to be measured by the income
of the business from the beginning of the year. Another early case was Billings
v. United States (222 U.S. 261 (1914)), validating a Federal use tax imposed by
an act pint.sed in August 1909 on the use of a foreign yacht during the taxable
year September 1. 1908, to September 1. 1909. The Supreme Court accepted as
constitutional, without discussion, an act of September S., 1919, retroactive to
January 1, 1916, which imposed a Federal excise tax on the manufacture- of
munitions ( United. States v. Anderson. (269 U.S. 422 (1026 )1.
Federal income taxes retroactive to the beginning of the year in which the
tax was passed or to the first of a subsequent month were upheld in Rcinerke v.
Ninith (1.59 U.S. 172 11933)), Cooper v. United States (280 U.S. 409 (1930)),
Lynch v. Hornby (247 U.S. 339 (19181). and Brushaber v. Union Pacific Co. (210
U.S. 1 (1916)). This lirm of cases has been recently reaffirmed by two circuit
courts which upheld the provision in the Revenue Act of Septentber 23, 1950 (64
Stat. OM 935), making distributions of gains from collapsible corporations dis-
tributed after December 31. 1949. taxable as ordinary income rather than is
capital gains (Sidney v. C.I.R.. 273 F. 2d 928 (2d ('ir. 1960) ; Spangler v.
278 F. 2d 665 (4th Cir. 19(10). certiorari denied. 3(14 U.S. 825 (1960)).
Particular13,- pertinent to the validity of the retroactive provisions in H.R. 8000
are the two Federal cases upholding legislation retroactive to specific dates not
the beginning of in year or of a month hut which were considered appropriate by
Congress because of the legislative activity urhirlr surrounded the enactment of
the tax law.
The first case was United States v. Hudson (299 U.S. 498 (1937)), which found
reasonable a special income Fax on the profits from the sale of silver Which
applied to such profits made withitt 35 days prior to the net. The reason for this
retroactivity in the Silver Purchase Act of 1934. (48 Stat. 1177. 1178) was similar
to that underlying the retroactive provision of 11.11. 8000: namely, to prevent
increased transactions in anticipation of the passage of the act. In the second
ease, Gillinor v. Quinliran (143 F. Supp. 440 (N.D. Ohio 1956)). the court upheld
the provision in the Revenue Act of October 20. 1051 (65 Stat. 452, 504), which
made a change in the status of certain gains from capital gains to ordinary in-
Mine applicable to gains from sales or exchanges after May 3, 1951. the date when
the House Ways and Means Committee announced its tentative decision to make
the amendment. If such an announcement could establish a reasonable date from
which to commence tax liability, it seems certain that the more widespread an-
nouncement provided by a Presidential message, supplemented by a notice in the
Federal Register, would be held reasonable notice to the taxpayer.
Among the State cases perndtting tax laws to be retroactive to the first of the
year are Shirks Motor Bien:us Corp. v. Messner (375 Pa. -150. 100 A. 26 9(3
(1953)), appeal dismissed and rehearing denied (347 U.S. 941. 970 (1954)), and
Garrett- Freight Lines, Inc. v. Slate Tax Commission (103 Utah 390, 135 P. 2;1
523 (1943)). In the Shirks ease the tax law amendment which eliminated
previously allowed credits for local taxes and registration fees in .computing
excise taxes from January 1, 1951, was not enacted until December 27, 1951.
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II. PERIODS OE RETROACTIVITY IIELD UNREASONABLE
The Welch v. Henry yardstick has been used to determine certain periods of
retroactivity to be unreasonable as well as those periods which are considered
reasonable. In Wheeler v. C.I.R. (143 F. 2d 102 (9th Cir. 1944) ) the court
decided that the Revenue Act passed in 1940 could not reasonably be applied to
a 1938 transaction. It commented that the act was not passed in the congres-
sional. session following the year of its application. The Supreme Court re-
versed on the ground that the IRS regulations existing at the time of the trans-
action validly, made the transaction taxable without application of the 1940
act, C./.11. v. Wheeler (324 U.S. 542 (1945)).
A significant State case is Commonwealth v. Budd Co. (379 Pa. 159, 108 A. 2d
563 (1054)), appeal dismissed, sub nom. Pennsylvania v. Budd Co. (349 U.S.
935 , (1055)). Here. the court refused to apply a 1947 corporation net income
tax to income received in 1944. It held that fallowing Welch v. Henry a tax
may not bet retroactively applied beyond the year of the general legislative
session immediately preceding that of the tax enactment. To like effect was the
decision in the Lae-Went case, above discussed, which invalidated so much of the
period of retroactivity as exceeded the year preceding the year of enactment of
the tax statute.
A comprehensive review of the cases on retroactivity was undertaken by the
court in Comptroller of the Treasury v. Glenn L. Martin Co. (216 Md. 235, 140
A. 2d 288 (1958) ), in passing on a 1957 statute amending the State sales and use
tax laws to be effective as of July 1, 1947. Since the amendments would apply
to the company's sales and use transactions from 3 to 6 years prior to the
statute the court concluded that the retroactivity exceeded reasonable limits.
CONCLUSION
From the foregoing analysis there seems to be no doubt that a Federal income
or excise tax act may be retroactive through the year in which the law is being
enacted' and at least through the preceding year as well, or to specific dates
within these periods, if the Congress has expressly provided for such retro-
activity. Extended retroactivity has been permitted in many instances even
without the presence of notice to the persons who may be taxed. The reasonable
retroactivity of a statute is increased where all possible advance notice to
prospective taxpayers has been given.
Consequently, it is my opinion that if the Interest Equalization Tax Act is
passed at any time in 1964 its retroactivity to July 18, 1963, would be upheld
and that no modification in the date of retroactivity is necessary to the act's
validity. If enacted after 1064, the result would obviously depend upon the
date of enactment and the circumstances, but such factors as the official notice
and publication given to it, the passage of the bill by the House and continuing
consideration in the Senate, and the widespread public anticipation of its enact-
ment would all be relevant.
To : Secretary Dillon.
From: G. d'Andelot Belie.
Subject: Constitutionality of the proposed Interest Equalization Tax Act.
You have asked my opinion on the constitutionality of the proposed "Interest
Equalization Tax Act of 1963." This act would impose an ad valorem tax on
the acquisition of certain debt obligations and securities of a foreign obligor
or issuer not exempted from its provisions, would require the tax to be paid on
certain acquisitions subsequent to July 18, 1963, the date of the President's mes-
sage to Congress proposing this tax, and would require report and payment of
the tax by the end of the first calendar quarter following the enactment of the
tax act and at quarterly intervals thereafter.
I will deal first with the constitutionality of the proposed tax and secondly with
the constitutionality of the proposed limited retroactive application of the tax.
My conclusion from this analysis is that the proposed legislation would be
constitutional.
[Opinicm file 759]
THE GENERAL, COUNSEL OF THE TREASURY,
Washington, D.C., August 6,1963.
34-937-64 7
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1. Constitutionality of an ad valorem tux on the acquisition of foreign debt
obligations and securitie.v
I hod no reason to doubt the constitutionality of an ad valorem tax on the
acquisition of designated property. particularly foreign property. It has long
been established that a lax on 0 property transaction Is a tax on the exercise
of one of the privileges of ownership of property and as such is an excise :ax
and not n direct tax requiring apportionment. Thomas v. United States ( (1904)
192 U.S. 3631. This ease held that a stamp tax on the sale of shares of stuck in
corporations was an excise tax and not a direct tax on property. It concluded
that excise taxes were those "imposed on importatimi, consumption, manufacture,
and sale of certain commodities, privileges, particular business transactions, VO-
viltiOns. oueupations and the like." (p. 370). The opinion cited several historic
eases Upholding as excises certain taxes on sales at stock exchanges, on agree-
ments to sell stock and on the transmission of property from the dead to the
living, illustrating property transfer tuxes. See also Fernandez v. Wiener
( ( 1945) 32(1 U.S. 340, 352).
It is immaterial that in the present proposal the tax would be paid by the
purchaser rather than the vendor as taxes on the purchase of privileges or com-
modities are uniformly recognized as excise taxes The Federal tax on the
purchase of a club membership was specifically held not to be a direct tax In
Congressional Country Club v. United States ( (1930) 4-1 F. 2d 206, 71 Ct. Cl. 1(11,
cert. denied (1931) 2-'i3 U.S. s.36) and Mann v. Bowers ( 2d 1931) 47 F. 2d
201, cert. denied (1931) 283 ('.S. 845), Numerous State cases treating Use taxes
placed on purchasers as excise taxes will be discussed below in connectiou with
the problem of retroactivity.
The express constitutional limitation on excise taxes is that they "shall be
uniform throughout the United States" (art. I, sec. 8, eh. 1). This limitation
requires geographic uniformity within the Voile(' Stales and does not prevent
diserimlnation against foreign, as opposed to .domeslic, property intereds.
Billings v, United Slated (([1114) 232 U.S. 201). See also 26 4371-4374
taxing the isstuthee of foreign insurance policies. The proposed tax would apply
uniformly to all purchasers throughout, the United States of the designated
foreign obligations and securities and thus would meet the constitutional require-
ment. It is Immaterial that the tax would apply to the acquisition of foreign
obligations and securities issued in sonic countries and not In others. Differen-
tiation between foreign .countries has been included in lax legislation. Inost
recently in section 955(c) of the 1054 Internal Revenue Code, as added by
section 12(n) of the 1962 Revenue Act, 76 Stat. 1013.
There is no compliration because the excise tax would take the form of an
ad valorem tax on the acquisition of the foreign interests. Excise taxes are
generally based on the value of the property sold or acquired. This is demon-
strated in the various excise taxes on the retail sale of certain commodities, 26
U.S.C. 31, the sale and use of certain manufactured goods, 26 U.S.C. 32, and
the acquisition and use of various facilities and service, 26 U.S.C. 33, to chcose
but a few examples.
A second et-institutional limitation on the levying of a tax or duty should be
briefly noted. This is the prohibition In article I, section 9, clause 5 that "No
tax or duty shall be laid On articles exported from any State." The Supreme
Court has Interpreted this clause to mean that no tax can be laid directly on
the export of articles; that is, commodities, merchandise, or goods in the acr. of
exportation. or on shipping doeuments, necessarily accompanying such articles
in export : that is, bills or lading or marine insurance on the articles. Fa irbank
v. United States. (1901) 151 U.S. 253; Thames and Mersey Insurance Co. v. United
slates (1915) 237 U.S. 19. Rut it has refused to apply the limitation to taxirton
of aetivities and interests indirectly associated wIth the export of articles.
Thus. incrane from exporting is taxable. Peek LE ro. v. Lowe (1918) 247 U.S. M.
As shown by the tax applied since 1920 to the issuance of foreign insurance
policies, this clause of the Constitution is not a restriction on the taxation of the
'IN-lois-Rion of foreign intangible interests with the consequent outflow of mone-
tary consideration from this country,
11. Limited- retroactive application
Thu proposed tax would be applied to certain acquisitions made after the
dale ut announeement of the legislative tax proposal by the President. Jul3 18,
1963. but the tax would he paid at the time of (Bing the purchaser's first return
before the end of the calendar quarter in which the act is passed. The con-
stitutional question is whether this coverage of purchases of foreign obligations
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and securities on and after the day following the. President's message would
violate the due process clause of the fifth amendment.
The retroactive application of a tax statute is not ipso facto violative of due
process. The courts reviewing such statutes examine the particular features
of the act, the. legislative purpose, and the effect on the taxpayer to determine
Whether the act as applied to the taxpayer is so unreasonable and arbitrary as
to constitute a taking of property without due process of law under the 5th or
14th amendment. By this process of analysis, the Supreme Court and circuit
courts over a period of the last 50 years have upheld as consistent with due
process the retroactive application of many tax statutes including, by way of
example, the following:
1. The application of the first income tat act of October 3, 1913, to income
received from March 1, 1913. Brushaber v. Union Pacific Co. (1916) 240 U.S. 1.
2. The. application of a change made by the Revenue Act of 1921 in the cost
basis of gift property in the hands Of a donee to render taxable a "prior but
recent" gain by a donee. Cooper v. United States (1930) 280 U.S. 409.
3. The application of a tax of 50 Percent or the -profits from the sale Of silver
bullion imposed by the Silver Purchase Act of 1934 to sales made within 35 days
of the passage of the act. United States v. Hudson (1937) 299 U.S. 498.
4. The. :ipplication of a 1935 State income tax to income received by the tax
payer in 1933 not previously taxed. Welch v. fienry (1938) 305 U.S. 134.
5. The application to gains from. collapsible corporations distributed to stock-
holders early in 1950 of the change enacted in the Revenue Act of September 23,
1950, making such distributions subject to ordinary income -rather than the
capital gains taxation. Sidney v. (C.A. 2d 1960) 273 F. 2d 928; Spangler
v. C.I.R. (C.A 4 1960) 278 P 2d 665, cert denied (1960) 364 U.S. 825. -
The holdings in the foregoing cases were based on the reasoning that the
Govermnent's need for revenue could be satisfied by taxes on gains over a prior
but recent period and that taxpayers receive gains with the knowledge that they
are the legitimate subject of taxation. In the liuds-on case the Supreme Court
pointed to the legislative activity for some months prior to the enactment, thus
suggesting constructive notice to the .taxpayer of the likelihood of the taxation..
Retroactive excise taxes
Congress has also enacted excise taxes which have a retroactive reach in that
the amount of the tax is measured by the business of the taxpayer for a period
prior to the date of the enactment of the act. - Thus in -the historic case of
Flint v. Stone Tracy Co. (1011) 22.0 U.S. 107 the Court upheld the Corporation
excise tax imposed by -the Tariff Act of August 5, 1909, on 'capital- stock corpora-
tions and associations which was Measured by the income of the business from'
the beginning of the year. The court considered the income from the beginning
of the year to be an appropriate yardstick upon 'which an excise tax on the
privilege of doing business could be based. Similarly, an excise tax on the
privilege of doing business by a Massachusetts trust was held validly measured
by the capital invested during a period prior to the application of the excise
tax to such trusts. Hee,ht-v. .41a//ey (1924) 205 U.S. 144. The Supreme Court
applied the munition manufacturers' excise tax of 121/2-percent on the net profits
received by the manufacturer during the preceding year without analysis of the
constitutional question in United States v. Anderson (1926) 269 U.S. -422.
The Supreme Court did, however., more than three decades ago hold that the
application of certain estate, inheritance, and gift taxes to transactions com-
pleted prior to the date of the act was arbitrary and unreasonable. Two of these
cases involved the passing of property upon death, In Nichols v. Coolidge (1927)
274 U.S. 531 the Court rejected the application of an estate tax to. trust property
which the Court found had been completely transferred prior to the dateof the
estate tax act. In Coolidge v. Long (1931) 282 U.S. 582, involving the same
estate, the Court found that the State inheritance tax could not be applied to
the remainder interests in the trust. The authority of :this case, however, is
reduced if not eliminated by Fernandez v.. Wiener (1945) 326 U.S. 340, supra
(which expressly restricted it, at 357), and United Status v. Manufacturers
National Bank (1960) 363 13.,S. 194. In these latter cases the -Supreme Court
held that the entire .value of property transferred prior to the tax act may be
subject to .tax if any incidents of ownership or 'control 'over -the property are
transferred as a result of subsequent death.
The other two early cases involved. the Federal gift tax act of June 2, 1924.
In Boldgett V. Holden (1927) 275 U.'S. 142 the Court majority, .considered it
unreasonable to apply the act to a gift made in January 1924. In Untermyer V.
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Anderson (192k) 27E1 V.& 440 the faet that the gift was macle during the last
stages of the enatetment of the gift tax act did not move the Court majority to
modify the BP/millet/ ruling. It should be noted, however, that (1) the four dis-
senting Justices in the Blod get t case thought that the gift tax act had not been
intended to apply retroactively. indicating that Congress had not been explicit
anti definitive on that Indio : (2i the three dissenting Justices in El a' Untcrinyer
case were Mimes, Brandeis. and Stone, whose dissents have often since become
the law, and (3) these three Justices considered it reasonable to permit the
recognized retroactivity of tax statutes to apply to Mr. Untermyer's gift. The
Vat/Tat/KT decision was to some extent modified in Milliken v. United- States
(1931) 253 U.S. 15 which held that it change in the rate of the gift. tax could
apply to a gift. previously made as the donor knew that the gift was subject to
tax and should have known that the rate of tax might he changed.
.Tuslice Stone laid an opportunity to distinguish the Un term case and to
develop the principles of permissible retroactive tax legislation in his often-
quoted opinion in Welch. v. Henry (1935) 305 U.S. 134. In bolding that the
State of Wisconsin could constitutionally tax in 1935 previously untaxed income
received by the taxpayer ill 1933 Justice Stone observed that one criterion was
Ivhether the taxpayer could reasonably have anticipated the tax and that in
each case "it Is necessary to (muskier the nature. of the tax and the circumstances
in which it is laid before it can be said that its retroactive application is so
harsh and oppressive as to transgress the constitutional limitation" (p. 147),
He concluded (p. 150) that there was a period beyond which a taxing statute
would be obviously unconstitutional in its backward reach but that a legislative
generally had authority to tax those prior but "recent transactions" referml to
in Cooper v. United k tees (1930) 280 r.S. -109, 411 (supra).
sides and use taxes.- Congress has normally applied new exelse taxes to
sales and purchases made subsequent. to the effective date of the tax act. In
ileSe cases there was no nerd to depart from the policy of giving the business
community time to prepare selling arrangements. However, Congress has im-
posed on merchandise held for sale new floor stock taxes based on prior pur-
chase and sale prices. thus altering retroactively the price of the inventory.
See. e.g.. 29 U.S.C. 4220. Congress also raised tlw rates of excise taxes on
distilled spirits held In bond, which increase related back to the levy of the
tax on distillation without impairing the constitution. 1.1rhenlcy Distillers v.
United Stales ( (C.A. 3, 19581 255 F. 2d 334. cert. denied (195S) 358 U.S. 835).
Moreover, Congress at one time applied a use tax to the prior use of foreign
property, which was upheld against the claim that the taxpayer was deprived
of due process of law. Ratings v. United States ( (1914) 232 U.S. 2(11). In addi-
tion. Congress has authorized the Commissioner of Internal Revenue to apply
his rulings with respect to liability for excise taxes on sides with retrospective
effect, 28 U.S.C. .7805(11), and the courts have not objected; e.g., see Exchange
Pails Co. v. United Slates ( (Ct. Cl. 1980) '1'79 F. 2d 251).
The States. however. have enacted excise taxes on sales and use of property
applying explicitly to ? transactions over periods prior to the date of the net.
These "use" taxes apply to purchases of properly subject to sales tax on which
the sales tax has not been paid. The courts of final appeal in a number of States
have held the retroactive application of such taxes to be consistent with the due
process clauses of the 14th amendment and of the Stale constitutions. provided
that the appliestion was to relatively recent transactions. In :doing so, the courts
Jinxed their holdings primarily on Cooper v. United Stules ( (1930) 230 U.S. 4091,
and justice Stone's reasoning in Welch v. Henry. supra. These State cases were
decided in variams [aorta.; of the country over a number of years. They are:
1. Laridm Realty Corp. v. Graves ((i9421 283 N.Y. 354, 43 N.B. 2d 4101.
Here the New York Court of Appeals permitted the application of the State
utility tax law of 1941 to sales of electric eurrent subsequent to January 1. 1940.
under the "prim. but recent" t ransaet ions .doctrine of the Cooper ease but rejected
the applien lion of the law to sales since May 193.7 on the grounds that such ex-
tended retroactivity was harsh and oppressive, citing Welch v. Henry.
2. Garrett Freight Lines, Inc. v. Stale Tux Comniission ( (1943) 103 Utah 390.
135 P. 2il 5231. The Supreme Court of Utah on the authority of Welch v. Henry
and after extensive consideration of the purpose of the legislation upheld the
application of the State excise tax on the use of diesel fuel from January 1. 1941.
to May 13. 1911. the date of the passage of the net. The court considered that
the legislature might reasonably place users of diesel oil on the same basis as
users of gasoline for a period commencing with the beginning of the year al-
though 5 months prior to the effective date of the act.
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3. Shirks Motor Express Corp. v. Messner ( (1953) 375 Pa. 450, 100 A. 2d 913),
appeal dismissed and rehearing denied ( (1954) 347 U.S. 941, 970). Here
the Supreme Court of Pennsylvania, quoting from Welch v. Henry, found con-
stitutional an amendment approved December 27, 1951, to the State's excise
tax on the gross receipts of motor carriers, which eliminated for the calendar
year 1051 credits previously allowed for registration fees and local use taxes.
This in effect applied the local use tax retroactively for 1 year, even though as the
court pointed out "the nature and amount of the increase in the tax could not
have been anticipated" (pp. 918, 919).
4. National Can Corp. v. State Tax Commission (1959) 220. Md. 418, 153 A, 2d
287, appeal dismissed (1960) 361 U.S. 534). This case upheld a statute passed
in 1958 which had the effect of ratifying the practice of assessing real property
differently from personal property subsequent to January 1, 1957. In finding
that ,principles of retroactivity apply no differently to an ad valorem tax, the
court held the statute consistent with due process under the Welch v. Henry rule
(at 301). It distinguished its earlier decision in Comptroller of the Treasury V.
Glenn L. Martin Co. ( (1958) 216 Md. 235, 1.40 A. '2d 288) on the grounds that
the retroactive application of the statute invoIved in. that Case, namely, from
3 to 6 years, could not be upheld because it did not fall within the "recent trans-
actions" rule. The illaraa case had involved the retroactive reach Of sales and
use taxes but had recognized that' a sales and use tax -nifty haVe a. retroactive
effect, if not extending beyond a reasonable period.
5. Similar to the Martin holding were two earlier decisions in Washington
which held that a 1939 use tax amendment applied retroactively as far back as
4 years exceeded the limit of reasonable retrohetivity established in WcZsli v.
Henry. State v. Pacific Tel. ce, Tcl. Co. ("(1941) 9 Wash, 26 11, 113 P. 2d 542)
Northern Pacific Ry. Co. V. Henneford ( (1041) 9 Wash. 2c1 18,113 P. 2d 545).
From the foregoing cases it is clear that taxation may apply constitutionally
to prior but recent transactions, whether the tax is an income tax or an excise
tax, whether the excise tax is on gross receipts or on completed transactions,
and where the purpose of the legislature is solely to raise revenue without addi-
tional considerations of public policy. Consequently, where Congress has com-
pelling reason and purpose to apply, an excise tax on purchases to the period
following the date when the President recommends such. taxation, Congress
may have confidence that. the application of the tax to such a prior but recent
period would be upheld as consistent with due process. See Combs v. United
States ( (D.C. Vt. 1951) 08 F. Supp. 749), applying retroactively for a month
a new meat inspection charge.
The President's message as notice
The conclusion that the proposed legislation would be constitutional because,
following the State court cases, it would reach only recent prior transactions
is further supported by the consideration that the taxpayer is given notice of
the probability of the tax by the President's message. Modern Federal courts
and recent tax commentators have concluded that where a taxpayer has notice
of the likelihood of the imposition of a tax he cannot successfully complain
that its application to him is arbitrary. This importance of notice appears as
early as the case of United States v. Hudson ( (1937) 295 U.S. 498), supra,
which pointed out that the sale of silver bullion occurred after the President's
tax message calling for a tax on such sale. A similar reasoning is expressed in
Wilgard Realty Co. v. C.I.R. ( (C.C.A. 2d 1942) 127 F. 2d 514, cert. denied
(1942) 317 U.S. 655). Here the court applied a provision of the 1.939 revenue
act to a sale occurring 7 years prior thereto on the 'grounds that the 1.939 act
merely conformed with the expectation of the taxpayer in 1932 consequently,
the taxpayer had no ground for complaint. In GiUmor v. Quinlivan ( (N.D.
Ohio 1956) 143 F. Supp. 440) the sale, the gains from which were made taxable
as ordinary income by a subsequent act, had taken 'place after the Ways and
Means Committee had announced its tentative decision recommending the tax
change. The retroactivity, to the date of the announcement was held reason-
able. In Neill v. Phinncy ( (C.A. 5 1957) 245 F. 24 645) excess profits tax acts
passed in January and October' 1951 Weye held constitutionally retroactive to
July 1, 1950. The enactments had been presaged by the Revenue Act of 1950
which had directed the Committee on Ways and Means and the Finance Com-
mittee to report to Congress excess profits legislation to be retroactive to July 1,
1950 (title VII, 64 Stat. 967). The court pointed out that the' directors of the
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96 INTEREST EQUALIZATION TAX ACT
corporation which was made retroactively subject to the tax had been indiffer-
ent to the congressional handwriting on the wall. They were bound to know
Hint their liability for these taxes was probable -if not inexorable" and to have
taken the taxation into account (pp. G49,053).
The importance of notiee as support for the constitutionality of retroactive
tax legislation is emphasized by Hochman (73 Harvard Law Review 092 (1900))
writing on "The Supreme Court and the Constitutionality of Retroactive Legis-
lation." He concludes Mat the primary timstderation is the ability of the
taxpayer "at the time of the transaction in dispute" to foresee the tax (p, 7(6).
A similar conclusion is expressed in the article on "Retroactivity in Federal
Taxes" by Novik and Petersberger ?1959) 37 Tuxes 407) in which Federal
canes emphasizing the factor of notice of pending legislation are diseusseti.
The President's message calling for a tax on the acquisition of foreign obli-
gations and securities from the time of him armonneement presents the tax as
an Immediate means of reducing the deficit in this country's international
transactions and defending its gold reserves. The message came in the midst
of congremional hearings and congressional and administratiou statements on
the need for action to reduce the unfavorable balanee. The message should,
consequently, be sufficient warning to any prudent investor that any purchase
thereafter would be subject to tax for the compelling reason that an outward
rush of dollars in anticipation of the net must he prevented.
Moreover, in a nuttier vital to the international monetary position of the
Foiled States, the President speaks with exceptional weight and importance,
as he is the recognized organ of the Nation in matters of foreign affairs,
United States v. Curtiss-Wright Corp. ( (1936) 299 U.S. 30-1).
Factor of subsequent and periodic payment
The reasonableness of the legislation Is further enhanced by the fact that il
provides only for subsequent and periodic payment of the tax. The tax is not
due on the date of enactment or the date of each purchase but at the lime of
filing of a quarterly statement covering past acquisitions. The amount of the
tax under the new legislation would, therefore, depend on the taxpayer's rtior
acquisitions to that period. In this respect, the tax would be similar to the
excise taxes on business Mild' are measured by events prior to the enactment of
the tax without violating the due process clause. The permissibility of measuring
a subsequent excise tax by previous business has been established since the cases
of Flint v. Stone Tracy (11911) 220 U.S. 107). supra, and Hecht v. Halley ( (1924)
265 P.S. 144), supra.
Additional powers of Congress
The proposed tax legislation is not reeommended or enacted solely for rev-
enue purposes. Its basic objective is to equalize the terms upon which capital is
raised in this country by foreign burrowers and issuers in order to affect the
amount of foreign commerce in this area and to protect the currency against any
possibility of devaluation which might arise from an unfavorable balance of
payments and the resulting drain on U.S. gold. A tax law may accomplish a
regulatory purpose, mis demonstrated in the various chapters of the Internal
RE-venue Code of 1954 providing for regulatory taxes (26 chs. 39-53).
Taxes may also be laid in aid of another power of Congress, particularly the
flower to coin money and regulate the value thereof, reazic Bank v. Fenno ( (1869)
75 U.S. (8 Wall.) 533), and to regulate interstate and foreign commerce, Rodpers
v. United States (C.C.A. 6 1953 I 13S F. 2t1 992).
Furthermore, Congress has authority to make all laws necessary and proper
to carry Into effect its delegated powers (art. I. sec. S. clause 18). When Con-
gress moves to avert or cure a major currency crisis it may draw upon its dele-
gated powers, including this ancillary power, to accomplish a purpose which it
might not he able to accomplish relying upon only one delegated power. This is
the reasoning and importance of the Legal Tender Cases ( (1870) 79 U.S. (12
Wall.) 457). In this case the Court upheld the power of Congress to modify
preexisting contracts for the payment of private debts so as to require the pay-
ment of such debts in the currency it designated legal tender. The Court found
that the congressional enactment was based upon( several of the powers of Con-
gress and its ancillary authority to employ every means necessary for the execu-
tion of its acknowledged duties, and that the act could not he defeated by
the due process clause.
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INTEREST EQUALIZATION TAX ACT
Conclusion -
The circumstances, therefore, under which the proposed tax legislation would
be .enacted would undoubtedly lead the Supreme Court to conclude that the Hin-
iteci. period of retroactivity of the tax was not only reasonable but necessary in
order to prevent an excessive outflow of capital in anticipation of the tax legisla-
tion and 'that the President's message provided adequate notice to satisfy the
due process clause. 'Moreover, ?the Court would, in all probability, recognize
that Congress -could call upon its powers to regulate the value of money and to
regulate foreign commerce, as well as its taxing power,. to prevent an interna-
tional, currency crisis. by imposition of a tax on the purchase of foreign obliga-
tions and securities following the date the President announced its necessity. In
such a decision the Court might also stress the preeminent power ,of the Presi-
dent in themanagement of foreign affairs. -
Senator BENNETT. It is pointed out to me that the Case Of Untermyer
v. Anderson, decided in 1.927 with respect to the retroactivity on a gift
tax found that that taxwas illegal because it was?the tax was uncon-
stitutional because the retroactivity was excessive. -
Secretary Dita,ox. Yes. Well, this is discussed in the opinion fully
and the basic case which seems to be the most, guiding case of the
Supreme Court currently?is a later case, called Welch v Henry which
was decided in 1938, which went into this in great detail. Since it was
a later case, itoverrides the earlier case.
Senator BENNETT. Well, Mr. Chairman, I have some more material
that I would like to work over a little bit and so I would like to yield
at the moment with the thought that I might want to come back again
for some more questions.
Senator SIVIATHERS. All. right, Senator Bennett.
Mr. Secretary, let, me just ask one question and I will -go back to
Senator Williams. ,
The only complaints I have received in my office with respect to this
particular proposal comes from American Underwriters who are
greatly concerned about the fact that if this bill is enacted into law,
not only will it stay in effect until December 1964 but probably will be
continued and that their position will finally be destroyed.
What do you have to say about that, Mr. Secretary ?
Secretary DILLON. Well, I dont' think that that is a valid opinion.
I think it is an argument that may be made, and if I were in their
position, I would make. But, in the first place, I don't think the tax
will be continued indefinitely. There is no reason why it should, be,
because more fundamental factors should be, and are, the basis of our
efforts to reach balance in our payments. When those come fully into
play, hopefully by the end of 1965, the tax will no longer be necessary.
At that tin-ie or whenever that time comes?even if it is a year or
two later, which I do not expect it to be, but even if it is?the- in-
genuity and skill and the size, of the New York market, I am sure will
be such that even after the way that foreigners will have developed
their markets, New York will immediately again become the domi-
nating place.
Certainly if it does not, the investment banking fraternity are not
the sort of men I used to know when I was in the business.
Senator SMATHERS. You don't have any fear then that having the
Western European and developed foreign country markets become
powerful. and influential M this field that they will finally in the long
run challenge New York's position as the financial center of the world ?
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Secretary DimAix. No. I think it is perfectly clear that, if there
is to be a good balance in the world, there is a limit to the amount
lint can be done in the way of port folio lending in any one market.
I think it is mooch more healthy to have a more balanced world mar-
ket where the European coin it ries will, as a matter of practice, more
usually take care of t bulk of their own requirements, and help
some of those count ries
es that are not in a position to raise their own
capital as well, and we would do the same.
But certainly the U.S. market will coot Mite to be and should be?
t here. is no reason why it shouldn't be --far larger than any other,
and I would think larger than all European markets combined.
Senator Sn.vriiras. With respect to thv retroactive effective date of
this proposal, has any American underwriter that you know of taken
the. matter to court and challenged the constitutionality of the action
taken by the Treasury Delia rtnient ?
Secretary DILLoN. I don't think there is any question about that.
Senator SmATiiras. I mean challenged even your regulations or
your authority to do it?
Secretary Dmi.ox. No. Of course, I don't think they could or
Ivould tint il the law had been passed, but we haven't heard any serious
views on that subject.
I think it is rather interesting to note that the .minority report in
the Ways and Means Committee, which was signed by some of the
minority of the Ways and Means Commit tee, but: not, by all of them,
did not make this point. It was apparently gone into carefully in
the hearings and (hey decided the only practical way to make his
x work, if it was going to be enacted, was to have that July effectlye
date, so they supported (lie majority of the committee on that subject.
The reason is perfectly clear. If you %mold signal to the world that
you were going to put something on at an indefinite day in (lie future.
we would have had a f:tirly tremendous demand on our market, a
remendous outpouring of funds such as we have never seen before.
We had seen something we had never seen before already in the first
months, but. the demand would have gone far beyond that. We
clearly couldn't have stood that. and the consequences for the dollar
and our balance of payments would have been unforeseeable but OM,
tainly very dire.
Senator SMATII MIS, Mr. SecretaiT, would it not be possible, even
WI (limit Congress having passed a law for some American under-
writer, to challenge the action which you have taken on the basis,
tal that there is no law authorizing you to do this. I ani just curious
as a legal question. Wouldn't there have to be some way to test it .!
Secretary pli.LoN, I am not, it lawyer, but I don't quite see how be-
cause we haven't. done anything except propose that the tax be passed
effect i ve, on 0 ret inactive basis, to n certain (late.
Senator Sm.yruEus. So it. is something- that still just reillailLS a pro-
posal and there has been no action against your regalia( out ?
Sec ret an' DILL( IN. No; we have not taken any action of any kind eX-
cern. We have worked wit Ii he stock exchange and time )at tonal Associ-
ation of Securit y Dealers particularly on the question of dealing in
outstanding securities and h
WC ave developed in coop with
th
them a simplied way in which their I ransaet ions could be carried on.
mid have been carried on workably under those arrangements.
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INTEREST EQVALIZATION TAX ACT 99
It would fit in with the tax should it be enacted. That wasirt any-
thing we prescribed. It was something- they developed and we agreed
with it.' '
'Senator Btx-NrfiT. Would the -Senator -yield, for a question at this
point? I -Would like to a,s1c the Secretary, What has been the general
effect of this proposal on the Market for outstanding foreign securities'
in the United States? ? ' '
Secretary DILLON. Well, the market for outstanding foreign securi-
ties i? 'still active: Those- that are trading among Americans are free
Of tax and account for the latilk. of the trading. They trade at gener-
ally Very sniall amounts?half a 'point, something like that; a quarter
of a point---higher than trades in stocks ownedby foreigners and sold
to Aniericans. ?
.In other words, there is a slight premium where the tax doesn't have
to: be paid Immediately after the tax was suggested some of these
premiums were higher, but they have gradually dropped- and Ithere
aren't any very 'large premiums any more. There are some small
preininms on Securities trading here among-Americans which is natu-
ral because they are free of tax.
Senator BENNETT. Because the owners are sure they will - not be
taxed under any circumstances, the owners--
Secretary DmiLoi.r. The purchasers'.
Senator BENNETT. The purchasers who consider buying from for-
eigners are doing it at their own risk?
'.Secretary DILT,oN. That is right. ,
Senator BENNETT. Thank you, Mr: Chairman.
Senator SMATIIERS. Mr. Secretary, if the effective ;date, if this pro-
posed legislation is changed, does it not meaii. those those people Who
gamblecron the fact that the Congress would not act have had a rather
profitable ride, whereas those who expected apparently the adminis-
tration to prevail will have suffered?,
Secretary DILLON. That is- correct. There are a few people' who
clearly have done that; although they are very, few in number. The
Seciftities, and Exchange Commission 'has noticed a few cases where
individuals have bought foreign stock of a foreigner in the market
and sold it to an American at the same time?identical transactions.
They are obviously arbitrating and making three-eighths of a point or
half a point, which would be a profit only if there is no tax. If the
tax went into effect, they would obviously suffer a considerable lOss,
if they intend to pay the tax. There hasn't been much of that, but
there has been some. Certainly a change in the law couldn't at this
point benefit anyone except people who have operated in that way.
We can give you an example of that. It doesn't have any names;
but just shows some of the sales in one well-known stock, Royal Dutch,
that were done in one day in May. It shows transactions, literally
within the same minute, of a thousand shares bought on the foreign
market and sold by the same person on the American market on the
New York Stock Exchange.
Senator WILLIAMS. In billing their customers have they been adding
on this extra charge as a tax?
Secretary DILLON. No; the way the situation works, Senator, is
that we worked out this?or rather the exchange worked it out, we
thought it was fine?procedure under which all sales on the New York
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1UU LNTEREST EQUALIzATWA AUT
Stock Exchange in the regular course of business are presumed to be
American owned securities and free of tax. The responsibilities for
determining that rests with the selling broker. If he knows shares are
foreign held, and be knows what stock he is selling, he must so indicate
when he offers it for sale, and (lien it is marked as a special foreign
transaction. There aren't very many of those.
The great bulk of the ramsnetions are of the other nature, the
lax-free nature.
When he does have a sale of foreign securities, the purchaser gets
his regular receipt, his regular transaction voucher, and it says that
he has purchased so many shares but they are marked with a "F" so
they are foreign. lie knows he is then subject to the tax.
The provisions of the tax say that, after the end of the first quarter
following enactment of the tax, the tax will be due on everything that.
has been taxable since the effective date of the tax, which would be
July 18, 1063.
So he hasn't been billed yet. The purchaser will have to pay it
at that time. If this is enacted in the third quarter, the tax would be.
due October 31.
Senator Sm.tmeas. Senator Williams, do you have any more
questions?
Senator Wii.m.vms. I have some more questions but I \yin yield to
Senator Morton.
Senator MorroN. Go ahead.
Senator WILLiAms. This tax, it seems to me, is being collected either
from the customer or by (he broker at sonic point. It is being paid
currently, is it not?
Secretary DILLON. Oh, no.
Senator Wri.talims. There is no tax being collected?
Secretary DILLON. No tax being collected?
Senator BEN NETT. No.
Senator Wn.i.mms. If after this is enacted, some customer refuses
to pay the tax could you put the penalty retroactively on this?
