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[CO M M ITTE E P B IN T ]

P R E S I D E N T ’S S P E C I A L

M ESSAG E

O N
B A LA N C E

O F

P A Y M E N TS

ALONG WITH H.R. 8000 AND DESCRIPTION AND
TECHNICAL EXPLANATION OP H.R. 8000, THE
“ INTEREST EQUALIZATION TAX ACT OF 1963”

P repared A

nd

S u b m it t e d B y T h e

DEPARTMENT OF THE TREASURY
TO T H E

C O M M IT T E E
H O U S E

N

o t e .—

O N

O F

W A Y S

A N D

M EA N S

R E P R E S E N T A T IV E S

This document is printed for information purposes only
so as to make it generally available to the public. It has
not been considered or approved by the Committee on
Ways and Means or any Member thereof.

U.S. GOVERNMENT PRINTING OFFICE
21-851




WASHINGTON : 1963

COMMITTEE ON W A Y S AN D MEANS
W IL B U R D . M ILLS, Arkansas, Chairman
JOHN W . B Y R N E S, Wisconsin
C E C IL R . K IN G , California
H O W A R D H . B A K E R , Tennessee
TH O M A S J. O 'B R IE N , Illinois
TH O M A S B. C U RTIS, Missouri
H A LE BOGGS, Louisiana
V IC T O R A. K N O X , Michigan
E U G EN E J. KEOGH, New York
JAM ES B. U T T , California
F R A N K M . K A R STE N , Missouri
JACKSON E. B E TT S , Ohio
A . S. H E R LO N G , Jr ., Florida
W IL L IA M J. G R E EN , Jr ., Pennsylvania
B R U C E A LG E R , Texas
S TE V E N B. D E R O U N IA N , New York
JOHN C. W A T T S , Kentucky
H E R M A N T. SCH N E EB E LI, Pennsylvania
A L U LLM A N , Oregon
H A R O L D R. C O L LIE R , Illinois
JAM ES A . B U R K E , Massachusetts
C L A R K W. THOM PSON, Texas
M A R T H A W . GR IFFITH S, Michigan
ROSS BASS, Tennessee
W . P A T JENNINGS, Virginia
L e o H. Ibw ix, Chief Counsel
John M . M artin, Jr., Assistant Chief Counsel
W illiam H. Q u ealy, Minority Counsel




C O N T E N T S

Page

President’s special message on balance of payments_____________________
Description of proposed interest equalization tax_______________________
Technical explanation of proposed Interest Equalization Tax Act of 1963. _
H.R. 8000, the “ Interest Equalization Tax Act of 1963” ________________




m

1
13
19
43

PRESIDENT'S SPECIAL MESSAGE ON BALANCE OP
PAYMENTS
T

he

W

h it e

H

ouse,

J ly 18,1963.
u

To the Congress oj the United States:
Soon after my inauguration, I reported to the Congress on the
problems presented to this Nation by 3 successive years, beginning
in the late.1950’s,'of mounting balance-of-payments deficits accom­
panied by large gold outflows: and I announced a program designed
to restore both confidence in the dollar and eventual equilibrium in
our international accounts. The challenge posed by those pressures
.was heightened at that time by the need to halt and reverse the
spread of unemployment and revive our faltering economy. Rejecting
a choice between two equally unpalatable alternatives—improved
employment at home at the cost of a weaker dollar abroad or a
stronger dollar at the cost of a weaker economy and nation—we
sought a new course that would simultaneously increase our growth
at home, reduce unemployment, and strengthen the dollar by elimi­
nating the deficit in our international payments. It is appropriate
now—nearly 2 years later—to look back on the problems faced, to
}i
review the progress made and to chart the course ahead.
There is much from which to take heart. Our economy has re­
sumed-its growth and unemployment has been reduced. The dollar
remains strong, bulwarked by nearly 40 percent of the free world’s
monetary gold stock as well as by a newly constructed network of
bilateral" and multilateral financial arrangements. Our gold outflow
has been halved. There are signs of longer run improvement in our
world competitive position, as our prices and costs hold steady while
others are rising. T h e deficit in our balance of payments has been
reduced—from 83.9 billion in 1960 to $2.4 billion in 1961 and $2.2
billion in 1962.
Our basic strength, moreover, is vast, real, and enduring.. -Our
payments deficits, measured in terms of our loss of gold and the
increase in our short-term liquid liabilities to foreigners, have con­
sistently been equaled or exceeded by the growth of our long-term
high-yielding foreign assets—assets which have been and will continue
to be an increasing source of strength to our balance of payments.
Today, Americans hold more than $60 billion of private investments
abroad, and dollar loans repayable to the U.S. Government total over
$11 billion. At the end of 1962, all of these assets exceeded our
liabilities to foreigners by an estimated $27 billion. ,. And they have
shown an increasing strength over the years: our total income from
these sources in 1959 was $3 billion; m 1962 it had risen to $4.3
billion; and we expect further substantial increases in the coming years.
These are all signs of progress. But unemployment is still too high;
our growth rate is still too low; and it is now clear that, despite the
favorable forces at work over the long run, more remains to be done
today to eliminate the continuing payments deficit.




2

MESSAGE ON BALANCE OF PAYMENTS

A significant portion of our progress so far has been due to special
agreements with friendly foreign countries—for debt prepayments,
advance payments for military equipment, and U.S. borrowings
abroad. While similar arrangements may once again prove capable
of covering a substantial amount of the gross deficit in 1963, such
special transactions cannot be relied upon for the indefinite future.
Moreover, while our commercial trade balance and Government ex­
penditures overseas have shown modest improvement, capital out­
flows, both short-term and long-term, have increased.
Although there is urgent need for further effort I want to make it
clear that, in solving its international payments problem, this Nation
will continue to adhere to its historic advocacy of freer trade and cap­
ital movements, and that it will continue to honor its obligation to
carry a fair share of the defense and development of the free world.
At the same time, we shall continue policies designed to reduce unem­
ployment and stimulate growth here at home—for the well-being of
all free peoples is inextricably entwined with the progress achieved
by our own people. I want to make it equally clear that this Nation
will maintain the dollar as good as gold, freely interchangeable with
gold at $35 an ounce, the foundation stone of the free world’s trade
and payments system.
But continued confidence at home and cooperation abroad require
further administrative and legislative inroads into the hard core of
our continuing payments deficit—augmenting our long-range efforts
to improve our economic performance over a period of years in order to
achieve both external balance and internal expansion—stepping up
our shorter rim efforts to reduce our balance-of-payments deficits
while the long-range forces are at work—and, adding to._ougistockjpU of arrangements^ designed .to__finance ouF^eficiteduring our
e
return to eqimibrium in a way that assures the continued" smooth
functioning of the world's monetary and trade systems.
Before turning to the specific measures required in the latter two
categories, I must emphasize ohce again the necessity of improving
this Nation’s overall long-range economic performance— including
increased investment and modernization for greater productivity ana
>rofits, continued cost and price stability, and full employment and
aster growth., This is the key to improving our international com­
petitiveness, increasing our trade surpluses and reducing our capital
outflows.

{

That is why early enactment of the comprehensive tax reduction
and revision program previously submitted is the single most impor­
tant step that can be taken to achieve balance abroad as well as
growth here at home. The increased investment incentives and
purchasing power these personal and corporate tax reductions would
create—combined with last year’s actions giving special credits for
new investment and more favorable depreciation treatment—will
promote more employment, production, sales and investment, par­
ticularly when accompanied by the continued ample availability of
credit and reasonable long-term rates of interest. A prosperous,
high-investment economy brings with it the rapid gains in productivity
and efficiency which are so essential to the improvement of our com­
petitive position abroad.
To gain new markets abroad and retain the gains of new growth and
efficiency here at home, we must continue the price-cost stability of



MESSAGE ON BALANCE OF PAYMENTS

3

recent years, limiting wage and profit increases to their fair share of
our improving productivity. That is why we have, for 2 years, been
urging business and labor to recognize and use reasonable wage-price
guideposts for resolving the issues of collective bargaining. Our suc­
cess in holding down our price level relative to that of our major com­
petitors is a powerful force working to restore our payments balance
over the longer run. This fact should not be obscured by current,
short-run developments.
While these long-range forces are taking effect, a series of more
immediate and specialized efforts are needed to reduce the deficit in
our international transactions and defend our gold reserves:
1. EXPORT EXPANSION

Our commercial sales of goods and services to foreign countries
in 1962 exceeded our purchases by $4.3 billion, and they are continuing
at about the same rate this year. This is our greatest strength, but it
is not enough. Our exports of goods have risen only moderately over
the past 3 years, and have not kept pace with the rapid rise of imports
which has accompanied our domestic expansion. As a result, rather
than furnishing increased support for our other transactions, 1962 saw
a decline in our commercial trade surplus.
The primary long-term means for correcting this situation is
implementation of the Trade Expansion Act of 1962. The special
representative for trade negotiations is preparing to use to the fullest
extent the authority given to me by the act, in an across-the-board
drive for lower tariffs and against other barriers to trade. This should
open new markets and widen existing markets for American exports.
As mentioned above, our whole long-range domestic program—
including increased investment, improved productivity and wageprice stability— is designed to better the competitive position of our
roducts both at home and abroad. Continued price stability at
ome, contrasted with the upward trend in prices abroad, will create
an increasingly favorable climate for American exports; and this
administration is concentrating on six immediate measures to help
American businessmen take advantage of our export potential.

E

First, the Export-Import Bank has created a wholly new program of
export financing which now provides U.S. business with creait facilities
equal to any in the world. The major element in this new program
is the guarantee of short- and medium-term export credits by the
Foreign Credit Insurance Association, composed of more than 70
private insurance companies in conjunction with the Export-Import
Bank. I urge the Congress to act promptly to restore the Bank to
full operating efficiency by renewing its charter and authorizing
adequate financing.
Second, the Departments of State and Commerce have strengthened
and expanded efforts overseas to probe for new markets and promote
the sale and distribution of American products.
Third, the Department of Commerce has developed a broad program
of education and assistance to present and potential American ex­
porters. I have requested a relatively small amount of additional
funds to strengthen the Department's efforts to stimulate our exports.
These funds, amounting to $6 million, were not approved by the
House of Representatives. It is essential, if we are to increase our



4

MESSAGE ON BALANCE OF PAYMENTS

trade surolus, that they be included in the final appropriation bill.
This modest sum would pay for itself many times over in increased
exports, lower payments deficits, and protection for our gold reserves.
Fourth, the Department of Agriculture announced last March a
new auction program for direct sales of cotton abroad. It is expected
that this new technique will insure competitive pricing for our cotton
in export markets and will increase exports by as much as $100 million
over last year’s levels.
Fifth, present ocean freight rates discourage our exports as com­
pared to imports. The freight charges on Atlantic crossings are far
higher for eastbound freight than for comparable items bound for
our shores. A similar situation prevails on other trade routes.
While these substantial differentials may have been acceptable in
the immediate postwar period of the dollar shortage when Europe
was struggling to get on its feet, their magnitude is clearly unjustified
today. Accordingly, I have directed the Secretary of Commerce to
take corrective action through the Maritime Administration; and
I am urging the Federal Maritime Commission in its role as an in­
dependent regulatory agency to question those specific export rates
which appear unduly high. Should legislation prove necessary, it
will be sought.
Sixth, in order to give further momentum to the expansion of our
export performance, I will convene a White House Conference on
Export Expansion on September 17 and 18, to alert American firms,
whether or not they are now exporting, to the opportunities and
rewards of initiating or expanding export efforts. We shall use this
opportunity to emphasize to American businessmen that vigorous
action to increase their exports would serve their own private interests
as well as the national interest.
2.

tourism

Another element that requires attention in our commercial trans­
actions is the increase in our unfavorable net tourist balance. With
increasing prosperity encouraging American travel abroad, total tour­
ist spending in foreign countries rose another 10 percent last year, to
nearly $ %
2 billion. This was partially offset by increased foreign tour­
ist expenditures in the United States, but the net result was an outflow
of $1.4 billion, or two-thirds of last year’s overall balance-of-payments
deficit. This year the cost is estimated to be still greater. That is
why we have had to limit the duty-free exemption for returning tour­
ists to $100 per person. Last year this measure achieved a saving of
more than $100 million, and I am gratified that Congress has extended
the limitation for another 2 years. We have also sought, through
establishment of the U.S. Travel Service, to increase our income from
visitors coming to our country. To further that effort, I strongly
recommended that Congress approve the full amount of the appro­
priation requested for the U.S. Travel Service.
In addition, in cooperation with the appropriate Government
agencies, I am asking the domestic travel and tourism industry to
launch a more unified drive to encourage Americans to learn more
about their own country and the glory of their heritage. A “See
American Now" program, to be in fim operation by the spring of 1964,
will make the most of our magnificent resources and make travel at
home a more appealing alternative to travel abroad.



MESSAGE ON BALANCE OF PAYMENTS

5

3. FEDERAL EXPENDITURES ABROAD

Federal expenditures abroad go largely for defense and aid. These
represent the obligations which now from our position of world leader­
ship and unrivaled economic strength. With the recovery of other
economically advanced nations, particularly our allies in Western
Europe, we have made vigorous and increasingly successful efforts
to work out with them a better sharing of our common responsibilities.
These efforts— combined with rigorous scrutiny of offshore expendi­
tures— have enabled us, in spite of mounting worldwide requirements
and costs, to reduce the overall total of our own oversea expenditures
while we increase the security of the free world and maintain a high
level of assistance to developing countries.
A continual process of modernizing our Armed Forces and increasing
efficiency, resulting in heightened defense effectiveness, is reducing
the requirements for oversea dollar expenditures. At the same time,
by tying our aid more effectively to domestic procurement and cutting
civilian expenditures sharply, we should be able to achieve further sav­
ings. In fact, by January 1965, these processes should result in a
reduction of the rate of our Federal oversea dollar expenditures by
aprroximately $1 billion from that of .1962.
(-4) M ilitary expenditures
The Defense Department has, since the beginning of this administra­
tion, been making vigorous efforts to restrain oversea expenditures,
without reducing military effectiveness.
Thus, despite the Berlin buildup of 1961 and rising costs overseas,
gross expenditures abroad by the Defense Department have been
held below i960 levels. As a result of the desire of our allies to acquire
from us modern military equipment, which they need to strengthen
free world defenses, at lower cost than they could produce the equip­
ment themselves, substantial offsets to these expenditures have also
been achieved, so that our net outlays abroad for defense have declined
from $2.7 billion in 1960 to $1.9 billion in 1962.
In line with these continuing efforts, the Secretary of Defense has
informed me that the annual rate of expenditures abroad by the De­
partment of Defense will be reduced— by measures to be put into
effect before the end of calendar year 1964— by more than $300 million
from the 1962 level. At the same time the Department of Defense
will continue to seek arrangements with major allied countries to in­
crease their military procurement from the United States so as to
reduce the net outflow still further. The Secretary has further assured
me that this reduction will be accomplished without any reduction in
the effectiveness of our military posture and with no impairment in
our ability, to meet our commitments to our allies in all parts of the
world.
In addition to direct expenditures by the Defense Department, our
defense expenditures abroad have for many years been increased by
the cost of programs for the acquisition of strategic materials from
foreign sources. The cost of these programs is now steadily declining
since they have largely fulfilled their purpose and are no longer needed.
Within 2 years they will be reduced by over $200 million as compared
to 1962, insuring a total reduction in defense dollar expenditures well
in excess of $500 million.
21-851H-6S—

