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-._.__-. ..^_»--»*•»..• 11 >i JBp1——' •mi~rr—— iiiWiiimi • ' w • » | ^ j r PRESS RELEASES^ B-374 TO B-547 JGUST 1, 1977 THROUGH NOVEMBER 10, 197 7 OBRAR? FEB? 1979 ROOM 5004 TREASURY DEPARTMBfl FOR RELEASE UPON DELIVERY EXPECTED AT 10:00 A.M. AUGUST 1, 197 7 STATEMENT OF THE HONORABLE ROGER C. ALTMAN ASSISTANT SECRETARY OF THE TREASURY FOR DOMESTIC FINANCE BEFORE THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES Mr. Chairman and Members of the Committee: I am pleased to be here today to assist you in your consideration of the public debt limit. As you know, on September 30, 1977, the present temporary debt limit of $700 billion (enacted on June 30, 1976) will expire and the debt limit will revert to the permanent ceiling of $400 billion. Legislative action by September 30 will be necessary, therefore,to permit the Treasury to borrow to refund securities maturing after September 30 and to raise new cash to finance the anticipated deficit in the fiscal year 1978. In addition, we are requesting an increase in the $17 billion limit (also enacted June 30, 1976) on the amount of bonds which we may issue without regard to the 4-1/4 percent interest rate ceiling on Treasury bond issues. Finally, we are requesting authority to permit the Secretary of the Treasury, with the approval of the President, B-374 ~~ n Q Savings Bonds if that to change the interest rate on U.S. Saving *-.v nnmnses of assuring a fair rate becomes necessary for purposes of return to savings bonds holders. Debt Limit Turning first to the debt limit, our estimates of the amounts of the debt subject to limit at the end of each month through the fiscal year 1978 are shown in the attached table. The table projects a peak debt subject to limit of $780 billion at September 30, 1978, which assumes a $12 billion cash balance. The usual $3 billion margin for contingencies would raise this amount to $783 billion. We are thus requesting an increase of $83 billion from the present temporary limit of $700 billion. This $83 billion increase reflects the Administration's current estimates of a fiscal 1978 unified budget deficit of $61.5 billion, a trust fund surplus of $13.1 billion, and a net financing requirement for off-budget entities of $8.5 billion. The trust fund surplus must be added to the debt requirement because the surplus is invested in Treasury securities which are subject to the debt limit. The debt of off-budget entities which affect the debt limit consists largely of obligations which are issued, sold or guaranteed by Federal agencies and financed through the Federal Financing Bank. Since the Federal Financing Bank borrows from the Treasury, the Treasury is required to increase its borrowing in the market by a corresponding amount. This, of course, adds to the debt subject to limit. As indicated in the table, it is assumed that the Treasury's operating cash balance will be at $12 billion on both September 30, 1977, and September 30, 1978. On this basis, no net increase in the debt will be required to finance the cash balance in the fiscal year 1978. We believe that our $12 billion projection is reasonable in light of current needs and the actual balances maintained by the Treasury in recent years. Over the past decade, the Treasury's cash balances at the end of each fiscal year have been as follows: 1968 1969 1970 1971 1972 1973 1974 1975 1976 T.Q. 1977 1978 $ 5.3 billion 5.9 8.0 8.8 10.1 12.6 9.2 7.6 14.8 17.4 12.0 est. 12.0 est. The trend to larger cash balances in recent years reflects the overall growth in Government receipts and expenditures. Also, there is a heavy drain in cash from Government expenditures in the first half of each month, and there is a sharp increase in cash from tax receipts in the second half of the tax payment months. Thus, large month-end cash balances, which must be financed from additional borrowing, are essential to the efficient management of the Government's finances. Our requested increase in the debt subject to limit is slightly lower than the $784.9 billion agreed to in the House-Senate Conference on May 11, 1977, on the First Concurrent Resolution on the budget for fiscal 1978. This means that the targeted amount of debt subject to limit in the May Concurrent Resolution will be adequate to meet the Administration's estimated requirements of $783 billion. Bond Authority I would like to turn now to our request for an increase in the Treasury's authority to issue long-term securities in the market with regard to the 4-1/4 percent statutory ceiling on the rate of interest which may be paid on Treasury bond issues. We are requesting that the Treasury's authority to issue bonds (securities with maturities over 10 years) be increased by $io billion from the current ceiling of $17 billion to $27 billion. 5 As you know, the 4-1/4 percent ceiling predates World War II but did not become a serious obstacle to Treasury issues of new bonds until the mid-1960's. At that time, market rates of interest rose above 4-1/4 percent, and the Treasury was precluded from issuing new bonds. The Congress first granted relief from the 4-1/4 percent ceiling in 1967 when it redefined, from 5 to 7 years, the maximum maturity of Treasury notes. Since Treasury note issues are not subject to the 4-1/4 percent ceiling on bonds, this permitted the Treasury to issue securities in the 5 to 7 year maturity area without regard to the interest rate ceiling. Then, in the debt limit act of March 15, 1976, the maximum maturity on Treasury notes was increased from 7 to 10 years. Today, therefore, the 4-1/4 percent ceiling now applies only to Treasury issues with maturities in excess of 10 years. Concerning amounts exempted from this ceiling, in 1971 Congress authorized the Treasury to issue up to $10 billion of bonds without regard to it. This limit then was increased to the current level of $17 billion in the debt limit act of June 30, 1976. As a result of these actions by the Congress, the Treasury has been able to achieve a better balance in the maturity structure of