Secretary I)it,LoN. There would he civil penalties, which are really
to assure the collection of the tax, but the criminal penalties for will ful
false filing and things of that nature cannot take effect until after
the bill is enacted because, under our Constitution, they can't be
retroactive.
Senator WD.I.IAms. You mentioned (lie fact that the hank loans have
increased somewhat in recent months. Do you have the figures show-
ing the bank loans for the last ;.3 or 4 years?
Secretary Dimox. Yes, we can give you those. We will submit
table for the record. They have increased quite substantially. This
increase- --
Senator WILLIAMS. Do von have those with you now ?
Secretary DILLoN. Yes: I have some figures on hank loans which
I would be glad to give yott.
Senator 'WILLI AM. Would you give them to us?
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Secretary Dmnorr. They are really of two types. There are long-
term bank loans and short-term bank loans.
Senator WILLIAMS. Would you give them separately and then the
totals?
Secretary DILLON. Yes. For the long-term bank loans they in-
creased by $153 million in 1960; $133 million in 1961; and $127 million
in 1962.
Senator WiLmAms. That is increases?
Secretary DILLON. Increases.
Now in 1963 they decreased in the first quarter by $27 million, and
then in the second quarter, which is when I had mentioned the increase
really started?this was prior to our announcement of the tax or to
any effect of the tax, they increased by $177 million. That was more
in that quarter than in any of the preceding years.
Senator WILLIAMS. What was the increase for, the year of 163?.
Secretary DILLON. Well, in the third quarter they increased an-
other $114 million, and in the fourth quarter the increase was large;
it was $302 million, which excludes $150 million of trade credits that
a U.S. corporation sold to the banks, so there was actually no balance--
of-payments effect. The total then for the year was $566 million.
Then, in the first quarter of this year, they were also high but the
increase was less than in the fourth quarter. They went from an
increase of $300 million to $219 million.
Senator WILLIAMS There had been an increase of $225 million in
the first quarter of this year?
Secretary DILLON. That is right. And the indications are that in
the second quarter that will be considerably smaller.
Senator DOUGLAS. Would the Senator from Delaware yield for just
one question?
? Senator WILLIAMS. Sure.
Senator DOUGLAS. Are these increases cumulative, Mr. Secretary,
or are they increases in terms of a given fixed base?
Secretary Dinnox. They are cumulative changes in the outstanding
claims on foreigners reported by banks.
Senator DOUGLAS. They are cumulative. That is each year is an
addition over the previous year?
Secretary DILLON. Yes.
Senator DOUGLAS. Therefore-, overall, you could get a very large
total?
Secretary DILLON. Yes.
Senator DOUGLAS. Will you submit for the record what the totals
have been?
Secretary DILLON. Oh, yes; will be glad to.
Senator WILLIAMS. That is What I was going to ask, what the totals
were for each of the years 1960 through so we can see what the total
increase ,was.
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Secretary Dn.i.ox. We can give yon the totals for each year and the
increases.
Senator Wn.a.l.tms. Do von have those fbrures now ?
Secretary Dn.i.ox. No.
Senator Wn.m.ors. You don't have the total figures for the. bank
loans of each of the 5 years?
Secretary Diu,ox, No, I just. have these in the form of increases in
the outstanding amounts which is the usual wity we have been looking
at, them but we can easily put it together in that. form.
Senator WaaaAms, A rough, rapid catmint ion shows about a billion
and a quarter increase on an annual basis; is that about correct?
Secretary Dn.i.ox. No, they increased the total for 19
Senator Wil.m.vms. That is 64
Secretary Dua.ox. The first quarter if you multiply that out.
Senator WitaaAms. No, not, multiplying it, out. If these are in-
creases each :1,,ear over the preceding year does that not mean that
1964 is 'sunning about a billion and a quarter higher than 1960?
'Secretary Du.i.ox. 'Ilan 1960, I see. Yes, the total outstanding is
tlait much higher.
Senator WILLIAMS. About a billion and a quarter ?
Secretary DILLON. About a billion and a quarter net increase since
the beginning of 1960.
Senator WILLI:ills. Yes.
On private investments, how does that total run over that. same
period?
Secretary Well, that grew much more rapidly as the tables
here show.
Portfolio purchases of new issues table .2 shows it?jumped from
555 million in 1960 and $523 in 1961 to $1,670 million in 1962, and in
the first half of 1963, before the tax was proposed, $1,858 million at a
seasonally adjusted annual rate. Actually the total was over a billion
dollars?just over a billion dollars?for the first half of 1963, which
was approximately the same as it was for the entire, year 1962. So
the absolute amounts have gone up much more than these bank loan
figures.
Senator WILLIAMS. Now again, are these increases each year as com-
pared with the preceding year?
Secretary Dlia,ox. These are total purchases.
Senator WiLmAms. And you will furnish for
Secretary am.ox. The same way.
Senator WILLIAMS. And Irou will furnish the total for each?
Secretary DILLON. We will be glad to do the same thing, yes.
Senator 13ENxErr. Will the SCIIIItO1' yield?
Senator WILLIAMS. Yes.
Senator BENNETT, I think it will be helpful to the committee, Mr.
Secretary, if you would assume that bank loans and the sale of new
issues represented as a total of the two a penetration of our market,
so let's go back to 1960, if that is where Senator Williams wants to
start, and total those two for 1960,1061, 1962, and 1963, the full year,
and then give us the first quarter of 1961.
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INTEREST EQ .
Secretary DIELoN. Yes we will be. glad to do them both separately
and then total them together and give them to you every way you want
them.
Senator BENNETT. That is right. Then we can see the movement.
Secretary DuLEoN. Every way you want.
Senator WimaAms. As I understand it the figures we have been.
using have been capital investments and long-term bank loans?
Secretary PuLoN. That is right.
Senator WIELTAms. Have you short-term bank loans in the same
category?
Secretary DmEoN. Yes, sir;. they have also increased but they move
around with much more flexibility.
Senator BENNETT. They are much more fluid? . .
Secretary DIEEoN. They have to do with trade flows and things like
that.
Senator WILLIAMS. But do you have the similar statistics and re-
port on it?
Secretary DILLON. Yes, sir; the statistics: show for the year 1960
they increased by $995 million, .for .the year. 1961 by $1,125 million;
for the year 1962 it &Opp' to $324 Million; for the 'year 1963 they
increased again to $721 million, and they were larger again in the first
quarter of 1964. They were $421 nailliOn.
But they vary very much between quarters because last year, when
the net increase was $721 million, there were two quarters in which
they decreased and two quarters in which they increased, and in each
case by over $400 million.
So they are much more erratic on a quarterly and on an annual basis,
but we will be glad to give you the same statistics.
Senator WILLIAMS. You _will furnish the same statisties. for that?
Secretary DILLON. Yes.
(The material. referred to follows:)
TABLE 1.?Net purchases of foreign securities bp U.S. residents and net changes
in bank credit extended to foreigners, 1960-63 and 1st quarter, 1964
In millions of dollars]
?
Net pur-
chases of
foreign
securities
Net increase
in long-
term bank
claims I
Total, long
term
Net increase
in short-
term bank
credit 2
Total
1960
864
153 .
1,017
639
1,656
1.961
910
133
1,043
953
1,996
1962
1, 172
127
1, 299
386
1, 685
1963:
I
540
?27
513
?87
426
II
596
177
763
264
1,027
III
151
114
265
?28
237
IV
?2
302
300
385
685
Total
1, 275
566
1,841
534
2, 375
1064: I
3 33
219
252
275
527
I Mostly loans,
2 Mostly loans and acceptance financing; excludes collections and foreign currency claims, which 'are
mostly for account of customers.
a Preliminary.
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TABLE purchases or sales of foreign securities by U.S. residents, 19130-63
and 181 qua,-kr, 1004
[Millions of dollars; purchases l+) sales (?)1
New issues of foreign securi-
ties purchased by CS.
residents
Net purchases or sales of
outstanding foreign se-
curities by U.S. residents
Total, U.S. purchases or
sales of foreign securities
By years-
By quarters-
1960
1961
1962
1963
1963
1964
481
so
IV
555
800
623
387
1,070
oe
1,260
6
618
so
183
?82
87
?89
'132
_gg
864
910
1,172
1,276
640
ass
151
?2
33
Preliminary.
Source: Survey Of Current Business,
TABLE 3.?Net changes iii elai?zs on foreigners reported by u.s. banks,' 1960-63
and 1st quarter, 1964
[ Millions of dollars; intrerses (-I-) decreases (-1)
By years?
By quarters-
1961
1962
1063
1968
11
ill
IV
Short-term claims:
Collections and foreign
currency claims
(mainly for account of
'
customers)
366 172
?sa
iu
10
las
?68
107
146
Other (dollar) claims
(mainly loans and ac-
ceptances)
au 053
888
634
?87
264
?28
385
275
Total, short len],
095 1,125
324
721
?77
402
?96
492
421
Long-term claims (mainly
loans), total
153
138
127
1 555
?27
177
114
302
219
Total, long- and short-
term claims
1,130
1, 261
4,51
1.207
?104
570
18
794
640
(Of which, claims
on Japan) 485
676
262
532
12
152
24
343
331
I Includes claims for account of banks' customers as well as loans, acceptances, and other claims for banks'
own account.
Excludes sales of about 150,1030,000 of outstanding trade credits to the banks by a U.S. corporation.
N OTE,?Details may not add to totals because of rounding.
Source: Department of Commerce and Treasury Department.
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INTEREST EQUALIZATION TAX ACT
TABLE 4.?Total outstanding short- and long-term claims on foreigners reported,
by U.S. banks
[In millions of dollars]
Claims reported as of?
Total,
short term 1
Long term
Total 1
Of which
claims on
Japan
Dec. 31, 1959
2, 599. 0
1, 545, 1
4,144.1
339.3
Dec. 31, 1960
3, 594.2
1, 698. 4
5,292. 6
825. 0
Dec. 31,1001
2
4, 777. 3
3
2, 033. 8
2 3
6, 811. 1
2 1, 551. 7
Dec. 31, 1962
5, 100. 9
2, 160. 4
7, 261. 2
1,814.2
Mar. 31,1963
5, 023. 9
2. 133. 0
7, 156. 8
1, 827. 1
June 30, 1963
5, 430.0
4
2, 396. 5
4
7,827. 4
I, 982:7
Sept. 30,1963
5, 334. 8
2, 510. 3
7,843. 1
2. 008. 5
Dec. 31, 1963
5, 826. 7
6
3, 005. 1
2
8,831. 8
52, 392, 0
Mar. 31,1964
6,247. 0
3, 224. 2
9, 471. 2
2, 676. 3
Apr. 30, 1064
6, 377. 3
3,251, 2
9,028. 6
2,675. 2
1 Excludes claims hold by the Exchange Stahl. ization Fund.
Short-term claims include $57,900,000 reported by banks initially included as of Dec. 31, 1961. Of this
amount, claims on Japan amount to $51,900,000.
8 Includes $200,000,000 classified as a direct investment tran,saction. .
Includes claims of $86,000,000 previously held but first reported as of May 31, 1963.
S includes claims of $193,000,000, reported by banks for the first time as of Dec, 31, 1963, which includes
about $150,000,000 of trade credits sold to the banks by a U.S. corporation but in part represents claims
previously held but not reported by the banks. Included in this amount are claims of $46,400,000 on Japan.
Nom?Data for foreign securities held by Americans at the end of calendar years
1950-03 that may be directly compared with the figures for net purchases shown on table
2 are not available. However, the Department of Commerce has estimated that the value
of all foreign securities held by United States residents at the end of 1952 was $11,802,000.
Source: Treasury Department.
Senator MORTON. This depends a lot on our volume of exports, does
it not?
Secretary DILLoisr. It depends on the volume of exports and other
factors. For instance, we have had a cycle of borrowing by Japan--
arld I think ,they are the biggest borrower here--depending on the
status of the balance of payments of Japan. They borrow heavily
when they need the funds, and then they get a little better and they
pay off heavily and then they borrow heavily and it has been going
like that.
Senator WILLIAMS. I understand that but I thought if we had those
it would be helpful to the committee.
Secretary DILLON. Yes, we will be glad to submit those, Senator,
along with the other data you asked for on bank lending.
Senator WILLIAMS Now, you mentioned in your report about the
improvement in our balance of payments and substantial reduction in
our loss of gold in recent periods.
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What do you anticipate for the next 6 to 12 months in that di-
rection?
Secretary Daamx. Well, it is so difficult to look ahead.
Senator WILLI:ors. A:-.stune the enactment of this bill.
Secretary Dit.i.ox. Even with this bill I have learned that prophesy-
ing balance of payments is a very unprofitable operation because it
doesn't depend only on what action the 'United States may take, but
it also depends on developments in all other countries of the world.
So it is not a very useful thing and you never can be too accurate
when you prophesy ahead. But we see no reason why the present
improvement which, as I said, suggests a balance of payments deficit
for the fiscal year of $2 billion or maybe a little less, shouldn't con-
tinue through the remainder of this calendar year, so we wind Up with
a calendar year on about the same basis.
We would think that. next year, everything being equal, we ought
to do better because we do know that, as a result of actions that are
currently underway, our Government expenditures overseas will be
about half it billion dollars less in 1965 than they will be in 1964.
So that will be a substantial improvement, and if nothing else changes
it would reduce the deficit by about 25 percent.
We would hope there would be some other improvements besides
but that is the best one. can say looking ahead.
Senator Wit.m.tms. To what extent do you attribute the reduction
in the outflow of gold as resulting from our new method of financing:
that is, borrowing direct from these countries with their currencies?
Secretary IhLtA.ix. I think that has had some effect, particularly last
year. I don't think it had much this year because in the first 6 months
of this year we have done very little of that. So I think that the
fact that it has improved in the first 0 months is due to some other
factors.
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One of the main reasons, I think, has been that the other countries'
surpluses?the counterpart of our deficit?last year and early this year
seemed to have shifted somewhat from earlier times.
The underdeveloped countries as a whole, because of higher prices
for their basic commodities, have been in surplus in the last year,
and they like to hold dollars. They don't get any benefit out of gold,
so there has been no demand by them for gold.
Also, private accounts have apparently needed dollars to finance
their trade, or whatever they want them for, and they have increased
their holdings of dollars, whereas the holdings of dollars of official
governmental bodies have declined substantially. The figures for the
end of April are back to what they were at the end of 1062, nearly 18
months ago?about three-quarters of a billion dollars less than they
were at their high point. I think that has been the primary thing that
has had the effect on this outflow of gold.
Of course, there has been one other thing which has to be taken into
account. That is that there has been, particularly since last fall, a
somewhat greater supply of new gold to the free world in view of the
unusually heavy sales by the Soviet Union in the London market.
That supply has also helped to meet the demand and so there has been
less demand on us.
Senator WILLIAMS. Will you furnish for the record a list showing
the extent of these borrowings and the countries involved and the
rates of interest, and so forth, and the terms of the loans?
Secretary DILLON. We would be glad to. They are regularly
published.
Senator WILLIAMS. I know they are, but I just thought if you would
consolidate them at this point in the record.
Secretary DiuLorf. Yes.
(The material referred to follows:)
34-937-64 8
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g^ aSe.
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.1;-Z7g: obligations of the United Statesi
except that in applying this paragraph the determination of whether a
foreign country is a less developed country shall be made in accordance
with subsection (b) of this section.
(2) SPECIAL RULES.?
(A) For purposes of subparagraphs (A) and (B) of paragraph (1)?
(-A} ineenae derived from property described in Seetieft 966-(b) (1)
{regardless of when rbeetuireel} shall net be taken into account; and
(i) the United States shall be treated as a less developed country, and
-(49- (ii) obligations of any other less developed country corpora-
tion shall be taken into account under section 955(c)(1)(B)(iii)
without regard to the period remaining to maturity at the time
of their acquisition..., and
(iii) income from deposits with persons carrying on the banking
business in the United States shall be considered to be income derived
from sources within less developed countries and income from deposits
other than in a less developed country shall not be taken into account.
(B) For purposes of subparagraph (B) of paragraph (1), deposits
eutsiele the United States (other than deposits in a less developed
country) with persons carrying on the banking business; and inceine
from slash deposits; shall not be taken into account.
(3) APPLICABLE PERIODS.?The determinations required by subparagraphs
(A) and (B) of paragraph (1) shall be made 4). for the annual accounting
period (if any) of the foreign corporation immediately preceding its account-
ing period in which the acquisition involved is made -94 for the annual
fteeetuating period of the foreign eerperation whieia sueh acquisition is
read?, and -(G)- for the nex-t sueeeeding atintral fteeounting period of the
foreign corporation: except that if said annual accounting period is less than
a 12-month period, the determination shall be made for such period of time as
the Secretary or his delegate may by regulations prescribe.
RE PROPOSED AMENDMENTS TO H.R. 8000
SEC. 4916. EXCLUSION FOR INVESTMENTS IN LESS DEVELOPED
COUNTRIES.
(e) LESS DEVELOPED COUNTRY CORPORATION DEFINED.?
(1) IN GENERAL.?For purposes of this section, the term "less developed
country corporation" means a foreign corporation which for the applicable
periods set forth in paragraph -(2} (3)?
(A) meets the requirements of section 955(c) (1) or (2); or
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(B) has gross income 80 percent or more of which is derived from
sources within less developed countries, and has assets 80 percent or
more in value of which consists
(i) property property described in clauses (ii), (iii), (iv), and (v) of sec-
tion 955(0 (1)(B):,
(ii) property described in section 966(b)(1) (regardless of wizen
acquired), and
(iii) debt obligations described in paragraph (3) of subsection (a)
of this section;
except that in applying this paragraph the determination of whether a
foreign country is a less developed country shall be made in accordance
with subsection tb) of this section.
(2) SPECIAL RULES.?
(A) For purposes of subparagraphs (A) and (B) of paragraph (1)?
(i) the United States shall be treated as a less developed country, and
(ii) obligations of any other less developed country corporation shall
be taken into accannt under section 956 (c) (1) (B)(iii) without regard
to the period remaining to maturity al the lime of their acquisition, and
(iii) income from deposits with persons carrying on the banking
business in the United States shall be considered to be income derived
from sources within less developed countries and income from deposits
other than in a less developed country shall not be taken into account.
(13) For purposes of subparagraph (B) of paragraph (1), deposits (other
than deposits in a less developed country) with persons carrying on the
banking business shall not be taken into account.
(-24 (3) APPLICABLE PERIODs.?The determinations required by subpara-
graphs (A) and (B) of paragraph (I) shall be made -(A) for the annual account-
ing period (if any) of the foreign corporation immediately preceding its
accounting period in which the acquisition involved is made, +B.-) for the
ftRFHlal Elreefalitt int< fiel4Ofi ef the foreign corpora-Nen it* Wifieh &Hell acquisitien
-is (C) far the tient etieeeeding anneal fteeettoting period of the
foreign eneperation, except that if said annual accounting period is less than
a 12-month period, the determination shall be made for such period of time as
the Secretary or his delegate may by regulations prescribe.
UNITED STATER COUNCIL OF THE
INTERNATIONAL CHAMRF:R OF COMMERCE, INC.,
_Veto York, N.Y., Jufy 7, 1964.
Re H.R. 8000, interest equalization tax.
Senator HAnter Byan.
Chairman, Comm itt ec on Finance,
U.S. Senate, Washington, D.C.
DEAR SENATOR BYRD: The Tax Committee of the United Slates Council of the
International Chamber of Commerce regrets that eircumslances of the hearing
on H.R. 8090 before your committee made it impracticable for our members to
study in depth the relationship of TI.R. 8000 to the current problem of the U.S.
international bainnee-of-payments sit no ion, presented to the vonunittee on June
20 by the Secretary of the Treasury. In part leular, we were unable to s:udy
fully the 40-odd amendments proposed on that day by the Treasury Department,
since the report on them Wag not available until the opening clay of the hearings.
However, based on a preliminary review of the statement to your committee by
the Secretary of the Treasury, we recommend that the Senate Committee on
Finanee should not report. this bill favorably, even with acceptance of all the
amendments proposed hy the Treasury Department on .Ione 20. The members of
the United Stales (7tionvil recognize the vital nature of the need to reverse
the outflow of gold from the United States and were pleased at the Secretary's
report of considerable progress on the Treasury's long-range plan to improve the
halallee-of-ltaYmenla situation, and his expression of confidence that substantial
sorcess will lie achieved ID I he very near future. However, we question whether
the proposed legislation would contribute substantially to the solution of this
problem. We urge that the members of your commit tee keep constantly in mind
hue ixissible impact of this legislation on international trade and investment and
the attendant effects on U.S. relations with other nations. Creation of reszric-
I ions on the movement of U.S. capital of the sort included in 11.11. 8000 at a time
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when our Government is urging others to open their capital markets to foreigners
does not seem to be sound policy.
In addition, it seems generally understood that, although while the bill is pend-
ing new financing in the U.S. market by foreign enterprises outside Canada has
been largely stopped, this financing will resume when the final decision is known
whether or not the provisions of the bill are adopted by the Congress. That is,
Japan and Europe will reenter our markets when the bill is passed or when the
Congress adjourns without passage. The Secretary of the Treasury expressed
confidence that passage of the bill in its present form with Its retroactive date
would be constitutional, but it appears ,unlikely that the 89th Congress would
pass such a bill with a 1963 retroactive date.
Furthermore, the exemption in the bill before you, including that for Canada
and the possibility that other countries might be included, present the dilemma
that either the bill will have so little effect as to not produce the hoped-for re-
striction on the outflow of funds, or to the extent it is effective it will create the
many disturbances to our international trade and economic position which op-
ponents of the bill have presented to you.
The members of the United States Council recognizes the many pressures on
the Congress and on your committee for prompt action on this important piece of
legislation. Therefore, the following comments are directed to the bill now
before your committee, and include comments on the amendments recommended
by the Treasury Department by letter to you dated June 12, 1964.
1. The bill and the Treasury proposals provide for exemption of certain speci-
fied acquisitions of debt and equity securities incident to normal business trans-
actions. However, these exemptions do not recognize the broad scope and va-
riety of financial transactions involved in doing business abroad, and in fact we
do not believe it possible to cover such transactions by specific provisions. Amer-
ican businesses operating in foreign countries must be prepared to make invest-
ments of many kinds in order to improve their position, such as, for example,
loans to employees, purchases of securities of nonprofit organizations, investments
in foreign banks to facilitate financing of their own operations and those of their
customers and suppliers and the like. We believe there should be a blanket ex-
emption for purchases of securities otherwise covered by the bill if, under regula-
tions to be proposed by the Secretary or his delegate, the "U.S. person" investor
can demonstrate that the securities acquired were purchased for business pur-
poses and not as portfolio investments. We do not believe such a broad provision
would be difficult to administer.
2. The bill would impose the interest equalization tax on purchases of for-
eign securities by nonresident citizens of the United States. It is normal, and
indeed it is expected of such citizens, that they will purchase securities of
foreign corporations operating in the countries of their residence including
securities of their foreign employers. To the extent that such purchases are
made from funds earned abroad in foreign currencies, the U.S. balance-of-pay-
ments position is not affected, and thus imposition of tax on such transactions
is not only a needless hardship on these citizens but is not within the purpose
of the proposed bill.
3. If the committee does not adopt the suggestion in the preceding paragraph,
it is recommended that exemption be provided for purchase of securities of
foreign corporations by their U.S. nonresident citizen employees when the pur-
chase has a relationship to employment, such as stock purchase plans or options
or the like. It seems quite unreasonable to impose a penalty tax on some of
the employees of a foreign corporation merely because they are U.S. citizens,
and again the U.S. balance-of-payments problem is not at issue.
4. We recommend that the bill provide a complete exemption for purchases
of existing foreign securities, that is, foreign securities which were outstanding
on the effective date of the act. The statistics presented to your committee
indicate that transactions in such securities in the American markets are not
a significant factor in the balance-of-payments problem, and in fact in some
periods the net effect is an inflow of gold. It seems clear that the purchase and
sale of foreign securities by Americans is influenced by many economic factors
including rates of return here and abroad, and economic prospects in this and
in foreign countries. Imposition of the interest equalization tax will have no
effect on the balance of these transactions other than to impose a needless
penalty on the American investor.
5. If the suggestion in the preceding paragraph is not adopted, we recommend
that when the President determines that application of the tax would threaten
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international monetary stability the exemption should cover existing securities
as well as new issues. Adoption of this proposal would recognize that one of
the justifications for taxing outstanding issues in the first place is to make the
tax on new issues effective. However, as already indicated, we do not think this
justification is sound.
0. An attempt has been made in 11.11. 8000 to limit the proposed tax to port-
folio investments. The exemption for direct investments is restricted, however,
to persons owning at least 10 percent of the stock of the foreign corporation
whose stock or obligations are acquired. The 10-percent figure is too high to
provide an adequate basis for distinction betweea portfolio investments and
direct investments. Investments should be exempt when made by less than
10-percent stockholders if they are investments in foreign corporations engaged
In operations similar or related to those of the Investor.
T. We are quite concerned about the administrative problems and potential
penalties on American investors and others of the July 19, 1963, effective date for
transactions. The bill necessarily includes complicated provisions for reporting
transactions in foreign securities since that date, and both civil and criminal
penalties may he Incurred by investors and their agents for possibly inadvertent
failure to comply with the provisions of the act. Furthermore, while security
dealers and others have been on notice as to the possible enactment of the bill,
and have taken elaborate steps in preparation for compliance, inadvertent non-
compliance may still occur. Ti is recognized that an effective date of enactment
of the act might give an opportunity for avoidance of the provision of the bill
for a short period. This would not occur if the date of enactment were changed
to the date the Finance Committee reports on the bill, and we so recommerd.
Sincerely,
Pin= YOUNG, PrCede/it.
BROTEIERITOOD OF RAILROAD TRAINMEN,
BOARD OF TRUSTEES,
Cleveland, Ohio, July 7, 1964.
Hon. HARRY F. BYRD,
Chairman. Senate Finance Committee,
U.S. Senate, Trashingtmi, D.C.
MY DEAR SENATOR 13Y RD On August 23, 1933, I appeared before the House
Committee on Ways and Means and gave the following quoted statement with
reference to H.R. 8000:
"My name is J. H. Smith, member of the board of trustees of the Brotherhood
of Railroad Trainmen, with headquarters in Cleveland, Ohio.
"The brotherhood is a fraternal organization international in scope, in that
10.61 percent of its membership Is comprised of Canadian citizens residing in
that country.
"While the headquarters of this organzintion Is based in the United States,
dues and insurance premiums paid by our Canadian members are deposited
directly by our local treasurers in Canadian banks. Consequently, the Cana-
dian members' money does not, therefore, come across the border. We do not
appear today in opposition to RR. 8000 in toto, as we are cognizant of the
administration's responsibility in restoring both confidence in the dollar and the
eventual equilibrium in our international accounts.
"We would request your committee, however, to give consideration to a cir-
cumstance such as In the ease herein described. Specifically, we would request
that the present bill be amended to permit fraternal organizations to reinvest
funds which are already in Canada in Canadian securities without being sub-
jected to the tax that would be imposed by the proposed legislation."
The bill as reported out of the House committee and passed by the House con-
tains language prayed for by the organization I represented in my testimony on
August 23, 1903.
The purpose of this letter Is to request that the Senate committee likewise
give favorable consideration to the problem as outlined in the above quoted.
Respectfully yours,
J. II. SMITH.
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THE INTERNATIONAL NICKEL CO., OF CANADA, LTD.,
OFFICE OF THE VICE PRESIDENT,
New York, 1V .Y ., July 7,1.964'.'
Re section 4920 (a) (3) of the interest equalization 'tax bill (H.R.' 8090).
Senator HARRY .FLoon BYRD,
Chairman, Committee on Finance,
Senate Office Building, Washington, D.C.
DEAR MR. CHAIRMAN: I am writing, as vice president of the International,
Nickel Co. of Canada, Ltd., to explain our support of the provision in section 4920
(a) (3) .of the interest equalization tax bill (H.R. 8000) as approved by the House
of Representatives, which provides an exclusion from the proposed tax for foreign
corporations that are traded on a U.S. national securities exchange registered
with the Securities and Exchange Commission, if trading on U.S. exchanges pro-
vides the principal market for the stock and if more than 50 percent of the stock-
holders on the last record date before July 19, 1963, were U.S. persons. The
language I refer to appears on lines 1 through 11 on page 57 of the bill before
your committee.
? This provision was added to the original draft of the bill with the active
consent of the Treasury Department. As Secretary Dillon stated in his testimony,
before the Finance Committee on June 29, 1964, while discussing this provision,
"Close association of these companies with the United States justifies their treat-
ment as domestic companies."
The International Nickel Co. of Canada, Ltd., is incorporated under the laws,.
of Canada, but has always been closely associated with the United States. The
company carries on very substantial operations in the United States and is a
major source of this country's nickel. The. company's Stock and that of. its pred-
ecessors have been listed on the New York Stock Exchange since 1915, and the
New York Stock Exchange has always been the principal market for its .shares.
Approximately 31,000 of International Nickel's shareholders are shown by
our records to be U.S. citizens or. residents, and as of May 21, 1963, the com-
pany's last record date before July 19, 1963, 57.2 percent of Its stock was
owned of record by U.S. citizens or residents. Indeed, transactions in Inter-
national Nickel stock are so much a part of the domestic financial structure
that International Nickel is one of the 30 companies used as a basis for the
Dow Jones Industrial Average, and its shares are also included in the New
York Times and the Standards & Poor's index.
Dividends paid by the company to stockholders in this country have sub-
stantially assisted the U.S. balance-of-payments position through the years.
Since 1931, the date of the last public issue of its stock, International Nickel
has paid over a half billion dollars in dividends to 11,5. citizens or residents.
Only, seven other companies listed on the New York Stock Exchange would
be exempted under this provision. The largest of these. Is Aluminum, Ltd.,
which is 73 percent owned by U.S. persons. The other, six companies that
would be excluded are listed in the testimony of our chairman, Mr. Henry S.
Wingate, before the House Ways and MeanS Committee, which may be found
beginning on page 269 of the printed copy.
Exclusion of stock issued by these firms from the interest equalization tax
would not adversely affect the U.S. balance-of-payments position and there
are positive reasons why the exemption should be made:
1. It would permit continuation of the common world market which has
always existed for trading in the shares of International Nickel and other
widely traded foreign companies which are majority,owned by U.S. persons.
2. This exclusion will result in equal treatment for shareholders of
foreign companies in which Americans own at least 50 percent of the stock
and shareholders of U.S. companies in which foreigners own a substantial
? number of shares.
I am submitting this letter for inclusion as part of the committee's record
In connection with the proposed bill.
Sincerely yours,
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FIRST NATIONAL Cit r BANK,
New York, N.Y., July 7, 1964.
Hon. HArtax F1,001) BYRD,
Chairman, Comm titcc on Finance,
U.S. Senate, Washington, D.C.
DrAn MR. CHAIRMAN: The views of my bank on the interest equalization tax
are set out at length in the article entitled "Interest Equalization Tax : A De-
ceptive Tourniquet," which appeared in the enclosed issue of our Monthly Eco-
nomic Letter in April 1994.
I am writing now to urge you strongly that, if you do report the interest
equalization tax hill out of your committee, you add language to it that would
make it clear that loans mode by foreign branches of American commerelni
banks In foreign currencies are not subject to the tax regardless of type or
duration,
The intent of the bill is to cheek the outflow of dollar capital from the United
States. Section 4914(b) (2) properly exempts loans of a commercial bank made
in the ordinary course of its commercial banking business so as not to interfere
with the financing of our vital export trade.
The language of this section does not fully take into account commercial hanks,
like my own, that have worldwide branch networks in foreign countries. Our
bank has 109 branches and nffillates in 37 countries outside of the United States.
The business of those brunches is essentially to accept deposits in foreign cur-
rencies and to use those deposits to make loans. The earnings from this foreign
currency business are then converted into dollars and remitted to the United
States. Loans made by our foreign branclies in foreign currencies thus in-
volve no dollar outflow and, in fact, froni the haInnce-of-payments point of
view, earnings on them are net current receipts when remitted to the United
States. Additionally, to the extent that these foreign currency loans are made
available to foreign subsidiaries of American firms, the U.S. head office does
not have to export U.S. dollars to cover their sasidinries' financial needs. In
the national interest, they should be encouraged rather than discouraged. The
bill should therefore distinguish between the dollar loans of the head office and
American branches of a commercial bank and the foreign currency loans of the
foreign branches or that bank, for the balance-of-payments consequences of the
first are precisely the opposite of the second.
Unless the bill is changed, our foreign branches will be at n competitive
disadvantage in foreign countries, because all of their term loans (presumably
those 3 years and over) in foreign currencies would have to include a provis!on
that the borrower pay any interest equalization tax found due. Our foreIgn
competitors, whose loans could not possibly be subject to the tax, could make
tonna without such. a provision.
This ambiguity in the bill could be cleared up if your committee were to
add some such language ns follows
Section 4914(b) (2) (c) of debt obligations by the foreign branches of a
commercial bank in making loans in foreign currency.
A provision of this kind could not be subject to abuse because American banks
do not risk converting dollars to make long-term loans in foreign currencies.
Yours sincerely,
WALTER B. WinszoN.
INTEREST EQUALIZATION TAX: A DECEPTIVE TOURNIQUET
Last month, the House of Representatives passed a bill providing for a tax
on purchases of foreign securities by Americans. The bill now awaits hearings
in the Senate Finance Committee. Although it is generally expected that the
legislation will be passed. It may be worthwhile to have yet another look at a
measure which even its advocates regard as undesirable as permanent legislation
and which, In any event, is due for reconsideration by December 1965.
In spite of this lack of enthusiasm, the administration continues to urge the
approval or the tax on the ground that failure to pass it might cast doubts upon
willingness to reduce the large and stubborn balance-of-payments deficit.
This effort places the main burden of redressing the deficit on cutting private
investment abroad though such investment creates opportunities for U.S. exports
and builds up valuable income-producing assets. Furthermore, It constitutes a
departure from the principles of free international movement of capital?prin-
ciples that the United States urges other nations to restore and respect because
they make for a flourishing world economy.
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The levy, it may be recalled, bears the title of "interest equalization tax" and
is designed principally to check purchases of newly issued foreign bonds through
raising interests costs by 1 percentage point for borrowers from the so-called de-
veloped countries. The legislation, which was proposed last summer when the
balance of payments turned sharply for the worse, is to be applicable retro-
actively to July 19, 1963 (August 17 for securities listed on national exchanges).
While the tax is not law, it has?not unexpectedly?created so many uncer-
tainties with regard to costs of raising funds in the United States that it has
shut off practically all foreign bond purchases by Americans. Like the Emperor's
new clothes in the fable, the tax does not exist but nobody can challenge its
image.
RANGE oF POSSIBLE RESULTS
There is no sure way of estimating the possible results of the proposed tax.
Judging by capital shortages throughout the world and by restrictions in London
and continental capital markets, borrowers will undoubtedly continue to seek
long-term money in the United States. To provide statistical background, the
table sums up purchases by Americans of foreign bond issues over recent years
by grouping borrowers according to their tax status under the contemplated
legislation.
By far the biggest borrower at long term in the U.S. market is Canada.
Within 48 hours following the administration's announcement of the proposed
tax last July, Canadian officials asked for, and obtained, a general exemption
for new issues on the grounds of special economic relationships between our
two countries. This is to be done under a clause in the proposed legislation
giving the President authority to provide exemption from the tax "where re-
quired for international monetary stability." As officially stated, only Canada
today qualifies for exemption on these grounds?with the understanding that
Canada will not increase its official monetary reserves through the proceeds of
borrowings in the United States. As Canada will return to our capital market
on an exempt basis, the whole scheme has lost much of its potential usefulness
as a means of significantly reducing the volume of foreign bond issues.
Less-developed countries are also to be exempt from the tax; but?with the
notable exception of Israel?they have raised long-term money in our market
only sparingly. The World Bank and the Inter-American Development Bank
are also exempt.
This leaves only developed countries other than Canada?i.e., mainly Western
Europe and Japan?as the area where the tax deterrent might decrease bond
sales significantly. Such issues?floated mostly by governments and semiofficial
institutions?have gained U.S. investors' acceptance only in recent years. Ad-
mittedly, the future cannot be predicted solely on the basis of past experience.
While the volume of such borrowings will, in all likelihood, recede from the
high level of the first half of 1963, it is doubtful whether the net effect of the
proposed tax will be substantial enough to warrant taking such a potentially
harmful and unsettling step.
The proposed legislation also imposes a 15 percent tax on U.S. purchases of
foreign stocks and other outstanding securities. Such purchases have never
been a serious factor in our international payments.
CONTROL AND REGULATION
As originally conceived, the measure represented an intellectual attempt at
Interest equalization between our capital market and the principal centers
abroad. It was to increase costs to foreigners of capital in the U.S. market
without any need for U.S. financial authorities to interfere with market proc-
esses through controls over, or even the screening of, capital issues. Yet, as
embodied in the actual draft legislation, the measure depends more upon con-
trols over the transactions that are exempt from the tax than upon the tax
itself. Of the 71 pages of H.R. 8000, as approved by the House, 50 pages are
devoted to the listing of exemptions.
Some of these exemptions are to be provided for in the law. Thus, recogni-
tion is given to the importance of financing U.S. exports by exempting securities
or commercial bank loans that mature in 3 years; recognition is also given to
the foreign exchange earning power of oversea investments by American corpora-
tions by exempting direct investments. Many exemptions are, however, left to
the discretion of the President and the Treasury Department. Thus, the tax,
as proposed, would apply to 22 "developed" countries selected by the administra-
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Lion. For example, Portugal would be exempt, but not Spain; Finland but not
Norway; the Philippines but not Hong Kong. The selection is subject to change
by Executive order. Canada's exemption, noted above, also rests on the dLs-
cretionary power of the President.
The exemption proposed for commercial banks is designed to make sure that
credit "in support of normal and recurrent business operations abroad will not
be unnecessarily impeded," to quote Treasury Secretary Dillon. The "possibil-
ity of abuse of this exemption" prompted the Treasury to seek and obtain an
amendment to the legislation endowing it with specific authority to obtain from
banks detailed reports of their foreign lending activity. The implied threat of
taking away the exemption Is expected to obtain voluntary compliance with
official views.