2




6

MESSAGE OK BALANCE OF PAYMENTS

(B) Agency fo r International Development

During 1960 only about one-third of AID program expenditures
were in the form of U.S. goods and services. Last year that proportion
had risen to about 50 percent. But during the fiscal year whicn ended
last month, fully 80 percent of A ID ’s commitments were “ tied” to the
export of U.S. goods and services. The balance was virtually all
committed for purchases in the less developed countries rather than
in the developed nations where the payments surpluses exist which give
rise to our deficit. During fiscal year 1964, for which funds are now
being considered by the Congress, AID commitments tied to U.S.
exports will rise beyond 80 percent of the total. I have directed the
Administrator of AID to continue and intensify this policy so that
AID expenditures entering our balance of payments in fiscal year
1965 may be further reduced by about $500 million as compared to
fiscal year 1961, from about $1 billion to not over $500 million, the
lowest practicable minimum.
(i0 ) Other departments and agencies
The oversea disbursements of all other departments of Government
have also been brought under special review and control by the Direc­
tor of the Bureau o f the Budget. Total Federal expenditures abroad
(excluding Defense, AID, Treasury payments on foreign-held debt
and Federal pension payments) coming within the scope of this
review now amount to approximately $600 million per year. The
Director of the Budget has assured me that vigorous screening of
expenditures abroad by these other Federal departments and agencies
will achieve further substantial balance-of-payments savings. These
savings, together with those which may be expected from revisions
of programs under the Agricultural Trade Development and Assistance
Act, should amount to some $100 million a year. This includes my
request to the Congress to enact legislation permitting freer use of
our present holdings of the currencies of a number of other countries.
4. SHORT-TERM CAPITAL FLOWS

By skillful use of the tools of debt management and monetary
policy, the Treasury Department and the Federal Reserve System
have substantially reduced the outflow of short-term capital through
a series of carefully managed increases in short-term money rates,
while maintaining ample credit availability and keeping both long­
term rates and bank loan rates low and, in many cases, declining.
Experience in the recovery underway over the past 2% years provides
a solid basis for expecting that a determined effort can succeed in
keeping long-term investment and mortgage money plentiful and
cheap while boosting short-term interest rates. From February 1961
through July 12, 1963, the rate on newly issued 3-month Treasury
bills rose 76 basis points, while the rise in long-term Treasury bond
yields was held to only 22 basis points and the yields on high-grade
corporate bonds and mortgages actually declined.
However, the recorded outflows of short-term funds— together with
unrecorded net outflows, a large portion of which undoubtedly
represent short-term capital movements— still amounted to approxi­
mately $1.6 billion in l962 and have continued on a substantial scale
so far this year. A sizable reduction in this drain would do much to
strengthen our overall balance of payments. It is for this reason




MESSAGE ON BALANCE OF PAYMENTS

7

that the Federal Reserve has decided to increase the rediscount rate
from 3 to 3% percent. At the same time, the Board of Governors of
the Federal Keserve System and the Federal Deposit Insurance
Corporation have raised the interest-rate ceilings on time deposits
payable in 90 days to 1 year, in order to enable our banks to compete
more effectively with those abroad and thus attract funds that might
otherwise leave the country.
While none of us welcomes higher interest rates at a time when our
economy is operating below capacity, an increase in short-term rates—
at a time when liquid sayings are growing rapidly, and when there are
no accompanying restrictions on credit availability nor parallel
increases in the interest rates on bank loans, home mortgages, or other
long-term obligations— should have little, if any, adverse effect on
our economy. The unprecedented flow of liquid savings should largely.
insulate the longer term markets from the effect of higher short-term
rates. I have been assured by both Treasury and Federal Reserve
officials that they intend to do everything possible through debt
management policy and open-market operations to avoid any reduc­
tion in domestic credit availability and any upward pressure on long­
term interest rates while the economy operates below capacity without
inflation. Other agencies of the Federal Government will work to
maintain continued ready availability of private mortgage loans at
stable interest rates. Nevertheless, the situation lends increased
urgency to the fiscal stimulus that would be provided by the prompt
enactment of the substantial tax reductions I have recommended.
5. LONG-TERM CAPITAL OUTFLOWS

Long-term capital outflows consisting of direct investment in pro­
ductive plant abroad appear to have leveled off in recent years,
whereas portfolio investments in the form of long-term loans or se­
curities purchases have been rising rapidly. While our long-range
program should increase the attractiveness of domestic investment
and further reduce the outflow of direct investment, the rising outflow
of long-term capital for portfolio investment abroad shows no sign of
abating. It is up from $850 million in 1960 to $1.2 billion in 1962,
and so far this year is running at an annual rate of well over $1.5
billion.
In view of the continued existence of direct controls and inadequate
capital market mechanisms in many foreign countries, and the wide
differential between the long-term rates of interest in the larger indus­
trial countries and the United States, there appear to be only three
possible solutions to this problem, two of which are unacceptable under
present circumstances:
A substantial increase in our whole long-term interest rate
structure would throw our economy into reverse, increase unem­
ployment and substantially reduce our import requirements,
thereby damaging the economy of every free nation;
The initiation of direct capital controls, which are in use in
most countries, is inappropriate to our circumstances. It is con­
trary to our basic precept of free markets. We cannot take
this route.
A third alternative— the one which I recommend— would stem
the flood of foreign security sales in our markets and still be fully



8

M ESSAG E ON BALANCE OF P A Y M E N T S -

consistent with both economic growth and free capital movements.
I urge the enactment by the Congress of an “ interest equalization
tax,” which would, in effect, increase by approximately 1 percent
the interest cost to foreigners of obtaining capital in this country,
and thus help equalize interest rate patterns for longer term
financing in the United States and abroad. The rate of tax
should be graduated from 2.75 to 15 percent of the value of debt
obligations, according to the remaining maturity of the obliga' tion, and should be 15 percent in the case of equity securities.
This tax should remain in effect through 1965 when improvements
in both our balance of payments and in the operation of foreign
capital markets are expected to permit its abandonment.
Under this alternative, the allocation of savings for investment in
securities will continue to be the result of decisions based on market
prices. There will be no limitations on the marketing of foreign issues
and no governmental screening of borrowers. Reliance will be placed
on price alone to effect an overall reduction in the outflow of American
funds for stocks, bonds, and long-term loans—both new or outstand­
ing^ whether publicly marketed or privately placed.
The tax would not apply to direct investment. It would not apply
to securities or loans that mature in less than 3 years. Nbr would it
apply to the loans of commercial banks. ; These exemptions will assure
that export credit will remain fully available. Furthermore, purchases
of the securities of less developed countries or of companies operating :
primarily in such countries will not be taxed.
Nor will the tax apply to transactions in foreign securities already
owned by Americans, or to the purchase of securities by foreigners.
Underwriters and dealers would be exempted from the tax on stock or
securities resold to foreigner as part of the distribution of a new issue.
But all Americans who purchase new or outstanding foreign securities
from foreign issuers or owners would be subject to tins tax. In order
to avoid unfair burdens, on transactions which are nearly complete, the'
tax should not apply to offerings of securities for which active registra- ’
tion statements are now 6n file with the Securities and Exchange
Commission. .Purchase commitments which have already been made
should also not be affected.
The Secretary of the Treasury is submitting the details of this
proposal to the Congress; and I have been assured that the House
Ways and Means Committee will be prepared to give high priority
to this proposal after action has been taken with respect to the
overall program of tax reduction and reform now before it. Since
the effectiveness of this tax requires its immediate application, I am
asking Congress to make the legislation effective from the date of
this message. # The Internal Revenue Service: will promptly make
available all instructions necessaiy for interim fulfillment of the
provisions of this recommendation, pending the enactment of legisla­
tion by the Congress.
6. INVESTMENT B Y FOREIGN SAVERS IN THE SECURITIES OF U .S .
PRIVATE COMPANIES

Investment by foreign savers in the securities of U.S. private
companies has fallen rapidly to less than $150 million in 1962. The
better climate for investment that will flow from enactment of the



MESSAGE ON BALANCE OF PAYMENTS

9

rogram for tax reduction and reform now before the Congress will
o much to improve this situation but a direct action program is
also needed to promote oversea sales of securities of U.S. companies.
Such a program should also be designed to increase foreign partici­
pation in the financing of new or expanded operations on the part of
U .S. companies operating abroad.

S

To meet these two facets of a single problem, a new and positive
program should be directed to the following areas of effort:
(а) The identification and critical appraisal of the legal,
administrative, and institutional restrictions remaining in the
capital markets of other industrial nations of the free wond which
prevent the purchase of American securities and hamper U.S.
companies in financing their operations abroad from non-U.S.
sources;
(б) A review of U.S. Government and private activities which
adversely affect foreign purchase of the securities of U.S. private
companies; and
(< A broad and intensive effort by the U.S. financial commu­
?)
nity to market securities of U.S. private companies to foreign
investors, and to increase the availability of foreign financing for
U.S. business operating abroad.

Such a program will necessarily involve a pooling of the know-how
and efforts of the Government and the financial community. I have
asked the. Treasury Department, in consultation with, the State
Department, to develop an organization plan and program.
The increased freedom of capital movement and increased participa­
tion by foreign citizens and financial institutions in the ownership
and financing of American business, toward which these efforts are
directed, will serve to strengthen the economic and political ties of the
free world as well as its monetary system. Securities of. U.S. private
firms could be and should be one of our best selling exports. An
increasing foreign investment in these securities will encourage a more
balanced two-way capital traffic between the United States and other
capital markets and minimize the impact of net long-term capital
outflows from the United States on our balance of payments.
7.

special g o v e r n m e n t transactions

Special Government transactions covered $1.4 billion of our deficit
in 1962. These included prepayment of debt by foreign countries,
advance payments on military purchases here, and the issuance by
the Treasury of medium-term securities to foreign official holders of
dollars. Further debt prepayment is expected in 1963— France has
just announced a prepayment of $160 million— but it is clear that
these are temporary gains which cannot be repeated for very long.
Nor is it likely that advance payments on military purchases will
again be large, as the pace of deliveries against purchases is now rising.
Therefore, as our continuing balance-of-payments deficit, leads to
accruals of dollars by foreign central banks, exceeding the size of the
dollar balances which they normally parry, it has been particularly
helpful that a number of foreign governments and central Thanks have
begun purchasing a new type, of nonmarketable medium-term
Treasury security, denominated either in dollars or in* their own
currencies, as a convenient alternative to:the purchase of gold. . Some



10

MESSAGE ON BALANCE OF PAYMENTS

$610 million of such securities have been newly issued thus far in
1963.
Further debt prepayments and further sales of these securities
during the remainder of this year will reflect the unprecedented degree
of cooperation now prevailing in international finance and the growing
recognition that correction of payments imbalances is a responsibility
of the surplus as well as the deficit countries. In this spirit we shail
also continue to press for a fuller and fairer sharing of the burdens of
defense and aid and for the reduction or elimination of the trade
barriers which impede our exports.
8. GOLD SALES AND INCREASED DOLLAR HOLDINGS

Gold sales and increased dollar holdings serve to finance what
remains of our deficit after special governmental transactions. In
1962, this deficit amounted to approximately $2.2 billion. It was
financed by the sale of $890 million in gold and $17 million of our
holdings of foreign exchange as well as by an increase in foreign
holdings of dollars and U.S. Government securities amounting to
$653 million, and an increase of $626 million in the holdings of dollars
by the International Monetary Fund.
The total outflow of gold for the 2 years 1961 and 1962 combined
only slightly exceeded the outflow in the single year 1960; and the
outflow in 1963 is running at a rate well below last year. Since the
rise in short-term interest rates resulting from the recent action of
the Federal Reserve will make it considerably more attractive for
foreigners to hold their assets in dollars, including short-term U.S.
Government securities, prospects are improved that increased foreign
holdings of these assets instead of gold will finance a still larger share
of our deficit.
9. THE INTERNATIONAL MONETARY FUND

The International Monetary Fund, however, presents a different
situation. Last year the Fund’s dollar holdings increased as other
countries paid off their debts in dollars and concentrated new borrow­
ings in other convertible currencies to the extent practicable. But
the Fund's rules provide that, except in the case of a drawing— that
is, a borrowing—it cannot hold more of any currency than was paid
in at the time of original subscription (in effect, 75 percent); and the
Fund's holdings of dollars have now nearly reached that level.
To meet this situation the United States has requested and the
Executive Board of the IM F has approved a $500 million standby
arrangement which authorizes us to draw on the Fund from time to
time during the coming year. It is our intention to utilize this
authority for the purpose of facilitating repayments which are ex­
pected to total about $500 million during the course of the next 12
months. When a country desires to repay the Fund, we will draw
convertible foreign currencies from the Fund, paying for them with
dollars. The country making the repayment will use its own dollars
to buy these foreign currencies from us in order to repay the Fund.
All transfers will take place at par. Thus the Fund will continue to
finance a portion of our deficit by increasing its holdings of dollars
and its various debtors will continue to have a simple and costless



MESSAGE ON BALANCE OF PAYMENTS

11

method by which. they can redeem their obligations to the Fund.
The alternative under present circumstances, now that they cannot
pay off directly in doUars, would have been either to buy gold from
the United States with which to repay the Fund, or to purchase other
convertible currencies in the market with their dollars at extra cost
and inconvenience.
Drawings by the United States under this new arrangement will be
repayable in 3 years, with a 2-year extension available if needed. No
interest will be payable, but the drawings will be subject to a one­
time service charge of one-half of 1 percent.
10. EVOLUTION OF THE INTERNATIONAL MONETARY SYSTEM

During the past 2 years great progress has been made in strength­
ening the basic fabric of the international monetary system upon
which the whole free world depends. Far closer cooperation among
the central banks of the leading industrial countries has been achieved.
Reciprocal credit arrangements have been established to meet instantly
any disruptive disturbance to international payments— arrangements
which successfully contained the monetary repercussions of the Berlin
crisis in 1961, the heavy pressure on the Canadian dollar in the
spring of 1962, the Cuban crisis last autumn, the reaction that followed
the exclusion of the United Kingdom from the Common Market, and
a number of less striking events that might, in other years, have set
off dangerous rounds of currency speculation. An informal but highly
effective operating relationship has grown up among a number of the
same countries with respect to the London gold market, ruling out
for the future any repetition of the alarming rise in the price of gold
which created such uncertainty in October 1960. Finally, 10 of the
leading industrial countries have established a $6 billion facility for
providing supplemental resources to the International Monetary Fund,
which will be available in the event of any threat to the stability of
the international monetary system.
The net result has been to provide strong defenses against successful
raids on a major currency. Our efforts to strengthen these defenses
will continue. While this process is taking place, the United States
will continue to study and discuss with other countries measures
which might be taken for a further strengthening of the international
monetary system over the longer run. The U.S. interest in the con­
tinuing evolution of the system inaugurated at the time of Bretton
Woods is not a result of out current payments deficit— rather it
reflects our concern that adequate provision be made for the growth
of international liquidity to finance expanding world trade over the
years ahead. Indeed, one of the reasons that new sources of liquidity
inay well be needed is that, as we close our payments gap, we will
cut down our provision of dollars to the rest of the world.
As yet, this Government is not prepared to recommend any specific
prescription for long-term improvement of the international monetary
system. But we are studying the matter closely; we shall be dis­
cussing possible improvements with out friends abroad; and our
minds will be open to their initiatives. We share their view that the
problem of improving the payments mechanism is one that demands
careful joint deliberation. At the same time, we do not pretend that
talk of long-range reform of the system is any substitute for the actions
that we ourselves must take now.




12

<MESSAGE ON BALANCE OF PAYMENTS
THE PROMISE OF THE FUTURE

Full implementation of the program of action I have outlined
today should-lead to substantial improvement in our international
payments. The rate of Government expenditures abroad will drop
by $900 million over the next 18 months, and the combined effect of
the increase in short-term interest rates and the interest equalization
tax should equal, and more probably exceed, this figure. Gains of
this magnitude— approximately $2 billion— will give us the time our
basic long-term program needs to improve our international com­
petitive position, and increase the attraction for investment in the
United States.
;
, ;. ,
These two objectives must be the basis of any permanent closing
of the payments gap, and this program will achieve them without
threatening our growth at home. It will also do so without compro­
mising our adherence to the principles of freer trade and free move­
ments of capital. It will, in fact, help prevent pressures for more
restrictive measures. In short, while we must intensify our efforts,
we can do so with full confidence in the future.




John

F.

K ennedy.

DESCRIPTIO N OF PROPOSED IN TER EST EQ U ALIZATIO N
TAX1
In his balance-of-payments message of July 18, 1963, the President
announced a series of coordinated actions to reinforce the administra­
tion’s program to correct the U.S. balance-of-payments deficit, in­
cluding a request for an interest equalization tax. The enactment
of H .R . 8000 would effectuate this request.