the debt and has re-established the market for long-term Treasury securities. Today, however, Treasury has nearly exhausted the present $17 billion authority. Including the $1 billion new bond issue announced on July 27, the amount of remaining authority to issue bonds is $1 billion. Since the last increase in this limit on June 30, 1976, the Treasury has offered $6.3 billion of new bonds in the market. This includes $2.5 billion issued in the current quarter. While the timing and amounts of future bond issues will depend on current market conditions, a $10 billion increase in the bond authority would permit the Treasury to continue this recent pattern of bond issues throughout the fiscal year 1978. We believe that such flexibility is essential to efficient management of the public debt. Savings Bonds In recent years, Treasury recommended on several occasions that Congress repeal the 6 percent statutory ceiling on the rate of interest that the Treasury may pay on U.S. Savings Bonds. The 6 percent ceiling rate has been in effect since June 1, 1970. Prior to 1970 the ceiling has been increased many times. As market rates of interest rose, it became clear that an increase in the savings bond interest rate was necessary in order to provide holders of savings bonds with a fair rate of return. 7 While we do not feel that an increase in the interest rate on savings bonds is necessary at this time, we are concerned that the present process of requiring legislation for each increase in the rate does not provide sufficient flexibility to adjust the rate in response to changing market conditions. The delays encountered in the legislative process could result in inequities to savings bond purchasers and holders as market interest rates rise on other competing forms of savings. Also, the Treasury has come to rely on the savings bond program as an important and relatively stable source of long-term funds, and we are concerned that participants in the payroll savings plan and other savings bond purchasers might drop out of the program if the interest rate were not maintained at a level reasonably competitive with other comparable forms of savings. Any increase in the savings bond interest rate by the Treasury would continue to be subject to the provision in existing law which requires approval of the President. Also, the Treasury would, of course, give very careful consideration to the effect of any increase in the savings bond interest rate on the flow of savings to banks and thrift institutions. To sum up, we are requesting an increase in the debt limit to $783 billion through September 30, 1978, and an increase in the bond authority to $27 billion, and a repeal of the interest rate ceiling on savings bonds. I will be happy to try to answer any questions regarding these requests. Thank you. oOo PUBLIC DEBT SUBJECT TO LIMITATION FISCAL YEAR 1977 Based on: Budget Receipts of $358 Billion, Budget Outlays of $404 Billion, Unified Budget Deficit of $46 Billion, Off-Budget Outlays of $10 Billion ($ Billions) Operating Cash Balance 1976 September 30 Public Debt Subject to Limit With $3 Billion Margin for Contingencies Actual$17.4 $635.8 October 29 12.0 638.7 November 30 8.7 645.8 December 31 11.7 654.7 January 31 12.7 655.0 February 28 14.6 664.5 March 31 9.0 670.3 April 29 17.8 672.2 May 31 7.0 673.2 June 30 16.3 675.6 July 27 9.8 673.0 1977 -EstimatedAugust 31 12.0 690 $693 September 30 12.0 696 699 PUBLIC DEBT SUBJECT TO LIMITATION FISCAL YEAR 1978 Based on: Budget Receipts of $401 Billion, Budget Outlays of $463 Billion, Unified Budget Deficit of $62 Billion, Off-Budget Outlays of $9 Billion ( $ Billions) Operati.ng Cash Balanc:e 1977 September 30 Public Debt Subject to Limit With $3 Billion Margin for Contingencies -Es1:imated$12 $696 $699 October 31 12 708 711 November 30 12 716 719 December 30 12 721 724 January 31 12 720 723 February 28 12 733 736 March 31 12 749 752 April 17 12 757 760 April 28 12 745 748 May 31 12 763 766 June 15 12 770 773 June 30 12 758 761 July 31 12 764 767 August 31 12 775 778 September 29 12 780 783 1978 department of theTREASURY fASHIM6TOMrD.C.2t220 TELEPHONE 566-2041 FOR IMMEDIATE RELEASE August 1, 1977 RESULTS OF TREASURY1S WEEKLY BILL AUCTIONS Tenders for $ 2,400 million of 13-week Treasury bills and for $3,601 million of 26-week Treasury bills, both series to be issued on August 4, 1977, were accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: 13-we ek bills maturinLg November 3, 1977 Price High Low Average Discount Rate 98.638 98.625 98.629 5.388% 5.440% 5.424% : 26-week bills . maturing February 2, 1978 Investment [ Rate 1/ : Price 5.54% 5.59% 5.58% Discount Rate 5.671% 5.697% 5.691% , 97.133 : 97.120 : 97.123 Investment Rate 1/ 5.92% 5.95% 5.94% Tenders at the low price for the 13-week bills were allotted 23%. Tenders at the low price for the 26-week bills were allotted 89%. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Received $ 51,090,000 Boston 3,491,575,000 New York 36,370,000 Philadelphia 44,305,000 Cleveland 27,780,000 Richmond 24,075,000 Atlanta 166,230,000 Chicago 35,640,000 St. Louis 26,845,000 Minneapolis 39,630,000 Kansas City 112,790,000 Dallas 247,805,000 San Francisco Accepted $ 21,780,000 1,948,800,000 34,755,000 34,305,000* 26,780,000 21,055,000 89,380,000 17,430,000 6,845,000 32,685,000 112,790,000 53,455,000 Received Accepted $ 58,755,000 5,688,480,000 26,845,000 29,495,000 52,410,000 19,355,000 528,970,000 23,700,000 35,425,000 13,930,000 9,000,000 574,365,000 $ 3,755,000 3,332,380,000 6,345,000 9,495,000 16,410,000 17,715,000 168,220,000 9,500,000 3,425,000 13,340,000 6,590,000 13,475,000 Treasury 75,000 75,000 150,000 150,000 TOTALS $4,304,210,000 $2,400,135,000 a/ $7,060,880,000 $3,600,800,000 a/Includes $ 295,425,000 noncompetitive tenders from the public. b/lncludes $129 910 000 noncompetitive tenders from the public. 