The real effect of the proposed tax is thus control and regulation. Not stir-
prisingly, some people have suggested that there Is a better way to obtain the
desired result?a voluntary capital issues committee acting on guidelines estab-
lished by appropriate governmental agencies to screen foreign plans for borrow-
ing in our market.
New issues of foreign securities purchased by liner icons, grouped according to
seller's status under the proposed tax
[In millions]
1956-60
Average
1961
1962
1263
January
to June
July to
December
Year
EXEMPT FROM TAX
Danada .
2345
6237
8437
S632
$104
$786
c,atin America
24
Is
102
12
28
35
sracl
50
58
60
85
83
es
World Bank 133
12
SS
0
0
0
Subtotal
563
325
708
679
160
se
SUBJECT 'TO TAX
Western Europe
60
57
195
219
53
272
apan .
7
61
101
108
57
165
Lostras, New Zealand. and South
Africa_ _
SO
86
77
18
0
18
Subtotal
87
198
378
845
110
455
Total
040
523
1,076
1.024
270
1,294
2edemptions
127
123
170
sa
67
150
Net total
513
400
006
941
203
1,144
I Includes, in 1962, issues of the Inter-A.meri can Development Bank.
Source U.B.: Department of Commerce, Survey of Current Business.
Those who regard a capital issues committee as a lesser evil than the proposed
tax are aware of the drawbacks common to both: experience shows that "tem-
porary" taxes as well as "temporary" controls tend to become permanent; even
If things do not go well, the medicine is all right but just more of it Is needed.
In addition, one expedient often carries with it a whole sequence of further ex-
pedients, each with leas justification than the last. The alleged advantage of the
capital issues committee is its informality and flexibility.
The difficulty is that a capital issues committee would have to ward off the
countless outside pressures which would be brought to bear on it as it performs
the thankless task of deciding just bow much portfolio investment abroad is
sustainable. Such a committee, which would have to make judgments against
the background of the country's delicate and complex international relations,
could scarcely win many friends and might earn many enemies.
More fundamentally, tinkering with controls may well have unwanted conse-
quences. As the former president of the New York Federal Reserve Bank Allan
Sproul noted:
"We need to avoid experimenting with direct controls, whatever they may be
called, which in times of strain may be interpreted as a forerunner of stronger
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controls of capital outflow, or eVen of all dealings in foreign exchange, which in
turn would heighten the danger of anticipatory withdrawals of foreign funds
from our markets?'
Investors abroad seek and trust bonds denominated in U.S. dollars. A con-
siderable part of foreign dollar bonds issued in the United States has been sold
to nonresidents. Since mid-1963, issues that otherwise would have been floated
in New York have been carried through in European markets but it is the label
"U.S. dollar" that makes them acceptable to investors. The smaller shrinkage
of the purchasing power of the dollar and its greater freedom of use compared
with many other major currencies have not remained unnoticed.
THE BROADER CONTEXT
In this whole context, it needs to be recognized that borrowing's in the United
States are attractive because long-term interest rates abroad, except in Switzer-
land, are higher than in our market. ,This is the result of the very abundance
of U.S. savings, together with the reluctance of the administration to condone
higher costs and lesser availability of credit Yet given the conditions in which
the U.S. economy finds itself this year, interest rates may well tend to rise of
their own accord. This would tend to slow up new borrowings, including new
issues of foreign bonds. Now that, tax relief has been given, materially higher
Interest rates need not darken the prospects of sustained business expansion.
They need not restrain investment and output so long as profit incentives and
profit expectations are encouraging.
? It is neither necessary nor desirable to erect a wall around a particular sector
of the U.S. capital market. Whenever Canada, Japan, and those Western Euro-
pean nations which are not dollar-rich sell bonds in the United States, the pro-
ceeds are used, directly or indirectly, to buy U.S. goods and services. Usually,
there is a direct connection ;trade follows credit.
The business community makes a strong contribution to our balance of pay-
ments. This is unmistakably evidenced by the surplus on merchandise account
and the excess of remitted income over the net outflow of private capital for long-
term investment abroad. U.S. Government policies to redress the balance-of-
payments deficit should encourage this contribution, not hamper it, as does the
proposed tax.
The interest equalization tax may well prove to be a deceptive tourniquet. Its
enactment should serve as yet further evidence of the tendency for a persistent
balance-of-payments deficit to corrupt the principles of a free international capi-
tal market. Government policy should serve not to postpone but to expedite action
to deal with the payments deficit effectively and resolutely.
STATEMENT OF EDWIN D. ETHERINGTON, PRESIDENT OF THE AMERICAN STOCK
EXCHANGE, REGARDING H.R. 8000, INTEREST EQUALIZATION TAX
The American Stock Exchange, as the foremost national securities exchange
In trading common stocks of foreign issues, has a direct interest in the interest
equalization tax as proposed in H.R. 8000. Since the volume of trading in foreign
Issues on the exchange dropped to 47 million shares (15 percent of the total) in
1963 from 56 million shares (18 percent of the total) in 1962, the Impact of the
proposal over the last 41/2 months of 1963 was clear. The pattern of relatively
depressed trading in these issues has continued in 1964.
It is sound policy for the United States to move toward freer trade and greater
mobility of capital among countries. Progress toward these goals is increasingly
urgent for the continuing growth of the interdependent economies of the free
world. H.R. 8000, by tending to impede the free operation of this country's
relatively friction-free capital markets, is inconsistent with the broad press of this
Nation's efforts in international cooperation. The proposed tax would be a
restrictive and at least partially self-defeating measure.
In contrast to the restrictive provisions of H.R. 8000, the proposals of the
President's Task Force on promoting increased foreign investment, set forth in
the report released on April 27, 1964, are affirmative and constructive. This
group proposed a liberalization of capital movements throughout the world by
the removal of exchange controls and by a relaxation of monetary, legal, in-
stitutional, and administrative curbs on capital flows. Fewer, not more, re-
strictions are needed.
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The exchange recognizes the fact that voluminous statistical information has
been placed before the Senate Finance Committee by a series of experts, all of
whom--whatever their position on this proposal?share the administration's
concern over the balance-of-payments problem. The purpose of this statement
Is to make the exchange's position clear in the hope that it will aid the com-
mittee as it seeks a final perspective on the wisdom of this particular approach
to an admittedly difficult question of national policy.
The exchange submits the following points for your consideration:
1. The proposed bill is not addressed to the chief causes of the balance-of-pay-
ments deficit
The underlying assumption of MR 8000 is that private portfolio investment
abroad Is a major cause of this Nation's balance-of-payments deficit. In recent
years, however, date complied by the U.S. Department of Commerce indicate
that private portfolio investment abroad has been relatively insignificant com-
pared to such items as military expenses, unilateral transfers to foreign countries,
tourist spending abroad, direct investments, and net U.S. Government long-term
capital transfers. Accordingly, two critical weaknesses In the proposed bill
are revealed:
First: Significant sources of capital flowing abroad are beyond the reach
of the bill. The measure will not curb the dollar outflow stemming from direct
investments abroad, U.S. Government long-term capital transfers and commercial
bank loans?none of which as yet comes under the interest equalization tnx.
These exempted bank loans in particular have risen markedly in recent months.
Second: The proposed hill is necessarily made relatively meaningless because
of the exemptions it properly contains. Canada, which has been the prime cause
of the outflow of dollars fur new foreign portfolio investment over the year)
will be exempt from the bill, thus reducing even further the limited scope of tin
measure. In the first quarter of 1963 Canada alone accounted for $348 of the
$485 million port folio outflow.
2. Enactment of this bill could ad rcrscly affect the balance of payments by
creating fears of further restrictive measures
Even the most generous estimates indicate that HAI. 8000 %Oil not solve the
halance-of-payinents problem. A Treasury Department orojeetion fore-
sees the bill reducing the outflow of capital to the $500 to $700 million range
that prevailed in 1959-61. Compared to the $1.1 billion total outflow in 1962, a
reduction of only $400 to $600 million in the overall deficit would be realized.
However, if further effect is given to the exemption promised Canada, and if
It Is assumed that the dollar outflow to that country equals the 1962 figure of
$457 million, a maximum reduction in outflow of only $143 million would be
forthcoming.
Paradoxically, this bill could well aggravate the situation IL is designed to
remedy. If enacted, it could create fears abroad of further restrictive measures
designed to curb the net outflow of dollars. Foreign investors own approximately
$12 billion of U.S. securities, Should their concern, result in a weakening
of foreign confidence in the U.S. dollar, it Is conceivable that some foreign
holders of U.S. securities would liquidate their positions. This would cause a
further outflow of dollars. Conversely, the fears of some American investors
about the value of the dollar could motivate them to buy more, rather than fewer,
securities abroad. Iii either CQ8C, the U.S, balance-of-payments picture could
deteriorate further, producing an effect opposite from the one intended. These
are the hazards of a restrictive, as opposed to an affirmative, policy.
3. The proposed bill overlooks the fact that foreign inrcstmcnts produce a con-
siderable part of U.S. income from- abroad
President Kennedy, in his special message to Congress on the balance-of-pay-
ments problem, stated that U.S. income from foreign investment amounted to
$4.3 billion in 1962. He further stated that we can expect "further substantial
Increases in the coming years in U.S. income from these investments."
If this bill achieved Its intended result of discouraging American investment
abroad, the significant anticipated increases in income surely would not be
forthcoming. Moreover, American owners of foreign securities might be tempted
to sell their holdings for fear of retaliatory measures by foreign countries. As
a result, the funds now flowing into the United States through foreign invest-
ments would decline. Accordingly, if the bill wore enacted, the growth of U.S.
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income from foreign investments might be curtailed and the balance of payments
adversely affected.
In most of the years since World War IT, foreigners have been substantial
net buyers of U.S. corporate securities. Thus the flow of capital is not all
one way. In addition, through short-term investment of its large dollar earn-
ings, Western Europe has put more capital into the United States than it has
taken out through long-term borrowing.
It may be that further study of the proposals of the President's Task Force,
as noted above, will indicate areas where legislation could substantially ease the
balance-of-payments problem without the potential far-reaching consequences of
II.R. 8000. Before adopting any proposal raising fears on the part of in-
vestors and adversely affecting U.S. foreign investment income, Congress should
satisfy itself that the bill's long-range impact will not worsen rather than
improve our balance of payments.
4. Exemption for outstanding securities
The proposed tax is to be applicable to the acquisition of both new and
outstanding securities. The Treasury Department, while observing that the
major problem area is in the issuance of new securities?in 1962 the dollar
outflow resulting from new issues of foreign securities amounted to $1.076
billion as compared to $55 million from outstanding securities?feels that
an exemption for outstanding securities would sharply reduce the effectiveness
of the tax because American investors would shift their interest to outstanding
foreign securities. This reason discounts two important factors, First, Amer-
ican investors are not likely to purchase outstanding foreign securities solely
because they are exempt from the tax. Whatever temporary buying pressure
might initially exist would cause the price of the security to rise to a level
that would soon be unattractive. Second, a significant percentage of outstanding
foreign securities, at least those traded on the two principal stock exchanges
in New York, are already owned by Americans. Thus any sale by an American
would not be subject to the tax and would not adversely affect the balance
of payments.
It seems unlikely that an exemption for outstanding securities would ma-
terially reduce the limited effectiveness of the proposed tax. Moreover, foreign.
ers' net purchases of outstanding U.S. corporate securities have traditionally
exceeded American purchases of outstanding foreign securities, thus producing
a net inflow of dollars to the United States. Accordingly, if H.R. 8000 is
enacted, Congress should provide an exemption for outstanding foreign securi-
ties.
CONCLUSION
The provisions of section 4918(c), developed with the Treasury Department
to assure the continued efficient operation of national securities exchanges,
as included in the version of this bill approved by the House of Representa-
tives, are critical elements of the bill. Moreover, an exemption for outstanding
securities, in view of the fact that the major problem area lies in the new
issues field and trading in outstanding securities has traditionally produced
a net inflow of dollars to the United States, would be in the national interest.
The essential position of the exchange, however, is that the bill should not be
enacted.
(Whereupon, at 12:05 p.m., the committee was in adjournment.)
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88TH CONGRESS t HOUSE OF REPRESENTATIVES S REroRT
1st Session f No. 1046
INTEREST EQUALIZATION TAX ACT OF 1963
DECEMBER 16, 1963.?Committed to the Committee of the Whole house on the
State of the Union- and ordered to be printed
Mr. MILLS, from the Committee on Ways and Means, submitted the
following
REPORT
[To accompany H.R. 8000]
The Committee on Ways and Means to whom was referred the bill
(H.R. 8000) to amend the Internal Revenue Code of 1954 to impose
a tax on acquisitions of certain foreign securities in order to equalize
costs of longer term financing in the United States and in markets
abroad, and for other purposes, having considered the same, report
favorably thereon with an amendment and recommend that the bill
as amended do pass.
The amendment appears in italic type in the bill herewith reported
to the House.
I. SUMMARY
H.R. 8000, as reported, provides an interest equalization tax de-
signed to bring the cost of capital raised in the U.S. market by foreign
persons more closely into alinement with the costs prevailing in
markets in other industrial countries. The tax is designed to aid our
balance-of-payments position by restraining the heavy and accelerated
demand on our capital market from other industrialized countries.
The interest equalization tax is a temporary excise tax effective for
the period July 19, 1963 (August 17, for listed securities) through
December 31, 1965.
The bill imposes the tax on the acquisition by a U.S. person of a
debt obligation of a foreign obligor, or stock of a foreign issuer,
which is acquired from a foreign person. The tax on the transfer of
stock is 15 percent of the actual value of the stock at the time of the
transfer. The tax on the transfer of debt obligations varies from 15
percent on obligations with a maturity of 28% years or more down to
2.75 percent for those with a maturity of 3 to 3% years. For debt
obligations with a shorter maturity, no tax is imposed.
95-006-63--1.
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These tax rates are designed to reduce the net rate of return Lo the
U.S. buyer on the foreign securities involved by about 1 percent per
annum, in order to decrease the volume of foreign securities sold in
the U.S. market. It is anticipated that this may well improve the
U.S. balance of payments by from $1.25 to $1.5 billion a year relative
to the. rate in the first 6 months of 1963. It is expected to increase
revenues by up to $30 million a year.
The principal exclusions in the bill relate to?
(1) Securities acquired from a prior Amerienn owner;
i
(2) Securities received n connection with it wide range of ex-
port transactions:
(3) Debt obligations received by commercial banks in the
course of their rommercial banking business;
(4) Direct investments in 10-percent-owned corporatioi s;
(5) Securities of "less-developed-country corporations" and
obligations of less-developed countries;
(6) New security issues which the President exempts in the
interest of international 111011einry stability, presumably new
Canadian securities;
(7) Reserves niaintained by insurance companies doing busi-
neww in foreign countries; am)
(8) Investments of foreign membership dues by labor unions
and other exempt organizations.
The administration has strongly urged the adoption of this bill as
an essential part of the overall program to reduce the balance-of-pay-
ments deficit.
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II. REASONS FOR THE BILL
As indicated in table 1, the U.S. balance of payments has con-
sistently been in a deficit position since 1957, and with the exception
of the year 1957, has been in a deficit position since 1949. The deficits
attributable to the last 6 years have given rise to a depletion of the
U.S. gold reserve of over $7 billion.
TABLE 1.
1949
1950
U.S. balance of payments annually
for 1962 and 1963
[In millions of dollars; quarterly figures
175
?3, 580
for the period 1949-62, and quarterly
to date
seasonally adjusted annual rates]
1961 ?2,370
1962 ?2, 186
1951
?305
1962:
1952
?1,046
I
-2,340
1953
?2,152
II
?1,808
1954
?1,550
III
?1,424
1955
?1, 145
IV
?3, 172
1956
?935
1963: '
1957
520
I
?3,460
1958
?3, 529
II
?4, 956
1959
?3,743
III
?1,024
1960
?3,881
i Excludes receipts from sales of nonmarketable, medlum-term convertible Government securities.
Source: U.S. Department of Commerce.
Thus, on an annual basis the peak deficit in the overall U.S. balance
of payments of $3.9 billion was reached in 1960. Since that time, the
overall deficit has gradually declined to a level of $2.2 billion in 1962.
However, late in 1962 the deficit?in the balance of payments started
to rise again and this trend continued through the first half of 1963.
As indicated in table 1, the overall deficit in the balance of payments
in the fourth quarter of 1962 was $3.2 billion and in the first quarter
of 1963 was $3.5 billion (both figures are seasonally adjusted annual
rates). Then in the second quarter of 1963, this increased to $5
billion on an annual rate basis. This worsening of the balance-of-
payments position occurred despite arrangements for the advance
payment of debt owed the United States by various foreign countries,
despite progress in reducino. net Government outlays of dollars
abroad and also despite efforts over that period by the administration
to bring upward pressures on short-term interest rates and thus
encourage the retention of funds seeking short-term investment in
this country.
The trend in the balance of payments in recent years can more ac-
curately be seen by examining the balance on regular transactions.'
These data are shown in table 2. They indicate that the deficit on
regular transactions in 1962 was in excess of $3.5 billion, or more than
This Includes all regular reoccurring transactions, including those involving tho Government, but does
not include nonscheduled repayments of Government loans, advances from other countries On military
exports, and other special measures taken to reduce the financial burden of the deficit, such as medium-
term borrowings.
3
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$500 million above the deficit in 1961. Moreover, the deficits of $973
million and $1,25s million in the first two quarters of 1963, respec-
tively, when converted to an annual rate, suggest a deficit in these
regular transactions of approximately- $4.5 billion for the first 6 months
of the year. Table. 2 indicates that the major factor in this worsening
of the balance-of-payments position is the outflow of private long-
term capital. The net outflow of this capital increased over $300
million from 1961 to 1962. Moreover, the experience of the first two
-wafters of 1063 suggests that private long-term capital outflows
tiould be expected to reach an annual rate of $3.5 to $4 billion, further
increasing the outflow of long-term capital more than $1.25 billion
above the 1961 level.
TABLE 2.?U.S. balance of payments, 1960 through 3d quarter 1963
lin millions of dollars'
Commercial trade balance
L'ommercial services balance
Italanee on commercial goods and
services'
Military expenditures
Military cash receipts'
Government grunts anti eapitalsiollar
payments Cu foreign countries and inter-
national instlintiOnS
Government capital receipts, excluding
debt prepayments, borrowings, and
(findings'
Remittances and pensions
l'rivaLe capital:
Long-term
Short-term
enrecorded transictions
Balance on regular transactions
Sperial Government transactimis I
Overall deficit
19iX)
2,817
1.458
1961
3,179
2.130
I962
1,089
2,322
1963'
1st
quarter
2d
quarter
3d
quarter
402
615
497
481
530
585
4.275
5,309
.
4,311
1,017

978
1,115
?3.048
?2,931
?3,0213
?748
?725
?707
836
393
673
184
197
171
?1.107
?I.. 116
?1.070
?241
?267
?179
538
533
513
102
120
166
?672
?705
?736
?212
?209
?193
?2.114
?2,143
?2.495
?1,022
?901
?482
?1,438
?1,475
?716
69
?593
31
?683
?065
?1.025
?122
142
?334
?3.913
?3.413
?3,573
?973
?1,2.58
?412
32
673
1,387
458
171
331
?3,881
?2.370
?2,186
?515
?1,087
?81
I Seasonally adjusted but not annual rates.
Nonmilitary merchandise and service transactions less these flnancvd by Government grants and capitol.
Excluding advances on military exports.
'Includes small changes in miscellaneous Government nonliquid liabilities.
Not seasonally adjusted. Includes nonscheduled receipts on Government loans, advances on military
exports, anti sales of nonmarketable medium-term securities, including $350,000,000 of nonmarketabie
medium-term convertible securities In the lot quarter of 1063, 3132,000,000 in the 2t1 quarter of 1063 and
5175,000,000 In the third Quarter.
Source: Survey of Current Business.
One of the major factors in the increase in long-term private capital
outflow has been the very substantial rise in new issues of foreign
securities purchased by U.S, residents. As indicated ill table 3, these
new issues of foreign securities purchased by U.S. residents increased
from $323 million in 1961 to $1,076 million in 1962, an increase of over
$550 million, Moreover, the experience in the first two quarters of
1963 would suggest purchases of these securities [it an annual rate of
about $2 billion. Thus, in this period since 1961 the rate of pur-
chases of these new issues of foreign securities doubled relative to the
volume of purchases in the prior year. As indicated by table 3, the
great bulk of these new securities issues originated in Canada, 'West-
ern Europe, and Japan.
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TABLE 3.?New issues of foreign securities purchased by U.S. residents, 1961 to
3d quarter, 1963 1
[In millions of dollars]
Total
1961
1962
1963
II
Ill
IV
Total
II 2
264
154
65
17
17
In 3
79
14
52
23
11
Canada
Western Europe
Japan
Latin American Republics
Other developed countries
Other less developed countries
International institutions and unallocated_
Total new issues
237
57
61
18
43
95
12
10
35
11
(4)
(8)
(4)
80
112
138
17
19
(0)
1
41
15
48
(4)
ro3
)
294
7
25
5 83
(0)
457
195
101
5 102
60
77
84
368
65
42
12
19
523
170
312
133
461
1, 076
506
518
179
1 Not seasonally adjusted.
2 Revised.
3 Preliminary.
4 Less than $500,000.
5 Includes $75,000,000 issue by Inter-American Development Bank.
0 Not available.
Source: Survey of Current Business and Department of Commerce.
In addition to new foreign securities floated in the United States,
the large volume of outstanding foreign securities sold in the United:
States also has been an important factor in accounting for the deficit
in the balance of payments. United States net purchases of out-
standing foreign securities in recent years, and by quarters (not
enlarged to annual rates) for 1963, are as follows:
Net purchases of outstanding foreign securities
[In millions of dollars]
1959
?140
1960
?177
1961
?353
1962
?55
1963 (1st quarter)
?48
1963 (2d quarter)
?64
1963 (3d quarter)
+51
The substantial improvement suggested by these figures for 1962,
before the announcement of the tax, was centered in transactions in
foreign stocks, as shown by table 4. In good part, this appears to
have reflected some temporary factors. The available data do not
permit a precise analysis of the transactions of U.S. persons with
foreigners since the figures are collected only for purchases and sales
of foreign securities in the U.S. market, whether or not the trans-
actions are with Americans or other foreigners. But it appears that
despite the relatively small net sales of foreign stock in the U.S. market
in 1962, Americans remained large buyers of some foreign stock, while
apparently increasing their sales to foreigners of foreign stock pur-
chased at an earlier time. The size of these gross purchases and sales
is suggested by table 4. The tax should substantially reduce gross
sales by foreigners to U.S. purchasers without at the same time
affecting incentives to sell other foreign securities, already held by
Americans, to foreigners. This could have a substantial favorable
effect on the balance of payments, turning what could otherwise be a
major net minus factor in the balance of payments to a plus factor,
as happened in the third quarter of 1963.
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Iii addition to the direct improvement in the balance of payments
anticipated from including within the tax base outstanding foreign
securities, it is believed essential to cover these securities in any
provision which taxes new foreign issues. If these issues are not
subject to the tax, it could be expected that much of the improve-
ment in the balance of payments brought about by taxing Requi-
sitions of new issues would be offset by much larger acquisitions
by U.S. persons of outstanding foreign issues. To the extent that
sales of outstanding issues are diverted to the United States, the
opportunity for selling new issues in the foreign market is improved,
thereby achieving much the same result as if the new issues were
initially sold in the United States.
TABLE -i. ?Gross transactions in outstanding foreign bonds and stocks, 1960 th:varill
1st half 1963
[In millions of dollars!
Period
Outstanding foreign bonds
Outstanding foreign stocks
Gross sales
by for-
eigners
Gross pur-
chases by
foreigners l
Net pur-
chases by
Amerl-
cans f
Gross sales
by for-
eigners
Gross pur-
chases by
foreigners
Net pur-
chases by
Amer--
cans (-)
1060
-771
660
-102
-575
600
-75
1961 -624
597
-27
-919
593
-326
1962 -782
753
-29
-721
695
-26
1963:
lit quartrt i -175
126
-40
-169
167
1
24 quarto' 1 -175
117
-ss
-197
191
-6
, - - -
Ist hall i -350
243
-107
-363
358
-5
3,1 quarter i -245. 282
34
-116
133
17
Excludes new issues sold by foreigners to C.S. residents or other foreigners, and adjustment to, direct
investment tranStiellonS.
2 Excludes redemptions of bond Issues held by U.S. residen ts and other minor differences between security-
transaction and balance-or-payments data.
Source: Unpublished balance-of-payments data front Commerce Department.
In the third quarter of 1963?most of which followed the announce-
ment- of the tax --table 4 indicates that the net purchases of foreign
stocks and bonds result in a favorable balance of $51 million, which
converts to an annual rate of $204 million. This can be contrasted to
the unfavorable balance in 1962 of $55 million, a difference in the
balance-of-payments position of $259 million. The. comparable gain
from the second quarter to the third was an improvement at an annual
rate of more than $450 million.
There are no signs that the flood of new securities issues which
occurred up through the second quarter of 1963 would of its own
accord fall back to the more sustainable levels of earlier years.
Similarly, there is no indication that the purchases of outstanding
issues by Americans could be expected to decline in the absence of
legislation in this area. Foreign businessmen and foreign local gov-
ernments are becoming more aware of the efficient- marketing facilities
and also the relatively low rates of interest available here, and are
learning how to place securities in the U.S. market. Moreover, as
production costs rise in the European market, business firms are find-
ing it more difficult- to finance their growth from retained earnings.
Titus they can be expected to be in the market: for increased funds.
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The European markets still are not adequately organized to efficiently
supply business needs or the borrowing. requirements of their govern-
ments from the growing savings of their own people, and as a result,
foreign enterprises and governments in the absence of a change in
capital costs, can be expected to Ica toward the United States for
these funds.
Similarly, U.S. underwriters are becoming more familiar with
foreign securities. Moreover, American investors have become more
interested in foreign issues because of the large volume of these
securities now being offered in this country, and because the rate
of return on these securities, relative to the domestic investment
outlets, makes them highly attractive. The unfortunate experience
of the 1920's and 1930's, which in the past has restrained the de-
mand for foreign securities, now appears to have been largely for-
gotten. In addition, the more ready convertibility of currencies in
recent years has lessened the fear of difficulty in obtaining payment
in the United States of income and principal on these securities.
This bill deals with this problem of excess sales of foreign securities
here in the United States by imposing a tax, called the interest equal-
ization tax, on the acquisition by a U.S. person of a foreign security
from a foreign person. In the case of stocks, this tax is 15 percent
of the actual value. In the case of bonds, the tax is graduated by
the remaining length of time to the maturity of the bond, varying
from 2.75 percent for bonds with a period of maturity of 3 to 3% years
(those with a period of less than 3 years are exempt) to the same 15
percent rate applicable to stocks in the case of bonds with a period to
maturity of 281i years or more. The schedule of rates applicable
to bonds is calculated to be the equivalent to raising the interest rate
in the U.S. market by 1 percent. Since the sale of stock is, of course,
an alternative way of raising capital for foreign corporations, the tax
is applied to equities in a manner which will have a comparable effect
on the costs of raising capital by this means.
Looked at from the standpoint of an American contemplating the
purchase of an outstanding security from a foreign person, the interest
equalization tax will reduce the yield of that security by about 1
percent, making the yields available on alternative domestic invest-
ment relatively more attractive. Looked at from the standpoint of
foreign persons raising new money, the interest equalization tax will
raise the cost of obtaining capital in the U.S. market by approximately
this same 1 percent.
The interest equalization tax is expected to raise the cost of obtain-
ing capital in the U.S. market to more nearly the cost prevailing in
most of the industrialized countries abroad. In only two countries,
Switzerland and the Netherlands, are long-term interest rates below,
or comparable with, those presently prevailing in the United States.
However, these countries limit by direct controls the amount of for-
eign borrowing which can occur in their markets. This is also true of
the United Kingdom, which has the largest of the foreign markets.
The United Kingdom until quite recently confined its lending almost
entirely to Commonwealth countries in the sterling area. This is true
even though in the United Kingdom the prevailing interest rate already
is 1 percent or more above the rate prevailing in the United States.
The higher cost to foreign persons of obtaining funds in the United
States as a result of this tax will not prevent the floating of new
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issues, or the sale of outstanding, issues in (Ins country. With the
lax in effect normal market factors will continue to determine which
issues will be marketed in the United States. However, the bill will
stop the dram of funds front this country by foreign borrowers who
tire motivated merely by the fact that long.-term funds may be obtained
here at it shghtly lesser interest rate than generally prevails abroad.
Of course, much the stone results could be obtained by raising the
long-t elm interest rate by 1 percent or more in the United States.
To. achieve such a rise of long-term rates in a market which charac-
terisherilly supplies Many. as much capital for domestic uses
as for foreign, would under present circumstances not only be very
dillicylt but also unwise. Long-term interest rates have remained
relatively steady over the past 3 years, despite rising demands for
funds, because of the substantial ability of this Nation to generate
liquid savings. In this environment, 111011Chlry policy or the use of
other powers of the Government evolving within free markets would
not be capable of bringing about a change in interest rates of sufficient
size to effect a substantial reduction in the flow of funds abroad.
Certainly, attempts to achieve this result would have a restrictive
effect on new domestic investments at the very time additional invest-
ments tire required in this cowary to bring about a higher rale or
growth.
This tax is imposed as a temporary tax effective only throu,711
1965. It is it part of the broader attack on the balance-of-payments
problem, which includes both short- and long-run measures dealing
with all items affecting the balance of payments. Ott one hand, it is
is anticipated that the profitability and attractiveness of domestic
investment will be improved as a result of the tax reduction program
already passed by the House; and, on the other hand, it is anticipated
that its the capital markets in other industrialized countries abroad
become more efficient and are freed of controls, they will, supply
larger share of the world's capital requirements. The termination of
the Lax at the end of 1965 will give Congress an opportunity to review
all of the relevant considerations at that time, when it is hoped these
readjustments in savings and investment patterns and improvements
in the U.S. balance of payments will make it unnecessary to continue
this (4.LN.
The tax is effective with respect to transactions occurring on or after
July 19, 1963, which was the day after the administration proposed
the tax, and the tittle on which it was recommended that the bill he-
effective. Your commit tee believes that it is necessary to make
the tax effective as of I lima date. To do otherwise, would have invited
a flood of transactions in foreign securities after the announcement
of the proposal, but before the effective date. This, of course, would
1111VC SIASULIICIAY worsened the balance-of-payments position.
However, for securitie.s listed on national exchanges the effective date
witS made August 17, 1963, in order to give the exchanges an oppor-
tunity to adjust lo the new procedures.
As a result of this announcement's effect, the interest equalization
tax has already played an important part in reducing the outflow of
capital and in improving our overall balanee-of-payments position.
As indicated by table 2, the outflow of U.S. capital in the forni. of
new issues of foreign securities decreased from 6 n
levels or $50olhon
and $518 million consecutively in the first two. quarters or 1c)63. to
$179 million in the third quarter. The experience in outstanding
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foreign stocks and bonds purchased by Americans in this period is
similar (see table 4). In the first half of 1963, net purchases by
Americans of outstanding foreign stocks and bonds tunounted to $112
million. On an annual rate basis this represents an unfavorable
balance of $224 million. In the third quarter, there was a favorable
net balance of $51 million, or, on an annual rate basis, a favorable
net balance of $204 million. This is a change from the experience
in the first half of over $400 million.
This dramatic improvement in the balance of payments is a con-
crete demonstration of the effect that this bill can be expected to have.
The Treasury Department has estimated that this bill will result in
an improvement in the balance of payments of $1% to billion
from the rate in the first 6 months of 1963. This is suggested from the
changing pattern of U.S. transactions in foreign securities in the third
quarter relative to the first half of this year. Table 5, which
shows selected capital movements in 1962 and in the first three
quarters of 1963 on an annual rate basis, demonstrates the basis for
this expectation. This table shows that the purchase of new issues of
foreign securities in the third quarter of 1963 was at an annual rate of
approximately $1.1 billion below the level of purchases of these
securities in the first half of the year. In addition, the table shows
that net U.S. purchases of outstanding foreign securities have be-
tween the first half and the third quarter of 1963 changed from an un-
favorable balance of $224 million to a favorable balance of $204
million. This is an overall change in the balance-of-payments
position of over $400 million. The combined savings in the balance
of payments for these two categories, therefore, is $1.5 billion. While
it is recognized, of course, that uncertainties related to the imposition
of the tax may have restrained new lending during the third quarter,
it should also be noted that the sizable volume of new issues reaching
the market during that period reflected a working off of the large
backlog of new issues for which commitments had been made prior
to the announcement.
TABLE 5.?U.S. balance of payments?Selected capital movements and deficit on
regular transactions, 1962 to 3d quarter 1963
[Seasonally adjusted annual rates; in millions of dollars]
Full year
1962
1963
1st half
2d
quarter
3d
quarter 1
Selected capital movements:
U.S. transactions in foreign securities:
New iSSUOS
Redeinption
?1, 076
170
?1, 922
166
?1, 944
208
2 ?852
96
Other U.S. purchases (?) or sales (+)
?55
?224
?256
204
Total foreign securities
?961
?0,080
?1,992
?552
Bank credits to foreigners:
Long-term
?117
?318
?708
?572
Short-term
?277?.-772
?1,900
? 8
?1,090
Total bank credit
?394
?2,668
?564
Foreign purchases (+) or sales (?) of U.S. securities
+134
+294
+532
+144
Total securities and bank credit
?1,221
?2,776
?4,128
?972
Balance-of-payments deficit on regular transactions
?3,573
?4,465
?5,032
?1,048
I Preliminary.
< Reflects almost entirely commitments made before July 18.
Source: Commeree Department.
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The period which elapsed after July 18 and before your committee
acted to report this bill has made it possible to observe the effects this
tax could be expected to have on various groups in the United States.
This has demonstrated areas in which the original recommendation of
the Treasury Department would have created hardships and in-
equalities. 'Phis period of approximately 4 months has made it
possible for your committee to make adjustments to the originally
proposed bill to alleviate these hardships and inequalities while at
the same time maintaining the basic concepts of the bill as recom-
mended by the administration. The various exemptions provided,
including those for export. paper, commercial lnink loans, and short-
tenn paper, will assure that our export effort. and the normal recurring
financing of ml ernational business will not be hampered. These
exemptions are explained in the general explanation which follows.
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III. GENERAL EXPLANATION
a. Imposition of tax
This bill, subject to specified exemptions, imposes a tax on the
acquisition by U.S. persons of foreign securities from a foreign person.
It does not apply to pnrchases of foreign securities by U.S. persons
from other U.S. persons. To the extent practicable, the application
of the tax is limited to the area of long-term investment, which in
recent years has had an adverse effect on the U.S. balance of payments.
1. Rate of tax.--A tax of 15 percent of the actual value is applied
to the acquisition by a U.S. person of stock of a foreign issuer. In the
case of the acquisition of a debt obligation of a foreign obligor, the
tax is determined on the basis of the length of time remaining to
maturity of the obligation at the time acquired by a U.S. person in a
taxable transaction. The tax rate increases as the period remaining
to maturity of an obligation increases. No tax is imposed where the
period to maturity is less than 3 years. The tax rates applied are
designed to have the effect of increasing a foreigner's cost of raising
capital in the United States by approximately 1 percent a year.
The schedule of rates is as follows:
The tax, as a
percentage of
actual value,
If the period remaining to maturity is? is?
At least 3 years, but less than 31/2 years 2.75 percent.
At least 31/2 years, but less than 41/2 years 3.55 percent.
At least 41/2 years, but less than 51/2 years 4.35 percent.
At least 51/2 years, but less than 61/2 years 5.10 percent.
At least 61/2 years, but less than 71/2 years 5.80 percent.
At least 71/2 years, but less than 81/2 years 6.50 percent.
At least 81/2 years, but less than 91/2 years 7.10 percent.
At least 91/2 years, but less than 101/2 years 7.70 percent.
At least 101/2 years, but less than 111/2 years 8.30 percent.
At least 111/2 years, but less than 131/2 years 9.10 percent.
At least 131/2 years, but less than 161/2 years 10.30 percent.
At least 161/2 years, but less than 181/2 years 11.35 percent.
At least 181/2 years, but less than 211/2 years 12.25 percent.
At least 211/2 years, but less than 231/2 years 13.05 percent.
At least 231/2 years, but less than 261/2 years 13.75 percent.
At least 26% years, but less than 281/2 years 14.35 percent.
28% years or more 15.00 percent.
The equivalence of the tax to an interest rate increase of 1 percent
for foreign borrowers can be illustrated by the following example.
Assume that prior to the imposition of the tax a foreign borrower and
a U.S. borrower could each obtain $100,000 in the United States for
a 10-year period at an interest rate of 5 percent payable annually.
Thus, each would pay $50,000 in interest spread over the life of the
loan for use of the $100,000. Under the bill, the domestic borrower
could continue to borrow on the same basis. However, since the
American purchasing the debt obligation from the foreign borrower
would also have to pay a tax of $7,700 (7.7 percent rate for debt with
a maturity of 91A to 103? years), presumably the foreign borrowers in
11
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order to raise funds in competition with American borrowers would
have to reimburse the lender for the Lax. One war of doing this
would be to ask the borrower to pay a higher interest rale. had he
been required to pay a 1-percent higher interest- rate, spread over the
10-year period, he would have paid $10,000 additional. The $7,700
in tax, all of which would have to be paid at the beginning of the
10-year period, is approximately the present value of ten $1,000
payments spread over the period of the life of the obligation when
discounted at about the prevailing rate for foreign securities. The
tax passed onto the borrower, therefore is about the equivalent or an
increase in the interest rate of about 1 percent.
The. bill provides no tax on the acquisition of debt obligations
having less (him 3 years remaining to maturity from the date of
acquisition. Interest rates for short-term loans in the United States
can more readily be influenced by monetary policy, when appropriate,
and have been brought into closer alinement with those prevailing in
most.important industrialized countries abroad. Moreover, this ex-
emption will permit the wide variety of transactions relating to inter-
national trade to proceed unhampered. Although your committee is
aware of the fact that the exclusion of short-term loans from tax could
shift. foreign long-term borrowers into the short-terin money market,
it appears unlikely that this effect will occur to an important extent.