The interest equalization tax upon which congressional action has
been requested is applicable to certain portfolio transactions that
entail longer term capital movements from the United States. The
pressure of the heavy flow of domestic private savings into the U.S.
capital market, combined with our highly developed and efficient,
market facilities, have been reflected in a level of long-term borrowing
costs in this country far below those prevailing in most industrial­
ized countries abroad, where the development of efficient long­
term capital markets has lagged. These lower long-term rates, while
appropriate to domestic needs, invite a volume of securities sales in
the United States by foreigners that places heavy strains on our
balance of payments. From a 1959-61 average of about $600 million,
new foreign long-term securities sold to U.S. interests increased
sharply in 1962 to $1.1 billion, and to an annual rate of over $1.7
billion in the first half of 1963. Purchases of outstanding foreign
bonds and equities by U.S. interests have also been large and have
substantially increased in 1963.
The administration for some time has pointed out that a portion
of these foreign needs for capital now met from U.S. sources might
more appropriately be satisfied in the borrower's own market or
in those of countries with balance-of-payments surpluses* The im
->
position of the proposed tax will encourage this process by tending to
equalize costs of longer term financing in the United States and in
markets abroad, reducing the incentive to raise capital in the United
States simply to take advantage of a possible interest cost saving.
The tax will thus have an important effect on- the balance of
payments, without impeding access to the American market by
foreigners unable to procure longer term funds on reasonable terms
elsewhere. Allocation of funds for investment in foreign securities
and the determination of securities to be offered in the U.S. market
would continue to be the result of market prices! and decisions:
Accordingly, the interest equalization tax serves domestic and inter­
national needs in a way that supports the essential freedom^ of our
trading and financial markets, and fulfills our special responsibilities
at the center of the financial system of the free world. This method
of influencing aggregate American purchases of foreign securities
assures that selection among issues will be freely made on the basis
of market considerations.
1 Source: Treasury Departm ent.

13
21—
851— 63

3




14

MESSAGE ON BALANCE OF PAYMENTS
GENERAL DESCRIPTION OF THE BILL

H.R. 8000 proposes the enactment of the Interest Equalization
Tax Act of 1963. Under the bill, a special temporary excise tax, to
remain in effect through 1965, is imposed on the acquisition of stock,
debt securities or other obligations of foreign issuers or depositary
receipts or other evidence of interest in, or rights to acquire, such
interests. The tax is payable by all U.S. citizens, residents and
corporations, including organizations exempt from Federal income
taxes. It applies to portfolio purchases of stock or debt securities
issued by foreign corporations, governments, or other persons, whether
such securities are new or already outstanding issues and whether the
acquisition is effected in the United States or abroad. It does not
apply, however, to purchases by Americans from other Americans.
The tax is not applicable to direct investments by U.S. persons in
overseas subsidiaries or affiliates, nor does it apply to acquisition of
any indebtedness payable upon demand or maturing in less than 3
years. Producers of U.S. goods and services will not be subject to
tax on credits extended in connection with their exports. Moreover,
loans made by commercial banks in the ordinary course of their bank­
ing business are exempted, as is Export-Import Bank financing. The
tax is not applicable to purchases of securities issued by international
organizations of which the United States is a member, governments
of countries considered to be less developed, and corporations whose
principal activities are centered in less developed countries. The tax
will also be inapplicable to new issues of securities from a foreign
country if the President determines that application of the tax will
imperil or threaten to imperil the stability of the international mone­
tary system. A securities underwriter, or a dealer in foreign bonds,
is exempted from the tax on certain acquisitions of securities resold
to foreigners.

The tax is generally applied to acquisitions occurring after the date
of. the President’s message. Acquisitions effected on a national secur­
ities exchange on or before August 16, 1963, are not taxed, however.
Nor does the tax apply to purchase commitments made on the open
market on or before the date of the President’s message, to other
purchases which the buyer on that date was unconditionally obligated
to mpke, or to acquisitions under contracts which were partly per­
formed on that date. Exemption from the tax is also provided for
purchases made within 60 days after the date of the President’s
message if the security purchased was covered by a registration state­
ment filed with the Securities and Exchange Commission within 90
days prior to the date of the President’s message. Acquisitions are
not taxable if they represent the exercise of options held on the date
of the President’s message or foreclosure by a creditor on security for
a debt outstanding on that date.
Rate of tax
, The tax, based on the value of the security acquired, is imposed at
the rate of 15 percent in the case of stock, fn the case of debt securi­
ties, the rate of tax is geared to the period remaining to maturity,
ranging from 2.75 to 15 percent, in accordance with a rate table set
forth in the bill. Where an issue of securities is subject to early
retirement through operation of a mandatory sinking fund, the period



MESSAGE ON BALANCE OF PAYMENTS

15

remaining to maturity will .be determined under regulations, which are
expected to base maturity generally on the average fife of the securities.
Under the bill, the tax is hot deductible for Federal income tax
purposes (unless because of reimbursement or other reasons it is
separately includible in taxable income) but is included as an item of
cost in the tax basis for the stock or obligation acquired.
Liability fo r the tax

The U.S. person making a taxable acquisition is liable for the tax,
which will be collected through the filing of returns. The first of such
returns will be due at the end of the first full calendar month following
the end of the calendar quarter in which the bill is enacted and will
cover all prior acquisitions subject to the legislation. Returns will
thereafter be due at the end of the calendar month following each
calendar quarter in which a U.S. person makes any acquisition.
This is not a stamp tax; no obligation to compute or collect the tax is
imposed on the issuer or seller, or any underwriter, dealer, broker, or
transfer or deposit agent (except with respect to his own purchases).
Exclusion of. securities acquired from Americans

Under the bill, an acquisition from another U.S. person is not
subject to tax. To permit identification of securities covered by this
exclusion, a U.S. transferor executes a certificate attesting that he
was a U.S. citizen, resident, or corporation during the period of his
ownership of the security. A nominee is permitted to attest that the
security nad been held for the account of a U.S. person if such nominee,
kept adequate records to identify the actual owner of the securities
and such owner’s U.S. citizenship, residence, or incorporation. The
signature on any certificate is required to be guaranteed by a bank,
member of the National Association of Securities Dealers or member
firm of a national securities exchange. In determining his liability
for the tax, a purchaser is entitled to rely on any such certificate.
While the certificate may be delivered along with the security in most
cases, it can be delivered within a reasonable time thereafter.
There are attached temporary forms of certificates, together with
instructions and sample fmed-in forms, which the Treasury Depart­
ment has announced that it will accept in fulfillment of these require­
ments pending enactment of the legislation by the Congress and issu­
ance. of regulations and forms thereunder. These interim forms are
available at offices of the Internal Revenue Service, and facsimile
reproductions will be accepted.
,
Civil and criminal penalties are provided for the execution of false
or fraudulent certificates of American ownership.
Explanation o f excluded acquisitions
Export financing.—As indicated above,

no acquisition is subject to
tax under the bill if the obligation acquired is payable upon demand
or within 3 years of its acquisition. Most trade financing transactions
will fall within this exception. In addition, U.S. producers of goods
and services are accorded an exclusion for obligations acquired in
connection with their exports. The exclusion of loans made by
commercial bknks in the ordinary course of their banking business, as
well as Export-Import Bank financing, will also permit tax-free trade
financing on a longer term basis.




16

MESSAGE ON BALANCE OF PAYMENTS

Direct investment.— Direct investments in oversea subsidiaries and
affiliates are excluded from the tax. The bill defines a direct investor
as one who owns immediately following an acquisition, directly or
through a foreign corporation, at least 10 percent of the total com­
bined voting power of all classes of stock of a foreign corporation
entitled to vote- If a U.S. person qualifies as a direct investor, his
acquisitions of both stock and debt securities of the foreign corporation
are exempt. This exclusion will be denied, however, if the foreign
corporation is formed or availed of by a U.S. person for the principal
purpose of acquiring securities which would be subject to tax if
acquired directly, unless the foreign corporation acquires the securities
in the normal course of a commercial banking, securities underwriting,
or brokerage business conducted in one or more foreign countries.
Companies doing business in foreign countries are exempt from tax
on the acquisition of foreign securities, to the extent that the securities
acquired are, or would have been, required to be held in connection
with such business by application of foreign laws which were in force
on the date of the President’s message.
Exclusion required fo r international monetary stability.— If the Presi­
dent determines that application of the interest equalization tax will
have such consequences for a foreign country as to imperil or threaten
to imperil the stability of the international monetary system, the bill
authorizes him by Executive order to exclude from the tax acquisitions
of new issues of securities originating in such country. New issues
may include all issues of previously unissued securities, including public
offerings, private placements ana individual notes secured by mortgates. The President may exempt all of such new issues, or any
classification or limited aggregate amount thereof.
Marketing of foreign securities to foreigners.— The exclusion provided
for foreign issues resold by an underwriter to foreigners and for foreign
dollar bonds purchased by dealers and resold within 30 days to for­
eigners consistent with the objective of encouraging and facilitating
sales of these issues to foreigners.
International organizations.—Purchases of securities issued by any
international organization of which the United States is a member will
not bear the tax. This exempts purchases by Americans of the obli­
gations of such organizations as the International Bank for Reconstruc­
tion and Development and the Inter-American Development Bank.
Less developed countries.— The exclusion for acquisition of securities
issued by governments of less developed countries includes purchases
of securities issued by any corporation with the guarantee of such a
government, as well as securities of political subdivisions.
The exclusion for purchases of securities issued by corporations
operating in less developed countries applies to any corporation which
for its last annual accounting period prior to the acquisition by the
U.S. person had conformed to the definition of a “less aeveloped coun­
try corporation” in section 955(c) of the Internal Revenue Code, by
reason of conducting an active business in one or more countries desig­
nated as less developed for purposes of this tax. The exemption is also
made available for the securities of any foreign corporation which
establishes to the satisfaction of the Secretary of the Treasury or his
delegate that it had met these standards prior to issuance of its securi­
ties and might reasonably be expected to continue to meet them for



MESSAGE ON BALANCE OP PAYMENTS

17

such period as the Secretary or his delegate may deem appropriate to
carry out the intent of this exclusion.
The countries to be considered less developed for this purpose will
be designated in an Executive order issued by the President. For
the interim period prior to the issuance of this Executive order, all
countries designated by Executive Order N o. 11071, dated December
27, 1962, as less developed countries for purposes of the Revenue Act
of 1962, are to be considered less developed countries. This includes
all countries, and oversea territories and possessions of countries
(other than countries within the Sino-Soviet bloc), except the following:
Australia
Austria
Belgium
Canada
Denmark
France
Germany (Federal Republic)
Hong Kong
Italy
Japan
Liechtenstein

Luxembourg
Monaco
Netherlands
New Zealand
Norway
Republic of South Africa
San Marino
Spain
Sweden
Switzerland
United Kingdom

The designation of a country may be terminated by further Executive
order, but such termination will not affect acquisitions of securities
occurring prior to issuance of the Executive order.







TEC H N IC AL EXPLANATIO N OF PROPOSED INTEREST
EQ UALIZATIO N TAX ACT OF 19631
SECTION 1. SHORT T IT L E , ETC.

(а) Short title— Subsection (a) of section 1 of the bill provides that
the bill may be cited as the “ Interest Equalization Tax Act of 1963.”
(б) Amendment of 1954 Code.— Subsection (b) of section 1 of the bill
rovides that, except as otherwise expressly provided, whenever in the
ill an amendment is expressed in terms of an amendment to a section
or other provision, the reference is to be considered to be made to a
section or other provision of the Internal Revenue Code of 1954.

E

SECTION 2. IN TER EST EQUALIZATION T A X

(a) Imposition of tax.— Subsection (a) of section 2 of the bill
amends subtitle D (relating to miscellaneous excise taxes) of the code
by adding at the end thereof a new chapter 41 (relating to interest
equalization tax). The new chapter consists of 10 sections (secs.
4911-4920) which are explained below.
SECTION 4911. IMPOSITION OP TA X

(a)
Debt obligations.— Subsection (a) of section 4911 imposes a
tax on each acquisition by* a U.S. person of a debt obligation of a foreign
obligor if such obligation has a period remaining to maturity of 3
3ears or more. The tax is based on the actual value of the debt
r
obligation and is measured by the period remaining to maturity,
determined in accordance with the following table:
I f th e p erio d rem a in in g to m a tu r ity is—
A t le a s t 3 years, b u t less th a n 3}$ y e a r s ____
A t le a s t 3}$ years, b u t le s s th a n 4}! y e a r s ___
A t le a s t 4}$ years, b u t le ss th a n 5}$ y e a r s . . .
A t le a s t 5}$ years, b u t less th a n 6}$ y e a r s—
A t le a s t 6}$ years, b u t less th a n 7}$ y e a r s___
A t le a s t 7}$ years, b u t less th a n 8}$ y e a r s . . .
A t le a s t 8}$ years, b u t less th a n 9}$ y e a r s . . .
A t le a s t 9}$ years, b u t less th a n 10}fc y e a r s . .
A t le a s t 10}$ years, b u t less th a n 1 U $ y e a r s .
A t le a s t 11 }$ years, b u t less th a n 13}$ y e a r s .
A t le a s t 13}$ years, b u t less th a n 16}$ y e a r s .
A t le a s t 16}$ years, b u t less th a n 18}$ y e a r s .
A t le a s t 18}$ years, b u t less th a n 21}$ y e a r s .
A t le a s t 21}$ years, b u t less th a n 23}$ y e a r s .
A t le a s t 23}$ years, b u t less th a n 26}$ y e a r s .
A t le a s t 26}$ y ears, b u t less th a n 28}$ y e a r s .
28}$ y e a r s o r m o re___________________________

T h e t a x f a s a p ercen ta g e o f
a c tu a l v alu e, is —
2. 7 5
3. 5 5
4. 3 5
5. 1 0
5. 8 0
6. 5 0
7 .1 0
7. 7 0
8. 3 0
9. 1 0
10. 3 0
11. 3 5
12. 2 5
13. 0 5
13. 7 5
14. 3 5
15. 0 0

Actual value will be determined under rules similar to those con­
tained in paragraph (b)(2)(ii) of section 47.4301 of the Documentary
Stamp Tax Regulations, relating to the documentary stamp tax on
Source: Treasury Department.