1/Equivalent coupon-issue yield. B-375 FOR IMMEDIATE RELEASE August 2, 1977 SIMULTANEOUS WITHHOLDING OF APPRAISEMENT AND DETERMINATION OF SALES AT LESS THAN FAIR VALUE ON IMPORTS OF INEDIBLE GELATIN AND ANIMAL GLUE FROM YUGOSLAVIA, WEST GERMANY, SWEDEN AND THE NETHERLANDS The Treasury Department announced today a three-month withholding of appraisement and simultaneous determination of sales at less than fair value under the Antidumping Act with respect to inedible gelatin and animal glue from Yugoslavia, West Germany, Sweden and the Netherlands. Sales at less than fair value generally occur when the price of merchandise sold for export to the United States is less than the price of comparable merchandise sold in the home market. Interested persons were offered the opportunity to present oral and written views prior to these determinations. These cases, under the Antidumping Act, have been referred to the U.S. International Trade Commission, which must determine not later than October 29, 1977 whether a U.S. industry is being, or is likely to be, injured by the imports. Dumping results only when both sales at less than fair value and injury have been determined. If the Commission finds injury, a "Finding of Dumping" will be issued and dumping duties will be assessed on an entry-by-entry basis. Imports of this merchandise during the period January through September 19 76 were approximately as follows: the Netherlands, $964,000; Sweden, $506,000; Yugoslavia, $590,000; and West Germany, $655,000. Notice of these actions will appear in the Federal Register of August 3, 1977. * * * B-376 FOR RELEASE AT 4:00 P.M. August 2, 1977 TREASURY'S WEEKLY BILL OFFERING Tne Department of the Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $5,900 million, to be issued August 11, 1977, as follows: 91-aay Dills (to maturity date) for approximately $2,400 million, representing an additional amount of bills dated May 12, 1977, and to mature November 10, 1977 (CUSIP No. ^127_)3 L2 0 ) , originally issued in the amount of $3,303 million, tne adaitional and original bills to be freely interchangeable. lb2-oay bills for approximately $3,500 million to be dated august 11, 1977, and to mature Feoruary 9, 1978 (CUSIP No. 91z7b>3 N6 9 ) . The 182-day bills, with a limited exception, will be available in oook-entry form only. Botn series of Dills will be issued for cash and in excnange for Treasury Dills maturing August 11, 1977, outstanding in the amount of $5,903 million, of which Government accounts and Federal Reserve Banks, for themselves and as agents of foreign and international monetary adthorities, presently hold $3,233 million. These accounts may excnange bills they hold for tne bills now being offered at the weignted average prices of accepted competitive tenders. The bills will be issued on a discount basis under competitive ana noncompetitive biading, and at maturity tneir par amount will be payable without interest. 91-day bills will be issued in nearer form in denominations of $10,0U0, ^>15,U00, ^50,000, $100,000, $500,000 and _?1,000,000 (maturity value), as well as in book-entry form to designated bidders. Bills in book-entry form will be issued in a ninimum amount of ^10,000 and in any higher $5,000 multiple. Except for 182-day bills in the $100,000 denomination, which will oe available in definitive form only to investors who are able to show that they are required by law or regulation to hold securities in physical form, the 182-day bills will be issued entirely in book-entry form on the records either of the Federal Reserve Banks and Branches, or of tne Department of the Treasury. B-377 -2Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time, Monday, August 8, 1977. Form PD 4632-2 should be used to submit tenders for bills to be maintained OP the book-entry records of the Department of the Treasury. Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,000. In the case of competitive tenders the price offered must be expressed on the basis of 100, with not more than three decimals, e.g., 99.925. Fractions may not be used. Banking institutions and dealers who make primary markets in Government securities and report aaily to the Federal Reserve Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names of the customers and the amount for each customer are furnished. Others are only permitted to submit tenders for their own account. Payment for the full par amount of the 182-day bills applied for must accompany all tenders suomitted for such bills to be maintained on the book-entry recoras of the Department of the Treasury. A cash adjustment will be made on all accepted tenders for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities for the 91-day kills and 182-day bills to be maintained on the book-entry records of Federal Reserve Banks ana Branches, or for 182-day bills issued in bearer form, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Trp^nrS1^ f™ouncoment will be made by the Department of the rnnnL r the amount and price range of accepted bids. reiec nn^nf ^ d e r % W 1 i 1 b e a d v i s e d ° f t h * acceptance or rejection of their tenders. The Secretary of the Treasury expressly reserves the right to accept or reject any or all shall"; f?n:i0l%°rin,Part' and th " Secretary's action t0 these tenders for f ^ h ?« ^° reservations! noncompetitive c tenders for each issue for $500,000 or less without stared ori tor til K^^cUve is:Ls!ClmalS) °f °CC°Pted competitive bids -3Settlement for accepted tenders for the 91-day and 182-day bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and 182-day bills issued in bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt on August 11, 1977, in cash or other immediately available funds or in Treasury bills maturing August 11, 1977. Cash adjustments will be made for differences between the par value of the maturing bills accepted in exchange and the issue price of the new bills. Unaer Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, No. 418 (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. FOR IMMEDIATE RELEASE August 2, 1977 RESULTS OF AUCTION OF 3-YEAR NOTES The Department of the Treasury has accepted $3,011 million of $7,929 million of tenders received from the public for the 3-year notes, Series H-1980, auctioned today. The range of