Under the bill, debt obligations which are convertible into stock
over more than a 5-year period will initially be taxed as debt obliga-
tions. However, at the time they are converted into stock, they will
be subject to an additional tax equal to the full 15-percent rale which
would have been paid if they initially had been stock, reduced by the
tax previously paid by the person making the conversion. Where the
debt instrument may be converted into stock only within 5 years of
the date of issuance, the instrument is treated under the bill as
initially being stock and at that tnne subject to the 15-percent tax.
Your committee concluded that a debt- obligation which could be
converted into stock over an extended period of time (more than 5
years) should be basically treated as a debt obligation for purposes
of the interest equalization tax. Since the interest equalization tax
is imposed only for a short period (namely, through December 31,
1965) it was believed that these obligations would in all likelihood be
acquired primarily for their debt features. However, your committee
recognized that the treatment- of all convertible instruments as debt
obligations would create a possibility of avoidance whereby foreign
persons could issue short-term debt instruments whose principal
attraction would be the eombination of a low tax rate with favorable
conversion features that would be exercised shortly after the termina-
tion date of the interest equalization tax. Therefore, your committee's
bill treats those obligations which must be converted over a relatively
short. period of time into stock in the same manner as if they mandly
were stock issues. On the oilier hand, longer term convertible debt
obligations are so treated only if actually converted during the period
of time when the tax is in effect.
Permills liable for tax.- The person acquiring the obligation of a
foreign issuer or obligor is subject to tax if .this ,person is a "U.S.
person;" i.e., a citizen or resident of the United States, a domestic
partnership, a U.S. estate or trust, or a. domestic corporation.
Acquisitions made by a State of the United States or by an agency,
instrumentality, or political subdivision of a State, are also subject
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to tax. In addition, corporations created or organized under the
laws of the Commonwealth of Puerto Rico or the Virgin Islands or
other possessions of the United States are treated as U.S. persons.
Thus, for example, acquisition of foreign stock or debt obligations by
Puerto Rican corporations will be subject to tax, but acquisitions of
the stock or debt obligations of Puerto Rican corporations by citizens
or residents of the United States will be exempt.
3. General application of tax.?In general, the tax applies whenever
a U.S. person acquires ownership of stock or debt obligations of a for-
eign issuer or obligor from a foreign person. Under this general rule,
transfers which are not considered to represent a real change in owner-
ship are not to result in the imposition of the tax. For example, trans-
fers between a person and his nominee, custodian, or agent are exempt
from tax, as are transfers from a decedent to his executor or ad-
ministrator. In addition, transfers to a survivor upon the death of a
joint tenant, from a minor to his guardian, and other similar transfers
by operation of law, are exempt from tax. The bill also provides that
the receipt of stock or debt obligations of a foreign issuer or obligor by
an individual citizen or resident of the United States as a gift is not
subject to tax. Your committee also provided that acquisitions re-
sulting from corporate distributions, liquidations and reorganizations
would generally be exempt from tax since such transfers generally
involve neither a substantial change of position nor an outflow of
U.S. dollars. Finally, the receipt of a stock option or similar right
by a U.S, person for any reason connected with his employment by a
foreign corporation will not be subject to tax if the right is nontransfer-
able, otherwise than by will or the laws of descent and distribution, and
is exercisable during the optionee's lifetime only by him.
4. Limitations on amount of tax.?The bill contains a special rule
for the computation of tax where stock or a debt obligation is acquired
as the result of the surrender of another debt obligation, the extension
or renewal of a debt obligation by action by the obligee, or the exercise
of an option or right to acquire stock or debt obligations. In general,
the tax in these eases is equal to the regular tax reduced by the tax
which would have been payable had the option, right, or debt sur-
rendered, exercised, extended, or renewed been taxed at that time.
In these eases the option, right, or debt obligation involved represents
a value the American already had. Where a foreign corporation
issues rights to its shareholders which permit the shareholders to
subscribe to additional shares of the corporation, the tax is based
upon the subscription price.
b. Exemptions from the tax
The bill provides for exemptions for various transactions in order to
avoid creating unnecessary hardship and imparing normal commercial
transactions, as well as to avoid conflicting with other important
national objectives such as the promotion of our export trade and our
assistance to the less developed countries of the free world.
principal exemptions provided are described below.
I. International monetary stability.?Your committee believes that it
is desirable to enable the President of the United States to exempt new
security issues of a foreign country from tax where he determines that
application of tax to such securities imperils, or threatens to imperil,
the stability of the international monetary system. This is in accord-
ance with the treaty obligation of the United States to the Interna-
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tional Monetary Fund. This obligation requires the United States
" * * * to collaborate with the fund to promote exchange sta-
bility * * *."
Your committee has received assurances from the Secretary of the
Treasury that,, under present circumstances, new issues of Canadian
issuers and obligors are the only securities which he would recommend
that the President exempt from tax. Moreover, it is the intent of
your commit tee that the exemption of Canadian securities should be
contingent upon Canadian borrowings returning to their historical
levels and that the exemption should be revoked or limited if Canadian
borrowings exceed amounts required to maintain their international
reserves and reach the abnormal levels attained in 1962 and the first
6 months of 1963. It is understood that the Canadian Government,
through its own interest rate policy_ or otherwise, will maintain borrow-
ings by Canadians in the United. States only to the extent necessary
to permit Canada to attain an equilibrium in its reserve position.
Therefore, should the Canadian balance-of-payments position improve
as a result of recent Government policies to increase exports, it is
expected that the need for Canadian borrowing in the United States
will he reduced. Your committee lois also been assured that the
administration will follow the volume of Canadian borrowing in U.S.
markets closely. Should the total of such borrowing exceed prudent
limits, the President will have discretionary authority to impose a
limitation on the volume of such exempt borrowings. This discre-
tionary power to limit the size of any exemption gives assurance that
the Canadian exemption will not undermine Ow purpose of this tax.
Your committee believes that the Canadian-United States relationship
with respect to the (dose integration of their capitol markets and its
implications for the Canadian -balance of payments is unique, and that
exemption of new issues of Canadian securities under this discretionary
provision should not under normal circumstances be extended to
securities of other countries.
The bill provides that the exclusion is to apply only to original or
new issues. A debt obligation is treated as part of an original or new
issue for this purpose only when it is acquired during the first 60 days
after interest begins to accrue on the obligation. Stock is treated as
part of an original or now issue only when it is acquired from the issuer
by the U.S. person claiming the exclusion.
If the President. by Executive order limits the amount of issues
which may be exempt, or limits the period during which the issues
may be exempt, the exclusion is to apply to those as to which notice or
acquisition is filed first with the Secretary of the Treasury.
2. LPSN developed coluztrie8.?The hill provides that the tax isnot to
apply to acquisitions by U.S. persons of (1) debt obligations issued
or guaranteed by a natioual or local government of a less developed
country, (2) stock or debt obligations of a "less developed country
corporation," or (3) a debt obligation issued by an individual or part-
nership resident in a less developed country in return for property
which is used, conswned, or disposed of wholly within one or more
less developed countries.
'this exclusion is designed to avoid cutting down the flow of private
capital to those nations with chronic capital shortages, urgent devel-
i Artleks of agreement between the rolled States of Amulea and other powers respecting he Inter-
national Monetary Fund, Brett9n Woods. Agreement, art. IV, sec. 4(a).
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opment needs, and limited capability for foreign borrowing on normal
commercial terms. The United States has long recognized a responsi-
bility for assisting these nations in their struggle to achieve improved
standards of living, and the application of the tax to issues of these
countries would work against that objective. Furthermore, the
outflow of portfolio capital to these areas has been limited, never
exceeding $200 million during recent years, and usually running
closer to $100 million.
The bill permits the President to designate any country other than
the following as less developed countries:
Australia Monaco
Austria Netherlands
Belgium. New Zealand
Canada Norway
Denmark Republic a South Africa
France San Marino
Germany (Federal Republic) Spain
Hong Kong Sweden
Italy Switzerland
Japan United Kingdom
Liechtenstein Countries within the Sino-Soviet
Luxembourg bloc
The President may designate an overseas territory, department,
province, or possession of any foreign country as a separate eco-
nomically less developed country. Until the President designates
countries as being economically less developed for purposes of this
tax, all countries, other than those listed above, are to be treated as
economically less developed and all overseas territories, departments,
provinces, and possessions of any foreign country outside the Sino-
Soviet bloc are considered to be separate less developed countries.
Once the President initially designates a foreign country as being
economically less developed for purposes of this tax, he may not
terminate such designation without notifying the Congress of his
intention to do so.
3. Direct investments.?The bill provides that the tax is not appli-
cable to direct investments. Direct investment implies active par-
ticipation in the management of the foreign corporation. Decisions to
make investments of this type largely are concerned with questions of
market position and long-range profitability rather than interest-rate
differentials. Your committee believes that application of this bill,
which is intended to equalize costs as between capital markets, is not
appropriate in that area.
The bill defines as direct investments exempt from tax those acquisi-
tions by a U.S. person of stock or debt obligations of a foreign issuer
or obligor where immediately after the acquisition (or at the end of
that year) the U.S. person owns 10 percent or more of the combined
voting power of all classes of stock of the foreign corporation. In
determining whether or not a person owns 10 percent of the voting
stock, he is considered to own stock owned by corporations in an affil-
iated group of corporations as well as the stock owned directly.
The bill also defines as direct investments exempt from tax the
acquisition of an interest in, or a debt obligation of, a foreign partner-
ship by a general partner if such partner is entitled to a 10-percent or
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greater interest in the profits of the partnership immediately following
the acquisition,
lii general, the 10-percent ownership requirement exempts all t rans-
actions which would .normally be considered business investments.
llowever, your commit tee's attention was directed to thefact that in
certain. foreign countries U.S. persons are prevented by government
regulation from acquiring as much as a 10-percent in in certain
corporations even though the business of the foreign corporation is
directly related to the business or the U.S. person. In such cases (and
in similar eases involving general partnership interests) the bill pro-
vides for exempt mit from the tax even though the U.S. person owns
less than 10 percent of the voting stock of the foreign corporation (or
less than a 10-percent interest in the prol.its or a partnership).
The "direct investment" exception is not to apply if the foreign
corporation or partnership is formed or availed of for the principal
purpose of acquiring stock or debt obligations of foreign issuers or
i
obligors n a case when the 10-perrent owner would be subject to tax
upon acquisition had the stock or debt obligations been acquired
directly by him. Thus, U.S. persons will not he allowed to rorm
"closely held" holding companies for the purpose of acquiring secu-
rities winch would be taxed if acquired directly. Moreover, if a U.S.
person acquires stock or debt obligations of a foreign corporation in
which he owns a 10-percent or greater stock interest, for the purpose
of selling, or offering for sale, any part of the stock or debt obligations
to U.S. persons, the exemption will not apply.
4. Co7runercia1 bank loanK. The bill provides an exclusion from tax
for the acquisition of debt obligations by a commercial bank in the
making of loans in the ordinary course of its commercial banking
business. In psri, this is attributable to the fact that the 2TC11( bulk of
commercial bank loans fall within the less than 3-year matinity range
snd therefore would in any event not be subject to tax. However, this
exclusion also recognizes the special role played by banks in support
of uormal, returrim, financing of the international business of Ameri-
can firms. Also, it permits the banks to continue freely their role in
financing U.S. exports and their conduct of banking operations iii
foreign countries through branches. In this latter ease, their activi-
ties normally consist of receiving deposits in foreign currencies and
making loans in such currencies. These transactions, of course, have
rio effect, on the U.S. balance-of-payments position.
Your committee is aware that a generalized exclusion of this type
could be abused. Although that is not expected, your committee
does consider it necessary to provide specific authority in the bill for
the collection of detailed and timely information on the nature
of, and trends in, bank lending to foreign persons. The informstion
collected under these reporting requirements will provide a basis both
for determining whether a general exclusion of this character .should
be continued and, if not, for indicating the specific ways in wine]] the
general exclusion should then be modified.
The possible need for and practicability of amending this legislation
with respect to loans of commercial banks will be le-viewed by: your
committeo should this evidence suggest that bank lending to indus-
trialized countries abroad. whosc borrowing will otherwise be subject
to tax, is rising in amounts out of proportion to a greners1 expansion
in the banking business or amounts related to the normal recurring
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needs of international trade. A sizable increase in bank lending that
appeared to be related to a diversion of credit. demands from chtinnels
subject to the tax would be a source of particular concern to your
committee.
5. Export financing.?One of the best ways of reducing the deficit
in the U.S.. balance of payments is to increase exports from this
country. American business has had an excellent record in this regard
and to maintain and improve this record it is essential that American
firms have the ability to offer credit facilities to their foreign customers,
whether for short- or long-term loans. Therefore, your committee
has provided for a series of exemptions for stock and debt obligations
of foreign issuers or obligors which are acquired as a result of export
transactions. These are listed below:
A. Guarantees by Export-Import Bank.--The bill provides that the
acquisition of debt obligations which are guaranteed or insured in
whole or in part by the Export-Import Bank (or other U.S. ,Govern-
merit agencies or instrumentalities) are to be exempt from tax. This
exemption is based on the fact that the Export-Import Bank guaran-
tees or insures a loan only if, and to the extent, the debt obligation
received by the U.S. exporter is attributable to the sale of goods
produced in the United States. This exemption applies without regard
to the relationship of the exporter to the producer of the goods.
B. Goods produced in United States.?If a U.S. person acquires
a debt obligation in the course of his trade or business as a result of
the sale of property manufactured, produced, grown, or extracted
in the United States, the bill provides that the acquisition of the
debt obligation is to be exempt from tax if 85 percent or more of the
purchase price in the transaction is attributable to the sale of such
property, and to the performance of services, by the U.S. person.
However, the initial acquisition will in most cases, in effect becomes
subject to tax if the U.S. producer transfers the debt obligation to a
U.S. person other than a commercial bank which acquires it in the
ordinary, course of its commercial banking business or other than to
an agency or instrumentality of the United States. This restriction
on transferability is designed to prevent avoidance of tax by intro-
duction of the exporter into a market transaction normally- financed
by unrelated financial institutions.
C. U.S. contractors and suppliers.--The bill provides that tax is
not to apply to the acquisition of stock or debt obligations if 30 percent
or mot e of the purchase price is attributable to the sale of property
manufactured, produced, grown, or extracted in the United States by,
and services performed by, the person who acquires the stock or debt
obligation. However, this is to be true only if 50 percent or more
of the purchase price is attributable to the sale of property manufac-
tured, produced, grown or extracted in the United States, and serv-
ices performed, by all U.S. persons. This is designed to provide for
a problem called to your committee's attention in its public hearings
on H.R. 8000. It was pointed out that U.S. persons often bid on
an entire foreign project and, as a condition to obtaining the
business, are required to take part of the contract price in the form
of stock or debt obligations of a foreign issuer or obligor. In many
of these contracts, a portion, but not all, of the contract price is
attributable to the sale of U.S.-produced goods. In the contracts
referred to, the foreign stock or debt obligations arc required to be
If. Rept. 1046, 88-1-2
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taken by the principal contractor, even though some of the U.S.-
produced goods width are furnished in connection with the project
may he supplied by U.S. subcontractors. Your committee believes
that imposition of tax on acquisitions of this type might impede U.S.
contractors and suppliers when competing for foreign projects. As
in the case of debt obligations acquired in simple export transactions,
tax would generally apply at the time of transfer (based upon the
initial acquisition price) if the debt obligation is later transferred to a
U.S. person other than a commerical bank which acquires it in the
ordinary course of its commercial bunking business or other than to
an agency or instrumentality of the United States. Similarly, the
Lax will in effect apply to the initial acquisition of stock if the stock is
transferred to any U.S. person before January 1, 190G.
I). Export-related loans. --The bill provides that the acquisition of
debt obligation is to be exempt from tax if the U.S. person making
the loan and receiving the debt obligation can show that the proceeds
of the loan will be used for the storage, handling, transportation,
processing, packaginv, or servicing of property produced by him in
the United States. I his is designed to cover cases where U.S. pro-
ducers, in an effort to distribute their products abroad, are required
to finance the construction of foreign fabricating, distribution, and
marketing facilities which are necessary if U.S. exports of supplier
products are to be increased or maintained. Since the exporter-
producer generally would not transfer (lie debt obligation acquired
in a transaction of this kind, the bill provides that tax will, in most
eases, attach at the time of the transfer (based upon the initial acqui-
sition price) if the U.S. person transfers the debt obligation to a U.S.
person other than a commercial bank which acquires it in the ordinary
course of its commercial banking business or other than to an agency
or instrumentality of the United States. As in the case of debt
obligations acquired by an exporter in payment for exported goods,
and in the case of contractors financing entire foreigh projects, tax
is not payable if the .debi obligation is transferred to a foreign person,
since the acquisition and transfer of a debt obligation under such
circumstances does not have an adverse effect on the balance_ of
'laymen Is.
6. Other exemptions procided.?Your committee's bill also provides
a. series of additional exemptions, described below, designed to deal
with specific types of situations. Some of these relate to businesses
which, because of their nature deal in foreimi securities. Others are
related to natural resource or raw material sources outside of the
United States. The other exemptions are for various other factors.
bl general, these exemptions have one factor in common, however:
the acquisition of the foreign securities is due to factors other than
the interest rate differential between American and foreign security
markets. The, exemptions are as follows:
A. Insurance companies with foreign ti,u-incss. In general, the bill
permits insuranev companies to elect to acquire stock and debt
obligations of foreign issuers and obligors tax free in an amount equal
to 110 percent of their reserves against foreign risks. If such an
election is made, the company must designate stock of foreign issuers,
and debt obligations of foreign obligors having a period remaining to
maturity of 3 years or more, which it owned on December 10, 1003,
as part of such fund. It also is to designate stock and debt obliga-
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tions acquired after December 10, 1963, which it wants to consider
as part of the fund. Once a foreign security is designated as part of
one of these exempt reserve funds, if the insurance company sells the
security to a U.S. person, the U.S. purchaser will pay tax on the
security as if he acquired it from a foreign person. Of course, if it
sells the security to a foreign person, no tax would have to be paid by
it or the foreign purchaser. In addition to this exemption, insurance
companies, like other U.S. persons, may acquire securities tax free
under other sections of the bill. The reason for this exemption can
be explained as follows: Domestic insurance companies often engage
in business in foreign countries through branch operations. In the
conduct of this business, they collect premiums in a foreign currency,
reinvest the premiums in stock and debt obligations payable in that
foreign currency, and must pay liabilities arising under the insurance
contract in the same currency as that in which the premiums are
collected. These transactions do not, of course,, affect the balance-
of-payments accounts of the United States. Moreover, an imposition
of a tax on such transactions would impose an unreasonable burden
on such companies by requiring them, in order to avoid the tax, to
invest their reserves in U.S. securities and thereby expose, themselves
to a foreign exchange risk between the time of investment of premiums
and the time claims under the policy were payable.
B. Underwriters and dealers.?In the case of underwriters and
dealers of foreign securities, the bill provides a procedure which in
effect permits them to purchase these securities from foreign issuers
and obligors and sell them to other foreign persons without tax effect.
Under the provision in the bill, the underwriter is subject to tax when
he buys a security from a foreign person without regard to the person
to whom he intends to sell it. However, if he or a member of the same
distributing group sells it to a foreign person, he may claim a credit
or refund for the tax previously paid. In addition, a dealer in foreign
bonds is exempted from tax on acquisitions made in the ordinary
course of his business if the bonds are resold to foreign persons within
a specified period. A refund of tax is provided for the dealer or
underwriter in such cases since these transactions do not adversely
affect the balance-of-payments position of the United States and
assist in maintaining effective international capital market facilities.
C. Labor unions, etc.?The bill provides an exemption from tax
for a tax-exempt organization (described in sec. 501(c)) operating in a
foreign country through a local organization to the extent the acquisi-
tions result from the investment of contributions or membership fees
paid in the currency of the foreign country by individuals who are
members of the local organization if the securities acquired are held
exclusively for the benefit of the local organization. Representatives
of labor organizations which appeared before your committee stated
that their unions collect dues in foreign currency from their members
who are residents in the foreign country. The unions invest these
dues in stock or debt obligations arising in the foreign country. Sub-
sequently, they dispose of these securities as necessary to meet their
foreign obligations. Your committee believes that transactions of
this type, like the insurance company reserve provisions described
above, should be exempt from tax since they do not affect the U.S.
balance of payments and would unnecessarily expose them to an ex-
change risk. Moreover, investments of this type are not made in
response to interest rate differentials.
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D. Ores and minerals with inadequate supply.--The bill contains
an exemption for loans by U.S. persons to a foreign corporation if
50 percent or more of the total combined voting power of all classes
of stock. of the foreign corporation is owned by U.S. persons and
the foreign corporation extracts or processes ores or minerals. 'lids
exem i
ption s only available, however, if the available deposits in the
lilted States of the ore or, mineral, involved are inadequate to satisfy
the needs of domectie producers. In addition, a U.S. person owning
the, voting stock of the corporation must agree to pay all amount
sufficient to amortize a portion of the loan under a so-called "take-or-
pay" contract by which it agrees either to purchase ft part of the
production of the foreign corporation or to pay it portion of its costs
of operation. lUsually, a U.S. corporation's commitment to finance
a foreign supplier of this type is satisfied through a direct loan from
the U.S. shareholder. Such a loan would be exempt under the
"direct investment" exemption. This exemption, therefore, will be
of limited application but is desirable as a way of providing share-
holders flexibility in the manner in which they finance the acquisition
of foreign ores and minerals such as bauxite, which cannot be acquired
in sufficient. quantities in the United States.
E. Ores and minerals extracted and sold Gutside the United Slates.?
'Pia: bill provides an exemption for debt obligations acquired by a.
U.S. person as a result of the sale by him of ores or minerals (or deriva-
tives of the ores or minerals) extracted outside tho United States if
the foreign purchaser agrees to purchase such ores or minerals for a
period of 3 years or more. Provision is also made in the bill to permit
these companies to acquire debt obligations of foreign obligors tax
free if the proceeds of the loan are to be used by the borrower to install,
niaintain, or improve facilities for the storage, handling, transporta-
tion, processing, or servicing of ores or minerals extracted outside the
United States. Acquisitions of debt obligations made as the result
of the sale of domestic ores and minerals, or the financing of facilities
for their distribution will, of course. be exempt under the general pro-
vision relating to export loans. Since, however, the ores and min-
erals available to U.S. companies may be located in other parts of the
world, this provision extends the exclusion to transactions involving
foreign ores and minerals. If a U.S. person acquires a debt obligation
tax free under this provision and transfers it (before ,January I, 1960)
to a U.S. person, other than a commercial bank receiving it in the nor-
mal course of its commercial banking business, or to an agency or
instrumentality of the United States, he will in most eases be subject
to tax in the same manner as if the original acquisition were taxable.
F. Acquisition required by l'oreigii law.?The bill provides an
exemption from tax in the case of securities acquired by a .5. person
doing business in a foreign country to the extent these acquisit2ons
are reasonably necessary lo satisfy minimum requirements relating to
the holding or foreign securities imposed by the laws of the foreign
country. Insurance companies, with respect to. their insurance
reserves, in effect are allowed to apply this exemption or the special
tax exemption with respect to foreign reserves, whichever results in
time greater holdings of foreign securities. This exemption is provided
because some foreign countries require foreign businesses engaged in
business locally to investment a portion or their assets in securities of
that country as a condition to doing business there. L sually restric-
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tions of this type exist in the case of less developed countries with
shortages of local investment funds and with serious exchange prob-
lems. However, most foreign countries impose restrictions of this
type on regulated industries such as commercial banks, insurance
companies, etc. Since these acquisitions of foreign securities arise
from business necessity and are not influenced by interest rate differ-
entials, the bill provides an exemption in these cases. If a U.S.
person claims an exemption with respect to foreign securities under
this provision and then subsequently disposes of these securities, he
is treated as a foreign person with respect to this transfer. Thus if
he transfers the securities to a U.S. person, this person will generally
be subject to tax on this acquisition.
G. Foreign corporations controlled by Ai; ericans and traded here.?
The bill treats as a domestic corporation for purposes of this tax
certain foreign corporations other than investment companies. The
effect of this is to exempt purchases of their stock from the interest
equalization tax. The foreign corporations qualifying for this treat-
ment are those whose stock is traded on a national securities exchange
or exchanges r4gistered with the Securities and Exchange Commission
exchanges the trading on these U.S. exchanes represented' the principal
market for their stock during 1962 and if more than 50 percent of
the stock was held by U.S. persons (on the latest record date before
July 19, 1963).
c. Administrative provisions
1. Certification procedure.?As indicated previously, the interest
equalization tax does not apply whore foreign securities are purchased
from a U.S. person. To distinguish taxable from nontaxable trans-
actions, the bill provides for the use of a certification procedure.
Under this procedure receipt of a certificate of American wnership
in connection with the acquisition of a foreign security is considered
as conclusive proof of prior American ownership unless the person
receiving it has actual knowledge that the certificate is false.
A substitute procedure is available in the case of securities pur-
chased OD a registered national securities exchange, if the exchange
has adopted rules under which transactions will lee permitted in the
"regular market" only where the seller is a U.S. person. Other
transactions through these exchanges would be treated as "special
contracts." If a broker provides the purchaser with a written con-
firmation that the security obtained for him was acquired in the
"regular market," this will be considered the equivalent of receiving
a certificate of American ownership by the purchaser. The broker
will also provide written confirmation in the case of "special contracts"
which will indicate that the security was not purchased in the regular
market and, therefore, may be subject to tax. A U.S. person selling
on such an exchange may file individual certificates of American
ownership with his broker with respect to each transaction. Alterna-
tively, he may file a blanket certificate of American ownership with
the broker which will qualify all his subsequent sales through the
same account. Essentially the same treatment is available in the
case of over-the-counter trading which is subject to similar rules
promulgated by the National Association of Securities Dealers.
The bill provides a penalty equal to 125 percent of the applicable
tax in the case of a person who willfully executes a certificate of
American ownership or a blanket certificate of American ownership
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which is false in any material respect. The penalty also applies in
the case of false reports of sales to foreign persons. The penalty
is an assessable. one, whiph means that it may be collected in the :3ame
manner as the tax.. This is provided to discourage persons from
executing false certificates. Similar penalties are provided in case
false confirmations arc furnished by members of either registered
national securities exchanges or the National Association of Securities
Dealers. Unless the person acquiring the stock or debt obligation
had actual knowledge that the certificate involved is false in any
material respect., the penalty applicable in the case of false certi-
fication is in lieu of, rather than in addition to, any interest equali-
zation tax.
The, bill also provides criminal penalties for 111e willful execution
of individual and blanket certificates of American ownership or sales
to. foreign persons which are false in any material respect. The
criminal penalty in this case makes the willful execution of a false
certificate a misdemeanor and provides for a fine or not more than
$1,000, or imprisonment for not more than 1 year, or both.
2. Filing returns.-- Tax liability in the case of the interest equaliza-
tion tax is to be reported by the filing on a calendar quarter basis of
returns covering all of the taxable and certain other transactions
occurring within the calendar quarter. The returns must be filed on
or before the last day of the first month following the period for which
the return is made. (However, the first return period commences
July 19, 1963, and ends at the close of the calendar quarter in which
this bill is enacted.)
Returns must be filed and reporting must be made on the return
both with respect to taxable transactions and also nontaxable transac-
tions where exemption certificates were received. However, in the
case of nontaxable transactions, where the purchaser has received
written confirmation from members of a registered national securities
exchange or the National Association of Security Dealers, the trans-
actions need not be reported on these quarterly returns. If required
returns are not filed, a civil penalty of 5 percent of the amount of the
tax is provided, except that the penalty in no event may be less than
$10 or more than $1,0o0. The penalty does not apply where the
failure to file can be shown to be due to reasonable cause.
3. Nondtcluttibility of /cu.?The bill provides that for income tax
purposes, deductions may not as a general rule be taken for the
interest equalization tax by persons acquiring foreign securities.
However, this amount may be capitalized by the person and, therefore,
treated as an amount paid by him for the security. If the interest
equalization tax paid by the U.S. person when added to the cost of a
debt obligation creates bond premium, this premium will be amoi.liz-
able, and deductible, in the same manlier as other bond premium
under existing law; ntunerly, rateably over the life of the bond. If
the foreign seller of the bond reimburses the U.S. person who buys
the bond for part or all of the lax paid by him, this amount is treated
as an item of income to the purchaser at that time. However, in
such eases he also receives a deduction for the tax in a like amount
and to that extent does not add the tax to his basis for the bond.
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d. Effective Date
The bill generally is effective with respect to acquisitions by U.S.
persons of foreign securities made on or after July 19, 1963. This is 1
day after the date Congress received the President's special message
to the Congress on the balance of payments and the public announce-
ment of the principal features proposed by the administration for this
bill. However, a special effective date is provided for acquisitions
of foreign securities acquired on a national securities exchange reg-
istered with the Securities and Exchange Commission. For these
acquisitions the effective date is August 17, 1963. This later effective
date permitted uninterrupted trading in foreign securities on the
exchanges, while they were adjusting their trading rules and pro-
cedures to the requirements of the proposed bill.
Your committee recognized, however, that the application of the
tax to acquisitions resulting from transactions which were in ad-
vanced stages of negotiation on July 18, 1963, would have created
serious hardships. For that reason, the bill provides that acquisi-
tions made after July 18, 1963, are exempt from tax in various situa-
tions such as the four following types of situations:
(1) The acquisition was made pursuant to an obligation which
was unconditional on July 18, 1963 (or was subject only to
conditions contained in a formal contract under which partial
performance had occurred);
(2) The acquisition was made by a person who had taken
every action, on or before July 18, 1963, necessary to signify
approval of the acquisition under the procedures ordinarily
employed by him in similar transactions and had sent the foreign
issuer or obligor a commitment letter in which he set forth the
principal terms of the acquisition;
(3) The acquisition was made by a U.S. person (exempt under
sec. 4915 except for subsec. (c)) who had applied for, and re-
ceived from a foreign government, on or before July 18, 1963,
authorization to make the acquisition, if this authorization
was required in order for it to be made; and
(4) If the acquisition was made before September 17, 1963, of
stock or a debt obligation covered by a registration statement
filed with the Securities and Exchange Commission on July 18,
1963, or within 90 days prior, and the registration statement
had not been amended after July 18, 1963, and before the ac-
quisition, in a manner to increase the number of shares of stock
or the aggregate face amount of the debt obligations covered
by the registration statement.
The bill also provides that tax is not applicable to the acquisition of
foreign stock made pursuant to the exercise of an option or similar
right held on July 18, 1963, by the acquiring person (or by a decedent
from whom he acquired the option or right). U.S. persons who
held employees' stock options on July 18, 1963, may exercise their
options without tax, and persons who held convertible debentures on
July 18, 1963, may convert their debentures to stock without tax.
e. Revenue effect
It is estimated that this bill will result in an annual revenue gain of
up to $30 million in a full year of operation.
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IV. TECHNICAL EXPLANATION OF THE BILL
SECTION 1. SHORT TITLE, ETC.
(a) Short tit/e.?Subsection (a) of section 1 of the bill provides that
the bill may be cited as the "Interest Eq.ualization Tax Act of 1963."
(b) Amendment of 1954 code. -Subsection (b) of section 1 of the bill
provides that whenever in the bill an amendment is expressed in terms
of an amendment. to a section or other provision, the reference is con-
sidered to be made to a section or other provision of the Internal
Revenue rode of 1954.
SECTION 2. INTEREST EQUALIZATION TAX
(a) Imposition of tax. - Subsection (a) of section 2 of the bill adds
to subtitle D of the code (relating to miscellaneous excise taxes) a new
chapter 41, imposing an interest equalization lax and consisting of
sections 4911 through 4920.
SECTION 4911. IMPOSITION OF TAX
(a) In general. --Section 4911(a) imposes a tax on each acquisition
by a U.S. person of stock of a foreign issuer, or of a debt obligation of
a foreign obligor if such obligation has a period remaining to maturity
of 3 years or more. The amount, of tax imposed on each such acquisi-
tion is determined under section 4911(b). The term "acquisition" is
defined in section 4912(a); the terms "United States person," "stock,"
"Foreign issuer," "debt obligation," "foreign obligor," and "period
remaining to maturity" are defined in section 4920.
(b) Amount of tax.- -Paragraph (1) of section 491I(b) provides that
the tax imposed on the acquisition of stock of a foreign issuer is equal
to 15 percent of the actual value of the stock.
Paragraph (2) of section 4911(b) provides that the tax imposed on
the acquisition of a debt obligation of a foreign obligor is equal to a
percentage of the actual value of the debt obligation measured by the
period remaining to its maturity, determined in accordance with the
following t able:
If the period remaining to maturity is?
At least 3 years, but less than 3!,i years
At least 34 years, but less than 4!-i2 yea -
At least 4''; years, but less than ri years__ _
At least 5'4 years, but less than 0Y, years_ __ _
At least IV rears, but less than 74 years
At least 7'4 years, but less than 8!-i years.._ _ _
At least 8'4 years, but less than 9!,4 years_ __ _
At least 9,4 years, but less than ICJ years_ _ _
At least 10Vi veers, but less than Irn years
At least 11'h years, but less than 134 years
At, least 13'4 years, but less than 161-4. years
At least 1.6',4 years, but less than 18!,'. years
At least 18'-; years, but less than 21'4 years
At least 21t?. years, but less than 23'4 years
At least 234 years, but less than 26- Years
At least 26'.4 years, but less than 2.8!4 years
28'.; years or more
The tax, as a percentage of
actual value, is?
2. 75
3. 55
4. 35
5. 10
5. 80
O. 50
7. 10
7. 70
8. 30
9. 10
10. 30
11. 35
12. 25
13. 05
13. 75
14. 35
15. 00
24
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In general, actual value is determined by the consideration paid by a
purchaser in an arm's length transaction. In no event will the actual
value of any stock or debt obligation acquired be considered to be less
than the actual value of the money or other property paid for such
stock or debt obligation.
(c) Persons liable for tax.?Section 4911(c) provides (in par. (1))
that the tax imposed by section 4911(a) is to be paid by the person
acquiring the stock or debt obligation involved. In general, the
person who (immediately prior to a transaction constituting an acqui-
sition under ch. 41) owns the money or other property transferred as
the consideration for the stock or debt obligation acquired is con-
sidered the person who makes the acquisition and is liable for the tax.
The fact that some other person is the registered owner of the stock
or obligee of the debt obligation does not make such person liable for
the tax, or relieve the transferor of the property of liability, if such
other person is not in fact the owner. A nominee, custodian, or
agent who purchases stock or a debt obligation on behalf of his prin-
cipal is not considered as having made an acquisition of such stock
or debt obligation; the person for whom the stock or debt obligation
has been purchased is treated as having made the acquisition. For
example, a broker who purchases stock of a foreign issuer in his
capacity as broker is not considered as having obtained ownership of
such stock even if it is registered in the broker's name pursuant to
the instructions of the person for whom the broker is acting; the
person for whom the broker is acting is treated as having made the
acquisition of the stock.
Section 4911(c) also contains (in par. (2)) a cross reference to section
6681 of the code (added by sec. 5(a) of the bill), which provides for
the imposition of a penalty on the maker of a false interest equaliza-
tion tax certificate. Such penalty may be in lieu of or in addition
to the tax.
(d) Termination of tax.?Section 4911(d) provides that the tax
imposed by section 4911(a) will not apply to any acquisition made
after December 31, 1965.
SECTION 4912. ACQUISITIONS
(a) In general.?Section 4912(a) defines the term "acquisition" as
any purchase, transfer, distribution, exchange, or other transaction
(whether occurring wi.thi.n or outside the United States) by virtue
of which ownership is obtained either directly or through a nominee,
custodian, or agent.
As a general rule, an acquisition is considered as having been made
on the date the consideration is paid. for the stock or debt obligation
acquired. Where a U.S. person enters into an agreement to make a
series of loans to a foreign person over a period of time, each particular
loan is treated as a separate acquisition of 4 debt obligation of a
foreign obligor, occurring as of the date the loan is made. In the
case of an acquisition of stock subject to the rules of a national
securities exchange or national securities association registered with
the Securities and Exchange Commission, the acquisition will nor-
mally be deemed to occur on the settlement date provided in such
rules (whether or not payment is actually made on that date), al-
though the actual value of the stock will normally be fixed as of the
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trade date by reference to the price at which the purchase was effected.
The application of these rules is illustrated by the following examples:
Example (1).?On December 27, 1963, A, a U.S. person, places an
order with his broker to purchase, pursuant to a special contract, 100
shares of the stock of foreign corporation M from a nonresident alien;
the stock is traded on the New York Stock Exchange. The order is
executed on that- date at a price of $10 per share. A gives his check
for $1,000 to his broker on December 31, 1963. Pursuant to the
rules of the exchange, settlement is not due to be made until 4 business
days after the trade date. Because of an intervening Saturday and
Sunday (December 25 and 29, 1963) and holiday (January 1, 1964),
the settlement, date with respect to A's acquisition falls on January
3, 1964. A is considered to acquire the M stock on January 3, 1964.
The actual value of the M stock is $1,000, and A is liable to pay a
tax of $150 with his return covering the first calendar quarter of 1964.
Is'xample (2).?B, it U.S. person, enters into an agreement to make
it series of loans to foreign corporation N. Pursuant to the_ ternis of
the agreement , B transfers $10,000 to N on ,January 1, 1964, $10,000
on March 30, 1964, and $10,000 on June 1, 1965, All of the loans
mature on September 10, 1968. B acquires on ,January 1. 1964,
a debt obligation of a foreign obligor having a period remaining to
maturity of between .1! and 5% years. B acquires on March 30,
1964, a debt obligation of a foreign obligor having a period remaining
to maturity of between 31; and 4!-'2 years. B acquires on June 1, 1965,
a debt obligation of a foreign obligor having a period remaining to
maturity of between 3 and 31(2 years.
-Section 4012(a) also provides that a U.S. person acting as H fiscal
agent in connection with the redemption or purchase for retirement
of stock or debt obligations is not considered to obtain ownership of
such stock or debt obligations, even though such person acts in
en parity tvhich technically may be that of a trustee. The person
on whose behalf the fiscal agent is acting is considered as having
made the acquisitions involved.