19

20

MESSAGE ON BALANCE OF PAYMENTS

original issues of stock. Thus, the price agreed upon by parties dealing
at arm’s length normally constitutes actual value. ^ The term “ acquisi­
tion” is denned in section 4912; the terms “United States person,”
“ debt obligation,” “ foreign obligor” and “ period remaining to
maturity” are defined in section 4920.
(6)
Stock.— Subsection (b) imposes a tax on each acquisition by
a U.S. person of stock of a foreign issuer. The tax is 15 percent of
the actual value of the stock acquired. The terms “stock” and
“foreign issuer” are defined in section 4920.
(c) Persons liable for tax.— Subsection (c) states in paragraph (1)
the general rule that the tax imposed by subsection (a) or (b) is to be
paid by the person acquiring the stock or debt obligation. Paragraph
(2) contains a cross reference to section 6681 which provides for the
imposition of a penalty on the maker of a false interest equalization
tax certificate. Such penalty may be in lieu of or in addition to the
tax,
(d) Termination of tax.— Subsection (d) provides that the tax
imposed by subsection (a) or (b) is not to apply to any acquisition
made after December 31, 1965.
SECTION 4912. ACQUISITION

(a) In general.— Subsection (a) of section 4912 defines the term
“acquisition” as any purchase, transfer, distribution, exchange, or
other transaction by virtue of which ownership is obtained either
directly or through a nominee, custodian, or agent. The place where
the acquisition occurs is irrelevant.
Any extension or renewal of an existing debt obligation requiring
affirmative action of the obligee at the time of the extension or renewal
is considered the acquisition of a new debt obligation. Section 4913
provides a limitation on the tax imposed on an acquisition of this kind.
In the case of an agreement to make an acquisition, the acquisition
is deemed to have occurred at the time when the parties to the agree­
ment first become unconditionally obligated to complete the transac­
tion. For example, in the case of an acquisition of stock on a stock
exchange, the acquisition is considered to have occurred on the trading
date rather than on the settlement date. If the obligation of a lender
to acquire promissory notes of a foreign corporation is subject to
conditions, such as the receipt by the lender on the closing date of an
opinion of counsel that the notes are duly issued and binding obliga­
tions of the obligor, the acquisition is not considered to have occurred
until such conditions have been fulfilled.
(b) Special rules.— Paragraph (1) states the special rule that any
transfer (other than in a sale or exchange for full and adequate con­
sideration) of money or other property to a foreign trust, partnership,
or estate (except to the extent that such transfer results in an acqui­
sition otherwise subject to the interest equalization tax) 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, partnership, or estate is availed
of to acquire stock or debt obligations of foreign issuers or obligors
other than debt obligations maturing in less than 3 years. This rule
is applicable without regard to whether the transferor is a beneficiary
of the trust or estate, or a partner in the partnership to which the



;

MESSAGE ON. BALANCE OF PAYMENTS

21

transfer is made. The exclusion for direct investments provided by
section 4915 is not applicable to the transfer because such exclusion
is applicable only to acquisitions of stock or debt obligations of a
. foreign corporation. Any transfer covered by the rule will be taxable
without regard to any exemption or exclusion that would be applicable
if the U .S. person making the transfer directly acquired the stock, or
debt obligations that the foreign trust, partnership; or estate acquires.
; The special rule does not apply to transfers made in a sale or ex-;
change for full and adequate consideration, not to any transfer to the
extent that it results in an acquisition that is otherwise subject to the
interest equalization tax. Thus, this rule is not applicable to the
sale of property to a foreign trust, partnership, or estate, but if the
consideration received by the U .S. person consists of stock of a foreign
. issuer or debt obligations of a foreign issuer with a period remaining
to maturity of 3 years or more, the acquisition of such stock or debt
obligations will nevertheless be taxable. The exception to the special
rule relating to a sale or exchange for a full and adequate considera-.
tion does not cover cash loans; such loans will not be considered sales
or exchanges.
^
The application of the special rule provided by paragraph (1) may
be illustrated by the following examples:
Example (1).— On July 26, 1963, A , a U.S. person, transfers $1,000
to X , a foreign trust, and X trust acquires 10 percent of the voting*
stock of Y , a foreign corporation,^for $800. A is considered to have
acquired stock of a foreign issuer in the amount of $800 and incurs a.
tax of $120 (15 percent of $800).
Example (#).— The'facte are the same as in example (1). A makes
no further transfers to X trust but X trust thereafter acquires froili
B , a U .S. person, debt obligations of Z, a less developed country
corporation, with a period remaining to maturity of 10 years. The
purchase price of these debt obligations is $300. A is considered to
have acquired stock of a foreign issuer in an additional amount o f
$200, representing the balance of the $1,000 transferred to X trust,
remaining after, application of $800 to the earlier acquisition. A.
therefore incurs an additional tax of $30 (15 percent of $200).
Example (5).— On August 1,1963, C, a U.S. person, transfers $1,000
to P, a foreign partnership, to acquire a limited partnership interest
in P. P thereafter acquires debt obligations of Q, a foreign govern-ment, for $600. Since a limited partnership interest is considered
stock for purposes of the bill, the special rule does not apply and C*
incurs a tax of $150 (15 percent of $1,000).
Example (4) — On September 1, 1964, D , a U.S. person, makes a.
cash loan of $1,000 to R , a foreign estate, the loan being repayable in
10 years. R thereafter acquires debentures of S, a foreign corporation,
with a period remaining to maturity of 25 years. The purchase price,
of the debentures is $500. Since D has acquired a 10-year debt,
obligation of a foreign obligor from R , the special rule does not apply
and D incurs a tax of $77 (7.70 percent of $1,000).
Paragraph (2) provides the special rule that the value of the stockacquired, when a shareholder transfers money or other property as a
contribution to the capital of a foreign corporation, is considered to,
be the amount of money and the actual value of the property trans-.
ferred. Thus, if a U.S. person,, who owns less than* X > percent of the
0
voting stock of a foreign corporation which is not a less developed.
>
21-851—63------ 1




22

MESSAGE ON BALANCE OF PAYMENTS

country corporation, transfers $1,000 to the foreign corporation as a
contribution to its capital, the U.S. person will be considered to have
acquired stock of the foreign corporation in the amount of $1,000, and
the acquisition will be subject to interest equalization tax of $150.
Amounts paid to satisfy stock assessments are considered to be
contributions to capital.
Paragraph (3) provides the special rule that an acquisition of stock
or a debt obligation of a foreign issuer or obligor by a U.S. person in
an exchange to which section 354,355, or 356 applies will be considered
an acquisition from the foreign issuer or obligor in exchange for its
stock or debt obligations. Under this rule, stock or debt obligations,
distributed in a'reorganization will be deemed to have been acquired
from the foreign issuer or obligor even though actually received from
a domestic corporation and the exemption for prior American owner­
ship provided by section 4918 will be inapplicable. 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
of this treatment, a U.S. person surrendering debt obligations iii the
exchange will be entitled to apply the limitation on tax provided by
section 4913(a)(1) and a U.S. person surrendering stock in the ex­
change will qualify for the exclusion provided by section 4914(a)(4).
This special rule has no bearing upon the treatment accorded to a
domestic corporation acquiring stock or debt obligations of a foreign
issuer or obligor as a party to a reorganization; such an acquisition
will be taxable unless excluded or exempted from tax by some other
provision of the bill.
The application of the special rule provided by paragraph (3) m ay
be illustrated by the following examples:
Example (1).— A , a U .S. person, owns stock of X , a domestic cor­
poration. On July 30, 1963, X corporation transfers a portion of its*
assets to Y , a foreign corporation, in exchange for stock of Y corpora-*
tioa. X corporation then distributes the stock of Y corporation to*
its shareholders in exchange for their X corporation stock. The trans­
action meets the requirements of section 355, the Commissioner hav­
ing previously ruled under section 367 that avoidance of Federal
income taxes was not one of its principal purposes. A is considered
to have acquired Y corporation stock in a distribution by Y in ex­
change for its stock.
Example (#).— B , a U .S. person, owns stock of M , a foreign corpora­
tion. On July 30, 1964, B surrenders his M corporation stock to N ,
another foreign corporation, in exchange for voting stock of N corpo­
ration. The transaction meets the requirements of section 368(a)(1)
(B) and the necessary prior clearance under section 367 has been
secured. B is considered to have acquired the N corporation stock
in a distribution by N corporation in exchange for its stock.
Example (8).— C, a U .S. person, owns debt obligations of G, a foreign
corporation organized under the- laws of foreign country X . On
January 1, 1964, G transfers all of its assets to H , a foreign corpora­
tion organized under the laws of foreign country Y , and receives in
exchange stock and debt obligations of H corporation. G corpora­
tion then distributes the H corporation stock and debt obligations to
its stockholders and security holders respectively in exchange'for its
stock and debt obligations. The transaction meets the requirements *
‘of section 368(a)(1)(F) and the necessary pribr^ clearance -under



MESSAGE ON BALANCE OF PAYMENTS

23

section 367 has been^ secured. C is considered to have acquired H
corporation debt obligations in a distribution by H corporation in
exchange lor its debt obligations.
SECTION 4913 LIMITATION ON TA X ON CERTAIN ACQUISITIONS

(a)
General rule.— Subsection (a) of section 4913 states the general
rule that, with respect to certain acquisitions of stock or debt obliga­
tions of a foreign issuer or obligor, the interest equalization tax will
be limited as provided in subsection (b). The acquisitions to which
this limitation applies are those resulting from:
: (A) the surrender for cancellation of a debt, obligation to the
foreign obligor;
(B) the extension or renewal of an existing debt obligation
requiring affirmative action of the obligee; or
(C) tne exercise of. an option or similar right to acquire such
stock or debt obligation.
■ (6) Limitation,— Subsection (b) provides that the tax imposed upon
any acquisition referred to in subsection (a) 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 similar 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 de­
faulted debt obligation of a foreign government .(or agency or sub­
division thereof) which has been in default for at least 10 years and
which is surrendered in exchange for another debt obligation of that
overnment (or agency or subdivision thereof) shall be deemed to
ave an actual value and period remaining to maturity equal to that
of the debt obligation acquired.
The application of this section may be illustrated by the following
examples:
Example (.t ).— A is a U.S.. person and M corporation is a foreign
corporation which is not a less developed country corporation. A , who
owns no stock in M corporation, surrenders a debt obligation of M cor­
poration having a period remaining to maturitv of 5% years and an
actual value of $900 in an exchange for a debt obligation of M corpora­
tion having a period remaining to maturity of 10}£ y'ears 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 of $78.85 (8.30
percent of $950) less the amount of tax that would have been imposed
if the debt obligation which was surrendered had been acauired in a
transaction subject to tax immediately prior to the surrender of such
debt obligation, of $45.90 (5.10 percent of $900).
Example (2).— The facts are the same as in example (1), except that
the debt obligation of M corporation will mature in 30 days and the
instrument provides that the obligation shall 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,
. A incurs a tax of $43.50, representing the amount of tax imposed
on the actual value of the debt obligation acquired of $43.50 (4.35

g




24

MESSAGE ON BALANCE OF PAYMENTS

percent of $1,000) less tlie amount of tax that would have been im­
posed if the debt obligation which was extended had been acquired
in a transaction subject to the tax immediately prior to! the extension
of such debt obligation (no tax, since the debt obligation would have
had a maturity of less than 3 years).
Example (8).— On August 6, 1963, B, a U.S. person, acquires for
$100 from a person other than a U.S. person an option to purchase
for $100 per share 10 shares of stock of N corporation, a foreign cor­
poration. Immediately prior to the acquisition of the option, B owns
no stock in N corporation, and N corporation is not a less developed
country corporation. B exercises the option oil January 1, 1964, at
which time the option has an actual value of $500 and the shares of
N corporation stock have an actual value of $150 per share. B owns
no stock in N corporation immediately prior to the exercise of the
option and N corporation is not a less developed country corporation.
B incurs a tax upon the acquisition of the option of $15 (15 percent
of $100). In addition, B 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 of $225 (15 percent of $1,500) 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 the exercise of such
option, of $75 (15 percent of $500).
Example (4).— C, a U.S. person owning less than 10 percent of the
voting stock of O corporation, a foreign corporation which is not a
less developed country corporation, receives from O corporation, as a
distribution with respect to his stock, rights to purchase 100 additional
shares of O corporation stock at a price of $20 per share. C incurs no
tax on the distribution of the rights. C exercises such rights at a time
when the actual value of O corporation stock is $30 per share and the
actual value of such rights equals $10 per share. C incurs a tax of
$300, representing the amount of tax imposed on the actual value of
the stock acquired of $450 (15 percent of $3,000) 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 the exercise of such
rights, of $150 (15 percent of $1,000).
Example (5).— A , a U.S. person, owns bonds of X , a domestic
corporation, with an actual value of $20,000 and a period remaining
to maturity of 10 years. In a transaction to which section 354 applies,
A surrenders his X corporation bonds to X corporation and receives
in exchange 20-year debentures of Y , a foreign corporation, with an
actual value of $22,000. Under the special rule provided in section
4912(b)(3), A is considered to have acquired the Y corporation deben­
tures from Y corporation and to have surrendered Y corporation
bonds to Y corporation. A therefore incurs a tax of $1,155, repre­
senting the amount of tax imposed on the actual value of the deben­
tures acquired of $2,695 (12.25 percent of $22,000) less the amount
of tax that would have been imposed if the surrendered bonds had
been acquired in a transaction subject to tax immediately prior to'the
exchange, of $1,540 (7.70 percent of $20,000).
SECTION 4914. EXCLUSION FOR CERTAIN ACQUISITIONS

(a)
Transfers not considered acquisitions.— Subsection (a) of section
4914 provides in paragraph (1) that the term “ acquisition” shall not



MESSAGE ON BALANCE OF PAYMENTS

25

include any transfer between a person and his nominee, custodian,
or agent. Thus, the term does not include a transfer of stock or
debt obligations to a broker for purposes of selling the securities.
Paragraph (2) excludes any transfer described in section 4343(a),
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 to a U.S. person by gift, legacy,
bequest, or inheritance.
Paragraph (4) excludes any distribution by a corporation to a
shareholder with respect to or in exchange for its stock; thus, divi­
dends, stock dividends, distributions of rights, or distributions to
stockholders whether in connection with a reorganization, liquidation,
or redemption, are transfers which are not considered acquisitions,
whether or not subject to Federal income tax. This ride may be
illustrated by the following example:
Example.— C, a U .S. person, is a stockholder in P, a domestic
corporation. In a transaction to which section 354 applies, C sur­
renders his stock in P corporation to P corporation in exchange for
voting stock of R, a foreign corporation. Under the special rule
provided by section 4912(b)(3), C is deemed to have acquired voting
stock of R corporation in a distribution by R corporation in exchange
for its stock. The acquisition by C is therefore not considered to be a
taxable acquisition.
Paragraph (5) excludes any exercise of a right to convert a debt
obligation, pursuant to its terms, into stock. This type of transaction
is excluded because an acquisition of a debt obligation containing a
right to convert into stock is taxable, in the first instance, as an
acquisition of st6ck. (See definition of “ stock” in section 4920(2) (D ).)
Accordingly, no tax is imposed on the conversion of the debt obliga­
tion. If tne holder of a debt obligation is required, in order to
convert the debt obligation into stock, to pay any additional amount
to the foreign obligor, the tax will be imposed to the extent of such
additional payment, since this will be considered the exercise of an
option to acquire additional stock.
(6)
Excluded acquisitions.— Subsection (b) enumerates certain addi­
tional acquisitions which are excluded for purposes of the interest
equalization tax. Paragraph (1) provides for the exclusion of acquisi­
tions of stock or debt obligations by any agency or wholly-owned in­
strumentality of the United States. For example, acquisitions by the
Export-Import Bank will be excluded.
Paragraph (2) provides for the exclusion of acquisitions of stock or
debt obligations by a commercial bank if the bank acquires th e securi­
ties in making loans in the ordinary course of its commercial banking
business. The exclusion* also applies to acquisitions through fore­
closure on stock or debt obligations held as security for such loans.
The exclusion does not extend to investment banks, trust companies,
•or others not regularly.engaged in the commercial banking business
•or to acquisitions by a commercial bank for its investment portfolio,
but a corporation organized under section 25(a) of the Federal Reserve
A ct, commonly known as the “ Edge A ct,” is considered a commercial
bank for this purpose. If a person is engaged both in the commercial
banking business and in other businesses or activities, Only those
acquisitions related solely to the commercial banking business are



26

MESSAGE ON BALANCE OF PAYMENTS

Whether a loan by a commercial bank is made in the ordinary
course of its commercial banking business is to be determined with
regard to all of the facts and circumstances of a particular case.
While past practices are not determinative, the conduct of the business
of the commercial bank in the past, as well as the ordinary conduct of
^business by other banks similarly situated, is indicative of what con^
stitutes a loan made in the ordinary course of the commercial banking
business. The exclusion for loans by commercial banks is not limited
to loans with maturities of less than 3 years. In general, although the
largest portion of such loans are for periods of less than 3 years, loans
of this type are frequently made for periods up to 5 years. Commer­
cial bank loans have in some cases been made for periods in excess of 5
years, but loans with such maturities account for only an insignificant
proportion of commercial bank loans.
Paragraph (3) provides for the exclusion of acquisitions of debt
obligations acquired by a U .S. person as all or part of the purchase
price of property manufactured, produced, grown, or extracted in
the United States by such person, or by one or more includible corpo­
rations in an “ affiliated group,” as defined in section 1504, of which
such person is a member, if such debt obligation is either held by the
U.S. person to maturity (or until his death) or transferred to an agency
or wholly-owned instrumentality of the United States or to a com­
mercial bank acquiring the debt obligation in the ordinary course of its
commercial banking business. If the debt obligation is transferred
to any other person, the U.S. person making the acquisition of the
debt obligation will lose the exclusion provided by this paragraph.
Example.— M , a domestic corporation, manufactures aircraft in
the United States. M corporation sells an airplane to X , a foreign
corporation which is not a less developed country corporation, for
a total price of $1 million, receiving as payment $100,000 in cash and
$900,000 in 5-year promissory notes of A corporation. Immediately
thereafter, M corporation transfers $720,000 of the notes to N , a
domestic corporation, which acquires the notes in the ordinary course
of its business as a commercial bank. M corporation retains $180,000
of the notes until they are paid. No tax is imposed on the acquisition
hy M corporation of any of the promissory notes of X corporation.
Paragraph (4) excludes acquisitions of stock or debt obligations by
U.S. persons doing business in a foreign country to the extent that the
acquisition is reasonably necessary to satisfy minimum requirements
relating to holdings of stock or debt obligations of local issuers or
obligors imposed by the laws of such foreign country. This will
exclude from the tax acquisitions by insurance companies, banks or
others which are required to maintain reserves, make deposits, or
otherwise hold stock or debt obligations of foreign issuers or obligors
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 ex­
pressly set forth by statute or are imposed by administrative action
under applicable laws.
The exclusion provided in paragraph (4) is limited in amount to
holdings of foreign securities required to be held by laws or administra­
tive regulations in force on the date of an acquisition or, if the required
minimum holdings of local securities have been increased since July 18,
1963, on such date. In the latter case, the test is not the amount of