accepted competitive bids was as follows: Lowest yield 6.78% 1/ Highest yield Average yield 6.85% 6.84% The interest rate on the notes will be 6-3/4% . At the 6-3/4% rate, the above yields result in the following prices: Low-yield price 99.920 High-yield price Average-yield price 99.733 99.760 The $3,011 million of accepted tenders includes $684 million of noncompetitive tenders and $2,200 million of competitive tenders (including 40% of the amount of notes bid for at the high yield) from private investors. It also includes $127 million of tenders at the average price from Federal Reserve Banks as agents for foreign and international monetary authorities in exchange for maturing securities. In addition, $J,083 million of tenders were accepted at the average price from Government accounts and Federal Reserve Banks for their own account in exchange for securities maturing August 15, 1977, ($425 million) and from Federal Reserve Banks as agents for foreign and international monetary authorities for new cash ($658 million). 1/ Excepting 4 tenders totaling $345,000 B-378 <l> a™ tederal financing bank </> CM a> o WASHINGTON, D.C. 20220 FOR IMMEDIATE RELEASE Q_ *» August 2, 1977 SUMMARY OF FEDERAL FINANCING BANK HOLDINGS June 1-June 30, 1977 Federal Financing Bank activity for the month of June, 1977, was announced as follows by Roland H. Cook, Secretary: On June 1, the Export-Import Bank issued Note #12 to the Bank in the amount of $146.2 million. The note matures on September 1, 1986 and bears interest at a rate of 7.216% on a quarterly basis. On June 1, the FFB advanced $144,434 to the Guam Power Authority at a rate of 7.11%. On June 8, the Bank advanced $551,576.24 to the Guam Power Authority at a rate The note matures on December 31, 1978 and is of 10 guaranteed by the Department of the Interior. The National Railroad Passenger Corporation (Amtrak) made the following drawings from the Bank under notes guaranteed by the Dept. of Transportation: Interest Note # Amount Maturity Rate Date 5 280% 8/01/77 $ 5,000,000 13 6/1 5 277% 8/01/77 5,000,000 13 6/6 5 277% 6/13/77 5,000,000 11 6/6 5 248% 9/12/77 5,000,000 11 6/13 5 280% 9/12/77 35,917,699 11 6/13 5 236% 9/12/77 10,000,000 11 6/17 5 207% 9/12/77 2,500,000 11 6/24 5 239% 9/12/77 1,000,000 11 6/30 The U.S. Railway Association borrowed the following amounts against Note #8: Interest Maturity Rate Amount Date 6.328% 4/30/79 $2,945,000 6/1 6.317% 4/30/79 178,000 6/10 6.219% 4/30/79 5,637,000 6/29 ranteed by the Department of Transportation The note is gua B-379 i-H 2 The Bank purchased notes in the following amounts from ilitv comp companies guaranteed by the Rural Electrification utility Administration: Interest Maturity Rate Amount Date Borrower 6/2 6/2 Oglethorpe Elect. $ 1,110,000 Membership 8,000,000 United Pwr. Assn. Cooperative Pwr. Assn. 12,000,000 Sierra Telephone Co. 1,271,000 6/3 Dairyland Pwr. Coop. 10,000,000 12/31/11 7.797% 6/1 6/1 Colorado-Ute Electric 729,000 Assn. 6/8 Colorado-Ute Electric 3,600,000 Assn. 6/10 Tri-State Generation 5 Transmission Assn. 13,818,000 6/13 Arkansas Elect. Corp. 46,525,762 6/13 Allied Telephone Co. of Arkansas 500,364 6/8 6/15 North Florida Telephone Co. 4,000,000 12/31/11 12/31/11 7.799% 7.799% 12/31/11 6/02/79 7.812% 6.315% 6/08/84 6.295% 12/31/11 7.766% 12/31/11 7.762% 12/31/11 7.729% 12/31/11 7.729% 12/31/11 7.672% 6/16 Cooperative Pwr. Coop. 7,000,000 12/31/11 7.677% 6/17 Big River Elect. Corp. 2,359,000 12/31/11 7.698% 6/20 S. Mississippi Elect. Power 2,253,000 6/25/79 6.236% 6/22 6/22 Big River Elect. Corp. 155,000 East Kentucky Pwr.Coop. 8,665,000 12/31/11 12/31/11 7.712% 7.712% 6/24 6/24 6/24 6/27 6/27 6/27 6/28 b/28 6/30 6/30 6/30 Commonwealth Tele. Co. 13,052,000 Big River Elect. Corp. 3,200,000 Gulf Telephone Co. 64,000,000 Arizona Elect. Pwr. 9,657,000 Hillsborough § Montgomery Telephone Co. 249,000 Northwest Telephone Co. 2,628,000 S. Mississippi Elect. 1,885,000 3,300,000 Tri-State Generation § Alabama Elect. Coop. 13,000,000 Transmission Assn. Dairyland Pwr. Coop. 5,000,000 Southern 111. Pwr.Coop. 3,890,000 12/31/11 12/31/11 12/31/11 12/31/11 12/31/11 12/31/11 7/02/79 12/31/11 12/31/11 12/31/11 6/30/79 7.653% 7.697% 7.697% 7.653% 7.653% 7.653% 6.227% 7.652% 7.635% 7.635% 6.177% Interest payments on the above REA borrowings are made on a quarterly basis. - 3The Federal Financing Bank made the following advances to borrowers guaranteed by the Department of Defense; Borrower Date Argentina 6/3 6/22 6/22 6/15 6/29 6/23 Brazil China Dom. Rep. Ecuador Honduras Indonesia Israel Jordan Korea Liberia Malaysia Nicaragua Paraguay Philippines Thailand Tunisia Turkey Uruguay 6/27 6/7 6/13 6/17 6/24 6/7 6/23 6/30 6/7 6/24 6/3 6/15 6/17 6/16 6/16 6/3 6/14 6/16 6/23 6/7 6/30 6/3 6/8 6/29 6/30 6/1 6/1 6/15 6/17 6/30 6/30 6/6 6/20 6/15 6/30 Maturity Interest Rate 7,999.96 65, 980.00 82, 719.45 1,943, 408.95 373, 806.32 150, 000.00 4/30/83 6/30/83 4/30/83 6/30/83 6/30/83 12/31/82 6.836% 6.716% 6.695% 6.699% 6.663% 6.635% 89, 220.00 9, 442.50 126, 921.00 225, 901.00 88, 234.61 90, 566.00 4,669, 290.00 1,000, 000.00 22,023, 255.16 3,731, 110.47 2,198, 721.83 1,312, 977.80 110, 825.55 1,905, 068.81 408, 002.00 147,,563.76 90, 219.55 240, 000.00 212,,533.87 30,,508.03 20,,910.00 80 ,000.00 36 ,732.35 445 ,187.40 7,000 ,000.00 5 ,660.44 4,629 ,322.93 678 ,279.07 20 ,903.74 30 ,174.30 1,136 ,745.00 59 ,647.44 5,029 ,574.21 8,255 ,395.38 560 ,139.84 6/30/80 6/30/83 6/30/83 6/30/83 6/30/83 6/30/81 6/30/83 6/30/83 10/01/06 6/30/85 6/30/84 6/30/84 6/30/82 6/30/83 12/31/82 6/30/80 6/30/80 6/30/80 6/30/80 6/30/81 6/30/81 6/30/82 6/30/82 6/30/82 6/30/82 12/31/80 6/30/83 12/31/80 6/30/83 6/30/83 12/31/80 6/30/84 6/30/84 10/01/86 6/30/83 6.268% 6.841% 6.767% 6.729% 6.706% 6.574% 6.693% 6.660% 7.797% 6.912% 6.971% 6.776% 6.613% 6.714% 6.657% 6.411% 6.330% 6.305% 6.305% 6.566% 6.400% 6.728% 6.703% 6.519% 6.538% 6.497% 6.844% 6.337% 6.728% 6.661% 6.319% 6.949% 6.816% 6.993% 6.660% Amount $ - 4On June 3, the Bank advanced to the Chicago Rock Island and Pacific Railroad $765,700 at a rate of 7.705%. The note, under which the