In addition, section 4912(a) provides that the exercise of a right to
convert a debt obligation (as defined in sec. 4920(a)(1)) into stock is
deemed an acquisition of stock from the. foreign issuer by the person
exercising such right. Thus, if a U.S. person acquires such a debt
obligation (whether or not from the foreign obligor) and then exercises
the right to convert, thr3e stock so acquired is considered as having been
acquired from the, foreign issuer of the stock at the tune of exercise,
(Sec. 4913(a)(3)(A) contains a special limitation on the amount of
tax that is imposed in certain cases when stock is acquired pursuant
to the exercise of the right to convert a debt obligation into stock;
and see. 2(c)(6) of the bill contains a provision excluding from the
tax the exercise of certain rights to convert debt obligations Nvhich
were held on July 18, 1963.)
Finally, section 4012(a) provides that any extension or renewal
of an existing debt obligation requiring affirmative action of the
obligee is considered the acquisition of a new debt obligation. (Sec.
4913(a)(2) provides a limitation on the tax imposed on an acquisition
of this kind; and sec. -4920(a)(7)(B)(ii) provides a rule, for the treat-
ment of the acquisition of a debt obligation which is renewable without
affirmative action by the obligee.)
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(b) Special rules.?Section 4912(b) contains special rules under
which certain types of transactions are deemed to constitute acquisi-
tions for purposes of the new chapter 41.
Certain transfers to foreign trusts
Paragraph (1) of section 4912(b) provides that any transfer (other
than in a sale or exchange for full and adequate consideration) of
money or other property to a foreign trust is deemed an acquisition by
the transferor of stock of a foreign issuer in an amount equal to the
actual value of the money or property transferred, but only to the
extent that such trust acquires stock or debt obligations which would,
if acquired directly by the transferor, be subject to the interest
equalization tax. If any stock or debt obligation acquired by the
foreign trust would not have been taxable had the acquisition been
made directly by the transferor, then such stock or debt obligation is
not taken into account under this paragraph. This rule is applicable
without regard to whether the transferor is a beneficiary of, or other-
wise interested in, the trust. As a general rule, the owner of property
immediately before its transfer is considered the "transferor" for
these purposes. (Sec. 4913(b) provides a limitation on the tax in
the case of a transfer, deemed to be an acquisition under this para-
graph, which is otherwise taxable under ch. 41.)
The special rule contained in section 4912(b) (1) does not apply to
transfers made to a foreign trust in a sale or exchange for full and
adequate consideration. If, however, the consideration received by
the U.S. person consists of stock of a foreign issuer or debt obligations
of a foreign obligor with a period remaining to maturity of 3 years
or more, the acquisition of such stock or debt obligations is taxable
to the extent otherwise provided in chapter 41. Transfers by a U.S.
person to a foreign trust of which he is a beneficiary are not con-
sidered, simply by reason of his beneficial interest, to be for full and
adequate consideration. The exception to the special rule relating
to a sale or exchange for full and adequate consideration does not cover
loans; loans are not considered sales or exchanges for this purpose.
One additional exception is provided to the coverage of the special
rule contained in section 4912(b)(1). Contributions to a foreign
pension or profit-sharing trust established by an employer, made by
an employee who performs personal services on a full-time basis in a
foreign country (and is not an owner-employee as defined in sec.
401(c)(3) of the code) are not deemed acquisitions of stock of a foreign
issuer. Thus, such an employee can contribute money to a foreign
pension or profit-sharing trust established by his employer, and his
contributions will not be deemed acquisitions of stock of a foreign
issuer even if the trust acquires foreign stock or debt obligations
which would be subject to the tax had the employee acquired them
directly. The exception is not applicable to contributions by an
employer.
The application of section 4912(b) (1) is illustrated by the following
examples:
Example (1).?On July 25, 1964, A, a -U.S. person, transfers $1,000
to X, a foreign trust, and X acquires voting stock of Y, a foreign
corporation, for $800, on September 3, 1964. The direct acquisition
by A of the Y stock would have been taxable to him. A is considered
to have acquired stock of a foreign issuer on July 25, 1964, in the
amount of $800 and incurs a tax of $120 (15 percent of $800).
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Example (2).- -The facts are the same its in example (1). A makes
no further transfers to foreign trust X but. on December 1, 1964, X
acquires from B, a nonresident alien individual, debt obligations of Z,
a foreign corporation, with a period remaining to maturity of 10
years. The diroci acquisition by A of the Z debt obligations would
have been taxable to him. The purchase price of these debt obliga-
tions is $300. A is considered to have acquired (as of July 25, 1964)
stock of a foreign issuer- not a debt obligation of a foreign obligor- -
in on oulditional amount or $200, representing the balance of the
$1,000 transferred to X whirl' remains after the application of $800
to the earlier acquisition. A therefore incurs an additionol tox of $30
(15 percent or $200).
Example (3).--The facts are the same as in example (2), except (hot
B is a prison. incurs no additional tax by reason of the pur-
chase by the trust of t he Z debt obligations. The same result would
follow if B wore it nonresident. alien individual but Z were a less-
developed cam try corpora t ion .
Certain transfers to forcign corporations and partnerships
Paragraph (2) of section 4912(b) provides that any transfer of
money or other property to a foreign corporation or foreign partner-
ship, either (A) as a contribution to the capital of such corporation
or partnership, or (B) in exchange for one or more debt obligations
of such corporation .or partnership if it is a foreign corporation or
partnership formed or availed of by the transferor to acquire (through
such corporation or partnership) stock or debt obligations the direct
acquisition of which by the transferor would be subject to the tax
imposed by section 4911, is deemed an acquisition by such transferor
of stock of such foreign corporation or partnership in an amount
equal to the actual value of the money or property transferred.
Amounts paid to satisfy stuck assessments are considered to be con-
tributions to capital.
The application of section 4912(b)(2) is illustrated by the following
examples:
Example (1).?A, a U.S. person, transfers $1.000 to foreign corpora-
tion M as a contribution to its capital. A is considered to have
acquired stock of M in the amount of $1,000 and the acquisition
(if not otherwise excluded under ch. 41) is subject to tax in the amount
of $150.
Erample (52).?A, it U.S. person, owns 10 percent of the voting
stock of foreign corporation M. all of which he acquired before July 18,
1963. On April 9, 1964, A transfers $5,000 to M in exchange for a
2-year promissory note of M. On June 1, 1965, N1 is availed of
by A for the principal purpose of acquiring, for $3,500, stock of foreign
corporation N. Because of section 4915(c)(1) the exclusion for direct
investments cannot apply to A's acquisition of M's promissory: note;
and because A's acquisition is deemed to be an acquisition ol stock
I he exemption for debt obli!,otions of less than 3 years' maturity does
not apply. Accordingly, the acquisition (if not otherwise excluded
under ch. 411 is subject to tax in (lie an?ount or $730 (15 percent of
$5,000).
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Acquisitions from domestic corporation or partnership formed or ()wailed
of to obtain funds for foreign issuer or obligor
Paragraph (3) of section 4912(b) provides that the acquisition of
stock or a debt obligation of a domestic corporation (other than a
domestic corporation described in sec. 4920(a)(3)(B)), or a domestic
partnership, formed or availed of for the principal purpose of obtaining
funds, whether directly or indirectly, for a foreign issuer or obligor,
is deemed an acquisition from such foreign issuer or obligor of its
stock or debt obligation. The effect of this provision is to treat the
stock or debt obligation of such a domestic corporation or partnership
as that of a foreign issuer or obligor and, therefore, subject to the in-
terest equalization tax unless it is otherwise excluded (as for example,
under sec. 4915, 4916, or 4917) because of the status of (or the rela-
tionship of the acquiring person to) the foreign issuer or obligor; the
status of (or relationship to) the domestic corporation or partnership
will not serve to provide (or prevent) such an exclusion. On the other
hand, this rule is not applicable to a domestic corporation or partner-
ship which obtains capital to be used by it in the active conduct of its
own business, or the active conduct of a business by it as a participant
in a joint venture, even though the corporation or partnership may be
wholly owned by a foreign issuer or obligor. The acquisition and
holding of investments is not the active conduct of a trade or business
for this purpose.
Reorganization exchanges
Paragraph (4) of section 4912(b) provides that an acquisition of
stock or debt obligations of a foreign issuer or obligor by a U.S. person
in an exchange to which section 354, 355, or 356 of the code applies (or
would apply but for sec. 367) is considered an acquisition from the
foreign issuer or obligor in exchange for its stock or debt obligations.
Under this rule, stock distributed in a reorganization is deemed to
have been acquired from the foreign issuer even though actually re-
ceived from another corporation which is a party to the reorganiza-
tion. As a result, a U.S. person receiving stock of the foreign issuer
in such an exchange for stock of another corporation will qualify for
the exclusion provided by section 4914(a)(4). The rule also treats
any stock or debt obligations surrendered in the exchange as stock or
debt obligations of the foreign issuer or obligor. As a result, a U.S.
person acquiring debt obligations of the foreign obligor in such an ex-
change for stock or debt obligations of another corporation will be
entitled to apply the limitation on tax provided by section 4913(a)(2).
Although this special rule does not apply to a domestic corporation
acquiring stock or debt obligations of a foreign issuer or obligor as a
party to a reorganization, such an acquisition may be excluded by
some other provision of chapter 41 (as, for example, sec. 4914(a) (5)
or 4915(a)).
The application of section 4912(b) (4) is illustrated by the following
examples:
Example (1).?A, a U.S. person, owns stock of X, a domestic corpo-
ration. On July 30, 1964, X transfers a portion of its assets to Y, a
foreign corporation, in exchange for 80 percent of the voting stock of
Y. X then distributes the stock of Y to its shareholders in exchange
for X stock. The transaction is one to which section 355 of the code
would apply, although no prior ruling under section 367 is obtained.
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A is considered (for purposes of ch. 41) to have acquired Y stock in a
distribution by Y in exchange for its stock.
Example (2).?B, a, U.S. person, owns stock of M, a foreign corpora-
tion. On July 30, 1964, B surrenders his M stock to N, another
foreign corporation, in exchange for voting stock of N. The trans-
action is one to which section 354 of the code would apply. B is con-
sidered (for purposes of ch. 41) to have acquired the N stock in a dis-
tribution by N in exchange for its stock.
SECTION 4913. LIMITATION ON TAX ON CERTAIN ACQUISITIONS
(a) Certain surrenders. extensions, renewals, and exercises. ?Section
4.913(a) provides limitations on the amount of the interest equaliza-
tion tax otherwise applicable in the ease of certain specified types of
acquisitions.
General rule
Paragraph (1) of section 4913 (a) provides that the limitations 3et
forth in such section are applicable to acquisitions of stock or debt
obligations of foreign issuers or obligors in cases where the acquisition
involved results from--
(A) the surrender to the foreign obligor, for cancellation, of a
debt obligation of such obligor;
(B) the extension or renewal of an existing debt obligation
requiring affirmative action of the obligee; or
(C) the exercise of an option or similar right to acquire such
stock or debt obligation (or a right to convert a debt obligation
into stuck).
By reason of the rule set forth in section 4912(b)(4), transactions
described in subparagraph (A) of this paragraph include certain
transactions in which stock or debt obligations of the foreign issuer or
obligor are received Upton surrender of a debt obligation of another
corporation which is a party to a reorganization.
General limitation
Paragraph (2) of section 4913(a) provides that the tax imposed
upon any acquisition referred to in paragraph (1) of such section,
except in cases to which paragraph (3) applies, will not exceed the
amount of tax imposed by section 4911 less the amount of tax that.
would have been imposed if the debt obligation (or the option or right)
which was surrendered, extended, renewed, or exercised had been
acquired in a transaction subject to such tax immediately prior to
the surrender, extension, renewal, or exercise. For this purpose, a
defaulted debt obligation of a foreign government or subdivision (or
an agency or instrumentality thereof) which has been in default as to
payment of principal for at least 10 years and which is surrendered in
exchange for another debt obligation of that government or subdi-
vision (or agency or instrumentality) is deemed to have an actual
value and period remaining to maturity equal to that of the debt obli-
gation acquired. For purposes of paragraph (2), the term ."option or
right" does not include the right to convert a debt obligation (as de-
fined in sec. 4920(a)(1)) into stock; the limitation on tax upon the
exercise of such a conversion privilege is separately treated in para-
graph (3). (The exercise of certain rights of shareholders and em-
ployees to acquire stock is also subject to the special rules in par. (3).)
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The application of section 4913(a)(2) is illustrated by the following
examples (in which none of the exclusions or exemptions provided by
ch. 41 is applicable):
Example (1).?A is a U.S. person, and M corporation is a foreign
corporation. A surrenders a debt obligation of M, having at the time
a period remaining to maturity of 5% years and an actual value of
$900, in exchange for a debt obligation of M having a period remain-
ing to maturity of 104 years and an actual value of $950. A incurs a
tax of $32.95, representing the amount of tax imposed on the actual
value of the debt obligation acquired (8.3 percent of $950, or $78.85)
less the amount of tax that would have been imposed if the debt
obligation which was surrendered had been acquired in a transaction
subject to tax immediately prior to its surrender (5.1 percent of $900,
or $45.90).
Example (2).?B is a U.S. person, and N is a foreign corporation.
B acquires a debt obligation of N which will mature in 30 days, and
the instrument provides that the obligation will become payable at
maturity unless within the 30-day period prior to maturity the parties
agree to extend the obligation on the same terms for an additional
5-year period. The parties so agree. The actual value of the debt
obligation before and after the extension is $1,000. B incurs a tax of
$43.50, representing the amount of tax imposed on the actual value
of the debt obligation acquired (4.35 percent of $1,000, or $43.50)
less the amount of tax that would have been imposed if the debt
obligation which was extended had been acquired in a transaction
subject to the tax immediately prior to its extension (no tax, since
the debt obligation would have had a maturity of less than 3 years).
Example (3).?On August 5, 1964, C, a U.S. person, acquires for
$100 from X, a nonresident alien, an option to purchase for $100 per
share 10 shares of stock of 0, a foreign corporation. C exercises the
option on January 2, 1965, at which time the option has an actual
value of $500 and the 0 stock has an actual value of $150 per share.
C incurs a tax upon the acquisition of the option of $15 (15 percent
of $100). In addition, C incurs a tax on the exercise of the option of
$150, representing the amount of tax imposed on the actual value of
the stock acquired (15 percent of $1,500, or $225) less the amount
of tax that would have been imposed if the option had been acquired
in a transaction subject to tax immediately prior to its exercise (15
percent of $500, or $75).
Example (4).?D, a U.S. person owning stock of P, a foreign cor-
poration, receives from P, as a distribution with respect to such
stock, rights to purchase 100 additional shares of P stock at a price
of $20 per share. The rights are valid for a period of 1 year from
the date of distribution to the shareholder. D incurs no tax on the
distribution of the rights. D exercises such rights at a time when the
actual value of P stock is $30 per share and the actual value of such
rights equals $10 per share. D incurs a tax of $300, representing the
amount of tax imposed on the actual value of the stock acquired (15
percent of $3,000, or $450) less the amount of tax that would have
been imposed if the rights had been acquired in a transaction subject
to tax immediately prior to their exercise (15 percent of $1,000 or
$150).
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Special limitations
Paragraph (3) of section 9913(a) provides special limitations on
the amount of tax imposed on certain types of acquisitions.
Conversion of debt obligations into stack
Paragraph (3)(A) of section 4913(a) provides a limitation on the
tax imposed on the acquisition of stock pursuant to the exercise of
a right to convert a debt obligation (as defined in sec 4920(a)(1))
into stock, where the person exercising such right (or, in certain eases,
a decedent) was liable for tax on his acquisition of the debt obligation.
'Phe tax imposed upon such an acquisition is limited to the amount of
tax which would have been imposed under section 4911 if the debt
obligation had been treated as stock at the time of its acquisition by
the person exercising the right (or by a decedent from whom such
person acquired the right, by bequest or inheritance or by reason of
such dccendent's death), less the amount of tax paid by the person
(or such decedent) exercising the right as a result of the acquisition
of the debt obligation. (The third sentence of sec. 4912(a) treats
the exercise of a right to COI1Vel't a debt obligation into stock as an
acquisition of stock front the foreign issuer.)
The application of section 4913(a)(3)(A) is illustrated by the
following example:
Eaunp/e. On January 2. 1904, A, a U.S. person, purehases from
nonresident alien X a debt obligation of foreign corporation N. The
debt obligation has a period remaining to maturity of 10 years at the
time of its acquisition by A and has a conversion privilege which is
effective for the full 10-year period. A pays $1,000 for this debt
obligation and also pays an interest equalization tax of $77 (7.70 per-
cent, of $1,000). In June 1904, A exercises the conversion privilege
and exchanges the debt obligation for 200 shares of stock of N. At
the time of the conversion, 200 shares of the stock of N have, all actual
value of $1,500. Under the special rule of section 4913(n)(3)(A), A
is liable for an additional lax or $73 (15 percent or $1,000, less the $77
already paid).
li:xercise of certain shareholders' rights
Paragraph (3)(B) of section 4913(a) states the special rule that the
tax imposed by section 9911 upon the acquisition of foreign stock or
debt obligations as a result of the exercise of certain rights of a share-
holder in a foreign corporation to subscribe for additional shares of
its stock or debt obligations is limited to the amount of tax which
would be imposed by section 4911 if the price paid upon exercise of
such option or right were the actual value of the stock or debt obliga-
tion acquired. The rights covered under paragraph (3)(B) are those
which are distributed to a shareholder with respect to his stock and
which by their terms must expire or terminate within it period not
exceeding 90 days from die date on which the rights are so distributed.
(The general rule and general limitation set forth in pars. (1) and (2)
of sec. 4913(a) are applicable if the right involved is exercised by a
person other than the shareholder to whom it was distributed, or if
the right by its terms need not expire or terminate within the 90-day
period.)
The application of section 4913(a)(3)(B) is illustrated by the
following example:
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Example.?A, a U.S. person, receives in a distribution with respect
to 100 shares of stock he owns in N, a foreign corporation, the right
to subscribe for 1 new share of the stock of N for each 5 shares he
owns. The right by its terms expires on the 60th day after distribu-
tion. A exercises the right and acquires 20 new shares of N stock at
a purchase price of $200. Under the special rule of paragraph (3)(B),
A incurs a tax of $30 (15 percent of the $200 paid for the new stock).
Certain employee stock options
Paragraph (3)(C) of section 4913(a) provides that the tax imposed
by section 4911 upon an acquisition of stock of a foreign issuer by a
U.S. person pursuant to the exercise of an option or similar right
described in section 4914(a) (7) is limited to the amount of tax which
would have been imposed under section 4911 if the price paid for
such stock were its actual value. Thus, the tax imposed upon the
exercise of an employee's stock option described in section 4914 (a) (7)
is based on the option price.
(b) Certain transfers which are deemed acquisitions.?Section 4913(b)
provides a limitation on the amount of tax imposed in a transfer to
which either section 4912(b) (1) or (2) applies. The amount of tax
thus imposed as a result of the transfer of property to a foreign trust,
corporation, or partnership, as the case may be, is limited to that
imposed by section 4911, less the amount of tax paid by the transferor
as a result of the transfer being otherwise taxable as an acquisition
under chapter 41. The application of this rule is illustrated by the
following example:
Example.?A, a U.S. person, transfers $1,000 to a foreign trust in
exchange for a 5-year debt obligation of such trust. A pays an inter-
est equalization tax of $43.50 (4.35 percent of $1,000) as a result of
the acquisition of such debt obligation. Thereafter, the trust acquires
for $1,000 stock of foreign corporation N, the direct acquisition of
which by A would have been subject to tax under section 4911. The
additional tax for which A is liable is limited to $106.50 (15 percent of
$1,000 less the $43.50 already paid).
SECTION 4914. EXCLUSION FOR CERTAIN ACQUISITIONS
(a) Transactions not considered acquisitions.?Section 4914(a)
enumerates certain transactions which are not included in the term
"acquisition" for purposes of the interest equalization tax.
Paragraph (1) excludes any transfer between a person and his
nominee, custodian, or agent. Thus, the term "acquisition" does not
include a transfer of stock or a debt obligation by any person to his
broker, or by a broker to his customer, where the broker is not acting
for his own account.
Paragraph (2) excludes any transfer described in section 4343(a)
of the code, relating to certain transfers by operation of law from
decedents, minors, incompetents, financial institutions, bankrupts,
successors, foreign governments and aliens, trustees, and survivors.
Paragraph (3) excludes any transfer by legacy, bequest, or in-
heritance to a U.S. person, as well as any transfer by gift to a U.S.
person who is an individual. Inter vivos transfers to trusts or other
entities are not excluded.
II. Rept. 1046, 88-1 3
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Paragraph (4) excludes any distribution by a corporation of its
stock or debt obligations to a shareholder with respect- to or in ex-
change for its stock. Thus, a stock dividend, distribution of rights,
or any other distribution to a stockholder of the distributing corpora-
tion's stock or debt obligations? in connection with a reorganization,
liquidation, or redemption, or otherwise is a transfer which is not
considered an acquisition, whether or not it is subject to Federal
income tax. This rule is illustrated by the followink,, examples:
Example (l).?A, a U.S. person, is a shareholder in M, a foreign
corporation. M distributes to A as a dividend, with respect to its
stock, the right to purchase its debt obligations. A is liable for
Federal income tax on the distribution. The receipt by A of the right
to purchase the debt obligations of M is not un acquisition for purposes
of the interest equalization tax.
Example (2).?The facts are the same as in example (1), except-
that A receives a further distribution by M (with respect to its stock)
of debt obligations of foreign corporations N and 0. The acquisition
by A of the debt obligations of N and 0 is not excluded under section
4914(a)(4), since the debt obligations are not those of M.
Example (8).--B, a U.S. person, is a stockholder in P, a domestic
corporation. In a transaction to which section 354 applies, B sur-
renders to I' his stock in P iii exchange for voting stock of R, a foreign
corporation. Under the special rule of section 4912(b) (4), B is deemed
to have acquired the R stock in a distribution by R to B in exchange
for stock of R. The acquisition by B is not considered to be a taxable
acquisition.
Paragraph (5) of section 4914(a) excludes any exchange to which
sect-ion 361 applies (or would apply but for seetion 367), where the
transferor corporation was a domestic corporation engaged in the
active conduct of a trade or business, other than as a dealer in stock
or securities, immediately before- the date on which the assets involved
are transferred to the acquiring corporation. The application of
paragraph (5) is illustrated by the following examples:
Example (/).---On September 3, 1964, X, a domestic corporation
which is engaged in the active conduct of a manufacturing business,
transfers all of its assets to M, a foreign corporation, in exchange for
voting stock of M. Immediately following the transaction, X owns
7 percent of such voting stock. Although no section 367 ruling is ob-
tained, the transaction is one described in section 361. X is not con-
sidered as having made an acquisition of the stock of M for purposes of
the interest equalization tax.
Example (2).?On October 6, 1964, N, a foreign corporation, trans-
fers substantially all of its assets to Y, a domestic corporation, in
exchange for voting stock in Y. The transaction is one described in
section 361, and the Commissioner of Internal Revenue prior to the
transaction has ruled under section 367 that- avoidance of Federal
income taxes was not one of its principal purposes. Included in the
assets transferred by N are stock and debt obligations of foreign cor-
porations 0, P. and R, none of which is a party to the reorganization.
The receipt by I of the stock and debt obligations of 0, P, and R is
not excluded under section 4914(a)(5) since N, the transferor corpora-
tion, is not it domestic corporation.
Paragraph (6) of section 4914(a) excludes any exercise of a right
to convert all indebtedness, pursuant to its terms, into stock, if such
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indebtedness was treated as stock pursuant to the provisions of section
4920(a) (2) (D). Thus, if a convertible debt obligation is one which
is classified as stock in accordance with the special rule of section
4920(a) (2)(D), no tax under chapter 41 will be imposed upon the
exercise of the conversion right. (For the treatment under ch. 41
of stock acquired as the result of the exercise of the right to convert
a debt obligation (as defined) into stock, see sections 4912(a) and
4913(a) (3) .)
Paragraph (7) of section 4914(a) excludes the grant of a stock option
or similar right to a U.S. person who is an individual, for any reason
connected with his employment by a corporation, if such option or
right (A) is granted by the employer corporation, or by its parent or
subsidiary corporation, to purchase stock of any of such corporations,
and (B) by its terms is not transferable by such U.S. person otherwise
than by will or the laws of descent and distribution, and is exercisable,
during his lifetime, only by him. This paragraph does not apply to
any option or right other than the employee stock options described.
The tax imposed on the exercise of an employee stock option or
similar right so acquired is determined under section 4913(a) (3) (C).
For an exclusion from the. tax of acquisitions occurring upon the
exercise of certain options or similar rights held on July 18, 1963,
see section 2(c) (6) of the bill.
(b) Excluded acquisitions.?Section 4914(b) enumerates certain
acquisitions to which the interest equalization tax does not apply.
Paragraph (1) of section 4914(b) excludes acquisitions of stock or
debt obligations by any agency or wholly-owned instrumentality of
the United States. For example, acquisitions by the Export-Import
Bank are excluded.
Paragraph (2)(A) of section 4914(b) excludes acquisitions of debt
obligations by a commercial bank if the bank acquires the debt
obligations in the ordinary course of its commercial banking business.
Paragraph (2)(B) excludes acquisitions of stock or debt obligations
by a commercial bank through foreclosure, where such stock or debt
obligations were held as security for loans made in the ordinary course
of its commercial banking business. The exclusion provided by
paragraph (2) does not extend to trust companies or other financial
institutions not regularly engaged in accepting deposits from customers
and performing other functions related to the commercial banking
business, or to acquisitions by a commercial bank for its investment
portfolio; however, if a person is engaged both in the commercial
banking business and in other businesses or activities, those acquisi-
tions related solely to the commercial banking business (but no others)
are excluded. A. corporation organized under section 25(a) of the
Federal Reserve Act (commonly known as the Edge Act), or a State-
chartered corporation operating under an agreement with the Federal
Reserve Board under section 25 of the Federal Reserve Act, will be
considered a commercial bank for this purpose if it is regularly
engaged in accepting deposits from customers.
Loans made in the ordinary course of a commercial banking business
may take a wide variety of forms and may be made for a multitude of
purposes. While past practices are not necessarily determinative,
the conduct of the business of a commercial bank in the past, as well as
the ordinary course of business by other banks similarly situated, is
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indicative of what will constitute loans made in the ordinary course
of a commercial banking business.
Paragraph (3) of section 4914(19 excludes any acquisition of stock
or debt obligations by a. U.S. person doing business in a foreign country
to the extent that such acquisition is reasonably necessaryto satisfy
minimum requirements relating to holdings of stock or debt obliga-
tions of foreign issuers or obligors imposed by the laws of such foreign
country. This will exclude from the tax acquisitions by insurance
companies (except as limited in the manner discussed below), banks,
and others who are required to make deposits of, or otherwise hold,
stock or debt obligations of foreign issuers or obligois in connection
with business carried on by their foreign branches. The exclusion
applies to acquisitions in amounts reasonably required to comply with
legal requirements, whether such requirements are expressly set, forth
by statute or are imposed by administrative action under applicable
laws. It is limited in amount to holdings of foreign securities required
by the laws or administrative regulations in force at the time of the
acquisition involved.
If any of the requirements imposed by foreign laws relates to the
holding of insurance reserves, the exclusion otherwise allowable under
section 4914(b)(3) with respect to acquisitions by an insurance
company (luring any calendar year is reduced by the maximum
amount of the exclusion which could be allowed under section 4914(e.)
(discussed below) with respect to acquisitions made. by the insurance
company during that year, or by the amount of the insurance re3erves
which must be held in order to satisfy such requirements, whichever
is less. The application of this rule is illustrated by the following
example:
Example.?R, a U.S. person, is an insurance company subject to
taxation under section 831 of the Code. R insures risks relating to
property located in foreign country X, which is the only foreign
country in which it is doing business. Pursuant to the laws of X, R
is required to acquire and hold foreign securities sufficient to maintain
insurance reserves equal to 120 percent of the unearned premiums
and unpaid losses with respect to its insurance and reinsurance of risks
located in X. Accordingly, R makes acquisitions of foreign stock and
debt obligations during the calendar year 1964 in sufficient amounts
so that it holds foreign securities at all times during the year equal to
120 percent of tlw insurance reserves required by X. Since, under
section 4914(e), R would be entitled to exclude up to 110 percent of
its allowable insurance reserve determined under that section. with
respect to the insurance of X risks, only the additional acquisitions
of foreign securities required to be made in order to comply with X's
laws are excludable under section 4914(b)(3).
Paragraphs (4) through (7) of section 4914(b) contain references to
the exclusions provided by section 4914(c) through (f) (discussed
below).
(c) Export credit, etc., transactions.?Section 4914(e) excludes from
the interest equalization tax certain acquisittons of stock and debt
obligations arising from the sale of property or services by L.S.
persons.
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INTEREST Ei.tuniJi
In general
Paragraph (1) of section 4914(c) provides that the acquisition by a
U.S. person of a debt obligation arising out of the sale to a foreign
obligor of tangible personal property or services (or both) is excluded
from tax if--
(A) payment of the obligation is guaranteed or insured, in
whole or in part, by an agency or wholly-owned instrumentality
of the United States; or
? (B) such U.S. person makes the sale in the ordinary course of
his trade or business and at least 85 percent of the purchase price
is attributable to the sale of property manufactured, produced,
grown, or extracted in the United States, or to the performance
of services by such U.S. person (or by one or more includible
corporations in an affiliated group, as defined in sec. 1504 of
the code, of which such person is a member) or to both.
The acquisition of a debt obligation, payment of which is guaranteed
or insured in whole or in part by the Export-Import Bank (or any other
agency or wholly-owned instrumentality of the United States) is
excluded from tax under paragraph (1)(A). Paragraph (1)(B) pro-
vides an exclusion from tax for the ordinary business operations of
U.S. merchant exporters. The acquisition of stock of a foreign issuer
may not be excluded under paragraph (1).
The term "services," as used in section 4914(c) (1) and (2), is not
construed to include functions performed as an underwriter.
The application of section 4914(c)(1) is illustrated by the following
examples:
Example (1).?A, a domestic corporation, sells machinery to foreign
corporation P for $200,000 (in a transaction otherwise taxable under
ch. 41), receiving as payment 850,000 in cash and $150,000 in P's
5-year promissory notes. Payment of the notes is guaranteed by the
Export-Import Bank. Acquisition of the notes by A is excluded
from tax.
Example (2).?M, a domestic corporation, sells an airplane manu-
factured in the United States to X, a foreign corporation, for a total
price of $1 million (in a transaction otherwise taxable under ch. 41),
receiving as payment $100,000 in cash and $900,000 in X's 10-year
promissory notes. The acquisition by M is excluded from tax.
Example (3).?N, a U.S. person, is engaged in business as a merchant
exporter. In the ordinary course of such business N sells equipment
to foreign corporation Y, for $100,000 (in a transaction otherwise
taxable under ch. 41), receiving as payment $30,000 in cash and
$70,000 in Y's 5-year notes. Of the $100,000 purchase price, $90,000
represents the fair market value a the equipment, which was manu-
factured in the United States, and $10,000 is attributable to assembly
and installation operations performed at the destination by a local
contractor on behalf of N. The acquisition of the notes by N is
excluded from tax.
Alternate rule for producing exporters
Paragraph (2) of section 4914(c) provides that the acquisition by
a U.S. person from a foreign issuer or obligor of its stock or debt
obligation is excluded from tax if the stock is received in payment
for, or the debt obligation arises out of, the sale of tangible personal
property or services (or both) to such issuer or obligor and if?
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(A) .at, least- MI percent of the purchase price in the transaction
is attributable to the sale of property manufactured, produced,
grown, or extracted in the United States by such U.S. person
(or by one or more includible corporations in an affiliated group,
as defined in section 1504 of the code, of which such person is
a member), or to the performauce of services by such U.S.
person (or by one or more such corporations), or to both, and
(B) at least 50 percent of the. puicliase price is attributable to
the, sale. of property manufactured, produced, grown, or ex-
tracted in the I Tnited States, or the. performance of services
by U.S. persons, or both.
Goods and services sold by the U.S. person acquiring the stock or debt
obligation involved are counted in meeting the 50 percent requirement.
(as well as the 30 percent test) and U.S. goods and services provided
by others are also counted. Where a U.S. person, such as a con-
struction engineer, acts as contractor for the performance of services,
amounts attributable to services performed by such person or em-
ployees of such person (whether or not within the United States) are
included in determining whether the 30 percent and 50 percent tests
are met; but amounts attributable to services performed by sub-
contractors who are not U.S. persons are not counted.
The application of section 4914(c)(2) is illustrated by the following
examples:
Example (1).--A, a domestic corporation, is in the business of
manufacturing electrival equipment in the United States. Corpora-
tion A contracts to sell such equipment to foreign corporation P and
to arrange. for the construction of a. plant to house the equipment.
P agrees to pay A a total purchase_ price of $1 million?$200,000 in
cash and $800,000 in l''s 5-year promissory notes. The value of the
electrical equipment sold by A is $250,000 and services provided by a
wholly owned domestic subsidiary of A are valued at $100,000. B,
domestic corporation, supplies construction materials manufactured
in the 'United States and valued at $100,000 and services valued at
$50,000. The acquisition by A of the notes of P is excluded from tax.
Example (2).?B, a domestic corporation, is a construction engi-
neering firm. B contracts with foreign corporation 11 for the con-
struction of a plant for $100,000, receiving as payment $30,009 in
cash, $50,000 in R's 5-year promissory notes, and $20,000 in R's
stock. B subcontracts to foreign corporation S the performance
of services in connection with the construction of a road leading to
the plant.; these services have a value or $20,000. The acquisition by
B of the debt obligations and stock of R is excluded from tax.
Export-related loans
Paragraph (3) of section 4914(c) provides that the acquisition
of a debt. obligation by a U.S. person from a foreign obligor is ex-
cluded from tax if the obligation arises out of a loan to increase or
maintain sales or tangible personal property manufactured, produced,
grown, or extracted in the United States by such U.S. person (or by
one or more. ineludible corporations in an affiliated group, as defined
in section 1504 of the code, of which such person is a member), and
if the proceeds of the loan will be used by the obligor for tire
installs-
tion, maintenance, or improvement- of facilities outside the. United
States which will by used for the storage, handling, transportation,
processing, packaging, or servicing of property a substantial portion
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of which is the tangible personal property referred to above. A
loan will not qualify for this exclusion unless the foreign obligor is
committed to invest the proceeds of the loan for the stated purpose.
Whether property sold by a U.S. person (or an includible corpora-
tion) constitutes a "substantial portion" of all of the property with
respect to which a facility is used will depend on the percentage which
the property so sold is of the total of all of such property, and not on
the absolute dollar amount of such sales. The determination will
be made by reference to the reasonably anticipated use to be made
of the facility over the period during which the loan to be excluded
will be outstanding.
The application of section 4914 (c)(3) is illustrated by the following
example:
Example. A, a domestic corporation, is engaged in the business of
producing steel in the United States. Over a period of several years
A has sold to foreign corporation X approximately 40 percent of the
steel fabricated by X in its plant in foreign country Q, and reasonably
anticipates that this relationship will continue indefinitely. In the
interest of increasing or maintaining these sales, A agrees to lend X
$500,000, and X agrees to use the proceeds to construct new steel
fabricating facilities at such plant. A receives 10-year promissory
notes from X in return for the loan. The acquisition of these notes
is excluded from the tax.
Other loans related to certain sales by U.S. persons
Paragraph (4) of section 4914(c) provides that an acquisition by a
-U.S. person of a debt obligation from a foreign obligor is excluded
from tax if the debt obligation?
(A) was received by the U.S. person as all or part of the
purchase price provided in a contract under which the foreign
obligor agrees to purchase for 3 years or more ores or minerals
(or derivatives thereof) extracted outside the United States
by the U.S. person, by one or more includible corporations in an
affiliated group (as defined in sec. 48(c)(3)(C) of the code) of
which such person is a member, or by a corporation at least 10
percent of whose voting stock is owned by such U.S. person (but
only if at least 50 percent of such voting stock is owned by -U.S.
persons each of whom owns at least 10 percent); or
(B) arises out of a loan, made by the U.S. person to the foreign
obligor, the proceeds of which will be used by the obligor for the
installation, maintenance, or improvement of facilities outside the
United States which will be used for the storage, handling, trans-
portation, processing, or servicing or ores or minerals (or deriv-
atives thereof) a substantial portion of which is extracted out-
side the United States by any of the persons or corporations
described in subparagraph (A).
Paragraph (4)(A) of section 4914(c) is applicable to credit extended
in connection with supply contracts of the type described, but not to
any cash loan which may be made in connection with such a contract.
Paragraph (4)(B) is applicable to cash loans, but only when the pro-
ceeds are used for the stated purpose. With respect to paragraph
(4)(B), whether property sold by any person constitutes a "substantial
portion" of all of the property with respect to which a facility is used
will depend on the percentage which the property so sold is of the
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total of all of such property, and not on the absolute dollar amount of
such sales. The determination will be made by reference to the
reasonably anticipated use to be made of the facility over the period
during which the loan to be excluded will be outstanding.
Neither paragraph (4)(A) nor (4)(B) applies to the acquisition of
stock of the foreign person involved or of debt obligations of any
other person.
The application of section 4914(e)(4) is illustrated by the following
examples:
Example (1).?A is a domestic corporation engaged in the business
of selling crude and refined oil. A enters into an agreement. under
which it sells heating oil to foreign corporation M over a period of
10 years for it total consideration of $5 million. In partial payment
of the contract price, A receives M's 10-year promissory notes in the
amount of $2,500,000. The oil is extracted outside the United States
by a corporation of which A owns 30 percent of the. combined voting
power of all classes of stock and U.S. person B owns an additional
20 percent. The acquisition by A of the notes is excluded from the
tax.
Example (2).?The facts are the same as in example (1), except
that A also agrees to make to foreign corporation M a $1 million loan,
the proceeds of which M agrees to use for construction of a refirery.
In return, A receives M's 10-year promissory notes. During the
period in which the loan is to be outstanding, 35 percent of the oil
refined in the facility which M constructs is to be supplied by A
under the contract referred to in example (1). The acquisition by A
of the notes is excluded from the tax.