MESSAGE ON BALANCE OF PAYMENTS

27

local securities actually held on July 18, 1963, but rather the amount
that was, or would have been, required on the date of an acquisition
(for example, to reflect higher levels of insurance in force or of bank
deposits) under foreign law or regulations in effect on that date.
Acquisitions made to satisfy increased requirements imposed by
changes in the applicable foreign law after July 18, 1963, are not
excluded.
SECTION 4915, EXCLUSION FOR DIRECT INVESTMENTS

. (a) General rule.— Subsection (a) of section 4915 states the general
rule that an acquisition by a U.S. person of stock or debt obligations
of a foreign corporation is not subject to interest equalization tax
if immediately after the acquisition the U .S. person owns 10 percent
or more of the total combined voting power of all classes of stock
of the foreign corporation. The 10 percent test applies without regard
to the attribution rules prescribed by various provisions of the Internal
Revenue Code, but stock owned, directly or indirectly, by or for a
foreign corporation shall be considered as being owned proportion­
ately by its shareholders. The exclusion for direct investment applies
to acquisitions of stock or debt obligations of the foreign corporation
from the cdrporation or from third parties and to contributions of
capital to the foreign corporation by a shareholder holding at least 10
percent of the voting power of all classes of stock of the corporation
immediately prior to making such capital contribution.
The application of this general rule may be illustrated by the
following examples:
Example j?.— On January 13, 1964, A , a U .S. person acquires 100
shares of the only class of stock of foreign corporation N , which
immediately thereafter has a total of 1,000 shares outstanding. N
corporation acquires no stock or debt obligations having a maturity
of 3 years or more. A ’s acquisition of the 100 shares of N corporation
stock is excluded from tax as the acquisition of a direct investment.
Example 2 .— The facts are the same as in example (1), except that
later in 1964, A lends N corporation $100,000, taking a 5-year prom­
issory note in return. A ’s acquisition of the indebtedness of N cor­
poration 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 additional 50
shares of the stock of N corporation. A ’s acquisition of the 50 shares
of stock of N corporation is exempt from tax as the acquisition of a
direct investment.
Example 4 .— The facts are the same as in example (1), except that
N corporation acquires 100 percent of the voting stock of foreign
corporation O, which acquires no stock or obligations of foreign
persons. Subsequently, A lends O corporation $100,000, taking a 5year promissory note in return. A ’s acquisition of the indebtedness
of O corporation is excluded from tax as the acquisition of a direct in­
vestment since A is considered to own 10 percent of the stock of O
corporation.
- Example 5 .— On July 15,1964, pursuant to a plan of reorganization,
D , a domestic corporation, transfers all, of its assets to F, a foreign
corporation, in exchange for 10 percent of the voting stock of F cor­
poration. .£> corporation then distributes the F corporation stock to



28

MESSAGE ON BALANCE OP PAYMENTS

its shareholders in exchange for its stock. F corporation is not ;
engaged in trading in foreign securities. Since D corporation owned
at least 10 percent of the total combined voting power of F corpora­
tion immediately after the transfer, its acquisition < f F corporation ,
o
stock is excluded from tax as the acquisition of a direct investment.

(ib) Exception fo r foreign corporations form ed or availed o f fo r tax ,
avoidance.— Subsection (b) provides in paragraph (1) that the direct,
investment exclusion is inapplicable if a foreign corporation is formed
or availed of by the U .S. person for the principal purpose of acquiring,
through the foreign corporation, an interest in stock or debt obliga­
tions, the acquisition of which would, if acquired 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 M ,
a 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 will not be excluded under this section. Moreover, even if.cor- '
noration M is not engaged in such activity at the time of the acquisition
by A , the acquisition would not be excluded under this section if
corporation M is later availed of principally for the purpose of acquir­
ing 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 incident of
such business, it is not considered to be availed of for the proscribed
purpose.
Paragraph (2) provides that the “formed or availed of” exception
to the exclusion from tax for direct investments in foreign corporations
will not be operative in cases where the foreign corporation is only
acquiring foreign securities because of legal requirements imposed as
a condition to doing business in foreign countries or, in the cases of a
foreign corporation engaged in the business of underwriting foreign
securities (within the meaning of section 4919(c)(1)) or of buying and
selling them* as a broker, or in the business of commercial banking,
wherie transactions in foreign securities are made in the ordinary
course of such businesses.
Thus, the fact that a U.S. person acquires stock or debt obligations
of a foreign corporation which in turn acquires stock and debt obliga- ’
tions of other foreign issuers and obligors—
(A) to satisfy minimum requirements relating to holdings of
stock or debt obligations of local issuers or obligors imposed
by the laws of foreign countries where such foreign corporation
is doing business,
(B) in the ordinary course of its business of underwriting and
distributing securities issued by other persons, or acting as a
broker, or
(C) in making loans in the ordinary course of its business as a
commercial bank,
.
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 purpose of this exclusion.

, (c) Exceptionfor acquisitions made with intent to sell to U .S. persons.— ;
Subsection (c) provides that the direct investment exclusion is in­
applicable if stock or debt obligations of a foreign issuer or obligor
are acquired by a U .S. person with intent to sell, or to offer to sell;



MESSAGE ON BALANCE OF fcAYMENTg

29

any part of the securities to U .S. persons. Thus, if a U.S. under­
writer acquires 15 percent of the stock of a foreign corporation with a
view to tne distribution of any part of such stock to U .S. persons
through resale, the entire acquisition will be taxable. (However, if all
or part of the stock acquired is ultimately sold by the underwriter1
to
persons other than U .S. persons, a credit or refund of the interest
equalization tax imposed may be allowed with respect to these sales
under section 4919.) On the other hand, if a domestic corporation
pursuant to a plan to expand its markets abroad acquires 50 percent
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
hot be considered to have been made with intent to sell, or to offer
to sell, such stock to U.S. persons and, under this section, will be
excluded from the tax.
. SECTION 4916. EXCLUSION FOR INVESTMENTS IN LESS DEVELOPED

COUNTRIES

(а) General rule.— Subsection (a) of section 4916 provides an ex­
ception from the interest equalization tax for an investment by a U.S.
person in stock or a debt obligation of a foreign issuer or obligor
which constitutes an investment in a less developed country. These
investments are:
(A) a debt obligation'issued or guaranteed by the government
of a less developed country or by political subdivision of such
a country or by an agency of such a government; or
(B) stock or a debt obligation o f'a less developed country
corporation.
The investments referred to above are the same as those referred
to in section 955 of the code although, as is pointed out below, some
countries treated as less developed under section 955 may not be so
treated under this section and vice versa. A debt obligation otherwise
qualifying for this exclusion will not be disqualified because it is
guaranteed by the government of a country which is not considered
less developed.
(б) Less developed country defined.-^Subsection (b) defines the term
“ less developed country.” Except for certain countries and areas
specified in the subsection which may not be designated as less devel­
oped countries, the designation of countries to be considered econom­
ically 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 legislation, all countries designated as less developed by
Executive Order No. 11071, dated December 27, 1962 (designating
certain areas as economically less developed countries for purposes of
subparts A and F of pt. I l l of subch. N and sec. 1248 of pt. IV of
subch. P of ch. 1), will be considered to be less developed for purposes
of the interest equalization tax. This includes all countries, and
oversea territories and possessions of countries (other than areas
within the Sino-Soviet bloc), except those enumerated in this sub­
section. The countries designated as less developed for purposes of
this subsection need not be the same as those designated as less devel­
oped in any Executive order under section 955(c)(3). The designa­
tion of a country as a less developed country can be terminated by a
further Executive order after 30 days' notice to the Congress. The



30

MESSAGE ON ^BALANCE OF PAYMENTS

30-day rule does not apply, to countries which are deemed to be less
developed for the interim period prior to the issuance of an Executive
order under the new legislation. Any termination will not affect the
treatment of acquisitions occurring prior to the issuance of the
terminating Executive, order.
(c) Less developed country corporation defined.— Paragraph (1) of
subsection (c) states the general rule that the term “less developed
country corporation” will have the same meaning as such term hasfor purposes of section 955(c) (1) and (2) and the regulations there­
under except that the status of a foreign corporation as a less developed
country corporation will be determined on the basis of the most recent
complete annual accounting period of the corporation (except as
provided in par. (2) of sec. 4916(c)), in light of the foreign country’s
status under subsection (b) of this section.
Subsection (c)(1) of section 955 provides that a corporation will
qualify as a less developed country corporation if it conducts one or
more active trades or businesses in countries designated as less de­
veloped 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 acquisition*
have at least a 5-year maturity, of any other less developed
country corporation;
(D) obligations of a less developed country;
(E) an investment required because of restrictions imposed by
a less developed country; and
(F) property described in section 956(b)(2), relating to excep­
tions from the term “ United States property.”
For purposes of section 955(c)(1), whether income is derived from
sources within less developed countries is to be determined under
regulations prescribed by the Secretary of the Treasury or his delegate.
The source rules prescribed under such regulations, to be used in
determining whether income is derived from sources within one
foreign country or another, need not be analogous to the rules used
in determining whether or not income is derived from sources within
the United States.
Subsection (c)(2) of section 955 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 and property described in section 956(b)(2), relating to excep­
tions 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 ex­
change of such aircraft or vessels, or



MESSAGE ON BALANCE OP PAYMENTS

31

(B)
dividends and interest received from foreign corporations
which arc less developed country corporations within the meaning
of this paragraph and 10 percent or more of the total combined
voting power of all classes of stock of which are 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.
The 80-percent gross income requirement can be satisfied by a com­
bination of the amounts described in subparagraphs (A) and (B).
Paragraph (2) of section 4916(c) provides a special rule for original
or new issues of securities. An original or new issue means .any
issuance by the foreign issuer or obligor of previously unissued stock
or debt obligations. A foreign corporation will be treated as a less
developed country corporation with respect to an acquisition by a
U .S. person of stock or a debt obligation as all or part of an original
or new issue, if, prior to the acquisition, it is established to the satis­
faction of the Secretary of the Treasury or his delegate that the foreign
corporation—
(A) has satisfied the requirements of subparagraphs (A) and
(B) of section 955(c)(1) and subparagraphs (A) and (B) of section
955(c)(2) for such period of time as the Secretary of the Treasury
or his delegate may by regulations prescribe, and
(B) may thereafter be reasonably expected to continue to
satisfy such requirements for such further period of time as the
Secretary or his delegate may by regulations prescribe.
For purposes of this paragraph, there will be taken into account only
that portion of the corporation’s gross income which is properly
attributable to the periods of time prescribed under subparagraphs
(A) and (B) .and only those days which are within such periods.
SECTION 4917. EXCLUSION OP N E W ISSUES W H E R E R E QUIRED F O R
INTERNATIONAL M O N E T A R Y STABILITY

Section 4917 provides that the interest equalization tax will not
be applicable to certain acquisitions which may be specified in art
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 Executive ordei*
exclude from the tax acquisitions of stock or debt obligations of
the foreign country, its agencies and political subdivisions, corpora­
tions, partnerships and trusts organized under its laws, or individuals
resident therein, including acquisitions of debt obligations secured by
mortgages. The order will in any event be applicable only to acqui­
sitions made, as part of an original or new issue of stock or debt obli­
gations (other than stock issued by a company registered under the
Investment Company Act of 1940) which is registered under the
Securities Act of 1933 or as to which prior notice of issuance is filed in
accordance with regulations prescribed by the Secretary of the Treas­
ury or his delegate. (An original or new issue means any issuance by
the foreign issuer or obligor of previously unissued stock or debt
obligations.) The order may be applicable to all such issues or only
to an aggregate amount or classification thereof, as stated in the
order. I f the order is applicable only to a limited aggregate amount



32

MESSAGE ON BALANCE OF PAYMENTS

of new issues, it will apply to those issues as to which registration
statements under the Securities Act of 1933 first become effective, or
the acquisition of which pursuant to notification first occurs, within
the period specified in the order. An Executive order issued under
this section may be terminated in whole or in part at any time by
issuing an Executive order for that purpose, and the termination will
be effective from the date the order is issued or from such date as is
.specified in the order.
SECTION 4918. E X E M P T I O N F O R PKIOR A M E R I C A N O W N E R S H I P

(а) In general.— Subsection (a) of section 4918 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. One form of clear and convincing evidence will be a properly
executed certificate of American ownership provided for in sub­
section (b). *
The effect of the 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, so long as continuous U .S. ownership is
maintained. A person who has not maintained his status as a U .S.
person during the entire period of his ownership of a security (or
continuously since July 18, 1963) will not be permitted to execute the
certificate*
(б) Certificate of American ownership.-—Subsection (b) provides
that, for purposes of this exemption, a certificate of American owner­
ship received in connection with an acquisition will be conclusive proof
of prior American ownership unless the person making such acquisition
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 it is to be executed
will be prescribed by the Secretary or his delegate in regulations. It
is Contemplated that such regulations will provide, among other
things, that this certificate may be executed either by the former
owner or by the nominee of the former owner and the signature must
be guaranteed by a U.S. bank, a member of the National Associ­
ation of Securities Dealers, 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 name of the actual owner to the purchaser; 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 incorporation, during his
period of ownership.
SECTION 4919. SALES B Y U N D E R W R I T E R S O R D E A L E R S T O
FOREIGN PERSONS

(a)
Credit, or refund.— Subsection (a) of section 4919 provides that
a credit against, or refund of, interest equalization tax may be allowed
upon the acquisition of stock or debt obligations of a foreign issuer



MESSAGE ON BALANCE OF PAYMENTS

33

or obligor if the stock or debt obligations (1) are acquired by an
underwriter from the foreign issuer or obligor and are resold to persons
other than U.S. persons in connection with a private placement or a
public offering registered with the Securities and Exchange Commis­
sion, or (2) consist of foreign dollar bonds 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 30 days after
their acquisition. The tax paid with respect to such acquisitions
will constitute an overpayment of tax only if it is clearly established
that the stock or debt obligations or the foreign dollar bonds were
resold to persons other than U.S. persons. Where stock or debt
obligations are resold in connection with a public offering registered
with the Securities and Exchange Commission, the underwriter may
claim a credit or refund not 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 distribution of the stock or debt obliga­
tions 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
of 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 from the foreign issuer or obligor 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 this section. 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 refund of tax will be allowed under this
section upon the filing of a claim for refund or a return for the subse­
quent period. However, it is contemplated that a tax credit will
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 foreign
dollar bonds by dealers will be claimed and allowed in a similar manner.
(6)
Evidence to support credit or refund.— Subsection (b) provides
that an underwriter or dealer claiming a credit or refund under this
section with respect to the interest equalization tax is to 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 prescribed by regulations. It is contemplated
that the type of information required from an underwriter with respect
to a privateplacement or public offering will be generally as follows:
(A) The name and address of the foreign issuer or obligor
from whom the stock or debt obligations were acquired and the
date of acquisition;
(B) The consideration paid or to be paid by the underwriter
to the foreign issuer or obligor 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



34

MESSAGE ON BALANCE OF PAYMENTS

(D ) In the case of private placement only, of such total, 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 of any agree­
ment or agreements with the foreign issuer or obligor governing
the acquisition or sale of the stock or debt obligations by the
underwriter; or
(E) In the case of public offerings only, of such total, the total
sold; the total sold to persons other than U.S. persons; the total
sold by U .S. persons participating in the distribution; a state­
ment that the stock or debt obligations were sold as part of a
public offering registered with the Securities and Exchange
Commission; and a copy of any prospectus or prospectuses used
in effectuating any of the sales.
A dealer claiming the credit or refund will generally be required to
furnish a description of the foreign dollar bonds involved and the name
and address of the person to whom the bonds were sold and the date
of sale.
’
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 registered with the Securities and Exchange Commission, in
the distribution of the stock or debt obligations acquired by the
underwriter unless the underwriter establishes by clear and convincing
evidence that the securities 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 such sales were
made 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 it 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 purchasing and
selling group for the purpose of acquiring stock or debt obligations
from a single foreign issuer or obligor, the filing of a certificate of
sales to foreign persons by any one of such underwriters may, to the
extent provided by regulations prescribed by the Secretaiy of the
Treasury or his delegate, constitute the filing of such certificate for
all of such underwriters. Normally, in such cases all certificates of
sales to foreign persons wpuld 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 subsection (a) provides that the
term “ underwriter” means any person who has purchased stock or
debt obligations from the issuer or obligor thereof with a view to the
distribution through resale of such stock and debt obligations. Para­
graph (2) of this subsection defines 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 and debt
obligations and selling them to customers with a view to the gains
and profits that may be derived therefrom. Paragraph (3) of this
subsection states that the term “ foreign dollar bonds” means any
debt obligations of a foreign obligor under the terms of which principal
and interest are payable only in U.S. currency.