advance was made, matures on June Zl, l»»iChicago, Rock Island and Pacific Railroad borrowings from the Bank are guaranteed by the Department of Transportation. The FFB purchased participation certificates from the General Services Administration in the following amounts: Interest Date Series Amount 6/6 M $5,281,869.00 7/31/03 7.876% 6/13 L $2,177,324.34 Maturity 11/15/04 Rate— 7.840% The Student Loan Marketing Association (SLMA) issued the fol lowing notes to the FFB: Date Note # 6/7 6/14 6/21 6/28 83 84 85 86 Amount $25,000,000 25,000,000 25,000,000 25,000,000 Maturity 9/06/77 9/13/77 9/20/77 9/27/77 Interest Rate 5.309% 5.260% 5.272% 5.223% SLMA notes are guaranteed by the Department of Health, Education and Welfare. The FFB purchased Series F notes in the following amounts from the Department of Health, Education and Welfare (HEW): Interest Date Amount 6/14 $2,304,000 7/01/01 7.665% 6/24 545,000 Maturity Rate 7/01/01 7.668% The notes were previously acquired by HEW from various public agencies under the Medical Facilities Loan Program. On June 14, the Department of Health, Education and Welfare (HEW) drew the second installment of $3,645,553.13 on a block of Health Maintenance Organization notes sold to the Bank on April 29, 1977. The notes mature July 1, 1996, and were sold to the Bank at a price to yield 7.53%. The notes are guaranteed & by HEW. On June 20, the FFB advanced $11.2 million to the Western Union Space Communications, Inc., at an annual rate of 7 41%. The note, which is guaranteed by the National Aeronautics and Space Administration, will mature on October 1 1989^ - 5The Tennessee Valley Authority issued short-term notes to the Bank in the following amounts: Interest Date Amount Maturity Rate 6/15 $ 55,000,000 9/30/77 5.343% 6/30 420,000,000 9/30/77 5.228% On June 21, the Bank purchased $650,000,000 of Certificates of Beneficial Ownership from the Farmers Home Administration: In terest ]Rate Amount Maturity 7 .03% $150,000,000 6/21/83 7 .58% 175,000,000 6/21/87 7 .81% 275,000,000 6/21/92 7 .98% 50,000,000 6/21/97 On June 22, the Bank purchased debentures from Small Business Investment Companies guaranteed by the Small Business Administration. The debentures, totalling $4.75 million, bear interest at the following rates: Interest Amount Maturity Rate $ 500,000 6/1/80 6.525% 4,250,000 6/1/87 7.445% Federal Financing Bank holdings on June 30, 1977, totalled S50.8 billion. # 0# FOR IMMEDIATE RELEASE August 3, 1977 RESULTS OF AUCTION OF 7-YEAR TREASURY NOTES The Department of the Treasury has accepted $2,251 million of $4,989 million of tenders received from the public for the 7-year notes, Series B-1984, auctioned today. The range of accepted competitive bids was as follows: Lowest yield 7.24% 1/ Highest yield Average yield 7.27% 7.26% The interest rate on the notes will be 7-1/4%. At the 7-1/4% rate, the above yields result in the following prices. Low-yield price 100.054 High-yield price Average-yield price 99.892 99.946 The $2,251 million of accepted tenders includes $ 839 million of noncompetitive tenders and $ 1,412 million of competitive tenders (including 85% of the amount of notes bid for at the high yield) from private investors. In addition, $560 million of tenders were accepted at the average price from Government accounts and Federal Reserve Banks for their own account in exchange for securities maturing August 15, 1977, ($300 million) and from Federal Reserve Banks as agents for foreign and international monetary authorities for new cash ($260 million). 1/ Excepting 2 tenders totaling $276,000 B-380 MSHIN6TIM, O.C. 2tZM ^Bj£**,~ff TELEFHOWC SSS-2M1 FOR IMMEDIATE RELEASE August 4, 1977 RESULTS OF AUCTION OF 29-1/2-YEAR TREASURY BONDS AND SUMMARY RESULTS OF AUGUST FINANCING The Department of the Treasury has accepted $1,000 million of the $2,140 million of tenders received from the public for the 29-1/2-year 7-5/8% Bonds of 2002-2007, auctioned today. The range of accepted competitive bids was as follows: Approximate Yield To First Callable To Price Date High - 99.10 1/ 7.71% 7.70% Low 98.80 Average 98.94 Maturity 7.73% 7.72% 7.73% 7.72% The $ 1,000 million of accepted tenders includes $131 million of noncompetitive tenders and $ 869 million of competitive tenders (including 91% of the amount of bonds bid for at the low price) from private investors. In addition, $199 million of tenders were accepted at the average price from Government accounts and Federal Reserve Banks for their own account in exchange for securities maturing August 15, 1977. 1/ Excepting 3 tenders totaling $2,025,000 SUMMARY RESULTS OF AUGUST FINANCING Through the sale of the three issues offered in the August financing, the Treasury raised approximately $4.0 billion of new money and refunded $4.9 billion of securities maturing August 15, 1977. The following table summarizes the results: \ New Offerings 6-3/4% 7-1/4% 7-5/8% Notes Notes Bonds 8-15-80 8-15-84 2-15-022007 Nonmarketable Special Issues Maturing Net New Securities Money Total Held Raised Public $3.0 $2.3 $1.0 $ - $6.3 $3.3 $3.0 Government Accounts and Federal Reserve Banks 0.4 0.3 0.2 0.7 1.6 __I 0-1 _-_ ___.__. 1.6 Foreign Accounts for Cash.! T0TAL $4.1 $2.8 $1.2 $0.7 $8.8 $4.9 $3.9 Details may not add to total due to rounding. B-381 _____ _L tpartment of theJRE/\$URY eHWOTOM f O.C,2«20 ELEPHONE 566-2041 FOR IMMEDIATE RELEASE August 8, 1977 RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS Tenders for $2,402 million of 13-week Treasury bills and for $3,501 milUon of 26-week Treasury bills, both series to be issued on August 11, 1977, vero accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: High Low Average 13-week bills maturing November 10, 1977 Price Discount Rate 98.655 98.643 98.647 5.321% 5.368% 5.353% Investment Rate 1/ 5. 5. 5. 26-week bills maturing February 9, 1978 Discount Investment Price Rate Rate 1/ 97.141 97.124 97.129 5.655% 5.689% 5.679% 5. 5.94% 5. Tenders at the low price for the 13-week bills were allotted 99%. Tenders at the low price for the 26-week bills were allotted 35%. