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Sorember 20, 1956. ^ POSSIBLE WAY OF CHECKED THE CTASIOg OF TAXES SBSIGBEB TO DETER j m t m OF CAPITfl, St is common knowledge that the treasury has never been successful In collecting more than a snail portion of the incone and capital gains taxes applicable to foreigners* The repeal of thecspital gains taxes and the surtaxes applicable to foreigners! in the Revenue Act of 19Sp and the substitution of a flat 10 percent tax on income was in part & recogni** tion of the fact of widespread evasion and of the growth of trading In American securities in other markets* Congress in affect said* •Wo cannot hope to tax foreigners as ure do Americans* J*et us therefore repeal the capital gains tax and try to prevent a further loss of business to our security exiih&nges** It would appear* therefore* futile to initiate a stock purchase tax or a capital gains tax applicable to foreigners unless sons means can be found to prevent the evasion of such taxes through the development of markets in our securities abroad* The following suggestion is designed to prevent this form of evasion! Require that all stocks in An&rican companies listed to our stock exchanges be legally transferable oiOy by gift* by private sale subject to the approval of the S* S* or % sale on American stock exchanges* Evidence that the stock had been transferred in one of these three says would have to be furnished to transfer agents before the transfer could be offacted* Any purchase or sale tqr noa-resldenta would either have to be negotiated directly through an Anerlcanbroker or indirectly through a resident* Other* wise nonresidents would have no legally enforceable claim to the stock or to the dividends payable on the stock* Hence* information could be obtained from brokers1 books without fear that this would involve loss of business to American brokers* as has happened formerly when information on transactions of foreigners was obtained in this ray* This provision would not prevent the issue of end tracing in abroad of bearer certificates representing ownership in American stocks. It would* however, require the payment of the purchase tax whenever more American stocks were purchased against which additional bearer certificates are issued* In order to prevent Americans abroad from purchasing stocks for foreigners on our stock exchanges and in this way avoiding the payment of a purchase tax* the tax might be made applicable to all non-residents rather than to non-resident aliens. The proposal has the additional merit of preventing the growth of trading abroad by Americans for the purpose of evading margin requirements and capital gains taxes* Its legality could be defended on the grounds that it was necessary for the effective exercise of powers that are constitutional* It would not apply to bonds nor to foreign stocks* such as Canadian Pacific* listed on our exchange* The Asa&caa broker* if the purchase were direct* or the resident nominee or correspondent* if the purchase were indirect* could be made responsible for the payment of & S percent stock purchase tax and, possibly, a flat c&pitsi gains tax at the time of sale* It Is far easier to discover and prosecute resident than non-resident evaders. One of the most effective vays of checking evasion and of deterring foreign purchases of our stocks would appear to be to impose a flat income tax of say percent (the seme as In Great Britain) to be deducted at source In the case of stocks registered In the namea of non-residents and to b© declared and paid by resident agents or correspondents in the case of stocks held here on non-resident account* Poss- ibly a lower rate sight be advisable for dividends going to residents of contiguous countries* Consideration alght even be given to the imposition of a high income tax deducted at source in lieu of a capital gains tax*