MESSAGE ON BALANCE OF PAYMENTS

35

SECTION 4920. DEFINITIONS

(1) Debt obligation.— Paragraph (1) provides that, in general, the
term “ debt obligation” means any indebtedness whether or not rep­
resented 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 referred to
in the preceding sentence whether or not such interest, option, or
right is in writing. The term “debt obligation” does not include any
obligation which—
(A) is convertible by its terms into stock of the obligor;
(B) is received as compensation for the performance of services
by a U.S. person; or
(C) arises out of the divorce, separate maintenance, or support
of a U .S. person.
(2) Stock.— -Paragraph (2) provides that the term “ stock” means
any stock, share, or other capital interest in a corporation, association,
insurance company, or joint-stock company; any interest of a limited
partner in a limited partnership; any interest in an investment trust;
any indebtedness which is convertible by its terms into stock of the
obligor; and, any interest in, or option or similar right to acquire,
any of the interests referred to in this sentence. The term includes
such interests as those evidenced by American depository receipts.
(8) Foreign issuer or obligor.— Paragraph (3) provides in subpara­
graph (Al) that the terms “foreign issuer,” “foreign obligor,” and
“ foreign issuer or obligor” 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; a foreign government or agency or
subdivision thereof; a corporation, association, insurance company,
joint-stock company, partnership, or estate or trust which is not a U.S.
person as defined in paragraph (4); or a nonresident alien individual.
Subparagraph (B) provides that the term “foreign issuer or obligor”
also includes a domestic corporation (other than a management
company described in subparagraph (C)) formed or availed for the
principal purpose of obtaining capital for any person referred to in this
paragraph. The effect of this provision is to render the stock or debt
obligations of such a corporation those of a foreign issuer or obligor
and, therefore, subject to the interest equalization tax. The exclu­
sion for direct investment provided in section 4915 is not available
since such corporation is formed or availed of for purposes of avoiding
the interest equalization tax. On the other hand, this rule is not
applicable to a domestic corporation which obtains capital to be used
by it in the active conduct of its own business even though such cor­
poration may be wholly owned by a foreign issuer or obligor.
Subparagraph (C) provides that the term “foreign issuer or obligor”
also includes a domestic corporation which, as of July 18, 1963, was a
management company registered under the Investment Company
A ct of 1940 (15 U .S.C . 8 0 a -l— 80b-2) if at least 80 percent of the
value of the stock or debt obligations owned by the corporation on
July 18, 1963, and at least 80 percent of the stock or debt obligations
owned by the corporation at the end of every calendar quarter there­
after consists of stock or debt obligations of foreign issuers or obligors;
if the corporation elects to be treated as a foreign issuer or obligor for
purposes of chapter 41; if during the period from July 18, .1963, to the



36

MESSAGE ON BALANCE OF PAYMENTS

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 18, 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 30th day after the enactment of this chapter under
regulations prescribed by the Secretary of the Treasury or his delegate.
The election will be effective as of the date specified by the corporation,
but not later than the date on which the election is made, and it
will remain in effect until revoked. If, at the close of any succeeding
calendar quarter, the company ceases to meet the 80-percent require­
ment, the election is deemed revoked. If an election is revoked,
no further election is permitted. In general, the effect of this provision
is to permit a management company which elects to be treated
as a foreign issuer or obligor under this provision to manage its
portfolio of foreign securities without incurring the interest equali­
zation 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 new shares or any shares of the company which are not owned
by U.S. persons prior to transfer.
If the assets of a foreign corporation are acquired by a domestic
corporation in a reorganization described in subparagraph (F) of sec­
tion 368(a)(1), both corporations will be considered a single domestic
corporation for purposes of subparagraph (C).
(4)
U.S. 'person.— Paragraph (4) provides that the term “ United
States person” means—
(A) a citizen or resident of the United States,
(B) a partnership created or organized in the United States
or under the laws of the United States or of any State,
(C) a corporation created or organized in the United States
or under the laws of the United States or of any State, other than
a domestic corporation described in subparagraph (B) or (C) of
paragraph (3),
(D ) an agency or wholly owned instrumentality of the United
States,
(E) a State and its agencies, instrumentalities, and political
subdivisions, 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 includible if not exempt from tax under section 501(a),
521(a), or 584(b), or
(ii) which is situated in the Commonwealth of Puerto
Rico or a possession of the United States.
The term “ United States person” includes organizations exempt from
federal income tax. As used in this paragraph 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.



MESSAGE ON. BALANCE OF PAYMENTS

37

( 5) Period remaining to maturity.— Subparagraph (A) of paragraph
<
(5) states the general rule that the period remaining to maturity of
a debt obligation is the period beginning on the date of its acquisition
and ending on the fixed or determinable date when, according to its
terms, the final payment of principal becomes due. For this purpose,
each installment of a debt obligation payable in installments will be
deemed to have a separate period remaining to maturity. A debt
obligation which is due or overdue at the time of its acquisition is
considered to have a period remaining to maturity of less than 3 years.
A debt obligation with no fixed or determinable maturity date is
considered to have a period remaining to maturity of more than 28
years. The rules may be illustrated by the following examples:
Example (1) — On June 1, 1964, A , a U.S. person, purchases from B,
a nonresident alien, 20-year bonds of X , a foreign government, having
an actual value of $20,000. The bonds mature on December 31, 1974,
and therefore have a remaining period to maturity of 10 years and
7 months. Assuming that the transaction is not exempt, A incurs a
tax of 8.30 percent of the actual value of the bonds or $1,660.
Example (2) .— On July 1, i964, 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 matuntv 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. C incurs a tax of $315 (2.75 percent of $2,000 or $55, plus
3.55 percent of $2,000 or $71, plus 4.35 percent of $2,000 or $87, plus
5.10 percent of $2,000 or $102).
Subparagraph (B) of paragraph (5) provides in clause (i) that the
period remaining to maturity of any interest in or option to acquire
any debt obligation shall be the period remaining to maturity of the
debt obligation. This rule may be illustrated by the following
example:
Example (1) — On June 1, 1964, A, a U.S. person, acquires for
$1,000 from B, a nonresident alien, a depositary receipt which consti­
tutes evidence of an interest in certain 15-year bonds of a foreign
corporation which are held by a foreign bank. Assuming that the
transaction is not exempt, A incurs a tax of 10.30 percent of the actual
value of the interest in the debt obligation of the foreign obligor or
$103.
Example (#).— On June 1, 1964, A , a U.S. person, acquires for
$1,000 from M , a foreign corporation, an option to acquire $50,000
of the 15-year bonds of M corporation when such bonds are issued.
The period remaining to maturity of the option is considered to be
15 years and, assuming the transaction is not exempt, A incurs a
tax of $103 (10.30 percent of $1,000) upon acquisition of the option.
Clause (ii) of subparagraph (B) provides that the period remaining
to maturity 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, ends on the last day of the
final renewal period. This rule may be illustrated by the following
example *
Example.— On June 1, 1964, A , a U.S. person, acquires from B,
a nonresident alien, 20-year bonds of M , a foreign corporation, having



38

MESSAGE ON BALANCE OF PAYMENTS

an actual value of $20,000 and a maturity date of December 31, 1974,
except that, under the terms of the bonds, the obligation is auto­
matically 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 re­
newal period of 10 years. Accordingly, assuming that the transac­
tion is not exempt, A incurs a tax of 12.25 percent of the actual value
of the bonds or $2,450.
Clause (iii) of subparagraph (B) provides that the period remaining
to maturity of a debt obligation which is subject to retirement prior
to its maturity through operation of a mandatory linking fund will
be determined under regulations prescribed by tne1 Secretary or his
delegate. It is contemplated that these regulations will generally
determine the period remaining to maturity on the basis of the aver­
age life of the debt obligations.
(6)
Technical amendment— Subsection (b) of section 2 of the bill
contains a technical amendment which amends the table of chapters
for subtitle D by adding at the end thereof: “ Chapter 41. Interest
equalization ta x ."
(c)
Effective date.— Subsection (c) of section 2 of the bill contains
the effective date provisions. Paragraph (1) thereof provides the
general rule that, except as provided by paragraphs (2), (3), (4), (5),
and (6), amendments made by section 2 of the bill shall apply only
with respect to acquisitions of stock and debt obligations made after
July 18, 1963. The time when an acquisition is deemed to occur will
be determined in accordance with the provisions of section 4912.
Thus, for example, a transaction that is not completed until after
July 18, 1963, but is made pursuant to an agreement under which the
parties were on July 18, 1963, unconditionally obligated to complete
the transaction, will not result in a taxable acquisition because the
acquisition is deemed to have occurred on or before July 18, 1963.
Paragraph (2), relating to preexisting commitments, provides that
the tax is inapplicable to an acquisition made pursuant to an obliga­
tion 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. A person
who had entered into a short sale contract on or before July 18t 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. W ith respect to acquisitions
made pursuant to an obligation to acquire which was on July 18,1963,
subject to conditions contained in a formal contract, the tax will not
apply if partial performance of. the contract, such as payment of a
substantial commitment fee, a “takedown,” or a “closing” under the
contract, occurred on or before July 18, 1963.
• Paragraph (3), relating to public offerings, provides that the tax is
inapplicable to an acquisition made on or before September 15, 1963,
(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 Securities
ana Exchange Commission on July 18, 1963, or within 90 days
prior thereto; and



MESSAGE ON BALANCE OF PAYMENTS

39

(C)
no amendment was filed with the Securities and Exchange
Commission after July 18, 1963, and prior to 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.
Paragraph (4) provides that the tax is inapplicable 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.
Paragraph (5), relating to options and foreclosures, provides that
the tax is inapplicable to an acquisition— •
(A) of stock pursuant to the exercise of an option or similar
right, if such option dr similar right was held on July 18, 1963,
by the person making the acquisition, 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.
Paragraph (6) provides that the acquisition by a domestic corpora­
tion of the assets of a foreign corporation pursuant to a reorganization
described in section 368(a)(1)(F) shall not be subject to tax if the
acquisition occurs prior to January 1, 1964, and the foreign corpora­
tion is a management company registered under the Investment
Company Act of 1940 (15 TJ.S.C. 8 0 a -l— 80b-2) from July 18, 1963,
until the time of the acquisition. The purpose of this provision is to
permit foreign investment companies to reincorporate as domestic
mvestment companies without tax on their portfolios of foreign
securities.
Paragraph (7) provides that terms used in this subsection of the
bill (except as specifically otherwise provided) shall have the same
meaning as when used in chapter 41 of the Internal Revenue Code of
1954, m ating to interest equalization tax.
SECTION 3. R ETU RN S
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 T A X
RETURNS

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 by each person who has acquisitions
during the calendar quarter which are nontaxable by reason of the
exemption provided in section 4918 for stocks or debt obligations
Acquired from a U .S. person.
In the case of a person incurring liability for the tax, the return
must disclose the taxable acquisitions and the tax incurred, and must



40

MESSAGE ON BALANCE OF PAYMENTS:

have attached a list of transactions during the quarter in respect of
which no liability for payment of tax is incurred by reason of the
provisions of section 4818. The list must be accompanied by clear
and convincing evidence that the acquisitions are ones to which the
provisions of section 4918 apply. A certificate of American owner­
ship described in section, 4918(b) will, of course, constitute clear and
convincing evidence for this purpose.
In the case of a person not incurring liability for payment of interest
equalization tax during the calendar quarter but who has acquisitions
to which the provisions of section 4918 apply, the return must have
a list of such acquisitions attached and must be accompanied by the
requisite evidence showing that the acquisitions are pnes to which the
provisions of section 4918 apply.
SECTION 3. R ETU RN S (CO N TIN U E D )
Section 3 of the bill contains one exception to the rule provided in
section 6011(d) for the making of returns on a calendar-quarter basis.
Under this exception the first period, regardless of its length, for
which a 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 into law.
Section 3 of the bill also amends part V of subchapter A of chapter
61 of the Code (relating to time for filing returns and other documents)
by adding new section 6076 which specifies the time for filing returns
of the interest equalization tax.
SECTION 6076. TIME F O R FILING INTEREST EQUALIZATION T A X R E T U R N S

Section 6076 provides that each return of interest equalization
tax (including returns disclosing acquisitions to which section 4918
applies) shall be filed on or before the last day of the first month
following the period for which the return is made. The first return
(the return for the period dining which the enactment of the bill
into law takes place) will be due on or before the last day of the
month following the calendar quarter during which the bill is enacted
into law.
SECTION 4. D ISALLO W AN CE OF D ED U C TIO N FOR AM O U N T
PAID AS IN TER EST EQ U ALIZATIO N T A X
Section 4 of the bill amends section 263(a) (relating to capital
expenditures) by adding a paragraph (3). The new paragraph would
deny, for income tax purposes, any deduction for interest equalization
tax paid by a person on his acquisitions of foreign stocks and debt
obligations, except to the extent that any amount attributable to the
amount paid as tax is included in gross income for the taxable year.
A t 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 produc­
tion of income).



MESSAGE: ON BAIiANCE. OP PAYMENTS

41

The effect of paragraph (3) of section 263(a), in generally denying
a deduction for^ income tax purposes of interest equalization tax,
is that of requiring the payor to capitalize the amount paid by him
as interest equalization tax.
:
The exception provided from the general provision denying a
deduction for income tax purposes of the interest, equalization tax
applies in a case where the interest equalization tax, itself, or a por­
tion thereof, is included in gross income. An illustration' of this is
a situation where a bond having a maturity period of 30 years is sold
by a foreign underwriter for $1,000, on which an American purchaser
must pay a tax of $150. A t 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 demand, 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. PEN ALTIES
Section 5 of the bill adds three new sections to the code. Section
6680 provides a civil penalty for failure to file an interest equaliza­
tion tax return in certain situations where no tax is due. Sections 6681
and 7241 provide civil and criminal penalties for executing a certificate
of American ownership or a certificate of sales to foreign persons
.which contains a misstatement of material fact.
SECTION 6680. FAILURE TO PILE INTEREST EQUALIZATION T A X R E T U R N S

Section 6011(d), added to the code by section 3 of this bill, requires
every person to file an interest equalization tax return if he would bave
incurred liability for payment of the tax but for the provisions of
section 4918 (relating to exemption for prior American ownership).
Except for the criminal penalty provided in section 7203, these persons
would otherwise incur no liability if they failed to file a return. Sec­
tion 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 T A X CERTIFICATES

Section 4918(a), of new chapter 41, exempts from the tax those
acquisitions which are made from another American person. Section
4918(b) provides that a certificate that the prior owner was an
American person during the applicable period of his ownership shall
be 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. The effect of section 4918 is to relieve
the person acquiring such a certificate, even though the certificate is
false, from payment of the tax unless he has actual knowledge of the
falseness of the certificate. New section 6681(a) would impose on a
person willfully executing a certificate of American ownership which
is false in any material respect a penalty equal to 125 percent of the
tax imposed oy section 4911 on the acquisition of the stock or debt



42

MESSAGE ON BALANCE OF PAYMENTS

obligation involved which, but for the provisions of section 4918(b),
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.
Subsection (b) of new section 6681 imposes on persons willfully
executing a false certificate of sales to foreign persons described in
section 4919(b) a similar penalty of 125 percent of the tax which is
imposed by section 4911 on the acquisition of stocks or debt obliga­
tions 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 certifi­
cate, would be payable by the underwriter.
SECTION 7241. P E N A L T Y F O R F R A U D U L E N T EQUALIZATION T A X
CERTIFICATES

Section 7241 provides a criminal penalty for the willful execution
of 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 execut­
ing 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.