Cross reference
Paragraph (5) of section 4914(c) contains a cross reference to
section 4914(g), which provides in effect that (except for the exclusion
contained in sec. 4914(c)(1)(A), relating to loans guaranteed or in-
sured by an agency or wholly-owned instrumentality of the U.S.
Government) any of the exclusions allowed under section 4914(c)
may be lost, as a result of certain subsequent transfers.
(d) Loans to assure raw materials gaurces.---Section 4914(d) excludes
from tax the acquisition of debt, obligations where the borrowing
foreign corporation extracts or processes certain ores or minerals arid
where the loan made by the U.S. person will be amortized under so-
called "take or pay" contracts entered into by the shareholders of the
foreign corporation.
General rule
Paragraph (1) of section 4914(d) requires, in order for the exclusion
to apply, that the foreign obligor extract or process ores or minerals
the available deposits of which in the United States are inadequate to
satisfy the needs of domestic producers, and that U.S. persons directly
own at least 50 percent of the total combined voting power of all
classes of stock of the foreign corporation at the time of .the acquisi-
tion involved. It further requires that the loan be amortizable under
a contract- or contracts in which stockholders of the foreign corpora-
tion (including at least. one U.S. person) .agree to pay during the
period remaining to maturity of the obligation, by purchasing a
part of the production of such corporation or otherwise, a portion of
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INTEREST EQUALIZATION rsx--g1P6OBAIXO3R00050b1200001-2
the corporation's costs of operation and costs of amortizing out-
standing loans.
Limitation,
Paragraph (2) of section 4914(d) limits the total exclusions allowable
under section 4914(d)(1) to the amount by which the "applicable
percentage" of the aggregate actual value of the debt obligation ac-
quired and all other debt obligations representing loans theretofore
made to the foreign corporation (by both U.S. and foreign persons)
during the same calendar year which are amortizable under 'take or
pay" contracts exceeds the actual value of similar debt obligations
the acquisition of which by any U.S. person has been excluded from
tax under section 4914(d) during the same calendar year. For this
purpose the term "applicable percentage" means the lesser of (A)
the percentage of the total combined voting power of all classes of
stock of the foreign corporation which is owned by U.S. persons at the
time of the acquisition involved, or (B) the percentage of the corpora-
tion's operating and amortization costs for the calendar year which all
such U.S. persons have agreed to pay. The application of section
4914(d) is illustrated by the following example:
Example.?A, a domestic corporation, owns 60 percent of the only
class of the outstanding stock of foreign corporation M. The remain-
ing stock of M is owned by other foreign corporations. M is engaged
in foreign country X in the processing of bauxite into alumina. The
deposits of bauxite in the United States are inadequate to supply the
needs of U.S. producers of aluminum for alumina.
A enters into a "take or pay" contract with M under which A agrees
(subject to a clause permitting termination of payments in case of
intervening force madeure) to purchase 60 percent of M's alumina
production, or in lieu thereof to pay 60 percent of an amount equal to
M's costs of operation and costs of amortizing outstanding loans.
Similar contracts are entered into by the other shareholders of M.
The following loans are made to M:
Lender
Amount
Date
Foreign corporation B
Foreign corporation C
Domestic corporation D
Domestic corporation E
$500,000
1, 000, 000
2, 000, 000
1, 000, 000
Dec. 15, 1964
Yan. 15,1965
Feb. 1,1965
Feb. 15, 1965
All of these loans are amortizable under the "take or pay" contracts
described above. All are repayable on December 31, 1974, except
the loan made by D, which is repayable on December 31, 1979. The
lenders acquire promissory notes of 1VI in the amounts set forth above,
and the notes have an actual value equal to their face value. None
of the other exclusions provided by chapter 41 is applicable.
D may exclude its acquisition from tax under the provisions of
section 4914(d) only to the extent of $1,800,000 (60 percent of $3
million). D is liable for a tax of $20,600 (10.30 percent of $200,000).
E may exclude its acquisition from tax under such provisions only
to the extent of $600,000 (60 percent of $4 million, or $2,400,000, less
the $1,800,000 previously excluded by D). E is liable for a tax of
$30,800 (7.70 percent of $400,000).
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EREST EQUALIZATION TAX ACT OF 1963
The exclusion allowed by section 4914(d) may in effect be lost as a
result- of certain subsequent transfers. The conditions under whieli
the exclusion may be lost, are set forth in section 4914(g).
(c) Acquisitions by insurance companies doing business in foreign
countries. Section 4914(e) excludes from tax the acquisition of certain
stock and debt obligations by insurance companies doing business in
foreign countries.
In general
Paragraph (I) of section 4914(e) states the general rule that i he tax
imposed by section 4911 does not apply to the acquisition of stock or
a debt obligation by a U.S. person %Odell is an insurance company sub-
ject to income taxation under section R02, 821, or 831 of the code if
it meets the conditions and requirements set forth in section 4914(0.
In general, the tax will not apply to an acquisition if?
(A) the stock or debt- obligation acquired is designated as part
of a fund or assets established and maintained by the insurance
company with respect to foreign risks insured or reinsured by
such company under contracts (including annuity contracts)
which, by their terms, provide that the proceeds will be pryable
only in the currency of it foreign country; and
(11) the actual value of all of the assets held in such fund
immediately alter the stock or debt obligation has been desig-
nated as a part thereof does not exceed 110 percent or the ap-
plicable allowable reserve of such company.
The terin "foreign risks," for purposes of section 4914(e), means risks
in connection with property outside, or liability arising out of activity
outside, or in connection with the lives or health of residents of
countries other than, the United States.
Establishment and maintenance of fund qf assets
Paragraph (2) of section 4914(e) provides that an insurance company
which desires to obtain the benefit of exclusions under such section
shall, as a condition of entitlement to any such exclusion, establish
and maintain a fund (or funds) of assets. A life insurance company
(as defined in see. 801(a) of the code) must. establish a fund of assets
separately for each foreign currency (other than the currency of a
country which qualifies as a less developed rountry) in which the
proceeds of its insurance contracts are payable and for which insurance
reserves are maintained by such company, and with respect to which it
desires to obtain the benefits of such exclusions. Each such fund
must separately meet the requirements of section 4914(e). An insur-
ance company other [hum a life insurance company (as so defined)
must establish a single fund of assets for all foreign currencies (other
tn ha currencies of coun h
tries wit qualify as less developed countries
at the time of the initial designation) in which the proceeds o;' its
insurance, contracts are payable and for which insurance reserves are
maintained by such company, if it desires to obtain the benefits of
exclusions under section 4914(e).
Designaiion of assets
Paragraph (3) of section 4914(e) contains three subparagraphs;
subparagraph (A) provides rules for the initial designation or assets
constituting a fund, subparagraph (B) provides rules for additional
designations of assets after the initial designation, and subparagraph
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INTEREST EQUALIZATION TAX ACT OF 1963
(C) provides a limitation on the designations permitted. (Under sec.
4914(g)(2), if an insurance company designates (or is required to
designate) stock or a debt obligation under sec. 4914(e), it will not
thereafter be considered a U.S. person with respect to that stock or
debt obligation.)
Initial designation
Paragraph (3)(A) requires that an insurance company desiring to
establish a fund (or funds) of assets under paragraph (2) must initially
designate, as part or all of such fund (or funds), stock of foreign
issuers, or debt obligations of foreign obligors having a period remain-
ing to maturity (as of December 10, 1963) of 3 years or more, or both,
which it owned on December 10, 1963, to the extent that such stock
and debt obligations had an actual value as of such date not in excess
(in the case of any such fund) of 110 percent of the applicable allowable
reserve as determined in accordance with paragraph (4)(A). The
designation or designations which an insurance company is thus
required to make must be made first from stock and debt obligations
which were acquired by such company on or before July 18, 1963, and
must not include any stock or debt obligation described in section
4916(a) (relating to less developed countries, less developed country
corporations, etc.). Any initial designation which an insurance
company is required to make under paragraph (3)(A) must be made
on or before the 30th day after the date of the enactment of the new
chapter 41 (or at such later time as the Secretary of the Treasury or
his delegate may by regulations prescribe) by the segregation on the
books of such company of the stock or debt obligations (or both)
designated.
Designations to maintain fund
Paragraph (3)(B) provides that, to the extent permitted by para-
graph (3)(C), an insurance company may claim an exclusion under
section 4914(e) with respect to the acquisition of stock or a debt
obligation of a foreign issuer or obligor after December 10, 1963, if
such company designates such stock or debt obligation as part of a
fund of assets described in paragraph (2) before the expiration of 30
days after the date of such acquisition (and continues to own it until
the time the designation is made); except that any such stock or
debt obligation acquired before the initial designation of assets to the
fund is actually made by segregating such assets on the books of the
company as described above may be designated under paragraph
(3)(B) at the time of such initial designation without regard to the
30-day and continued ownership requirements.
Limitation
Paragraph (3)(C) provides that no designation of stock or a debt
obligation as a part of a fund of assets may be made under paragraph
(3) (A) or (B) to the extent that, immediately thereafter, the actual
value of all of the assets held in such fund would exceed 110 percent
of the applicable allowable reserve determined in accordance with
paragraph (4).
Determination of reserves
Paragraph (4)(A) of section 4914(e) provides that, for purposes of
section 4914(e), the term "allowable reserve" means?
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44 INTEREST EQUALIZATION TAX ACT OF 1903
(1) in the ease of a life insurance company (as defined in
sec.. 801(a) oI the code), the items taken into account under
section. 810(e) of the code arising out of contracts of insurance
and reinsurance (including annuity contracts) which relate to
foreign risks and the proceeds of which are payable in a single
foreign currency (other than the currency of a less developed
country); and
(2) an the case of an insurance company other than a life
insurance company (as so defined), the amount of its unearned
premiums and unpaid losses which relate to foreign risks insured
or reinsured under contracts providing for payment in foreign
currencies (other than currencies of less developed couni.ries).
and which .are taken into account in computing taxable income
under section 832(b) (4) and (5) of the code. (for such purpose
treating underwriting income of an insurance company subject
to taxation under sec. 821 Of the code us taxable income under
sec. 832).
The determination of an allowable reserve of an insurance company
for any calendar year is made us of the close of the previous calendar
year, except as provided in paragraph (4)(B).
Paragraph (4)(B) provides that an insurance company which has
established a fund of assets under section 4914(e) may elect, in such
manner and form as the Secretary of the Treasury or his delegate
shall prescribe in regulations and on or before the date that such com-
pany is required under section 6076 of the code to file its return for
the period in which the last day of any calendar year occurs, to make
the determination of the allowable reserve with respect to such year
as of the close of such year. At the time of making such election, the
company may (if the allowable reserve as so determined is higher than
as determined under par. (4)(A)) designate additional stock or debt
obligations (or both) as part of such fund, so long as the company
still owns such stock or debt obligations at the time of designation and
the actual value of all of the assets held in such fund is not increased
to more than 110 percent of the allowable reserve applicable to such
fund as determined under paragraph (4)(B). In the case of a
life in-
surilnce company (as defined in see. 801(a) of the code), the election
under paragraph (4)(B) is made separately with respect to each fund
of assets established as provided in section 4914(e)(2). Any tax paid
by the company under section 4911 on the acquisition of the addi-
tional stock or debt obligations so designated will constitute an over-
payment of tax; and, under regulations prescribed by the Secretary
of the Treasury or his delegate, credit- or refund (without interest,.
will be allowed or made with respect to such overpayment.
Nonrecognition of artificial increases in, alluwable reserve
Paragraph (5) of section 4914(e) provides that an insurance or re-
insurance contract which is entered into or acquired by an insurance
company for the principal purpose of artificially increasing the amount
determined as an allowable reserve us provided in paragraph (4). of
such section will not be recognized in computing whether an acquisi-
tion of stock or a debt obligation of a foreign itsuer or obligor can be
excluded under section 4914(e). The facts and circumstancesof each
case will be considered in determining whether the principal purpose
was to artificially increase the amount of an allowable reserve.
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The operation of section 4914(e) is illustrated by the following
examples:
Example (1).-R is a domestic insurance company subject to income
taxation under section 802 of the code. R insures the lives of resi-
dents of foreign country X, under contracts the proceeds of which are
payable only in the currency of that country. AS of the close of
calendar year 1962, $500,000 was the amount of R's allowable reserve,
computed in accordance with paragraph (4)(A) of section 4914(e),
with respect to such contracts. R also insures the lives of residents
of foreign country Y under contracts the proceeds of which are pay-
able only in its currency. As of the same date, $200,000 was the
amount of the allowable reserve, similarly computed, with respect to
such contracts.
On December 10, 1963, R owned the following foreign securities,
each having as of that date the period remaining to maturity and the
actual value indicated:
Security
Period to
maturity
(years)
Actual
value
(1) Bonds of foreign corporation A
(2) Notes of foreign country X
(3) Bonds of foreign corporation B
(4) Stock of foreign corporation C
10
2
15
$200, 000
50, 000
100, 000
125, 000
All of such securities had been acquired by R on or before July 18,
1963.
During the period from July 19, 1963, through December 10, 1963,
R engaged in the following transactions:
(a) On July 24, 1963, R acquired a 5-year debt obligation of foreign
corporation D, having an actual value on that date of $2,000; and on
September 10, 1963, R sold that debt obligation.
(b) On July 29, 1963, R acquired a debt obligation of foreign
corporation E, maturing on November 30, 1966, and having an actual
value when acquired of $5,000.
(e) On August 27, 1963, R acquired 500 shares of stock of foreign
corporation F having an actual value on that date of $18,000 and an
actual value on December 10, 1963, of $20,000.
(d) On September 2, 1963, R acquired 10-year bonds of foreign
government Y having an actual value of $100,000 both at the time
of acquisition and on December 10, 1963.
R desires to obtain the benefit of exclusions under section 4914(e)
and therefore on December 31, 1963, establishes two funds of assets,
one with respect to the risks insured in foreign country X and the
other with respect to the risks insured in foreign country Y, by
segregating on its books (in accordance with sec. 4914(e) (3)(A) (i)) the
assets which are required to be designated as part of each fund.
(None of the other exclusions or exemptions provided by ch. 41 is
applicable.)
Before it may designate any other assets, R must designate the
bonds of foreign corporation A, the bonds of foreign corporation B
and the stock of foreign corporation C. R may not designate the
notes of foreign country X, since they had a period remaining to
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maturity of less then 3 years on December 10, 1963. R makes the
following designations:
Allowable reserve
Initial designation:
(I) Bonds of foreign corporation A
(2) Bonds of foreign corporation fl
(3) Stock of foreign e,orporation
Total
Amount remaining to be designate,'
Currency X
fund
Currency 1-
fund
MK 000
200,000
50,000
$220,000
100,000
75,000
2.50,000
300,000
175,009
45,000
In making further designations, R. is not, permitted to designate
the 5-year debt obligation of foreign corporation D, since it was not
owned by R. on December 10, 1963. It is also not permitted to desig-
nate the debt obligation of foreign corporation E, since on December
10, 1963, the debt obligation had a period remaining to maturity of
less than 3 years. R most designate the 500 shares of stock of cor-
poration F and the bonds of foreign country Y. R makes the following
designations:
(1) Stock of foreign corporation
(2) Bonds of foreign country Y
Currency X Currency Y
fund fund
$00,000
M, 000
$16, 000
Total, initial designation 32.5. 000
200,000
Example (2).?The facts are the same as in example (1), and R has
made the initial designations described therein. It now desires to
designate additional foreign stock and debt obligations which it has
acquired after December 10, 1963. R engaged in the following foreign
security transactions after December 101 1963, and prior to January
1, 1904:
(a) On December 21, 1963, R acquired a 5-year debt obligation of
foreign corporation II, which had an actual value of $10,000; this was
sold on December 27, 1963.
(b) On December 24, 1963, R acquired stock in foreign corporation
J, which had an actual value of $20,000,
(c) On December 26, 1963, R acquired a 15-year debt obligation of
foreign corporation K, which had an actual value of $5,000.
Under section 4914(e)(3)(B), R may maintain the funds it has
established by designating additional assets as part, of the funds to
the extent allowed under section 4914(e). The 5-year debt obligation
of II, which was sold on December 27, 1963, may be designated by
R despite the fact it is not owned by R on December 31, 1963, if such
designation is made on December 31, 1963, at the time of the initial
designation of assets. The stock acquired by R on December 24,
1963, and the debt obligation acquired by R on December 26, 1963,
may also be designated by R us part of a fund on December 31, 1963,
or on any date thereafter (UI) to 30 days after the date of acquisition)
on which they are owned by R. Accordingly, R designates the debt
obligation of II, the stock of J, and the debt obligation of K as part
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of the fund established with respect to risks insured in foreign country
X.
Example (3).?The facts are the same as in example (1). R, after
making the initial designation of assets in the funds established for
currency X and currency Y, makes other acquisitions of foreign securities
during the calendar year 1964. As of the close of the calendar year
1963, $600,000 is the allowable reserve with respect to risks payable
in the currency of foreign country X.
On June 10, 1964 R acquires a 10-year debt obligation of foreign
corporation P, having an actual value of $10,000. At the time of
such acquisition the actual values of the assets in the X currency
fund and the Y currency fund are such that the designation of the
P debt obligation would bring the total actual value of the assets
of each such fund to an amount greater than 110 percent of their
respective allowable reserves. Accordingly, R is not able to designate
the P debt obligation as part of a fund of assets under section 4914(e).
R thus is required to (and does) pay an interest equalization tax of
$770 (7.70 percent of $10,000) with respect to its acquisition of the
debt obligation of P.
However, R continues to hold the P debt obligation and on January
25, 1965, files its return with respect to transactions which occurred
during the last quarter of the calendar year 1964. At such time R
determines that the amount of its allowable reserve as of the close of
the calendar year 1964 with respect to currency X risks was $620,000.
The actual value of the P debt obligation on January 25, 1965, was
$12,000, and the actual value of all assets held in the X fund on that
?date was $640,000. Under the special election provided in section
4914(0)(4) (B), R may designate the P debt obligation as an asset of the
X fund since such designation would not raise the total actual value of
the X fund assets on January 25 above $682,000 (110 percent of
$620,000). Pursuant to regulations prescribed by the Secretary of the
Treasury or his delegate, R is permitted to obtain a refund or credit
of the $770 tax paid on the acquisition of the debt obligation of P.
(1) Acquisitions by certain tax-exempt labor, fraternal, and similar
organization,s having foreign branches or chapters.?Section 4914(f)
provides that the tax imposed by section 4911 does not apply to the
acquisition of stock or debt obligations by a U.S. person which is
described in section 501(c) of the code, is exempt from taxation under
subtitle A of the code, and operates in a foreign country through a
local organization or organizations, to the extent that such acquisition
results ''from the investment or reinvestment of contributions or
membership fees paid in the currency of such country by individuals
who are members of the local organization or organizations, and the
stock or debt obligations acquired are held exclusively for the benefit
of the members of any of such local organizations. The term "local
organizations" includes all branches, chapters, and similar entities,
located and operating in a foreign country, which are chartered by, or
affiliated or associated with, the parent or central organization, and
subject to the general supervision of, and examination by, such parent
or central organization. The term "membership fees' covers dues,
fees, and assessments which are paid by the local membership; how-
ever, premiums (including deposits and assessments) paid to a mutual
insurance company or association referred to in section 501(c) (15) of
the code are not considered membership fees or contributions. A
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U.S. person will meet the exclusive holding requirements of section
i
4914(f) f the stock or debt obligations involved are held exclusively
for the benefit of the members of any or all of the local organizations
in the particular foreign country.
An exclusion allowed under section 4914(1) may, in effect, be lost
as a result of certain subsequent transfers. The conditions under
which the exclusion may be lost are set forth in section 4914(g).
(g) Loss of entitlement to exclusion in case of certain subsequent
transfers.?Section 4914(g) provides in effect for the loss by 15.S.
persons of the benefits of certain exclusions previously allowed under
section 4914 upon subsequent transfers of the stock or debt obligations
involved.
In general
Paragraph (1) of section 4914(g) sets forth provisions relating to
the loss of the exclusions provided in section 4914 (c), (d), and (f)
upon the subsequent transfer of the debt obligation or stock involved.
In, the case of the exclusion of a debt obligation from tax under the
provisions of section 4914(c) (relating to export credit, etc., trans-
actions), other than paragraph (1)(A) thereof (relating to debt
obligations guaranteed or insured by an agency or instrumentality
of the United States), or under the provisions of section 4914(d)
(relating to loans to assure raw materials sources), the acquiring
person becomes liable for tax under section 4911 if the debt. obligation
is subsequently transferred by him before the termination of the tax to
any U.S. person otherwise than?
(A) to an agency or wholly-owned instrumentality of the
United States;
(B) to a commercial bank acquiring the obligation in the ordi-
nary course of its commercial banking business; or
(C) in a transaction described in section 4914(a)(1) (transfers
between a person and his nominee, custodian, or agent), a trans-
action described in section 4914(a)(2) (certain transfers by oper-
ation of law as enumerated in sec. 4343(a) of the code), or a
transaction (other than a transfer by gift) described in section
4914(a)(3) (transfers by legacy, bequest, or inheritance).
A debt obligation the acquisition of which is excluded from tax under
section 4914(c)(1)(A) (because guaranteed or insured by an agency
or instrumentality of the United States) may be transferred to any
person without loss of the exclusion.
In the case of the exclusion of stuck from tax under the provisions
of section 4914(c)(2) (alternate rule for producing exporters), the
acquiring person becomes liable for tax under section 4911 if the stock
is subsequently transferred by him before the termination of the tax to
a U.S. person otherwise than in a transaction described in section
4914(a)(1), a transaction described in section 4914(a)(2), or a trans-
action (other than a transfer by gift) described M section 4914(a)(3).
In the case of the exclusion of stock or a debt obligation from tax
under the provisions of section 4914(f) (relating to acquisitions .by
certain tax-exempt labor, fraternal, and similar organizations having
foreign branches or chapters), the acquiring person, becomes liable for
tax under section 4911 if the stock or debt obligation is subsequently
transferred by it before the terininat ion of the tax to any U.S. person.
Where an exclusion is lost under the provisions of section 4914(g)(1)
and liability for the tax is incurred by the transferor with respect to the
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stock or debt obligation involved, such liability is incurred at the time
of the subsequent transfer. The amount of the tax due is equal to the
amount of tax for which the transferor would have been liable had the
exclusion not originally applied with respect to the acquisition. No
liability is imposed under section 4914(g) (1) upon the transferee.
The application of section 4914(g)(1) is illustrated by the following.
examples:
Example (1).?M, a domestic corporation, on June 15, 1964, sells an
airplane manufactured in the United States to X, a foreign corporation,
for a total price of $1 million, receiving as payment $100,000 in cash
and X's 10-year promissory note having an actual value of $900,000.
At that time, the acquisition by M is excluded from tax under section
4914(c) (1)(B). On July 1, 1965, M sells the note to P, a domestic
corporation which is not a commercial bank, for $800,000. M incurs
liability on July 1, 1965, for tax in the amount of $69,300 (7.7 percent
of $900,000).
Example (2).?B, a domestic corporation, is a construction engineer-
ing firm. On September 1, 1964, B sells its services to foreign corpora-
tion R for the construction of a plant for $100,000, receiving as pay-
ment $80,000 in cash and stock of R having an actual value of $20,000.
At that time, the acquisition by B is excluded from tax under section
4914(c) (2). On February 15, 1965, B sells the stock to P, a domestic
corporation which is a commercial bank, for $18,000. B incurs
liability on February 15, 1965, for tax in the amount of $3,000 (15
percent of $20,000).
U.S. person treated as foreign person on disposition of certain securities
Paragraph (2) of subsection 4914(g) sets forth a special rule with
respect to the disposition by a U.S. person of stock or a debt obliga-
tion the acquisition of which by such person was excluded from tax
under section 4914(b) (3), or which was designated (or required to be
designated) under section 4914(e). If a U.S. person, after December
10, 1963, sells or otherwise disposes of stock or a debt obligation which
was so excluded or designated (or required to be designated), such
person is not, with respect to that stock or debt obligation, considered
a U.S. person. Accordingly, the acquisition of such stock or debt
obligation by any other U.S. person is not excluded from tax under
section 4918 (relating to prior American ownership).
In cases to which paragraph (2) applies, no liability for tax is im-
posed upon the U.S. person making the sale or other disposition.
Since such person is not considered a U.S. person for this purpose,
however, such person may become subject to penalty under section
6681 or 7241 of the code if he executes a certificate of American owner-
ship with respect to such stock or debt obligation or sells such stock or
debt obligation under the coverage of a blanket certificate of American
ownership.
The application of section 4914(g)(2) is illustrated by the following
examples:
Example (1).?R, a life insurance company, establishes a fund of
assets with respect to foreign currency X. Under paragraph (3)(A)
of section 4914(e), R is required, as part of its initial designation of
assets with respect to such fund, to designate 100 shares of P corpora-
tion stock which it owns. However, the shares are not at any time
so designated. In June 1964, R sells the P stock to a U.S. person.
H. Rept. 1046, 88-1 -4
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Under the special rule of section 4914(g)(2), R is treated as a foreign
person with respect to such stock and is not able to execute a certificate
of American ownership with respect thereto.
Example (2).?B, a U.S. company doing business in foreign country
X, is required by the laws of that country to place a deposit of $5,000 in
local securities with that government during the time B continues
to do business in X. 13 purchases two 10-year debt obligations of
foreign corporation N having a total actual value of $5,000, and de-
posits these with X. B has an exclusion under section 4914(13)(3)
with respect to these two acquisitions. In January 1965, B sells
one of the debt obligations to a U.S. person. B cannot give a certifi-
cate of American ownership to the purchaser. The U.S. person who
acquires the debt obligation of N from B is subject to the provisions
of chapter 41 to the same extent as if B were a foreign person.
SECTION 4915. EXCLUSION FOR DIRECT INVESTMENTS
(a) In general.?Section 4915(a) provides that the tax imposed by
section 4911 does not apply to the acquisition of stock or a !debt
obligation of a foreign corporation or foreign partnership where the
acquiring person is investing in a foreign corporation or foreign
partnership in which he has a substantial ownership interest.
Excluded acquisitions
Paragraph (1) of section 4915(a) states the general rule that an
acquisition by a U.S. person of stock or debt obligations of a foreign
corporation or foreign partnership is not subject to the interest
equalization tax if immediately- after the acquisition such person
(or one or more includible corporations in an affiliated group, as
defined in sec. 1504 of the code, of which such person is a member)
owns (directly or indirectly) 10 percent or more of the total com-
bined voting power of all classes of stock of such foreign corporation,
or if such person owns (directly or indirectly) 10 7ercent or more of
the profits interest of such foreign partuersaip. (Under sec.
4920(a)(2), any interest of a partner in a partnership is included
within the definition of the term "stock.") Stock owned, directly
or indirectly, by or for a foreign corporation or foreign partnership
is considered as being owned proportionately by its shareholders or
partners. The exclusion for direct investments applies to acquisitions
from the corporation or partnership or from third parties, and to
contributions of capital to the foreign corporation or foreign partner-
ship by a person holding at least 10 percent of the voting power of
all classes of stock of the corporation, or at least 10 percent of the
profits interest of the partnership, immediately after making such
capital contribution.
The application of section 4915(a)(1) is illustrated by the following
examples:
Erampie (I).-----On March 31, 1964, A, a U.S. person, acquires 100
shares of the only doss of stock of foreign corporation N from the
corporation. which immediately thereafter has a total of 1,000 shares
outstanding. A's acquisition of the 100 shares of N. stock is excluded
from tax as tlw acquisition of a direct investment.
1,,Irarn ph. facts are the same as in example (1), except
I hat later in 19414 A lends N $100.000. taking a 5-year promissory note
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in return. A's acquisition of the indebtedness of N is excluded from
tax as the acquisition of a direct investment.
Example (3).?The facts are the same as in example (1), except
that later in 1964 A purchases from R, a nonresident alien, an addi-
tional 50 shares of the stock of N. A's acquisition of the 50 shares of
stock of N is exempt from tax as the acquisition of a direct invest-
ment.
Example (4).?On April 15, 1964, A, a U.S. person, acquires a 10
percent interest in the profits of foreign partnership M. M acquires
100 percent of the voting stock of foreign corporation 0. Sub-
sequently, A lends 0 $100,000, taking a 5-year promissory note in
return. A's acquisition of the indebtedness of 0 is excluded from
tax as the acquisition of a direct investment since A is considered to
own 10 percent of the stock of 0.
Overpayment with respect to certain taxable acquisitions
Paragraph (2) of section 4915(a) provides that the tax paid on the
acquisition of stock of a foreign corporation or foreign partnership by
a U.S. person will constitute an overpayment if such person contin-
uously holds such stock from the time of its acquisition to the last
day of the calendar year in which the acquisition was made and as of
such last day owns 10 percent or more of the total combined voting
power of all classes of stock of the corporation or 10 percent or more
of the profits interest of the partnership. Paragraph (2) further pro-
vides that under regulations prescribed by the Secretary of the
Treasury or his delegate, credit or refund (without interest) will be
allowed or made with respect to such overpayment. This provision
permits a credit or refund on acquisitions of stock if the acquiring
U.S. person is unable to meet the direct investment requirements of
section 9915 (a)(1) in a single acquisition but does meet such require-
ments through a series of acquisitions in the same year. The exclusion
does not apply to the acquisition of a debt obligation by the U.S.
person prior to his acquisition of the requisite 10-percent interest in a
foreign corporation or foreign partnership.
The application of section 4915(a)(2) is illustrated by the following
example:
Example.?On each of September 1, October 1, November 1, and
December 1, 1964, A, a U.S. person, acquires from S, a foreign corpora-
tion, 2,500 shares of the only class of stock of foreign corporation N,
which has a total of 100,000 shares outstanding. On September 15,
1964, A lends N $10,000, taking a 5-year promissory note in return.
On December 15, 1964, A lends N an additional $10,000 on the same
terms. On December 31, 1964, A holds all 10,000 shares of stock so
acquired. A is entitled to a refund (without interest) of the tax paid
on the acquisition made on September 1, and a credit (without in-
terest) against the tax applicable to the acquisitions made on October
1 and November 1. The acquisition of stock made on December 1 is
excluded from tax under section 4915(a) (1) as a direct investment.
A incurs a tax of $435 (4.35 percent of $10,000) on the acquisition of
the 5-year promissory note of N on September 15, 1964; but the
acquisition of the similar debt obligation of N on December 15, 1964,
is excluded from tax as a direct investment.
(b) Special rule for Government-controlled enterprises.?Section 4915
(b) provides that a U.S. person will be considered to meet the direct
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investment ownership requirement of section 4915 (a)(1) with respect
to a foreign corporation or foreign partnership if (A) the government-
of a foreign country or any political subdivision thereof (or an agency
or instrwnentality of such a aoverninent), directly or indirectly,
restricts to less than 10 percent The percentage of the total combined
voting power of all classes of stock of such corporation or the per-
centage of the profits interest in such partnership which may be owned
by such U.S. person;
(B) such U.S. person owns at least 5 percent
of the total combined voting power of so much of such stock, or at
least 5 percent of so much of such profits interest, as is not. owned
by such foreign government, subdivision, agency, or instrumentality;
(C) a trade or business actively conducted in one or more foreign
countries by such U.S. person (or by one or more corporations in
an affiliated group, as defined in sec. 48(c)(3)(C) of the code, of which
such person is a member) is directly related to the business carried
on by such foreign corportion or partnership; and (D) such person,
and one or more other U.S. persons each of whom satisfies (B) and
(C), together meet the 10 percent direct investment requirement.
The application of section 4915(b) is illustrated by the following
example:
Example.?Corporation A, corporation B, and corporation C are
U.S. corporations. Each has a wholly-owned foreign subsidiary which
is actively engaged in selling petroleum products in foreign country
M. Country M permits foreign corporation 1' to be formed to con-
struct and operate an oil pipeline in country M. An agency of coun-
try M acquires 50 percent of the only class of stock of F and the re-
maining 50 percent is allocated by country M among the Oil companies
doing business in that country. Under this allocation, A acquires 9
percent, B acquires 7 percent., and C acquires 3 percent of the stock of
F (constituting 18, 14, and 6 percent, respectively, of the stock not
owned by the agency of M). All three acquisitions are excluded from
tax as direct investments.
(c) Exception for foreign corporations or partnerships formed or
availed of for tax avoidance.?Section 4915(e) prevents the application
of the exclusion for direct investments in certain cases.
In general
Paragraph (1) of section 4915(c) provides that the exclusion for
direct investments under section 4915(a) does not apply if the foreign
corporation or foreign partnership involved is formed or availed of
by the U.S. person for the principal purpose of acquiring, through the
foreign corporation or foreign partnership, an interest in stock or
debt obligations the acquisition of which would, if made directly by
the U.S. person, be subject to the interest equalization tax.
Thus, if A, a U.S. person, acquires 10 percent of the stock of N,
foreign corporation engaged primarily in the business of investing,
reinvesting, or trading in foreign securities the direct acquisition of
which by A would be subject to interest, equalization tax, the acquisi-
tion is not excluded under section 4915. Moreover, even if M is
not engaged in such activity at the time of the acquisition by A, the
acquisition would not be excluded under such section if M is later
availed of by A (prior to the termination of the tax) principally for the
purpose of acquiring for A an interest in a portfolio of foreign securities.
On the other hand, if M actively engages in the conduct of a business
other than a securities business and acquires debt obligations as an
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incident of such business, it is not considered to be availed of for the
proscribed purpose.
Commercial banks, underwriters, and required holdings
Paragraph (2) of section 4915(c) provides that the "formed or
availed of" exception to the exclusion from tax for direct investments
in foreign corporations and foreign partnerships is not operative in
cases where the foreign corporation or partnership is principally
acquiring foreign stock or debt obligations because of legal require-
ments imposed as a condition to doing business in a foreign country
or, in the case of a foreign corporation or partnership engaged in
business as an underwriter (within the meaning of sec. 4919(0)(1)) or
in the business of commercial banking, where transactions are made
in the ordinary course of such business.
Thus, the fact that a U.S. person acquires stock or debt obligations
of a foreign corporation or partnership which in turn acquires stock
and debt obligations of other foreign issuers and obligors?
(A) in making loans in the ordinary course of its business as
a commercial bank,
(B) in the ordinary course of its business of underwriting and
distributing securities issued by other persons, or
(C) to satisfy minimum requirements relating to holdings of
stock or debt obligations of foreign issuers or obligors imposed by
the laws of foreign countries where such foreign corporation or
partnership is doing business,
will not, standing alone, be considered an acquisition of an interest in
stock or debt obligations of foreign issuers or obligors by the U.S.
person for purposes of the exclusion under section 4915.
Loss of entitlement to exclusion or refund where foreign corporation or
partnership is availed of for tax avoidance
Paragraph (3) of section 4915(c) provides that where an acquisition
is excluded from tax as a direct investment under section 4915(a) (1),
or a credit or refund of tax has been received under section 4915(a) (2)
with respect to acquisitions made during a calendar year, but the
foreign corporation or foreign partnership is availed of by the acquiring
person (after the acquisition or calendar year involved but before
the termination of the tax) for the principal purpose of tax avoidance
as described in paragraph (1) of such section, such person will incur
liability for the tax under section 4911 at the time the foreign corpora-
tion or partnership is availed of for such purpose; and the amount of
such tax will be equal to the amount of the tax which would have
applied under section 4911 if the direct investment had not previously
been excluded, or (in a case involving a credit or refund under sec.
4915(a) (2)) to the aggregate amount of tax for which such person was
liable under section 4911 upon his acquisitions of the stock or debt
obligations involved.
(d) Exception for acquisitions made. with intent to sell to U.S. per-
sons.?Section 4915(d) provides that the direct invest lents exclusion
is inapplicable if stock or debt obligations of a foreign issuer or
obligor are acquired by a U.S. person with an intent to sell, or to
offer to sell, any part thereof to U.S. persons. Thus, if a U.S. under-
writer acquires 10 percent or more of the stock of a foreign corporation
with a view to the distribution of any part of such stock to U.S.
persons through resale, the acquisition is not excludable under section
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INTEREST EQUALIZATION TAX ACT OF 1963
4915(0. (However, if all or part of the stock acquired is sold to
persons other than U.S. persons, a credit or refund of the interest
equalization tax imposed nifty be allowed with respect to these
sales under sec. 4919.) On the other hand, if a domestic corporation,
solely to carry out a plan for expanding its markets abroad, Requires
10 percent or more of the stock of a foreign corporation but later,
for sound business reasons, disposes of its interest to a U.S. person,
such acquisition will not be considered to have been made with an
intent to sell, or to offer to sell, such stock to U.S. persons, and it will
be excluded under section 4915 from the tax.
SECTION 4191G. EXCLUSION FOR TNVESTM ENTS IN LESS 1) EVELOPFD
COUNTRIES
(a.) General rulr.?Section 4916(a) provides an exclusion from the
interest equalization tax for investments by U.S. persons (in stock or
debt obligations of foreign issuers or obligors) which constitute invest-
ments in a less developed country. These investments are -
(1) a debt obligation issued or guaranteed by the government of
a less developed country, by a political subdivision of such a
country, or by an atgeney or instrumentality of such a govern-
ment;
(2) stock or a debt obligation of a less developed country
corporation.' and
(3) a debt. obligation issued by an individual or partnership
resident in a less developed country in return for property which
is used, consumed, or disposed of wholly within one or more less
developed countries.
A debt obligation otherwise qualifying for this exclusion will not be
disqualified because it is guaranteed by a person other than one
described in section 4916(a) or because it is repayable in the currency of
a country which is not considered less developed.
(b) Less developed country defined,? Section 4916(b) defines the term
"less developed country." Except for certain countries and areas
(specified in such section) which may not be designated as less devel-
oped countries, the designation of may
to be considered eco-
nomically less developed for this purpose is left to Executive order.