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Received $ 22,055,000 Boston 3,860,855,000 New York 59,790,000 Philadelphia Cleveland 27,470,000 21,195,000 Richmond Atlanta 18,630,000 180,665,000 Chicago 39,290,000 St. Louis 20,225,000 Minneapolis 32,420,000 Kansas City 40,590,000 Dallas San Francisco 377,225,000 Ireasury TOTALS 125,000 $4,700,535,000 Accepted Received $ 22,005,000 1,926,605,000 24,790,000 27,470,000 20,185,000 18,630,000 79,655,000 27,290,000 5,225,000 32,420,000 40,590,000 176,675,000 $ 33,690,000 5,408,305,000 28,090,000 19,650,000 30,085,000 17,605,000 284,455,000 29,695,000 25,375,000 14,815,000 7,790,000 446,580,000 $ 23,690,000 3,124,305,000 8,090,000 9,650,000 17*, 085,000 17,605,000 102,455,000 10,195,000 10,375,000 14,815,000 6,790,000 156,330,000 125,000 60,000 60,000 $2,401,665,000 a/ $6,346,195,000 Includes $304,795,000 noncompetitive tenders from the public. Includes $126,800,000 noncompetitive tenders from the public. Equivalent coupon-issue yield. -382 Accepted $3,501,445,000 b/ CONTACT: George G. Ross 202-566-2356 August 8, 1977 FOR IMMEDIATE RELEASE US-UK Income Tax Treaty Technical Explanation As Submitted to Senate Foreign Relations Committee July 19-20, 1977 The United States Treasury Department today released the technical explanation of the United States-United Kingdom income tax treaty as submitted to the Senate Foreign Relations Committee at Hearings on July 19-20, 1977. With minor changes, the explanation adopts the rules for crediting advance corporation tax set forth in the proposed amendment to the technical explanation published on July 1, 1977 (Treasury news release B-322). It also clarifies the definition of the term "enterprise" used in Article 9(4) of the treaty. It otherwise corresponds to the technical explanation of the US-UK income tax treaty published March 9, 1977. Attached is a copy of the revised technical explanation. oOo B-383 For Release Upon Delivery Expected At 10:00 a.m. August 9, 1977 STATEMENT OF THE HONORABLE W. MICHAEL BLUMENTHAL, SECRETARY OF THE TREASURY BEFORE THE SENATE FINANCE COMMITTEE Mr. Chairman and members of this distinguished Committee: It is an honor to appear before you to discuss the National Energy Plan. The Need for an Energy Plan The plan anwsers a clear need for a concerted national attack on our energy problems. Our dependence on imported crude oil has been rising steadily. Today almost one-half of the oil consumed in the United States is imported. Much of our imported oil comes from insecure foreign sources. Importing this amount of oil also has serious balance of payments effects: the estimated $25 billion trade deficit for the current year would be a surplus of about $20 billion if we imported no fuel. Even disregarding these international considerations, we face an obvious peril: Our consumption of oil and gas is growing considerably faster than are proven domestic and foreign reserves. Unless restraint is shown now, and we prepare to shift to alternative energy sources, we risk potentially severe shortages of oil and gas. The National Energy Plan aims to encourage energy conservation, the substitution of alternative fuels for oil and gas, and increased production of all forms of energy. R-334 - 2 Conservation lies at the center of the Plan. We are not seeking an absolute reduction in energy consumption. Rather, we are aiming to reduce the rate of increase in energy consumption to less than 2 percent per year. This is a feasible, prudent, and essential objective. It poses no threat to our equally important economic objectivesj Conservation is to be achieved by making consumers of oil products pay the replacement cost of their consumption, by substituting more efficient modes of transportation for less efficient ones, by taxing businesses on their use of oil and gas1, arid by providing tax incentives for insulation and for other improvement outlays to improve energy efficiency. The substitution of coal arid other fuels for oil and^ gas is to be achieved by providing an incentive in the tax system for businesses to convert to these alternative fuels. Solar, wind, and geothermal energy sources will also be favorably treated to encourage greater<residential "and /? industrial use. Additional production will be stimulated by allowing ; newly discovered oil to be priced at world price levels and by providing an incentive price for newly discovered natural gas. The Plan's Provisions In general, the House did an admirable job with the energy bill. However, there are some areas where additional measures need to be considered. Additional energy savings can be accomplished by changes that I would like to offer to the Committee for their consideration. Crude Oil Equalization Tax The importance of the crude oil equalization tax cannot be overestimated. The tax would insure that by 1980 c o n sumers of oil pay the true replacement cost of their consumption. This is clearly necessary to achieve conservation and to stem imports. While promoting conservation, the National Energy Plan will also encourage the development of domestic oil and qas resources This is because newly discovered oil—so-called new new oil—can be sold, free of the tax, for the world - 3market price of $13 a barrel, or more. This price factor is a powerful incentive and provides domestic oil producers a profit margin that is among the highest in the world for the production and exploration of new oil. The bill provides a similar incentive to remove a higher percentage of oil from existing fields. This results from allowing oil from stripper wells and oil obtained by tertiary production to be sold at the world price, without the payment of any crude oil tax. These price incentives are fully adequate to encourage and reward new production. The House wisely rejected all attempts to give the oil producers part of the crude oil tax to plow back into oil and gas production. The Administration strongly opposes a plowback. A plowback would unbalance the program both economically and in terms of equity. Such a scheme would defeat the purpose of the crude oil tax, which is