8 8 t h CONGRESS
1s t S e s s io n

H. R. 8000

IN TH E HOUSE OF R EPRESEN TATIVES
A u g u s t 8, 1963

Mr.

M

il l s

introduced the following bill; which was referred to the Committee on
Ways and Means

A B IL L
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.

Be it enacted by the Senate and Home of Representatives oj the United
States of America in Congress assembled,
S E C T I O N 1. S H O R T T I T L E , E T C .

(a) S h o r t T i t l e .— This Act may be cited as the “Interest Equaliza­
tion Tax Act of 1963” .
(b) A m e n d m e n t o f 1954 C o d e .— Except as otherwise expressly
provided, whenever 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.
S E C . 2 . I N T E R E S T E Q U A L IZ A T I O N T A X .

(a)
I m p o s i t i o n o f T a x .— Subtitle D (relating to miscellaneous
excise taxes) is amended by adding at the end thereof the following
new chapter:

“ CHAPTER 41— IN TER EST EQ U ALIZATIO N TAX
“ Sec. 4911.
“ Sec. 4912.
“ Sec. 4913.
“ Sec. 4914.
“ Sec. 4915.
“ Sec. 4916.
“ Sec. 4917.

Imposition of tax.
Acquisitions.
Limitation on tax on certain acquisitions.
Exclusion for certain acquisitions.
Exclusion for direct investments.
Exclusion for investments in less developed countries.
Exclusion for 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.
“ S E C . 4911. I M P O S IT IO N O F T A X .

“ (a) D e b t O b l i g a t i o n s .— There is hereby imposed, on each
acquisition by a United States person (as denned m section 4920)



43

44

MESSAGE ON BALANCE OF PAYMENTS

of a debt obligation of a foreign obligor (if such obligation has a period
remaining to maturity of three years or more), a tax equal to a per­
centage of the actual value of the debt obligation measured by the
period remaining to its maturity and determined in accordance with
the following table:

The tax, as
“ If the period remaining
a percentage of
to maturity is:
actual value, is:
“ At least 3 years, but less than 3% years--------------------------- 2.75 percent
At least 3# years, but less than 4^ years--------- ----------------- 3.55 percent
At least 4H years, but less than
years................................ 4.35 percent
At least 5# years, but less than
years--------------------------- 5.10 percent
At least 6K years, but less than
years--------------------------- 5.80 percent
At least
years, but less than
years...........................—
6.50 percent
At least
years, but less than
years........... .................... 7.10 percent
At least
years, but less than 1 years--------------------------- 7.70 percent
At least 10H years, but less than
years..........................—
8.30 percent
At least 11% years, but less than 13# years............................... 9.10 percent
At least 13H years, but less than 16# years--------------------------- 10.30 percent
At least 16 years, but less than 1 years_________________ 11.35 percent
At least
years, but less than 21# years_________________ 12.25 percent
At least 21# years, but less than 23# years--------------------------- 13.05 percent
At least 23# years, but less than 26# years----------- --------------- 13.75 percent
At least 26 years, but less than 28# years__________________ 14.35 percent
years or more_______________________________ 15.00 percent

7)4
8H
9)4

6)4
7)4
8)4
9)4
0)4
11)4

)4
18)4

8)4

)4
28%

“ (b) S t o c k . — There is hereby imposed, on each acquisition by a
United States person (as defined in section 4920) of stock of a foreign
issuer, a tax equal to 15 percent of the actual value of the stock.
“ (c) P e r s o n s L i a b l e f o r T a x .—
“ ( 1 ) In g e n e r a l .— The tax imposed by subsection (a) or (b)
shall be paid by the person acquiring the stock or debt obligation
involved.
“ (2 )

C

ross

reference

.—

“ F o r im p o sitio n o f p en a lty o n m a k e r o f fa ls e c e rtific a te in lie u o f o r
in a d d itio n to tax o n a cq u isitio n in ce rta in c a s e s , s e e s e c tio n 66 81.

“ (d) T e r m i n a t i o n o f T a x . — The tax imposed by subsection (a)
or (b) shall not apply to any acquisition made after December 31,1965.
“ S E C . 4912. A C Q U IS IT IO N S .

“ (a) In G e n e r a l . — For purposes of this chapter, the term 'acquisi­
tion' means any purchase, transfer, distribution, exchange, or other
transaction by virtue of which ownership is obtained either directly
or through a nominee, custodian, or agent. Any extension or renewal
of an existing debt obligation requiring affirmative action of the obligee
at the time of the extension or renewal shall be considered the acquisi­
tion of a new debt obligation. In the case of an agreement to make
an acquisition, the acquisition shall be deemed to have occurred at
the time when the parties to the agreement first became uncondi­
tionally obligated to complete the transaction.
“ (b) S p e c i a l R u l e s .—
“ (1 ) C

e r t a in

estates

.—

transfers

to

f o r e ig n

trusts

,

p a r t n e r s h ip s

,

Any transfer (other than in a sale or exchange for
full and adequate consideration) of money or other property to
a foreign trust, partnership, or estate (except to the extent that
such transfer results in an acquisition otherwise taxable under
this chapter) shall be 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, if and to the extent that such
or




MESSAGE ON BALANCE OF PAYMENTS

45

trust, partnership, or estate is availed of to acquire stock or debt
obligations of one or more foreign issuers or obligors other than
debt obligations having a period remaining to maturity of less
than three years.
“ (2) C apital contributions by shareholders.— A ny trans­
fer of money or other property as a contribution to the capital
of a'foreign corporation by a shareholder shall be deemed an
acquisition by such shareholder of stock of the foreign corporation
in an amount equal to the actual value of the money or property
transferred, for purposes of this chapter.
“ (3) R eorganization exchanges.— A ny acquisition of stock
or a debt obligation of a foreign issuer or obligor in an exchange
to which section 354, 355, or 356 applies shall be considered
an acquisition from the foreign issuer or obligor in exchange for
its stock or for its debt obligations.
“ S E C . 49 1 3 . L I M I T A T I O N

O N T A X O N C E R T A I N A C Q U I S I T IO N S .

“ (a) G en era l R u le.— If stock or a debt obligation of a foreign
issuer or obligor is acquired by a United States person as the result of—
“ (1) the surrender for cancellation of a debt obligation to the
foreign obligor;
“ (2) the extension or renewal of an existing debt obligation
requiring affirmative action of the obligee; or
“ (3) the exercise of an option or similar right to acquire such
stock or debt obligation,
then the tax imposed on such acquisition shall not exceed the amount
determined under subsection (b).
“ (b) L i m i t a t i o n . — The tax imposed upon an acquisition described
in subsection (a) shall be limited to— ■
“ (1) the amount of tax imposed by section 4911, less
“ (2) the amount of the tax that would have been imposed
under section 4911 if the debt obligation which was surrendered,
extended, or renewed, or the option or similar right which was
exercised, had been acquired in a transaction subject to such tax ‘
immediately prior to such surrender, extension, renewal, or
exercise.
.
For purposes of this subsection, a defaulted debt obligation of the
government of a foreign country or a political subdivision thereof (or
an agency of such a government) which has been in default for at
least 10 years and which is surrendered in exchange for another debt
obligation of that government (or agency) shall be deemed to have
an actual value and period remaining to maturity equal to that of the
debt obligation acquired.
“ S E C . 49 1 4 . E X C L U S I O N F O R C E R T A I N A C Q U I S I T I O N S .

“ (a) T ransactions N ot C onsidered A cquisitions.— T he term
‘acquisition1 shall not include—
“ (1) any transfer between a person and his nominee, custodian,
or agent;
“ (2) any transfer described in section 4343(a) (relating to
certain transfers by operation of law from decedents, minors,
incompetents, financial institutions, bankrupts, successors, foreign
governments and aliens, trustees, and survivors);

“ (3) any transfer to a United States person by gift, legacy,
bequest, or inheritance;



46

MESSAGE ON BALANCE OF PAYMENTS

“ (4) any distribution by a corporation to a shareholder with
respect to or in exchange for its stock; or
“ (5) any exercise of a right to convert a debt obligation,
pursuant to its terms, into stock.
“ (b) E x c l u d e d A c q u i s i t i o n s .— The tax is imposed by section
4911 shall not apply to the acquisition—
“ (1 ) T

h e

U

n it e d

S t a t e s .— O f s t o c k

o r d e b t o b lig a tio n s b y

a n a g e n c y o r w h o lly -o w n e d in s tr u m e n ta lity o f th e U n it e d S t a t e s .
“ (2 )

C

o m m e r c ia l

bank

loans

.— Of s t o c k o r d e b t o b l i g a t i o n s

b y a c o m m e r c ia l b a n k in m a k i n g lo a n s in t h e o r d in a r y c o u r s e

of

i t s c o m m e r c ia l b a n k in g b u s in e s s .

“ (3) E x p o r t c r e d i t .— Of a debt obligation by a United States
person as all or part of the purchase price of property manu­
factured, produced, grown, or extracted in the United States by
such person (or by one or more includible corporations in an
‘affiliated group’ as defined in section 1504, of which such person
is a member), but only if such debt obligation is either held to
maturity (or until his death) by the United States person or.
transferred to an agency or wholly-owned instrumentality of the
United States or to a commercial bank acquiring the debt obliga­
tion in the ordinary course of its commercial banking business.
“ (4) A c q u i s i t i o n r e q u i r e d u n d e r f o r e i g n l a w . — Of stock
or debt obligations by a United States person doing business in a
foreign country to tne extent that the acquisition is reasonably
necessary to satisfy minimum requirements relating to holdings
of stock or debt obligations of local issuers or obligors imposed by
the laws of such foreign country. For purposes of the preceding
sentence, in the event that the minimum requirements referred to
exceed the requirements, if any, applicable in the foreign country
on July 18,1963, such minimum requirements shall be determined
as though the requirements, if any, applicable on July 18, 1963,
were in effect on the date of the acquisition.
“ S E C . 4915. E X C L U S IO N F O R D IR E C T IN V E S T M E N T S .

“ (a) G e n e r a l R u l e .— The tax imposed by section 4911 shall not
apply, except as provided in subsections (b) and (c) of this section,
to the acquisition by a United States person of stock or a debt obliga­
tion of a foreign corporation if immediately after the acquisition such
person owns 10 percent or more of the total combined voting power
of all classes of stock of such foreign corporation. For purposes of
the preceding sentence, stock owned, directly or indirectly, by or for
a foreign corporation shall be considered as being owned proportion­
ately by its shareholders.
“ (b ) E
of

for

x c e p t io n

T

a x

A

for

F

v o id a n c e

o r e ig n

C

o r p o r a t io n s

F

orm ed

or

A

v a il e d

.—

“ (1) In g e n e r a l . — The exclusion from tax provided for in
subsection (a) shall be inapplicable in any case where the foreign
corporation is formed or availed of by the United States person
for the principal purpose of acquiring, through such corporation,
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.




47

MESSAGE ON BALANCE OP PAYMENTS
“ (2 )

R e q u ir e d

h o ld in g s ,

u n d e r w r ite r s ,

and

c o m m e r c ia l

purposes of this subsection, the acquisition by a
United States person of stock or debt obligations of a foreign
corporation which acquires stock or debt obligations of foreign
issuers or obligors—
b a n k s .— F o r

“ (A) to satisfy minimum requirements relating to holdings
of stock or debt obligations of local issuers or obligors im­
posed by the laws of foreign countries where such foreign
corporation is doing business,
“ (B) in the ordinary course of its business of underwriting
and distributing securities issued by other persons, or acting
as a broker, or

“ (C) in making loans in the ordinary course of its business
as a commercial bank,
shall not, by reason of such acquisitions by the foreign corpora­
tion, be considered an acquisition by the Imited States person of
an interest in stock or debt obligations of foreign issuers or
obligors.
“ (c )
to

U

E

x c e p t io n

n it e d

s u b s e c tio n

S

tates

F

or

P

e r s o n s .—

A

c q u is it io n s

M

ade

W

it h

I

n ten t

to

S

ell

T h e e x c lu s io n f r o m t a x p r o v id e d fo r in

(a ) s h a ll b e in a p p lic a b le in a n y c a s e w h e r e th e a c q u is itio n

o f s t o c k o r d e b t o b lig a t io n s o f t h e fo r e ig n c o r p o r a t io n is m a d e w it h a n
in t e n t t o s e ll, o r t o o ffe r t o s e ll, a n y p a r t o f th e s t o c k o r d e b t o b lig a ­
tio n s a c q u ir e d t o U n i t e d S ta t e s p e r s o n s .

“ S E C . 4 9 1 6 . E X C L U S IO N F O R
C O U N T R IE S .

IN V E S T M E N T S

IN

LESS

DEVELOPED

“ (a) G e n e r a l R u l e . — 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 of such a government; or
“ (2) stock or a debt obligation of a less, developed country
corporation^
“ (b) L e s s D e v e l o p e d C o u n t r y D e f i n e d .— 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 acquisition 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 puroses of the preceding sentence, Executive Order Numbered 11071,
ated 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 for pur­
poses of the tax imposed by section 4911 on July 18, 1963, and con­
tinuously thereafter until there is in effect the Executive order referred
to in the preceding sentence. An overseas territory, department,
province, or possession of any foreign country may be designated as

S




48

MESSAGE ON -BALANCE OF PAYMENTS

a separate country. No designation shall be made under this sub­
section with respect to any of the following:
Luxembourg
Australia
Monaco
Austria
Netherlands
Belgium
New Zealand
Canada
Denmark
France
Germany (Federal Republic)
Spain
Hong Kong
Sweden
Italy
Switzerland
Japan
United Kingdom.
Liechtenstein
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 4911/ 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 thirty days
prior to such termination, he has notified the Senate and the House
of Representatives of his intention to terminate such designation.
“ (c) L e s s D e v e l o p e d C o u n t r y C o r p o r a t i o n D e f i n e d .—
“ (1) I n g e n e r a l .— For purposes of this section, the term
less developed country corporation’ shall have the same meaning t
as it has for purposes of section 955(c) (1) and (2) and the regu­
lations thereunder, except that the determination of whether a
corporation is a less developed country corporation shall be made
(A) with respect to the most recent complete annual accounting
period of such corporation, except as provided in paragraph (2),
and (B) in accordance with the foreign country’s status under
subsection (b) of this section.
“ (2) S p e c i a l r u l e f o r o r i g i n a l o r n e w i s s u e s .— A foreign
corporation shall be treated, for purposes of this section, as a
less developed country corporation with respect to an acquisition
of its stock or debt obligations by a United States person as all or
part of an original or new issue if, prior to such acquisition,, it
is established to the satisfaction of the Secretary or his delegate
that such foreign corporation—
“ (A) has satisfied the requirements of subparagraphs (A)
and (B) of section 955(c)(1) or subparagraphs (A) and (B)
of section 955(c)(2) for such period of time as the Secretary,
or his delegate may by regulations prescribe, and
“ (B) may thereafter be reasonably expected to continue
to satisfy such requirements for such further period of time
as the Secretary or his delegate may by regulations prescribe;
taking into account for purposes of this paragraph only that
portion of the corporation's gross income which is properly
attributable to the periods of time prescribed and only those days
which are within such periods.




49

MESSAGE ON BALANCE OF PAYMENTS
“ S E C . 49 1 7 . E X C L U S IO N

FOR

NEW

IS S U E S

W HERE

R E Q U IR E D

FOR

IN T E R N A T IO N A L M O N E T A R Y S T A B IL IT Y .

“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 applv to the acquisition^ by a United States person of stock or a debt obligation of such
foreign country, any agency or political subdivision thereof, any
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, to the extent that such stock
or debt obligation is acquired as all or part of an original or new issue
which is registered under the Securities Act of 1933 or as to which
there is filed such prior notification of issue as the Secretary or his
delegate may prescribe by regulations, Such Executive order may
be applicable to all such issues or to any aggregate amount or classifi­
cation thereof which shall be stated therein and shall apply to ac­
quisitions 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 to those issues as to which registration
statements under the Securities Act of 1933 first become effective, or
the acquisition of which pursuant to notification first occurs, during
the period specified in the order.
“ S E C . 4918. E X E M P T IO N F O R P R IO R A M E R IC A N O W N E R S H IP .