For the interim period prior to the issuance of an Executive order
under the new chapter 41, all countries designated as less developed
(under see, 955(c)(3) of the code) by Executive Order No. 11071,
dated December 27, 1962 (designating certain areas as economicElly
less developed countries for purposes of subpts. A and F of pt. III of
subch. N, and sec. 1248 of ch. 1 of the rode), will be considered to
be less developed for purposes of the interest equalization tax. This
includes all countries, and overseas territories, departments, provinces,
and possessions of countries (other than areas within the Sino-Soviet
bloc), except those specified. The countries designated as less
developed for purposes of section 4916 need not (except for the
interim period referred to above) be the same as those designated
as less developed in any Executive order under section 955(c)(3) of
the code. The designation of a country as a less developed country
under section 4916 can be terminated (after such interim period)
only by at further Executive order after 30 days' notice to the Congress.
Any such termination will not affect the treatment of acquisition,
occurring prior to the issuance of the terminating Executive order.
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(c) Less developed country corporation defined.?Section 4916(c)
defines the term "less developed country corporation."
In general
Paragraph (1) of section 4916(c) defines a less developed country
corporation as one which (for the applicable periods described in
par. (2)) (A) meets the requirements of section 955(c) (1) or (2)
of the code; or (B) has gross income 80 percent or more of which
is derived from sources within less developed countries, and assets
80 percent or more in value of which consists of property described
in clauses (iii), (iv), and (v) of section 955(c) (1)(B) of the code.
For this purpose, the determination of whether a foreign country
is a less developed country is to be made in accordance with section
4916(b).
Section 955(c) (1) of the code provides that a corporation will qualify
as a less developed country corporation if it conducts one or more
active trades or businesses in one or more less developed countries,
derives 80 percent or more of its gross income from less developed
countries, and has 80 percent or more in value of its assets consisting
of?
(A) property used in such trades or businesses and located in
less developed countries;
(B) money and deposits with persons carrying on the banking
business;
(C) stock, and obligations which at the time of their acquisi-
tion have at least a 1-year maturity, of any other less developed
country corporation;
(D) obligations of a less developed country;
(E) investments required because of restrictions imposed by
a less developed country; and
(F) property described in section 956(b) (2) of the code, relating
to exceptions from the term "United States property."
For purposes of section 955(c) (1), whether income is derived from
sources within less developed countries is determined under regulations
prescribed by the Secretary of the Treasury or his delegate.
Section 955(c) (2) of the code provides that the term "less developed
country corporation" also includes a foreign corporation 80 percent
or more of the assets of which consists of assets used, or held for use,
for or in connection with production of income described below an
property described in section 956(b)(2), relating to exceptions from
the term "United States property", and 80 percent or more of the
gross income of which consists of?
(A) gross income derived from, or in connection with, the
using (or hiring or leasing for use) in foreign commerce of aircraft
or vessels registered under the laws of a less developed country,
or from, or in connection with, the performance of services
directly related to use of such aircraft or vessels, or from the sale
or exchange of such aircraft or vessels, and
(B) dividends and interest received from foreign corporations
which are less developed country corporations within the meaning
of such section 955(c)(2) and 10 percent or more of the total
combined voting power of all classes of stock of which is owned
by the foreign corporation, and gain from the sale or exchange
of stock or obligations of foreign corporations which are such
less developed country corporations.
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Under. paragraph (1)(B) of the new section 4916(c), a foreign
corporation will be regarded as a less developed country corporation
even if it is not engaged in the active conduct of one or more trades
or businesses in less developed countries, if it has 80 percent or more
of its income from sources within less developed countries and has
80 percent or more in value of its assets in--
(A) stock, and debt obligations which at the time of their
acquisition have at least a 1-year maturity, of any less developed
country corporation;
(B) obligations of a less developed country; and
(C) investments which are required because of restrictions
imposed by a less developed country.
For purposes of paragraph (1)(B) of section 4916(c), whether income
is derived from sources within less developed countries is to be deter-
mined under the seine rules as those applicable under section 955(c)(1)
of the code.
Applicable periods
Paragraph (2) of section 4916(c) sets forth the applicable periods
for which a corporation must meet the requirements contained in
paragraph (1) of such section in order to qualify as a less developed
country corporation. These periods are -
(A) the annual Accounting period of the foreign corporation
immediately preceding the one in which the acquisition involved
is made, if it had such an accounting period;
(B) the annual accounting period in which the acquisition is
made; and
(C) the next succeeding annual accounting period.
If an acquisition is made in the first annual accounting period of a
newly-formed foreign corporation, the acquisition will be excluded
from the tax if the forei!,n corporation meets the applicable require-
ments for that accounting period and the next succeeding accomitng
period. If an acquisition is made in the final accounting period of a
foreign corporation, the acquisition will not be excluded, unless the
special rules of section 4916(c)(3) are applicable.
Special rules for treatment of corporationA as less developed country
corporations
Paragraph (3) of section 4916(c) provides that a foreign corporation
will be deemed to be a les3 developed country corporation with respect
to any acquisition if it is established to the satisfaction of the Secre-
tary of the Treasury or his delegate before the acquisition occurs (or,
in the case of an acquisition occurring before or within 60 days after
the date of the enactment of the bill, pursuant to application made
within such period following enactment as may be prescribed by the
Secretary of the Treasury or his delegate in regulations) that the
foreign corporation met the applicable requirements of section
4916(c)(1) for the annual accounting period (if any) immediately
preceding the accountinn, period in which the acquisition is made,
and may reasonably be expected to satisfy such requirements for the
annual accounting period in which the acquisition is made and the
next succeeding annual accounting period. In the case of an acquisi-
tion occurring on or before December 10, 1963, a foreign corporation
?vill be treated as a less developed country corporation if the require-
ments of section 4916(c) ( 1) are met for the annual accounting period
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immediately preceding the annual accounting period in which the
acquisition occurred.
The elective ruling procedure provided for in section 4916(c) (3)
is available for both new and outstanding issues. A ruling may be
issued even if the foreign corporation is newly organized and has had
no accounting period referred to in section 4916(c) (2) (A). A ruling
may not be issued, however, if the foreign corporation had an account-
ing period referred to in section 4916(c) (2) (A) but did not qualify
as a less developed country corporation for such period. If a ruling
is issued by the Secretary of the Treasury or his delegate under sec-
tion 4916(0)(3), the foreign corporation's subsequent failure to meet
the requirements of section 4916(c)(1) for the annual accounting
period in which the acquisition is made or the next succeeding annual
accounting period will not result in loss of the exclusion.
Treatment of corporations as less developed country corporations in
other cases
Paragraph (4) of section 4916(c) permits a U.S. person to treat a
?foreign corporation as a less developed country corporation for pur-
poses of section 4916, even though no ruling under section 4916(c) (3)
has been obtained, if such corporation has met the applicable require-
ments of section 4916(c) (1) for the annual accounting period (if any)
immediately preceding the accounting period in which the acquisition
involved is made and such person reasonably believes that such
corporation will satisfy such requirements for the current and next
succeeding annual accounting periods; but a person relying upon this
paragraph is subject to possible subsequent liability for tax as provided
in section 4916(d) (1).
(d) Subsequent liability for tax in certain cases.?Section 4916(d)
provides in effect for the loss of exclusions previously allowed under
section 4916(a) upon the happening of certain subsequent events.
Stock and debt obligations of certain corporations
Paragraph (1) of section 4916(d) provides that if a ruling is not
obtained from the Secretary of the Treasury or his delegate with
respect to an acquisition of stock or a debt obligation of a foreign
corporation under section 4916(0)(3), and such corporation is treated
under section 4916(c)(4) as meeting the applicable requirements of
section 4916(c)(1) but fails to meet such requirements either for the
annual accounting period in which the acquisition involved is made or
for the next succeeding annual accounting period, the U.S. person
making the acquisition involved will incur liability for the interest
equalization tax on the last day of the accounting period of the
foreign corporation with respect to which such failure occurs (prior
to termination of the tax), in an amount equal to the tax which would
have been payable under section 4911 if the exclusion had not applied
at the time of the acquisition. This rule is illustrated by the following
example;
Example.?On April 1, 1064, A, a U.S. person, acquires for $10,000
from B, a nonresident alien, bonds of foreign corporation M maturing
on June 30, 1967. The annual accounting period of M immediately
preceding the acquisition ends on December 31, 1963, and for that
period M satisfies the requirements set forth in section 4916(c) (1).
M fails to satisfy these requirements for its annual accounting period
ending December 31, 1964. A ruling has not been obtained from the
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Secretary of the Treasury or his delegate with respect to M under
section 4910(c)(3). A incurs liability for the tax on December 31,
1904 (although the period remaining to maturity of the bonds at
that time is less than 3 years), and the amount of the tax, computed
on the basis of the period remaining to maturity of the bonds on
April 1, 1964, is equal to 2.75 percent of $10,000, or $275.
Debt obligations issued in return .for certain property
Paragraph (2) of section 4910(d) provides that if an exclusion is
allowed under section 4916(a)(3) with respect, to the acquisition of a
debt obligation issued in return for property described in such section,
but part or all of such property is used, consumed, or disposed of
(before the termination of the tax) otherwise than wholly within one
or nn)re less developed countries, the acquiring person will incur
liability for the tax under section 4911 as of the time the property is
Ii ml so used, consumed, or disposed of, in an amount equal to the tax
which would have been payable under section 4911 if the exclusion
had not applied at the time of the acquisition.
SECTION 4917. EXCLUSION FOR ORIGINAL OR NEW ISSUES WHELE
REQUIRED FOR INTERNATIONAL MONETARY STABILITY
(a) In gcneral.- -Section 4917(a) provides that the interest equaliza-
tion tax will not be applicable to certain acquisitions which may be
covered by an Executive order issued by the President. If the
President determines that. the application of this tax will have such
consequences for a foreign country as to imperil or threaten to imperil
the stability of the international monetary system, he may by such an
Executive order exclude from the tax acquisitions of stock or debt
obligations of the government of the foreign country or a political
subdivision thereof, any agency or instrumentality of such a govern-
ment, ally corporation, partnership, or trust (other than a company
registered under the Investment- Company Act of 1940) organized
under its laws, or any individual resident therein, including acquisi-
tions of debt obligations secured by mortgages. The order will in
any event, be applicable only to acquisitions made as part of an original
or new issue of stock or debt obligations as to which notice of acquisi-
tion is filed in accordance with regulations prescribed by the Secretary
of the Treasury or his delegate. In the case of acquisitions made
durinr? the period from July 19, 1963, through the date of the enact-
nent of the bill, notice of acquisition may be filed within such period
following such date of enactment as is prescribed in regulations by
the Secretary of the Treasury or his delegate.
The regulations under this section may permit or require filing. of
the. prescribed notice to be made either before or after the acquisition
occurs. Such notice may he required to set forth all the principal
terms of the transaction involved and such other information as ma,y
be prescribed in such regulations.
It is contemplated that the regulations will not permit the filing of
a notice of acquisition in connection with a private placement until the.
material terms of the transaction are agreed upon by the parties, or.m
connection with a public offering which is registered with the Securities
and Exchange Cominission until a registration at has been
filed with die Commission..
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L1,11
(b) Applicability of Executive order. Section 4917(b) provides that
an Executive order described in section 4917ta) may be applicable to
all such original or new issues, or only to an aggregate amount or classi-
fication thereof, as stated in the order. If the order is applicable to a
limited aggregate amount of such issues it will apply under regula-
tions prescribed by the Secretary of the Treasury or his delegate to
those acquisitions as to which notice of acquisition was first filed, pro-
vided in any given case that the acquisition described in the notice
is made before or within 90 days after the date of filing. If the acqui-
sition is not made within this period, the notice will have no effect.
If a new notice is filed upon expiration of the 90-day period, the date
on which this notice is filed will govern the applicability of the order
to the acquisition. An Executive order described in section 4917(a)
may be terminated in .whole or in part at any time by an Executive
order issued for that purpose, and the termination will be effective
from the date the order is issued or from such later date as is specified
in such order.
(c) Original or new issue.?Section 4917(c) provides (for purposes
of sec. 4917) that a debt obligation is treated as part of an original
or new issue only if acquired not later than 60 days after the date on
which interest begins to accrue on such obligation, and that stock is
treated as part of an original or new issue only when it is acquired
from, the issuer by the U.S. person claiming the exclusion. Stock is
considered an original or new issue only if it is previously unissued;
treasury stock will not be so considered. A debt obligation may be
acquired from a person other than the obligor within the 60-day
period and still be regarded as part of an original or new issue.
SECTION 4918. EXEMPTION FOR PRIOR AMERICAN OWNERSHIP
(a) General rule.?Section 4918(a) states the general rule that the
interest equalization tax is inapplicable to an acquisition of stock or a
debt obligation of a foreign issuer or obligor if it is established by clear
and convincing evidence that the person from whom such stock or debt
obligation was acquired was a U.S. person throughout the period of
his ownership or continuously since July 18, 1963. The effect of this
exemption for prior American ownership is to assure that only one tax
will be paid on stock or debt obligations acquired after July 18, 1963,
and that no tax will be paid on those acquired prior to that date, so
long as continuous American ownership is maintained. A person who
has not maintained his status as a U.S. person during the entire period of
his ownership of stock or a debt obligation (or continuously since July
18, 1963) will not be permitted to transfer it free of the tax to other
Americans
Under section 4914(g) (2), neither a person making an acquisition
excluded from the tax under section 4914(b) (3) nor an insurance
company acquiring stock or a debt obligation which it designates (or
is required to designate) under section 4914(e) is considered a U.S.
person for purposes of section 4918 with respect to the stock or debt
obligation so acquired. Section 4920(a)(4)(C) provides that an in-
vestment company which has elected under section 4920(a) (3)(B) to
be treated as a foreign issuer or obligor is not considered a U.S. person.
While one or more classes of a foreign corporation's stock may be
treated under section 4920(a) (3) as not being the stock of a foreign
001-2
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issuer, the foreign corporation is not considered a U.S. person for any
of the purposes of chapter 41.
The clear and convincing evidence required by section 4918(a) may
be supplied through c-ertificates of American ownership as described
in section 4918(b), or through the use of individual or blanket certifi-
cates of American ownership and the furnishing of confirmations by
members of national securities exchanges and national securities as-
sociations in accordance with the requirements described in section
4918 (c) and (d).
(b) Certificate of American ownership.?Section 4918(b) provides
that, for purposes of the exemption under section 4918(a), a certificate
of American ownership executed and filed as provided in section
4918(e), and received in connection with an acquisition, is conclusive
proof of prior American ownership unless the person making such
acquisition has actual knowledge that the certificate is false in any
material respect.
(c) Trading on certain national securities exchanges.? Section 4918(c)
provides that, for purposes of the exemption under section 4918(a),
a written confirmation received from a member or member hem of a
registered national securities exchange stating that an acquisition
was made in the regular market on the exchange and not subject, to a
special contract will be conclusive proof of prior American ownership
(unless the acquiring person has actual knowledge that the confirma-
tion is false in any material respect) if the exchange has in effect at the
time of the acquisition rules providing in substance that (A) a member
or member firm can effect a sale as broker (of stock or debt obligations
subject to the tax) in the regular market on the exchange only if the
member or member firm has in his or its possession a certificate of
American ownership with respect to the stock or debt obligation sold
or a blanket certificate of American ownership with respect to the
seller's account, and (B) a member or member firm effecting a pur-
chase as broker of such stock or debt obligations other than in the
regular market and subject to a special contract must furnish the
acquiring person a written confirmation stating that the acquisition
was made subject to such special contract. A written confirmation
furnished to a custodian, nominee, or agent acting for the purchaser
is deemed to have been furnished to the purchaser.
In cases where stock or a debt obligation subject to tax under
chapter 41 is traded on an exchange having the rules described above,
U.S. person selling such stock or debt obligation executes and files
with the member or member firm acting as Ins broker either an indi-
vidual or blanket certificate of American ownership. The member or
member firm, not having actual knowledge that the certificate is false
in any material respect, may effect the sale in the regular market on
the exchange and the member or member firm act-in" on behalf of
the buyer can assume the seller is a U.S. person since the transaction
occurred in the regular market. The buyer will receive a confirma-
tion from the member or member firm efrecting the purchase on his
behalf stating that the acquisition was made in the regular market
and not subject to a special contract. This confirmation is regarded
for puses of this exemption as conclusive proof of prior American
ownership.
If the seller is not a U.S. person entitled to furnish an individual
or blanket certificate of American ownership, the member or member
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firm acting on his behalf may not effect the sale in the regular market
on the exchange and must make the sale subject to a special contract.
In such a case, the member or member firm acting on behalf of the
buyer must furnish the buyer a written confirmation stating that the
acquisition was made subject to such special contract, and, of course,
such confirmation is not regarded as proof of prior American ownership.
(d) Trading in the over-the-counter market.?Section 4918(d) provides
that, for purposes of the exemption under section 4918(a), a written
confirmation received from a member or member firm of a registered
national securities association in connection with an acquisition made
in the U.S. over-the-counter market is regarded as conclusive proof
of prior American own:ership, unless the confirmation states that the
acquisition was made from a person who has not executed and filed a
certificate of American ownership with respect to the stock or debt
obligation sold or a blanket certificate of American ownership with
respect to the seller's account (or the acquiring person has actual
knowledge that the confirmation is false in any material respect), if
the association has in effect at the time of the acquisition rules provid-
ing in substance that a member or member firm effecting a sale as
broker, in the over-the-counter market, of any stock or debt obligation
subject to the tax but for this exemption, must (A) have an individual
or blanket certificate in his possession, or (B) furnish the person
acquiring such stock or debt obligation a written confirmation stating
that the acquisition was made from a person who has not executed
and filed such a certificate. A written confirmation furnished to a
custodian, nominee, or agent acting for the purchaser is deemed to
have been furnished to the purchaser. Section 4918(d) also provides
that a member or member firm who makes an acquisition for his or
its own account in the over-the-counter market may treat a blanket
certificate of American ownership with respect to the seller's account
as conclusive proof for purposes of this exemption of prior American
ownership unless such member or member firm has actual knowledge
that the certificate is false in any material respect.
In cases where stock or a debt obligation subject to tax under
chapter 41 is sold in the over-the-counter market and a member or
member firm of the National Association of Securities Dealers (if
such association has adopted rules as described in sec. 4918(d))
is acting as broker for the seller or acquiring for his or its own account,
the U.S. person selling such stock or debt obligation executes and files
with the member or member firm either an individual or blanket
certificate of American ownership. Unless such member or member
firm has actual knowledge that the certificate is false in any material
respect, a written confirmation can be furnished by the member or
member firm which does not specify whether or not the seller executed
and filed a certificate. Such a confirmation is regarded for purposes
of this section as conclusive proof of prior American ownership. If
the seller is not a U.S. person entitled to furnish an individual or
blanket certificate of American ownership, the member or member
firm acting as broker on his behalf must furnish the acquiring person
a written confirmation stating that the acquisition was made from a
person who has not executed and filed an individual or blanket
certificate of American ownership, and, of course, such confirmation
is not regarded as proof of prior American ownership.
(e) Execution, filing, and contents of certificate.?Section 4918(e)
provides that a certificate of American ownership or a blanket certifi-
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cate of American ownership under section 4918 must be executed and
filed in such manner and set forth such information as the Secretary
of the Treasury or his delegate prescribes by regulations. It is
contemplated that such regulations will provide, among other things,
in connection with certificates of American ownership, that such a
certificate may be executed either by a former owner or by a U.S.
person acting as the nominee of the former owner and that the signa-
ture must be guaranteed by a U.S. bank, a member of the National
Association of Securities healers, or a member firm of a national
securities exchange registered with the Securities and Exchange
Commission. Where the certificate is executed by a nominee, it will
not be necessary to reveal the !UMW of the actual owner to the pur-
chaser; but the nominee will be required to maintain adequate records
to identify the U.S. person for whose account the securities were held
and to establish such owner's U.S. citizenship, residence, or incorpora-
tion during his period of ownership. With respect to blanket certifi-
cates of American ownership, the regulations are expected to provide
that, the owner of all account must certify that he is the actual owner
of all securities sold through the account. and that he has been a U.S.
person continuously since July 18, 1963. If such person ceases to
be a U.S. person, he will be required to certify that he will notify the
member or member firm of the change and will make no sale through
the account until such notice has been received. Blanket certificates
of American ownership will be permitted to be executed by nominees
subject to requirements such as those described for individua 'certifi-
cates of American ownership.
SECTION 4919. SALES BY UNDERWRITERS AND DEALERS TO FOREICN
l'ERSONS
(a) Credii or refund.--SecLion 4919(a) provides that a credit against,
or refund of, the tax paid under section 4911 upon the acquisition of
stock or debt, obligations of a foreign issuer or obligor may be allowed
or made if the stock or debt obligations (1) are acquired by an under-
writer from the. foreign issuer or obligor (or from a person or persons
controlling, controlled by, or under conunon control with such issuer
or obligor) and are resold directly to persons other than U.S. peisons
in connection with a private placement, (2) are acquired by an under-
writer in connection with a public offering by a foreign issuer or obligor
(or by a person or persons controlling, controlled by, or under common
control with such issuer or obligor) and are resold to persons other
than U.S. persons, or (3) consist of debt obligations acquired by a
dealer in the ordinary course of his business from persons other than
U.S. persons and resold to persons other than U.S. persons within 90
days after (or, in the ease of short sales, within 90 days before) their
acquisition. Control with respect to an issuer or obligor has the same
meaning for these purposes (and for purposes of the definition in see.
4919(c)(1)) as under the Securities Act of l933.
For purposes of section 4919(a) it is immaterial whether the acquisi-
tion or resale by the underwriter or dealer takes place in the United
States. The tax paid with respect- to any such acquisition will con-
stitute an overpayment of tax only if it is dearly established that the
stock or debt obli7ations involved were resold to persons other thin
U.S. persons. Where stock or debt obligations are resold as part of
a public offering, the underwriter may claim a- credit or refwid not
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only for its own sales to persons other than U.S. persons but also for
any such sales made by other U.S. persons participating in the dis-
tribution of the stock or debt obligations acquired by the underwriter.
The credit or refund (without interest) is to be allowed to an
underwriter or dealer under regulations prescribed by the Secretary
or the Treasury or his delegate. Where an acquisition by an under-
writer is concerned, if the underwriter sells all or part of the stock or
debt obligations acquired to persons other than U.S. persons during
the same return period in which the acquisition of such stock or
debt obligations is made, the acquisition will be subject to the tax
imposed by section 4911 and an offsetting tax credit for such sales
will be allowed under section 4919. If the sales by the underwriter to
? persons other than U.S. persons occur in a return period subsequent to
the return period in which the acquisition by the underwriter is made,
the tax imposed by section 4911 on the acquisition will be paid with
the interest equalization tax return filed for the prior period and a
credit or refund of tax will be allowed or made under section 4919
upon the filing of a claim therefor. It is contemplated that a tax
credit may also be allowed to the underwriter, if claimed, for sales to
persons other than U.S. persons which take place after the reporting
period during which the acquisition occurred but before the return for
that period is due. The credit or refund arising from the resale of
debt obligations by dealers will be claimed and allowed in a similar
manner.
(b) Evidence to support credit or refund.?Section 4919(b) provides
that an underwriter or dealer claiming a credit or refund under such
section with respect to the interest equalization tax must file with the
return required under section 6011(d) of the code such information
pertaining to his claim for credit or refund as the Secretary of the
Treasury or his delegate may prescribe by regulations. It is con-
templated that the type of information required from an underwriter
with respect to a private placement or public offering may include the
following:
(A) The name and address of the foreign issuer or obligor (or
the person or persons related in control) whose stock or debt
obligations were acquired and the date of acquisition;
(13) The consideration paid or to be paid by the underwriter
for the stock or debt obligations acquired;
(C) The total number of shares of stock or the total face
amount of debt obligations acquired and a brief description
thereof; and
(D) (i) In the case of private placements: The total sold; the
total sold directly by the underwriter to persons other than U.S.
persons; the dates of sale and the names and addresses of the
persons to whom sold; and a copy or description of any agreement
or agreements governing the acquisition or sale of the stock or
debt obligations by the underwriter; or
(ii) In the case of public offerings: The total sold; the total sold
to persons other than U.S. persons; the total sold by U.S. persons
participating in the distribution; and a copy of any prospectus or
offering circular used in effectuating any of the sales.
It is contemplated that the type of information required from a
dealer claiming the credit or refund may include a description of the
debt obligations involved, the names and addresses of the persons
to whom they were sold, and the date or dates of sale.
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The claim for credit or refund by an underwriter will not be allowed
with respect to stock or debt obligations sold by a U.S. person (other
than the underwriter) participating, in connection with a public
offering, in the distribution of the stock or debt obligations acquired
by the underwriter unless the underwriter establishes by clear and
convincing evidence that the stock or debt, obligations were sold to
persons other than U.S. persons. A certificate of sales to foreign
persons executed by a U.S. person (other than the underwriter) and
relied upon by the underwriter will be regarded as conclusive proof
that the sales were made to foreign persons unless the underwriter has
actual knowledge that the certificate is false in any material respect.
The requirements for filing such a certificate, the information to be
set forth therein, and the manner in which IL is to be executed will be
prescribed by the Secretary of the Treasury or his delegate by
regulations.
In any case where two or more underwriters form a group for the
purpose of purchasing and distributing (through resale) stock or debt
obligations of a single foreign issuer or obligor, the filing of a certifi-
cate of sales to foreign persons by any one of such underwriters may,
to the extent provided by regulations prescribed by the Secretary of
the Treasury or his deleoate, constitute the filing of such certificate on
behalf of all of such underwriters. Normally, in such cases all certifi-
cates of sales to foreign persons would be permitted to be filed with the
interest equalization tax return filed by the managing underwriter of
the purchasing and selling group.
(c) Definitions.- -Paragraph (1) of section 4919(c) defines the term
"underwriter" to mean any person who has purchased stock or debt
obligations from the issuer or obligor thereof (or from a person con-
trolling, controlled by, or under connnon control with such issuer or
obligor), or from another underwriter, with a view to the distribution
through resale of such stock or debt obligations. Paragraph (2) de-
fines a "dealer" as any person who is a member of the National
Association of Securities Dealers and who is regularly engaged, as a
merchant, in purchasing stock or debt obligations and selling them to
customers with a view to the gains and profits which may be derived
therefrom.
SECTION 4920. DEFINITIONS
(a) In genera?Section 4920(a) contains definitions of basic terms
used in chapter 41.
Debt obligation
Paragraph (1) of section 4920(a) provides that, in general, the
term "debt obligation" means any indebtedness, whether or not
represented by a bond, debenture, note, certificate, or other writing,
and whether or not bearing interest. The term also means any
interest in, or any option or similar right to acquire, a debt obligation
described in the preceding sentence, whether or not such interest,
option, or right is in writing. It does not refer to the obligations
(other than obligations to pay) of parties to executory contracts nor
does it refer to the obligation of an insurer to pay under a contract
or insurance or an annuity contract.
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The term "debt obligation" does not include any obligation which?
(A) is convertible by its terms into stock of the obligor, if it
is so convertible only within a period of 5 years or less from the
date on which interest begins to accrue thereon; or
(B) arises out of the divorce, separate maintenance, or support
of an individual who is a U.S. person.
Stock
Paragraph (2) of section 4920(a) provides that the term "stock"
means any stock, share, or other capital interest in a corporation; any
interest of a partner (whether general or limited) in a partnership; any
interest in an investment trust; any indebtedness which is convertible
by its terms into stock of the obligor if it is so convertible only within
a period of 5 years or less from the date on which interest begins to
accrue; and any interest in, or option or similar right to acquire, any
of the interests described in this sentence.
Foreign issuer or obligor
Paragraph (3) of secition 4920(a) defines the terms "foreign issuer,"
"foreign obligor," and "foreign issuer or obligor."
Under paragraph (3) (A) such terms mean any issuer of stock or
obligor of a debt obligation which is an international organization of
which the United States is not a member; the government of a foreign
country or a political subdivision thereof, or an agency or instrumen-
tality of such a government; a corporation, partnership, or estate or
trust- which is not a U.S. person as defined in paragraph (4); or a
nonresident alien individual.
Paragraph (3) (B) provides that such terms also include a domestic
corporation which, as of July 18, 1963, was a management company
registered under the Investment Company Act of 1940 if (i) at least
80 percent of the value of the stock and debt obligations owned by the
corporation on July 18, 1963, and at the end of every calendar quarter
thereafter consists of stock or debt obligations of foreign issuers or
obligors and of other debt obligations having an original period to
maturity of 90 days or less; (ii) the corporation elects to be treated as
a foreign issuer or obligor for purposes of chapter 41; and (iii) during
the period from July 18, 1963, to the date the election is made the
corporation does not materially increase its assets by borrowing or
by issuing or selling its stock (other than stock issued or sold on or
before September 16, 1963, as part of a public offering with respect to
which a registration statement was first filed with the Securities and
Exchange Commission on July 18, 1963, or within 90 days prior
thereto). The election must be made on or before the 60th day after
the date of the enactment of the bill and must be made under regu-
lations prescribed by the Secretary of the Treasury or his delegate.
The election will be effective as of the date specified by the corpora-
tion, which may be before the date of the enactment of the bill but not
later than the date on which the election is made. Such an election
remains in effect until revoked. If, at the close of any succeeding
calendar quarter, the company ceases to meet the 80-percent require-
ment described above, the election is deemed revoked as of the close
of that quarter. If an election is revoked, no further election is
permitted. In general, the effect of this provision is to permit a man-
agement company which elects to be treated as a 'foreign issuer or
H. Rept. 1046. 88-1 5
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obligor to manage its portfolio of foreign securities without incurring
the interest equalization tax which would normally be incurred on
acquisitions of such foreign securities. In addition, the provision
has the effect of imposing the interest equalization tax on the
acquisition by a U.S. person of any shares of the company which are
newly issued or not owned by U18. persons prior to acquisition.
If the assets of a foreign corporation are acquired by a domestic
corporation in a reorganization described in subparagraph (D) or (F)
of section 368(a)(1) of the code, both corporations are considered a
single domestic corporation for purposes of section 4920(a)(3)(B).
The election provided by section 4920(a)(3)(B) may be made by the
foreign corporation in anticipation of its becoming a domestic corpo-
ration for these purposes.
Paragraph (3) of section 4920(a) also provides that a foreign corpo-
ration other than ii company registered under the Investment Com-
pany Act of 1940 is not, considered a foreign issuer with respect to
any class of its stock which is traded on one or more national securities
exchanges registered with the Securities and Exchange Commission,
if the trading on such exchanges constituted the principal market for
such class during the calendar year 1962 and more than 50 percent
of such class was held of record try 'U.S. persons as of the latest record
date before July 19, 1963. The latest date as of which record owner-
ship of the stock of the foreign corporation was determined by the
foreign corporation, whether for the declaration of dividends or other
corporate purposes, governs. This provision has the effect of per-
mitting U.s. persons to acquire free of the interest equalization tax a
particular class of stock of a, foreign issuer, the principal market, for
which is on such U.S. exchanges and more than 50 percent of which
is owned of record by U.S. persons. The exclusion applies separately
to each class of stock, but the acquisition need not IDC made on an
exchange if the requirements of the provision have been satisfied.
A foreign corporation is not considered a U.S. person for purposes
of chapter 41, even though this provision applies to one or more
classes of its stock.
U.S. person
Paragraph (4) of section 4920(a) defines the term "U.S. person"
to mean?
(A) a citizen or resident of the United States;
(B) a domestic partnership;
(0) a domestic corporation other than a corporation described
in section 4920(a)(3)(B);
(D) an agency or wholly owned instrumentality of the United
States;
(E) a State or political subdivision, or any agency or instru-
mentality thereof; and
(F) any estate or trust?
(i) the income of which from sources without the United
States is includible in gross income under subtitle A of the
code or would be so includible if not exempt from tax under
section 501(a), 521(a), or 584(b) of the code; or
(ii) which is situated in the Commonwealth of Puerto
Rico or a possession of the United States.
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A foreign corporation engaged in trade or business within the United
States is not regarded as a resident of the United States. The term
"U.S. person" includes organizations exempt from Federal income tax
Domestic corporation; domestic partnership
Paragraph (5) of section 4920(a) defines the term "domestic cor-
poration" to mean a corporation created or organized in the United
states or under the laws of the United States or any State; the defini-
tion of "corporation" appearing in section 7701(a) (3) of the code is
applicable to chapter 41. This paragraph also defines the term
"domestic partnership" to mean a partnership created or organized
in the United States or under the laws of the United States or any
state; the definition of "partnership" appearing in section 7701(a) (2)
of the code is applicable to chapter 41.
.United States; State
Paragraph (6) of section 4920(a) provides that the term?"United
States' in a geographical sense includes the States, the District of
Columbia, the Commonwealth of Puerto Rico, and the possessions of
the United States; and the term "State" includes the District of
Columbia, the Commonwealth of Puerto Rico, and the possessions
of the United States. The term "possessions" includes the Virgin
Islands and other territories of the United States.
Period remaining to maturity
? Paragraph (7)(A) of section 4920(a) states the general rule that
the period remaining to maturity of a debt obligation is the period
beginning on the dale of its acquisition and ending on the fixed or
determinable date when, according to its terms, the payment of
principal becomes due. For this purpose each installment of a debt
obligation payable in installmentg is deemed to have a separate
period remaining to maturity. (For the time when an acquisition is
considered to be made, see sec. 4912(a) (discussed above).) This
rule is illustrated by the following examples:
Example (1).?On May 31, 1964, A, a U.S. person, purchases from
B, a nonresident alien, 20-year bonds of X, a foreign government.
The bonds mature on December 31, 1974, and therefore have a remain-
ing period to maturity of 10 years and 7 months.
Example (2).?On June 30, 1964, C, a U.S. person, acquires for
$10,000 from D, a nonresident alien, a serial promissory note due in
five equal annual installments of $2,000 commencing on August 1, 1966.
The debt obligation has a period remaining to maturity of 2 years and
1 month with respect to $2,000, 3 years and 1 month with respect to
$2,000, 4 years and 1 month with respect to $2,000, 5 years and 1
month with respect to $2,000, and 6 years and 1 month with respect
to $2,000.
Paragraph (7)(B) of section 4920(a) sets forth in clauses (i) through
(v) the modifications in the general rule which are to be made in
determining the period remaining to maturity in certain special cases.
Clause (1) of paragraph (7)(B) provides that the period remaining
to maturity of any interest in or option or similar right to acquire any
debt obligation is the period remaining to maturity of the debt
obligation at the time the interest, option, or right is acquired. This
rule is illustrated by the following examples:
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Example (1).?On July 31, 1964, A, a U.S. person, acquired
from B, a nonresident alien, a depositary receipt which constitutes
evidence of an interest in certain bonds of a foreign corporation
which are held by a foreign bank and which mature on June 30, 1979.
The depositary receipt has a period remaining to maturity ofj14 years
and 11 months.
Example (2) .?On September 1, 1964, A, a U.S. person, acquires
from M, a foreign corporation, an option to acquire 15-year bonds of
M when such bonds are issued. The period remaining to maturity
of the option is considered to be 15 years.
Clause (ii) of paragraph (7)(B) provides that the period remain-
ing to maturity of any debt obligation which is renewable without
affirmative action by the obligee, or of any interest in or option or
similar right to acquire such a debt obligation, ends on the last day of
the final renewal period. This rule is illustrated by the following
example:
Example.?On June 1, 1964, A, a U.S. person, acquires from B, a non-
resident alien, 20-year bonds of M, a foreign corporation. Such bonds
are payable on December 31, 1974, except that, under the terms of
the bonds, the obligation is automatically renewable for an additional
period of 10 years if the holder does not demand payment within 30
days following the lapse of the initial term. The period to maturity
is deemed to include the renewal period of 10 years.
Clause (iii) of paragraph (7)(B) provides that the period re-
maining to maturity of any debt obligation which has no fixed or
determinable date when the _payment of principal becomes due is
considered to_ be 28% years. This rule is illustrated by the following
example:
Example.--On October 1, 1964, A, a U.S. person, acquires from B,
a. nonresident alien, bonds of F, a foreign government. The bonds
are callable by the obligor at any time after 5 years; but they provide
for payment of principal only upon such call or upon default by the
issuer in payment of interest. The period remaining to maturity
is deemed to be 28;i years.
Clause (iv) of paragraph (7)(B) provides that the period remain-
ing to maturity of any debt obligation which is payable on the demand
of the obligee is considered to be less than 3 years. This rule applies
to a debt obligation as to which payment of principal is due or over-
due at the time of its acquisition.
Clause (v) of paragraph (7)(B) provides that the period
remaining to maturity of a debt obligation which is subject to retire-
ment prior to. its maturity through operation of a mandatory sinking
fund will be determined under regulations prescribed by the Secretary
of the Treasury or his delegate. It is contemplated that these regula-
tions will generally determine the period remaining to maturity on the
basis of the average life of the debt obligations involved.
(b) Cross reference.?Section 4920 (b) contains a cross reference
to the definition of the term "acquisition" in section 4912.
SECTION 2. INTEREST EQUALIZATION TAX?Continued
(b) Technical amendrunt.?Subsection (b) of section 2 of the bill
amends the table of chapters for subtitle D of the code to reflect the
new chapter 41 (added by subscc. (a) of sec. 2 of the bill).
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(c) Effective date.?Subsection (e) of section 2 of the bill contains
the effective date provisions applicable to the new chapter 41.
General rule
Paragraph (1) of section 2(c) of the bill sets ?forth the general rule
that, except as provided by paragraphs (2), (3), (4), (5), (6), and (7),
the amendments made by section 2 apply only with respect to acqui-
sitions of stock and debt obligations made after July 18, 1963.
Preexisting commitments
Paragraph (2) of section 2(c) of the bill provides that the interest
equalization tax does not apply to an acquisition?
(A) made pursuant to an obligation to acquire stock or debt
obligations which on July 18, 1963, was unconditional or was
subject only to conditions contained in a formal contract under
which partial performance had occurred;
(B) as to which on or before July 18, 1963, the acquiring U.S.
person (or, in a case where two or more U.S. persons are acquiring
as part of a single transaction, a majority in interest of such
persons) had taken every action to signify approval under the
procedures ordinarily employed by such person (or persons) in
similar transactions and had sent or deposited for delivery to the
foreign issuer or obligor written evidence of such approval in the
form of a commitment letter or other signed document setting
forth the principal terms of the acquisition, subject only to the
execution of formal documents evidencing the acquisition and to
customary closing conditions; or
(C) which would be excluded from tax under section 4915
(relating to direct investments) but for section 4915(c), if (i) on
or before July 18, 1963, the acquiring person received from a
foreign government (or an agency or instrumentality thereof)
authorization to make the acquisition involved (and approval of
the amount thereof), and (ii) such authorization was required in
order for the acquisition to be made.