to raise the price of new oil to consumers but at the same time to reimburse the average consumer for his consequent loss of purchasing power. The prospect of $13 a barrel oil will bring forth exploration, discovery, and production of new oil. A plowback provision would simply be a windfall to producers, who currently have adequate capital for exploration and development. The House version of the crude oil tax does need some improvement. First, it would be better if the tax were extended beyond 1981; we should not leave producers and consumers in a state of uncertainty about our long-term policy in this vital area. Second, the rebate of net proceeds of the tax should be a permanent feature, rather than stopping after one year. Finally, it would be better if the credit system were on a per capita rather than a per taxpayer basis: The tax affects the purchasing power of all consumers of oil products, not merely those consumers who pay income tax. The House credit oil tax is expected to raise $38.9 billion during the period 197 8 through 1982. However for one year at least, the amount collected under the House bill will be repaid to the consumers. On a net basis, this brings the collections down to $27.5 billion. The energy savings associated with this tax is estimated at about 230,000 barrels of oil per day by 1985. - 4 Transportation In the transportation sector, the Administration^ objective is to encourage the shift away from energy inefficient means of transportation. Our major proposal in this sector was the gas guzzler tax and rebate. We are not suggesting the restoration of the rebate. We do ask the Senate to strengthen the House version of the gas guzzler tax itself. We ask the Committee to consider imposing somewhat higher taxes than does the House bill. We believe that a strong gas guzzler tax is the key to achieving more rational and efficient use of automobiles. Reducing the number of gas guzzlers on the road will make the gasoline available for domestic consumption provide more transportation than is true with our current fleet of automobiles. Strengthening the gas guzzler tax is important to our program, since we believe the current standards will not achieve the necessary savings. We need to keep the pressure on gas guzzling automobiles until the national automobile stock is truly fuel efficient. We also need to apply the gas guzzler tax to the smaller trucks, which can be inefficient and contribute to the problem along with gas guzzling automobiles. In the transportation area, the House added several provisions. It extended the current 4-cents per gallon excise tax on gasoline beyond 197 9, repealed the personal deduction for state and local gasoline taxes, repealed the excises on buses and bus parts, revised the tax on motor boat fuels, removed the discriminatory tax on new oil used in rerefined lubricating oil and provided a credit for the purchase of electric cars. We consider these reasonable measures to promote more efficient modes of transportation and better use of oil. The energy saving for these provisions is estimated at 275,000 barrels of oil per day. The total revenue gain of the various transportation proposals is $29.5 billion for the period 1978 to 1985. However, $21.2 billion of this amount merely represents an extension of the present 4-cent tax on gasoline scheduled to be reduced 1-1/2 cents in 1979. Presently, this is a source of revenue for the Highway Trust Fund. - 5Tax on Business Use of Oil and Gas The oil and gas use tax on industry and the utilities was designed to achieve energy conservation and conversion to energy sources other than oil and gas. Industries and utilities consume oil and gas in many activities where coal and other nonfossil fuels could be used. The House use tax, while providing incentives for conversion and conservation, falls short of the use tax we would like to see enacted. The level of use tax on oil passed by the House varies depending upon whether the industrial process has conversion potential, conservation potential or is a utility. The gas tax passed by the House is a variable tax based on the difference between the user's acquisition price and the cost of a Btu equivalent amount of distillate oil. For utilities, however, the gas tax would be a flat tax such that the price of gas to a utility including the tax cannot exceed the price of residual oil. To encourage conversion to coal and other fuels, a rebate of this tax up to the annual user tax liability is allowed for qualified expenditures in boilers, burners and other equipment which do not use oil or gas. In lieu of the rebate, an additional 10-percent investment tax credit would be allowed. Where a utility elects to use the rebate option, a state utility commission could require a utility to pass the benefit of this rebate on immediately to consumers. On the other hand, if the utility elects the investment credit, the benefit of the credit can be passed on to the consumer only over the life of the asset. There are several areas where the use tax passed by the House should be improved. First, all industrial gas should be taxed at a rate which makes the price of gas in all cases equivalent on a Btu basis to distillate fuel oil, without exemptions. When applied in this fashion, the use tax works as a pricing mechanism, which makes industrial users pay the replacement cost of gas rather than an artificially low price, which encourages excessive use'. This tax should apply to all users without any exceptions except for the small user (50,000 barrels of oil equivalent per year) exemption. - 6 Second, we believe that a rebate of the utility tax should be conditioned on the benefit of the rebate not being passed on to the consumer any faster than ratably over the life of the asset. This would make the treatment consistent with the treatment provided for the investment credit, which the utilities at their option may take in place of the rebate. Third, in place of the industrial oil use tax proposed by the House, we suggest a simplified single tier tax on boilers, turbines