“ (a) G e n e r a l R u l e . — 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 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 ownership or con­
tinuously since July 18, 1963.
“ (b) C e r t i f i c a t e o f A m e r i c a n O w n e r s h i p .— For purposes of
subsection (a), a certificate of American ownership (executed and filed
in such manner and setting forth such information as the Secretary or
his delegate mav by regulations prescribe) received in connection with
an acquisition snail be conclusive proof for purposes of this exemption
of prior American ownership unless the person making such acquisi­
tion has actual knowledge that the certificate is false in any material
respect.
“ S E C . 4919. S A L E S B Y U N D E R W R IT E R S A N D

DEALERS TO

F O R E IG N

PERSONS.

“ (a) C r e d i t o r R e f u n d . — The tax paid under section 4911 on the
acquisition of stock or debt obligations of a foreign issuer or obligor
shall constitute an overpayment of tax to the extent that such stock
or debt obligations—
“ ( 1 ) P r i v a t e p l a c e m e n t s . — Are acquired by an underwriter
from the foreign issuer or obligor and are sold directly by the
underwriter to persons other than United States persons in
transactions not involving a public offering;
“ (2 ) P u b l i c
o f f e r i n g s . — Are acquired by an underwriter
from the foreign issuer or obligor for distribution in connection
with a public offering registered with the Securities and Exchange
Commission and are sola as part of such public offering by the



50

MESSAGE ON BALANCE OF PAYMENTS

underwriter (including sales by other United States persons par­
ticipating in the distribution of the stock or debt obligations
acquired by the underwriter) to persons other than United States
persons; or
“ (3) F o r e i g n d o l l a r b o n d s .— Consist of foreign dollar bonds
acquired by a dealer in the ordinary course of his business and
sola by the dealer to persons other than United States persons
within 30 days after 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 )

E

v id e n c e

T

S

o

upport

C

r e d it o r

R

efu n d

.— A n u n d e r w r i t e r

o r d e a l e r c l a i m i n g c r e d i t o r r e f u n d u n d e r t h i s s e c t i o n s h a l l f ile w i t h t h e
r e tu r n r e q u ir e d b y s e c tio n

6011(d)

o n w h ic h c r e d it is c la im e d , o r w it h

th e c la im fo r r e fu n d , s u c h in fo r m a t io n a s t h e S e c r e t a r y o r h is d e le g a t e
m a y b y r e g u la tio n s p re s c rib e .
w ith

resp ect

to

sto c k

or

C r e d it o r r e fu n d s h a ll n o t b e a llo w e d

d e b t o b lig a tio n s

s o ld

by

a

U n ite d

S ta te s

p e r s o n p a r t ic ip a t in g in th e d is t r ib u t io n o f t h e s t o c k o r d e b t o b lig a t io n s
a c q u ir e d b y a n u n d e r w r it e r u n le s s t h e u n d e r w r it e r e s ta b lis h e s b y c le a r
a n d c o n v in c in g e v id e n c e t h a t s u c h s t o c k o r d e b t o b lig a tio n s w e r e s o ld
to

p e rso n s o th e r th a n

U n ite d

S ta te s p erson s.

F o r pu rp oses o f

th e

p r e c e d in g s e n t e n c e , a c e r tific a te o f s a le s t o fo r e ig n p e r s o n s (e x e c u te d
m

s u c h m a n n e r b y t h e U n i t e d S t a t e s p e r s o n m a k i n g s u c h s a l e s , f ile d

in s u c h m a n n e r , a n d s e ttin g fo r th s u c h in fo r m a tio n , a s th e S e c r e ta r y
o r h is d e le g a te m a y b y r e g u la tio n s p r e s c r ib e ) s h a ll b e c o n c lu s iv e p r o o f
fo r

p u rp oses o f

a p erso n o th e r

th e

c r e d it o r r e fu n d

th a n

a U n ite d

t h a t s u c h , s a le s w e r e m a d e

to

S t a t e s p e r s o n u n le s s t h e u n d e r w r ite r

r e ly in g u p o n t h e c e r tific a te h a s a c t u a l k n o w le d g e t h a t t h e c e r tific a te
is fa ls e

in

any

m a te ria l re sp e c t.

u n d e r w r ite r s f o r m

In

any

case

w h ere

tw o

or

m ore

a p u r c h a s in g a n d s e llin g g r o u p fo r t h e p u r p o s e o f

a c q u ir in g s t o c k o r d e b t o b lig a t io n s o f a s in g le fo r e ig n is s u e r o r o b li g o r ,
th e filin g o f a c e r tific a te o f s a le s to fo r e ig n p e r s o n s b y a n y o n e o f s u c h
u n d e r w r ite r s m a y , to

th e e x t e n t p r o v id e d b y r e g u la tio n s p r e s c r ib e d

b y t h e S e c r e t a r y o r h is d e le g a t e , c o n s t i t u t e t h e filin g o f s u c h c e r t ific a t e
fo r a ll o f s u c h u n d e r w r ite r s .

“ (c)

D e f i n i t i o n s .— For purposes of this section—
“ (1) the term ‘underwriter* means any person who has pur­
chased stock or debt obligations from the issuer or obligor thereof
with a view to the distribution through resale of such stock or
debt obligations;
“ (2) the term ‘dealer7 means any person who is a member of
the National Association of Securities Dealers and who is regularly
engaged, as a merchant, in purchasing stock and debt obligations
ana selling them to customers with a view to the gains and profits
that may be derived therefrom; and
“ (3) the term ‘foreign dollar bonds* means any debt obligations
of a foreign obligor under the terms of which principal and interest
are payable only in United States currency.

“ SE C . 4920. D E F IN IT IO N S .
“ F o r p u r p o se s o f th is c h a p te r —
“ (1 )

D

ebt

o b l ig a t io n

.—

“ (A) In g e n e r a l . — Except as provided in subparagraph
(B ), the term ‘debt obligation' means—



MESSAGE ON BALANCE OF PAYMENTS

51

“ (i) any indebtedness, whether or not represented
by a bona, debenture, note, certificate, or other writing,
whether or not secured by a mortgage, and whether or
not bearing interest; and
“ (ii) any interest in, or any option or similar right to
acquire, a debt obligation referred to in this subpara­
graph, whether or not such interest, option, or right is
m writing. .
“ (B) E x c e p t i o n s . — The term 'debt obligation1 shall not
include any obligation which—
“ (i) is convertible by its terms into stock of the obligor;
“ (ii) is received as compensation for the performance
of services by a United States person; or
“ (iii) arises out of the divorce, separate maintenance,
or support of a United States person.
“ (2) S t o c k . — The. term ‘stock’ means—
“ (A) any stock, share, or other capital interest in a corpora­
tion, association, insurance company, or joint-stock company;
“ (B) any interest of a limited partner in a limited part­
nership;
'
“ (C) any interest in an investment trust;
“ (D) any indebtedness which is convertible by its terms
into stock of the obligor; and
“ (E) any interest in, or option or similar right to acquire,
any stock described in this paragraph.
“ ( 3 ) F o r e i g n i s s u e r o r o b l i g o r .— The terms ‘foreign issuer’,
‘foreign obligor’^ and ‘foreign issuer or obligor’ mean any issuer
of stock or obhgor of a debt obligation, as the case may be,
which is—
“ (A) (i) an international organization of which the United
States is not a member,
“ (ii) the government of a foreign country or any political
subdivision thereof, or an agency of such a government, or
“ (iii) a corporation, association, insurance company, jointstock company, partnership, or estate or trust which is not
a United States person as defined in paragraph (4), or a
nonresident alien individual;
“ (B) a domestic corporation (other than a domestic cor­
poration described in subparagraph (C)) formed or availed
of for the principal purpose of obtaining capital for any
other person referred to in this paragraph; or
“ (C) a domestic corporation which, as of July 18, 1963,
was a management company registered under the Investment
Company Act of 1940 (15 U .S.C . 8 0 a -l— 80b-2) if—
“ (i) at least 80 percent of the value of the stock and
debt obligations owned by such corporation on July 18,
1963, ana 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, consists of
stock or debt obligations of foreign issuers or obligors;
“ (ii) such corporation elects to be treated as a foreign
issuer or obligor for purposes of this chapter; and
“ (iii) such corporation does not materially increase
its assets during the period from July 18, 1963, to the



MESSAGE ON BALANCE OF PAYMENTS
date of such election through borrowing or through
issuance or sale of its stock (other than stock issued or
sold on or before September 15, 1963, as part of a public
offering with respect to which a registration statement
was first filed with the Securities and Exchange Com­
mission on July 18, 1963, or within 90 days prior
thereto).
The election under clause (ii) shall be made on or before the
thirtieth day after the date of the enactment of this chapter
under regulations prescribed by the Secretary or his delegate.
Such election shall be effective as of the date specified by the
corporation, but not later than the date on; which such elec­
tion 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 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 (F) of section
368(a)(1), the two corporations shall be considered a single
domestic corporation for purposes of this subparagraph.
“ (4) U n i t e d S t a t e s p e r s o n .— The term ‘ United States
person’ means—

“ (A) a citizen or resident of the United States,
“ (B) a partnership created or organized in the United
States or under the laws of the United States or of any State,
“ (C) a corporation created or. organized in the United
States or under the laws of the United States or of any State,
other than a corporation described in subparagraph (B) or
(C) of paragraph (3),

“ (D) an agency or wholly-owned instrumentality of the
United States,
“ (E) a State or any agency, instrumentality, or political
subdivision thereof, and
“ (F) any estate or trust—
“ (i) the income of which from sources without the
United States is includible in gross income under sub­
title A (or would be so includible if not exempt from tax
under section 501(a), 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.

As used in this paragraph, the term ‘United States’ in a geo­
graphical 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.
“ (5)

P

e r io d

r e m a in in g

to

m a t u r it y

.—

“ (A) In g e n e r a l .— Subject to the modifications set forth
in subparagraph (B), the period remaining to maturity of a
debt ODUgation 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 final payment of principal
becomes due.




MESSAGE ON BALANCE OP PAYMENTS

53

“ (B) M o d i f i c a t i o n s .— The period remaining to ma­
turity—
“ (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;
“ (ii) of any debt obligation which is renewable with­
out affirmative action by the obligee, or of any interest
in or option or similar right to acquire such a debt obli­
gation, shall end on the last day of the final renewal
period; and
“ (iii) of a debt obligation which is subject to retire­
ment prior to its maturity through operation of a man­
datory sinking fund shall be determined under regula­
tions prescribed by the Secretary or his delegate.”
(b) T e c h n i c a l A m e n d m e n t . — The table of chapters for subtitle
D is amended by adding at the end thereof the following item:

“ Chapter 41. Interest equalization tax.”
(c)

D a t e .—
(1) G e n e r a l r u l e .— Except as provided by paragraphs (2),
(3), (4), (5), and (6), the amendments made by this section shall
apply with respect to acquisitions of stock and debt obligations
made after July 18, 1963.
(2) P r e e x i s t i n g c o m m i t m e n t s .— Such amendments shall not
apply to an acquisition made pursuant to an obligation to acquire
which on July 18, 1963—
(A) was unconditional, or
(B) was subject only to conditions contained in a formal
contract under which partial performance had occurred. •
.
(3) P u b l i c o f f e r i n g .— Such amendments shall not apply to
an acquisition made on or before September 15, 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
Securities and Exchange Commission on July 18, 1963, or
within 90 days prior thereto; and
(C) no amendment was filed with the Securities and
Exchange Commission after July 18, 1963, and prior to 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) L i s t e d s e c u r i t i e s .— Such amendments shall 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.
' ( 5 ) O p t i o n s a n d f o r e c l o s u r e s .— Such amendments shall not
apply to an acquisition—
(A) of stock pursuant to the exercise of an option or sim­
ilar right, if such option or similar right was held on July 18,
1963, by the person making the acquisition,, 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.
E

f f e c t iv e




54

MESSAGE ON BALANCE OF PAYMENTS

(6)-JDomestication.— Such amendments shall not apply to
the acquisition by a domestic corporation of the assets of a foreign
corporation pursuant to a reorganization described in subpara­
graph (F) of section 368(a)(1) if the acquisition occurs prior to
January 1, 1964, and the foreign corporation was a management
company registered under the Investment Company Act of 1940
(15 U .S.C. 80a~l— 80b-2) from July 18, 1963, until the time of
the acquisition.
(7) M e a n i n g of terms. — Terms used in this subsection
(except as specifically otherwise provided) shall have the same
meaning as when used in chapter 41 of the Internal Revenue
Code of 1954.
SE C , 3. R E T U R N S .

(a) M a k i n g
of
R e t u r n s .— Section 6011 (relating to general
requirement of return, statement, or list) is amended by redesignating
subsection (d) as subsection (e), and by adding after subsection (c)
the following new subsection:
“ (d) I n t e r e s t E q u a l i z a t i o n T a x R e t u r n s .— Every person shall
make a return for each calendar quarter during winch 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.”
(b) T i m e f o r F i l i n g R e t u r n s .— Part V of subchapter A of chapter
61 (relating to time for filing returns and other documents) is amended
by adding at the end thereof the following new section:
“ S E C . 6 0 7 6 , T I M E F O R F I L I N G I N T E R E S T E Q U A L IZ A T I O N T A X R E T U R N S .

“Each return made under section 6011(d) (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) C l e r i c a l A m e n d m e n t .— The table of sections for part V of
subchapter A of chapter 61 is amended by adding at the end thereof
the following:

“ Sec. 6076. Time for filing interest equalization tax returns.”
(d) F i r s t R e t u r n P e r i o d .— Notwithstanding any provision of
section 6011(d) of the Internal Revenue Code of 1954, the first period
for which returns shall be made under such section 6011(d) shaU be
the period commencing July 19, 1963, and ending at the closei of the
calendar quarter in which the enactment of this Act occurs.
S E C . 4 , D IS A L L O W A N C E O F D E D U C T IO N F O R A M O U N T P A ID A S IN ­
T E R E S T E Q U A L IZ A T I O N T A X .

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 the provisions of section
4911 (relating to imposition of interest equalization tax) except
to the extent that any amount attributable to the amount paid
as tax is included as gross income for the taxable year.”




55

MESSAGE ON BALANCE OF PAYMENTS
S E C . 5. P E N A L T I E S .

(a) A s s e s s a b l e P e n a l t i e s .— Subchapter B of chapter 68 (relating
to assessable penalties) is amended by adding at the end thereof the
following new sections:
“ S E C . 66 80. F A IL U R E T O F IL E I N T E R E S T E Q U A L IZ A T IO N T A X R E T U R N S .

“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) (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 or 4919, 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 6076,
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 or 4919, 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 a return.
“ S E C . 6 6 8 1 . F A L S E E Q U A L IZ A T I O N T A X C E R T I F I C A T E S .

“ (a) F a l s e C e r t i f i c a t e o p A m e r i c a n O w n e r s h i p . — In addition
to the criminal penalty imposed by section 7241, any person who
willfully executes a certificate of American ownership described in
section 4918(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 obliga­
tion involved which, but for the provisions of section 4918(b), would
be payable by the person acquiring the stock or debt obligation.
“ (b) F a l s e C e r t i f i c a t e o p S a l e s t o F o r e i g n P e r s o n s . — In
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.
“ (c) P e n a l t y T o B e i n L i e u o p T a x i n C e r t a i n C a s e s .— 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 (b) shall be in lieu of any tax on the
acquisition of such stock or debt obligation under section 4911.”
(b) C r i m i n a l P e n a l t y .— 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:
“ S E C . 7241. P E N A L T Y F O R
T IF IC A T E S .

FRAUDULENT

E Q U A L IZ A T IO N

TAX

CER­

“Any person who willfully executes a certificate of American owner­
ship described in section 4918(b), or a certificate of sales to foreign
iersons described in section 4919(b), which is known by him to be
raudulent 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.”

f




56

MESSAGE ON BALANCE OF PAYMENTS

(c) C

lerical

A

mendments

.
—

(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.
“ Sec. 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.”




o