In order to qualify under the requirements of subparagraph (B)
above, the acquiring U.S. person must have both approved the
acquisition and sent or deposited the requisite commitment letter or
similar document on or before July 18, 1963. If two or more U.S.
persons are acquiring as part of a single transaction, those persons
acquiring more than 50 percent of the actual value or the stock or
debt obligations which are the subject of the transaction must have
taken these actions on or before July 18, 1963. A person who had
entered into a short sale contract on or before July 18, 1963, generally
will be considered subject to a preexisting commitment because, in
effect, such person is unconditionally obligated to make an acquisition
to cover the short sale.
Public offering
Paragraph (3) of section 2(c) of the bill provides that the tax does
not apply to an acquisition made on or before September 16, 1963, if?
(A) a registration statement (within the meaning of the
Securities Act of 1933) was in effect with respect to the stock or
debt obligation acquired at the time of its acquisition;
(B) the registration statement was first filed with the Securi-
ties and Exchange Commission on July 18, 1963, or within 90
days prior thereto; and
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(C) no amendment was filed with the Securities and Exchange
Commission after July 18, 1963, and before the acquisition which
had the effect of increasing the number of shares of stock or the
aggregate face amount of the debt obligations covered by the
registration statement.
Investment of proceeds of subscription offering
Paragraph (4) of section 2(c) of the bill provides that the tax does
not apply to acquisitions of stock or debt obligations by a corporation
electing to be treated as a foreign issuer or obligor under section
4920(a)(3)(B), to the extent that the amount of consideration paid
for all such stock and debt obligations does not exceed the proceeds
received by such corporation from a subscription offering, completed
on or before September 16, 1963, as to which a registration statement
was filed with the Securities and Exchange Commission on July 18,
1963, or within 90 days prior-thereto.
Listed securities
Paragraph (5) of section 2(c) of the bill provides that the tax does
not apply to an acquisition made on or before August 16, 1963, if the
stock or debt obligation involved was acquired on a national securities
exchange registered with the Securities and Exchange Commission.
This provision applies to acquisitions made on such an exchange
without regard to whether the acquired security is listed on the
exchange, but it does not apply to acquisitions of listed securities
which are not made through the exchange.
Options and foreclosures
Paragraph (6) of section 2(c) of the bill provides that the tax does
not apply to an acquisition----
(A) of stock pursuant to the exercise of an option or similar
right, or of a right to convert a debt obligation into stock of the
same issuer, if such option or right was held on July 18, 1963, by
the person making the acquisition or by a decedent from whom
such person acquired the right to exercise such option or right by
bequest or inheritance or by reason of such decedent's death; or
(B) of stock or debt obligations RS a result of a foreclosure by
a creditor pursuant to the terms of an instrument held by such
creditor on July 18, 1903.
Domestication
Paragraph (7) of section 2(c) of the bill provides that the tax does
not apply to the acquisition by a domestic corporation of the assets
of a foreign corporation pursuant to a reorganization described in
section 368(a)(1) (D) or (F) of the code if the acquisition occurs on
or before the 180th day after the date of the enactment of the bill
and the foreign corporation is a management, company registered
under the Investment Company Act a 1940 from July .18, 1963,
until the time of the acquisition. The effect of this provision is to
prevent foreign investment companies reincorporating as domestic
investment companies from being subject to the interest, equalization
tax on the portfolio of foreign securities held at the time of reincorpo-
ration.
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Meaning of terms
Paragraph (8) of section 2(c) of the bill provides that terms used in
section 2(c) of the bill (except as specifically otherwise provided) have
the same meaning as when used in the new chapter 41 of the code.
SECTION 3. RETURNS
(a) Making of returns.?Subsection (a) of section 3 of the bill amends
section 6011 of the code (relating to general requirement of return,
statement, or list) by redesignating subsection (d) as subsection (e)
and by adding a new subsection (d).
SECTION 6011(d). INTEREST EQUALIZATION TAX RETURNS
In general
Paragraph (1) of section 6011(d) provides for the filing, on a calendar
quarter basis, of returns of the interest equalization tax imposed by
section 4911. A return must be filed by each person who incurs
liability for the tax during the calendar quarter, and, in general, by
each person who makes acquisitions during the calendar quarter which
are nontaxable by reason of the exemption provided in section 4918 for
stock or debt obligations acquired from a U.S. person. However, a
return need not be filed in connection with an acquisition as to which a
written confirmation, furnished in accordance with the requirements
described in section 4918 (c) or (d), is treated as conclusive proof of
American ownership, nor must such an acquisition be listed in any
return made under this paragraph.
In the case of a person incurring liability for interest equalization
tax, the return must disclose the taxable acquisitions and the amount
of tax incurred, and must have attached a list of transactions during
the quarter (other than acquisitions as to which written confirmations
are furnished in accordance with the requirements described in sec.
4918 (c) or (d)) in respect of which no liability for payment of tax
is incurred by reason of the provisions of section 4918. The list
must be accompanied by clear and convincing evidence that these
acquisitions are ones to which the provisions of section 4918 apply.
A certificate of American ownership described in section 4918(e) will,
of course, constitute clear and convincing evidence for this purpose.
In the case of a person who does not incur liability for the interest
equalization tax during the calendar quarter but who makes acquisi-
tions to which the provisions of section 4918 apply (other than
acquisitions as to which written confirmations are furnished in accord-
ance with the requirements described in sec. 4918 (c) or (d)), the
return must have a list of such acquisitions attached and must be
accompanied by the requisite evidence showing that the acquisitions
are ones to which the provisions of section 4918 apply.
A person who receives a written confirmation in connection with
an acquisition from a member or member firm of a national securities
exchange or national securities association which is treated under
the provisions of section 4918 (c) or (d) as conclusive proof of prior
American ownership is not required to submit a return or accompany-
ing evidence as to such acquisition. If such person is required to file
a return because liability is incurred in connection with other transac-
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Lions, acquisitions as to winch such a written confirmation is received
need not be listed on the return.
Information returns of commercial banks
Paragraph (2) of section 6011(d) provides that every U.S. person
which is a commercial bank must file a return with respect to buns
and commitments to foreign obligors at such times, in such manner,
and setting forth such inform atioo as the Secretary of the Treasury
or his delegate may prescribe by forms and regulations. (Debt
obligations acquired by a commercial bank in making loans in the.
ordinary course of its commercial banking business are excluded
from the interest equalization tax under sec. 4914(b)(2)(A).) It is
contemplated that returns may include (in addition to any information
011 aggregate lending activity) information concerning the purpose of
each loan, the type of borrower, and the principal tennis of the
transaction.
Reporting requirements .for members of (.1-changes and associations
Paragraph (3) or section 6011(d) provides that members and
member firms of national securities exchanges and national securities
associations which are registered with the Securities and Exchange
Commission (and which have adopted rules of the type described in
see. 4918 (e) or (d)) must keep sueh records and file such information
as the Secretary of the Treasury or his delegate may prescribe by
regulations in connection with sales effected 'by such members and
member firms as brokers, and nequisiti?ms made for their own accounts,
of stock or debt obligations as to whieh a certificate of American
ownership or blanket certificate of American ownership is executed
and filed as described in section 4918(e).
(b) Time for filing rcturns.---Subsection (b) of section 3 of the bill
amends part. V of subchapter A of chapter 61 of the code (relating to
time for filing returns and other documents) by adding at the end
thereof a new section 6076, which provides that each return of interest
equalization tax must be filed on or before the last day of the first
month following the period for which the return is made.
(c) Publicity of returns.---Subsection (c) of section 3 of the bill
amends section 6103(0(2) of tire code (relating to public record and
inspection) to provide in effect that interest equalization tax returns
will be open to public examination and inspection only on the same
basis as other returns.
(d) Clerical amendment.---Subsection (d) of section 3 of the bill
amends the table of sections for part V of subchapter A of chapter 61
of the code to reflect the new section 6076 (added by subsec. (b) of
sec. 3 of the bill).
(e) First return period.?Subsection (e) of section 3 of the bill con-
tains one exception to the rule provided in sect-ion 6011(d) of the code
(as added by subsec. (a) of sec. 3 of the bill) for the making of returns
on a calendar-quarter basis. Under this exception the first period
for which an interest equalization tax return is to be made is the period
commencing July 19, 1963, and ending at the close of the calendar
quarter in which the bill is enacted.
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SECTION 4. DISALLOWANCE OF DEDUCTION FOR
AMOUNT PAID AS INTEREST EQUALIZATION TAX
Section 4 of the bill adds to section 263(a) of the code (relating to
capital expenditures) a new paragraph (3). The new paragraph
would deny, for income tax purposes, any deduction for interest
equalization tax paid by a person under section 4911 on his acquisi-
tions of foreign stock and debt obligations, except to the extent that
any amount attributable to the amount paid as such tax is included
in gross income for the taxable year.
At the present time section 164(b)(3) of the code denies, for income
tax purposes, a deduction for the amount of certain Federal excise
taxes (which would include the new interest equalization tax), with a
provision, however, that section 164(b)(3) will not prevent these taxes
from being deducted under section 162 (relating to trade or business
expenses) or section 212 (relating to expenses for the production of
income).
The effect of paragraph (3) of section 263(a), in generally denying a
deduction for income tax purposes of interest equalization tax, is to
require the acquiring person to capitalize the amount paid by him as
interest equalization tax. If an amount paid by a U.S. person as
interest equalization tax on the acquisition of a debt obligation,
when added to the basis of such debt obligation, creates bond premium
(as defined in sec. 171(b) of the code), such bond premium will be
amortizable in accordance with section 171.
The exception provided from the general rule denying a deduc-
tion for income tax purposes of the interest equalization tax
applies in a case where the interest equalization tax itself, or a portion
thereof, is included in gross income. An illustration of this is a
situation where a bond having a 30-year maturity is sold by a foreign
underwriter for $1,000, on which an American purchaser must pay a
tax of $150. At the time of his acquisition, the purchaser demands
$150 from the underwriter as reimbursement for the tax which he
must pay. If the purchaser accepts $100 in satisfaction of his de-
mand, the $100 is included in the purchaser's gross income, and he
will be allowed a deduction of $100 from gross income for the tax
paid by him.
SECTION 5. PENALTIES
Section 5 of the bill adds to the code three new sections imposing
civil and criminal penalties in certain cases.
(a) Assessable penalties. Subsection (a) of section 5 of the bill
amends subchapter B of chapter 68 of the code (relating to assessable
penalties) by adding at the end thereof two new sections?section
6680, providing a civil penalty for failure to file an interest equalization
tax return in certain situations where no tax is due, and section 6681,
imposing civil penalties for executing false equalization tax certificates
and for acting in disregard of the rules of national securities exchanges
and national securities associations.
SECTION 6680. FAILURE TO FILE INTEREST EQUALIZATION TAX RETURNS
Section 6011(d) of the code, as added by section 3 of the bill,
requires a person to file an interest equalization tax return even though
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he incurred no liability for the tax if he would have incurred such
liability but for the prior American ownership exemption of section
4918 of the code (except in connection with an acquisition with respect
to which a written confirmation, furnished in accordance with the
requirements described in sec. 4918 (c) or (d), is treated as conclusive
proof of prior American ownership). Except for the criminal penalty
provided in section 7203, these persons would incur no liability if they
failed to file a return. The new section 6680 imposes on such persons
a civil penalty of 5 percent of the amount of tax they would have been
required to pay but for the provisions of section 4918. However, the
penalty cannot be less than $10 nor more than $1,000. The penalty
does not apply if it is shown that the failure to file is due to reasonable
cause.
SECTION 6681. FALSE EQUALIZATION TAX CERTIFICATES
(a) False certificate of American owncrship.---Section 4918(a) of the
code exempts from the interest equalization tax those acquisitions
which are made from another American person. Section 4918(b)
provides that a certificate that the prior owner was an American per-
son during the applicable period of his ownership is conclusive proof of
American ownership for this purpose unless the person making the
acquisition has actual knowledge that the certificate is false in any
material respect. Under section 4918 (c) and (d) a blanket certificate
of American ownership may be treated as conclusive proof of prior
American ownership by members and member firms of national
securities exchanges and national securities associations in specified
circumstances, unless the member or member firm Inis actual knowl-
edge that the certificate is false in any material respect, The effect of
section 4918 is to relieve the person acquiring stock or a debt obliga-
tion covered by an individual or blanket certificate, even though the
certificate is false, from payment of the tax unless he has actual knowl-
edge of the falseness of the certificate.
Subsection (a) of the new section 6681 imposes on a person willfully
executing a certificate of American ownership or a blanket certificate
of American ownership which is falsi, in any material respect a penalty
equal to 125 percent of the tax (imposed by sec. 4911 of the code on
the acquisition of the stock or debt obligation involved) which, but
for the provisions or section 4918, would be payable by the person
making the acquisition. The penalty is an assessable one and, when
imposed, will enable the Government to collect the tax which was lost
by reason of the execution of the false certificate, plus an extra amount
to discourage persons from executing false certificates.
(b) Liability of members of national securities exchanges and asso-
ciations.?Section 4918 (e) and (d) of the code set forth procedures
under which receipt of a written confirmation from a member or mem-
ber firm of a national securities exchange or national securities asso-
ciation will be. treated as conclusive proof of prior American ownership
in connection with an acquisition made on such exchange or in the
over-the-counter market.
Subsection (b) of the new section 6681 provides a penalty for such
members equal to 125 percent of the tax (imposed by see. 4911 of
the code on the acquisition of the stock or debt obligation involved
in a transaction subject to the rules of such exchange or association as
described in sec. 4918 (c) or (d)) which, but for the provisions of sec-
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tion 4918, would be payable by the person acquiring the stock or debt
obligation, if such member (A) willfully effects the sale of such stock
or debt obligation or furnishes a written confirmation with respect to
the purchase or sale of such stock or debt obligation other than in
accordance with the requirements described in section 4918 (c) or
(d) ; or (B) has actual knowledge that the individual or blanket certifi-
cate of American ownership in his possession is false in any material
respect, or that the person who executed and filed the blanket certifi-
cate of American ownership in his possession was not a U.S. person at
the time of the sale. The penalty is an assessable one and, when
imposed, will enable the Government to collect the tax which was lost
by the willful failure of the member or member firm to comply with
the requirements described in section 4918 (e) or (d), plus an extra
amount to discourage members and member firms from such willful
failures to comply.
(c) False certificates of sales to foreign persons.?Subsection (c) of
section 6681 imposes, on a person willfully executing a false certificate
of sales to a foreign person described in section 4919(b) of the code,
a similar penalty of 125 percent of the tax which is imposed by section
4911 on the acquisition of the stock or debt obligation involved and
which, but for the application of the conclusive presumption provided
in section 4919(b) and the reliance on the correctness of the certificate
by the underwriter receiving the certificate, would be payable by the
underwriter.
(d) Penalty to be in lieu of tax in certain cases.?Subsection (d) of
section 6681 provides that unless the person acquiring the stock or
debt obligation had actual knowledge that the certificate involved was
false in any material respect, the penalty under subsection (a) or (c)
of section 6681 will be in lieu of any tax on the acquisition of such
stock or debt obligation under section 4911.
SECTION 5. PENALTIES?Continued
(b) Criminal penalty.--Subsection (b) of section 5 of the bill amends
part II of subchapter A of chapter 75 of the code (relating to penalties
applicable to certain taxes) by adding at the end thereof a new section
7241, providing criminal penalties for the willful execution of indi-
vidual or blanket certificates of American ownership, or certificates
of sales to foreign persons, which are false in any material respect.
The criminal penalty is in addition to the assessable civil penalty
provided in section 6681, discussed above. Section 7241 makes the
offense of willfully executing a false certificate a misdemeanor and
provides for a fine of not more than $1,000 or imprisonment for not
more than 1 year, or both.
(c) Clerical amendments.?Subsection (c) of section 5 of the bill
amends the table of sections for subchapter B of chapter 68 of the
code, and the table of sections for part II of subchapter A of chapter 75
of the code, to reflect the new sections added to the code by subsections
(a) and (b) of section 5 of the bill.
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V. SEPARATE VIEWS OF REPUBLICANS ON H.R. 8000
GENERA I. STATEMENT
II.R. 8000 is intended to restrict the flow of U.S. private invest-
ment capital abroad as a means of alleviating the balance of payments
problem. As such, it is misdirected. The- deficit in our balance of
payments, which i
has persisted for the past several years, is not
attributable to private nvestment abroad. In fact, in the private
sector the amounts repatriated, either as a return on prior investment
or as a repayment of prior loans, exceed the amounts reinvested.
The United States necessarily depends to a large degree upon private
investment abroad, with the offsetting flow of funds to the United
States as a return on that investment, or its a payment of prior ad-
vances, to provide a favorable balance in its foreign exchange accounts.
In recognition of this, there was widespread opposition to the. concept
embodied in the bill on the part of the banking and business com-
munity. Even the Secretary of the Treasury was forced to admit
that- the long-term effect of this legislation will be adverse to our
balance of payments. In fact., this was cited as the reason for making
the legislation "temporary."
While H.R.. 8000 is proposed as a "temporary" measure, there is
no assuranee that- the administration will undertake to deal with the
underlying causes which have brought about the deficit in the U.S.
balance of payments. In fact, there is little likelihood that these
basic causes will be remedied prior to December 31, 1965, which is
the stated expiration date of H.R. 8000. For that reason it is wholly
unrealistic to consider the bill as "temporary." H enacted, H.R.
8000 will heroine a permanent tax or penalty on certain types of
U.S. private investment abroad, the threat of which will be used as a
means of exercising control over all such investment.
We are not unmindful of the strain played upon our balance of
payments by foreign borrowers seeking advantageous U.S. long-term
interest rates. However, the bill is not specifically directed at That
type or transaction. The bill adopts a "shotgun" approach, with
"built in" loopholes for "favored" U.S. lenders or foreign borrowers.
In the final analysis, the Treasury is relying primarily upon so-called
voluntary restraints rather than upon the legislation itself. While
disclaiming any intention to invoke direct exchange controls, the
results sought to be achieved by this bill depend more upon a "control"
over the transactions which are exempt, than upon a tax on the
transactions which are nonexempt-. The Congress is in fact being
called upon to enact this bill as a "club" for the Treasury to hold
over certain segments of the financial community, both at home and
abroad, in order to obtain from those. who tire exempt from the tax
voluntary compliance with a program of control over capital outflow
which will be left to the sole discretion of the President and the
Treasury Depart nen t
Shire the bill is relied upon largely for its "psychological" effect--
for the induced controls over investment abroad?there has been no
76
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effort made on the part of the administration to press for the speedy
enactment of this legislation. On the contrary, because of the threat
of retroactivity in the bill, the Treasury has had almost absolute
control over all U.S. investments and loans abroad since July 18,
1963. In the interim, there has been a sharp reduction in the outflow
of U.S. capital. This should not be relied upon as an indication of
what will happen when the bill becomes law. The uncertainty which
exists today is a greater deterrent than the tax itself. Since the
legislation was proposed on July 18, 1963, the only major transactions
being consummated are those for which there have been reliable
assurances of exemption. Once the bill becomes law, there may well
be a substantial demand for -U.S. capital abroad on the part of bor-
rowers who will be willing, if necessary, to absorb the interest
equalization tax.
DISCUSSION
H.R. 8000 is more significant for the transactions it exempts than for the
transactions it purports to tax
The Ways and Means Committee was advised by the Secretary of
the Treasury that the immediate need for this legislation was the
strain placed upon our balance of payments by foreign borrowers
seeking to take advantage of the low long-term interest rates in the
United States. For that reason, the proposed bill was entitled an
"interest equalization tax" bill. Yet we find that the bill exempts
much of the long-term borrowing which supposedly created the
problem and, at the same time, in the guise of an "interest equalization
tax," taxes investment in foreign equity securities where there is no
interest factor and no balance-of-payments problem.
In the course of the consideration of this bill, the Treasury Depart-
ment submitted a schedule showing the outflow of private U.S. capital
for the years 1960 to 1962, inclusive, and for three calendar quarters
of the year 1963.
TABLE 1.?Outflow of private U.S. capital to abroad after deducting inflow of private
U.S. capital from abroad, 1960 to 3d quarter 1963
[In millions of dollars; negative figures indicate excess of outflow over inflow]
1960
1961
1962
1963 1
Total 2
I
II 3
III'
Direct foreign investments, net
?1,694
?1, 598
?1, 567
?501
?452
?161
?5,963
Short-term capital, net
?1,348
?1,541
?607
61
?508
123
?3,720
Long-term foreign loans by institutions
?200
?258
?248
?11
?131
?115
?963
New foreign bonds, after deducting redemp-
tions
?459
?364
?832
?450
?461
?134
?2,700
Outstanding foreign bonds, U.S. purchases
less sales
?102
?27
?29
?49
?47
34
?220
New foreign stocks
?14
?.36
?74
?25
?7
?21
?177
Outstanding foreign stocks, U.S. purchases
less sales
?75
?326
?26
1
?5
17
?414
Total
?3,892
?4, 150
?3,273
?974
?1,611
?267
?14,157
Of which long-term portfolio capital (all
above items except direct foreign invest-
ments and short-term capital)
?850
?1,011
?1,209
?534
?651
?219
?4,474
1 Not seasonally adjusted; 2d quarter anrevised.
45 months.
s Preliminary.
Source; Treasury Department, Dec. 4, 1963.
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It will be noted from the above table that there were substantial
inrrea.es in the first. and second quarters of the year 1963 in long-
term foreign loans and new foreign bonds purchased in the United
States. Other types of foreign investments do not reflect any ap-
preciable increase. Nevertheless, 1I.R. 8000 purports to exempt- a
substantial portion of both long-term foreign loans and foreign bonds
sales.
First, pursuant to (he terms of H.R. 8000, direct foreign invest-
ments, amounting to a net outflow of $1.557 billion for the year 1962,
will m
be exempt. In addition, special exemptions have been provided
i
for nvestments which did not qualify under the exemption for "di-
rect" foreign investments. Unquestionably, an undetennined airount
of the long-term foreign loans will fall within these special exemptions.
Secondly, II.R. 8000 exempts all loans for a term of less than 3
years. This provision will serve to exempt short-term capital out-
flow, which amounted to a net of 8507 million in the year 1962, to-
gether with an undetermined amount which might have been borrowed
for a longer term, but will be placed on a shorter term exempt basis.
Thirdly, H.R. 8000 exempts all bank loans irrespective of term.
It is understood that approximately one-half of the long-term foreign
loans by institutions, amounting to $248 million for the year 1962,
will fall within this exemption. In addition, a substantial amount
of the loans, which might otherwise be represented by foreign bonds,
may be placed with the banks free of tax. In fact, since the announce-
ments of the proposed tax on July IS, 1963, it, is reported that the
city of Vienna changed its plan or financing in the United States,
from a proposed bond issue to a direct loan from the banks.
Finally, irrespective of category, an exemption has been .granted
to Canada. Approximately one-balf of the foreign securities pur-
chased by U.S. residents come from Canada.
TABLE 2.?New issues of foreign securities purchased by U.S. residents, 1961 to
3d quarter 19631
lin millions of dollars]
Canada
Western Europe
Japan
Latin American Republics
Other developed countries
Other less developed countries_
International Institutions and unallocated__
Total, new Issues
TOW/
1961
1962
11 III
iv
1
1983
Total I
10
287 112 41 294
57 138 15 7
11
61 17 48 25
(4)
18 19 (4,
id) ) '83
95 r41 .
12 go ia r4
43
523 170 1 312 133 1 461
(4)
457
195
101
'102
60
77
84
368
65
42
12
19
264
154
65
17
17
79
14
52
23
ii
1.076 506
518
179
I Not seasonally adjusted.
Revised.
Preliminary.
4 f,as than 8500,000..
1 Includes 875 million Issue by Inter-American Development Bank.
Not available.
Source: Survey of Current Dustrirss and Department of Commerce, as stipplied by Treasury Depart-
ment, Ilee. 3, 1963.
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Accordingly, on its face, H.R. 8000 will accomplish very little.
The exemptions provided for in the bill serve to exclude from tax
the major areas of capital outflow, taxing only relatively insignificant
transactions, such as the purchase of foreign stocks and the purchase
of new foreign bonds (other than Canadian) where the borrower
is precluded from obtaining the funds from a bank. Since most
lending abroad, and for the most part foreign bonds, are purchased
by institutional investors such as banks, insurance companies, and
the like, the net effect is to permit the bank to lend money abroad
tax free, but to deny to the other institutional investors the same
right. The foreign borrower is "funneled" into the bank loan route.
In accounting for the seeming lack of scope of the bill, the Secretary
of the Treasury was forced to disclose the real effect of the bill?not as
a tax?but as a regulatory measure. Recognizing that the bill ex-
empts much more than it taxes, the Secretary nevertheless stated
that the Treasury does not anticipate any problem with respect to
the exempt transactions. Why? Because, according to the Secre-
tary, Canada will cooperate to limit the amount of the exemption
which is to be granted for Canadian borrowings. And, what is more
significant, the U.S. banks will "cooperate" so as to limit the amount
loaned abroad by these banks. Thus, while the bank loan exemption
admittedly constitutes a possible "loophole," the threat of taking
away the exemption will be counted on to prevent the U.S. banks and
the foreign borrowers from taking advantage of that loophole without
the consent of the Treasury.
Hi?. 8000 deals with a symptom, not the underlying causes of a balance-
of-payments problem
Unquestionably, there has been an accelerated outflow of U.S.
private capital in the form of long-term foreign loans and the pur-
chase of foreign bonds. However, the bill is not specifically directed
at these transactions, and actually exempts a substantial portion of
foreign borrowing. The real purpose of the bill is to exert pressure
against all forms of U.S. investment abroad. This ignores the under-
lying causes of the balance-of-payments problem.
There has been a growing lack of confidence in the ability of the
United States to continuo military and other foreign aid at existing
levels. The United States has undertaken to guarantee, practically
singlehandedly, not only the security of Western Europe but contain-
ment of the expansion of 700 million Communist Chinese. In addi-
tion to this tremendous burden, we may ultimately be faced with even
greater financial burdens in Latin America. Our expenditures abroad
for both military and nonmilitary aid have been running at the rate of
about $4 billion annually. Unless and until we find a means of re-
ducing this outflow of $4 billion annually, we will never solve the
balance-of-payments problem.
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TABLE 3.?U.S. balance of payments, 1960-- to 2d quarter 1903
fin mill 1011 of dollars)
Commercial trade balance_
Coinmercial services balance
Balance on commercial goods and services 1.
Military expenditures
Military cash receipts a
Government grants and capltal-dollar payments to
foreign countries and InternatIon.il Institutions_
Government capital receipts excluding debt prepay-
ments, borrowings, and Bindings
Remittances and pensions_
Private capital:
Long tern,
Short term
Unrecorded transactions
Balance on regular transactions__
Special Government transactions f
Overall deficit
1960
1961
1962
1963'
lot
quarter
2d
quirter
2,817
3.179
1.989
420
502
1.428
2,130
2.34
614
486
4,275
5,800
4.311
1,034
988
?3.048
?2,934
?3,028
?748
?717
336
393
673
184
199
?I. 107
?1,116
?1,070
?235
?261
538
533
513
104
121
?672
?705
?736
?212
?207
?2,114
?2,143
?2,405
?1,022
?895
?1.438
?1,475
?716
sa
?577
?683
?005
?1,025
?122
68
?5.913
?3,043
?3.573
?059
?1,281
32
673
1,387
458
171
?3,881
?2,370
?2,186
?501
?1.110
I Seasonally adrusted.
Nonmilitary merchandise and service transactions less those finance I by Government grants and
capital.
a Excluding advances on military exports.
Includes small changes In miscellaneous Government nonliquid liabilities,
Not seasonally adjusted. Includes nonscheduled receipts on Government loans, advances on military
exports, and sales of nonmarketabl- medlurn-terin securities, Including $350 million of nonniarict table
medium-term convertible securities In the 1st quarter of 1953, and $152 million in the Zi quarter of 1963.
Source: Survey of Current Busine..s. as supplied by Treasury Department, Dee, 3, 1963.
For the past 2 years, the administration attempted to conceal the
seriousness of the problem through a series of "gimmicks." For the
first tnne, in the consideration of this bill, the administration has set
out separately these so-called special Government transactions in
table 3 above.
These so-called special Government transactions were a temporary
expedient?just as is H.R. 8000 -designed to "buy time," and thereby
to avoid facing the problem. First, the Western European nations
were called upon to anticipate the payment of their debt obligations
to the United States and to pay an advance for military supplies
purchased from the United States. While these transactions resulted
in a. decrease in the net balance of payments, the underlying causes of
the deficit were ignored. Secondly, when the possibility for advance
payments from the Western European nations was exhausted, another
expedient. was resorted to to bring about an "improvement" on paper
in our balance of payments. The Treasury borrowed funds abroad
which, at the option of the lenders, were repayable at a fixed .rate of
exchange in the foreign currency. It is reported that approximately
$500 million of these obligations were issued during the 6 months
ending June 30, 1963. This form of financing solved nothing.
There is unquestionably a "tight" world money market. Any
action taken to restrict funds in the United States from going into that,
market in particular types of transactions will necessarily be reflected
in offsetting pressures elsewhere. For example, the sale abroad of
U.S. Government obligations (either repayable, in foreign funds. or
convertible into such funds) was resorted to ns a means of offsetting
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the demand against U.S. gold stocks. The withdrawal of such capital
by the United States was immediately offset by an increase in long-
term borrowing by foreign borrowers in the U.S. capital market.
From the standpoint of our balance of payments, the net result was
the same as if the Treasury had not resorted to these bonds as a
substitute for meeting the demands on the U.S. gold.
Faced with this dilemma, the Treasury proposes to establish inde-
pendent capital markets outside of the United States. The com-
mittee was told that the U.S. capital market?headquartered in New
York City?could no longer meet the world needs for capital. There-
fore, it was hoped that the effect of this legislation might lead to the
establishment of competing capital markets elsewhere. We challenge
the desirability of that result, even if it could be achieved?which we
doubt. It is isolationism on the part of a nation which has under-
taken as a major objective the promotion of free trade. The result
will be detrimental to the position of the United States as leader of
the free world in the economic struggle against the Communist bloc.
Instead of compromising our position of financial leadership of the
free world by curtailing private outflow of capital, we should re-
appraise our governmental expenditures abroad. Governmental ex-
penditures should be reduced before private investment.
H.R. 8000 will adversely affect balance of payments by restricting U.S.
investment abroad
In proposing to control or tax U.S. investment abroad as a means of
improving the balance-of-payments deficit, the administration has
elected to sacrifice the long-range benefits which flow from such
investment in order to gain a dubious short-range advantage. In
fact, any advantage is predicated upon the doubtful assumptions
(1) that there will not be an offsetting decrease in foreign investment
in the United States and foreign purchases of U.S. products, and (2)
that the curtailment of U.S. investment abroad will be "temporary."
The administration claims that the Trade Expansion Act of 1962 and
the pending tax reduction bill ultimately will bring about a sufficient
increase in exports to offset the existing deficit in our balance of
payments. These assumptions completely overlook the changes which
are taking place in the world about us.
All of the nations are today striving toward industrialization.
Canada proposes to put severe restrictions on the imports of automo-
tive parts from the United States to be used in the assembly of auto-
mobiles in Canada. Similar restrictions have been imposed by other
nations where U.S. automotive manufacturers have assembly plants.
India seeks U.S. aid in order to expand its capacity for steelmaking.
The U.S. commercial trade balance cannot achieve any long-range
growth in the face of such pressures. In fact, as compared with the
1960-61 average, this balance shows a decline of more than $1
billion in the calendar year 1962 and promises a similar decline in the
calendar year 1963. The only real "bright spot" in our balance of
payments is reflected in the growth of private investment income.
Private investment income has increased from approximately $2.9
billion for the year 1960 to an estimated $4 billion for the calendar
year 1963. A breakdown of the items making up the commercial
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surplus in our balance of payments is set forth in the table which
follows:
TABLE 4.? U.S. balance of payments?Commercial surplus on goods and services,
1960 to June 1963
liii millions of dollars]
I. Nonmilitary merchkuldlse exports
2. Less exports financed by 0 ov. rnment
grants and capital
3. Commercial merchandise exports
(1-2)
4. Nonmilitary merchandise Imports
5, Commercial trade balance
0. l'rivute Investment income
7. Other nonmilitary service receipts
8. Less services financed by Oovt rnment
grants snd capital
9. Coniniercial service exports (6-1-7-
is)
lu. Nonmilitary service imports
. Commercial services balant e
12. Commercial surplus
1960
1961
1062
Change,
1960-62
(Improve-
mcnt +)
January to
June 1063,
seasonally
adjusted
+19,4,59
+19,913
+20,479
+1,020
+10,454
+1.919
----
+2.537
?
+2,345
+428
+1,427
+17.540
+17,676
+18.134
+594
+9.027
-14.723
-14.497
-16.146
-1,422
-8.105
+2.817
+3.179
+L989
-828
+922
+Z 873
+3.484
+3. 850
+977
+2.005
+4.307
+4.532
+4,801
+494
-1-2. 490
+288
+430
+538
+250
+339
- -
+6,892
+7,566
+8.133
+1,221
+4.151)
-8.434
-5.436
-5,791
-357
-3,056
+1,458
+2.130
+2.822
+882
-E 1.100
+4.275
+5,309
+4,811
+36
+2.022
tiource: Treasury Department, Dee, 3, 1963.
Commercial goods and services sold abroad already produce a
favorable trade balance. Unquestionably, some exports can be
increased. Such increases will, however, be slow and hard won.
The industrial capacity of our major world customers to supply
themselves has been expanded, largely with U.S. aid. Our former
customers all strive towards self-sufficiency. Every nation, no matter
how small or how weak economically, seeks to establish productive
facilities in order to avoid having to import steel, chemicals, oil,
and even manufactured ,goods such as automobiles and parts, and
household appliances. This trend will snake difficult- any dramatic
expansion of U.S. exports.
The tax rate reductions in the. proposed Revenue Act of 1963,
now pending before the Senate Finance Committee, are relied upon
to bring about a substantial increase in consumer purchasing power
in the United States. Such an increase will inevitably result in
a corresponding increase in merchandise imports (table 4, item 4).
Tax reduction will produce no offsetting increase in merchandise
exports (table 4, item 3). As a net re-suit, the U.S. commercial trade
balance may be reduced. To counteract this effect it is necessary
to encourage investment abroad, with the accompanying increased
return on such investment. This bill is a backward step toward
the solution of the problem. Instead, we should be striving to in-
crease U.S. ownership of foreign income-producing assets.
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CONCLUSION
For the reasons stated, the undersigned Republican members of
the Ways and Means Committee are opposed to the enactment of
this legislation.
H.R. 8000 is another effort to "cover up" the underlying causes
which have brought about recurring deficits in our balance of pay-
xnents. Even its proponents concede that the legislation is undesirable
as a long-term measure. On the other hand, we have seen no program
advanced by the administration which would serve permanently to
meet the problem. In fact, the recent reduction by the Congress in
foreign aid appropriations was bitterly opposed by the administration
spokesmen.
No one should be deceived by this bill. The administration dis-
claims any desire to control foreign exchange. Except for its induced
effect as a "control" on all U.S. investment abroad, the bill would
accomplish little. We would be opposed to direct control over U.S.
investment abroad, and are equally opposed to the attempt by this
bill to achieve that result indirectly.
If the United States is to maintain its position as leader of the free
world in the cold war with the Communist bloc, and particularly in
the economic confrontation, we must maintain our position as the
financial leader of the free world. That position can be maintained
only so long as we provide a free capital market. Our position of
leadership imposes upon us that burden. Indeed, to be banker to
the world is a profitable occupation. This bill would seek to destroy
that position. It reflects a 'defeatist" attitude which we cannot
accept.
0
JOHN W. BYRNES.
THOMAS B. CURTIS.
VICTOR A. KNOX.
JAMES B. UTT.
JACKSON E. BETTS.
BRUCE ALGER.
STEVEN B. DEROTJNIAN.
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20 August 1964
MEMORANDUM FOR: Assistant to the Director
tive Registry
SUBJECT: H. R. 8000 - Interest Equalization Tax Act
1. On 19 August the Senate accepted the conference report
on H. R. 8000, the Interest Equalization Tax Act. This Act will
now be sent to the President for his signature.
2. As soon as a copy of the Public Law is available, we
shall forward it to you.
Distribution:
Orig & 1 - Addressee
1 - OGC/LC Subject
1 - OGC/LC Chrono
1 - OGC/LC Signer
OGC/LC/PJC:bw
Office of Legislative Counsel
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STAT
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STAT MEMORANDUM FOR:
SUBJECT:
H. R. 8000
Z March 1964
H. R. 8000 will be up for floor action on Tuesday under
rule providing for three hours of debate.
jOHN S. WARNER
Legislative Counsel
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MEMORANDUM OR: Director of C
SUBJECT:
13 November 1963
elligence
H. R. aOIo loterest Equalization Tax Act
This memorandumis for in formation only.
Z. Attached is a rather detailed analysis of H. R. 8000
prepared in this office. Also attached are the printed hearings on
this bill. This is an Administration measure to stem the outflow of
long-term capital from the U. S.
3. At the present time all hearings have been completed and
planned that there be executive sessions this weeb looking
a markup of the bill and reporting it out. It seems very
y the bill will probably pass the House after having been reported
favorably but it is doubted that we will see any action on the Senate
this year. It should be noted that the effect desired by the
tattoo has in part already been achieved in that the additional
Il apply on acquisitions made after 18 July 1963 thus slowing
vestment flow.
4. Also attached is an excerpt from The Waohinitn Post
commenting on this bill. From our sources in Treasury and on the
Hill, we agree generally with the conclusions of this article.
JOHNS.
istative Counsel
AUL
Distribution:
Orig - DCI wiatts
1 - ER w/o atts.
I - Leg. C. Subject w/o atts.
- Leg. C. Chrono. w/o atts.
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