and kilns, incorporating the House's tax schedule, which starts at 30 cents a barrel and in 1985 goes up to $3 a barrel. The only special exemption would be for current facilities unable to convert for environmental reasons. The House bill on a net basis—after the rebate—would collect $2.9 billion over the period 1979 to 1985. There would also be a revenue pickup from the denial of the regular investment credit on that financed out of the rebate. Finally, it is estimated the bill will save 1.0 to 1.4 million barrels of oil equivalent per day by 1985. Residential Energy Credit The residential energy credit provides incentives for homeowners and renters to buy energy conservation equipment and solar and wind energy equipment. The President has set a goal of insulating by 1985 90 percent of the homes that presently have insufficient insulation. The credit provided by the House bill goes a long way toward the fulfillment of this objective. Expenditures for insulation, storm doors and windows, clock thermostats, exterior caulking and weatherstripping and certain modifications to furnaces qualify for the credit. The solar and wind credit is designed to interest more homeowners in alternative energy sources. Both the solar and wind energy industries are in their infancy. The potential benefits to all Americans from developing use of solar and wind devices are great and justify a temporary tax incentive. The present cost of solar and wind energy installations is high because demand is currently low. This tax incentive will encourage more Americans to turn to these inexhaustible energy sources and will help these industries develop to the point where government incentives are no longer necessary. - 7The cumulative cost for the residential credits will amount to $4.8 billion for the period 1978 through 1985. It is projected that these proposals will save about 500,000 barrels of oil per day by 1985. Business Energy Tax Credits The House also approved a series of business energy tax credits. These credits are designed to promote the use of energy efficient insulation, to encourage commercial and industrial use of solar and other alternative resources, and to promote recycling and cogeneration. Expenditures in these areas will qualify for an additional 10-percent investment tax credit above the credit for which they otherwise qualify. The House also conserved energy at the same time it also reduced the revenue loss by denying accelerated depreciation and the investment tax credit to air conditioners, space heaters and boilers fueled by natural gas or oil. We endorse these House initiatives. The expected net revenue cost of these credits is $2.5 billion from 1978 through 1985. The energy savings is about 350,000 barrels of oil equivalent per day. Supply Incentives The House adopted two proposals in the National Energy Plan relating to the supply of energy resources. First, the House accepted a proposal to make permanent a provision that applies the minimum tax to intangible drilling costs for oil and gas only to the extent that such costs exceed the sum of the taxpayer's income from oil and gas production plus the result of 10-year amortization of these costs. The second provision allows the expensing of geothermal intangible drilling costs, which extends to geothermal resources the treatment accorded oil and gas. Also, the House provided percentage depletion for geothermal resources but only at a 10-percent rate, and only to the extent of basis in the property. Together these provisions will cost $600 million through 198 5. The geothermal provisions should save 60,000 to 110,000 barrels of oil per day. - 8 Conclusion Mr. Chairman, the National Energy Plan is in large measure a tax program. There are non-tax aspects also, but the Plan relies crucially on a battery of net taxes and new tax credits to move our economy away from its present, dangerous position of over-consumption of oil and gas. As you know, I am generally opposed to using the tax code to further non-tax objectives. In the not too distant future, I will be back before you to urge a major simplification of the income tax code. But in the case of energy, the basic problems are so urgent and the alternative solutions so unsatisfactory, that resort to tax incentives is clearly proper, indeed essential. We could have relied entirely on market incentives coupled with total deregulation of oil and natural gas prices. But, given the present distortion of world markets, this approach would have created enormous and unjust windfalls throughout our economy. The American people, with justification, would have rejected such an approach out of hand. The other alternative was to rely solely on physical controls, directives, and regulations. But this would have created a giant bureaucracy and injected the heavy hand of government regulation into every facet of the economy. Thus, the only reasonable, fair, and effective solution lies with the tax system. The Administration and the American people are now looking to this Committee, with its wellknown expertise, experience, and sense of responsibility in matters of taxation, for a solution to the most serious problem facing the nation. I hope to work closely with you in dealing with this challenge. Thank you. o 0 o Crude Oil and Natural Gas Liquids Equalization Tax Under Title II of H.R. 8444, the "National Energy Act" as Passed by the House of Representatives: Relationship of the Gross Tax to Amounts Available for Credits and Payments ($ millions) Fiscal Years 1978 Gross crude oil equalization tax collections 1,897 ' 1979 ' 1980 6,349 11,294 ' 19781982 1981 " 1982 14,596 4,802 38,938 Reduced refiners' income tax -305 -971 -1,720 -1,944 -900 -5,840 Refund for oil used to produce natural gas liquids at refineries -29 -97 -168 -211 -68 -573 Refund for heating oil: Homes Hospitals -82 -9 -476 -54 -688 -80 -793 -91 -181 -20 -2,220 -254 1,819 -1,819 -780 -- .. . . -2,599 -- — Per taxpayer credits Net receipts effect -347 3,971 8,638 11,557 3,633 27,452 Special payments to qualified recipients -- -866 -- -866 Net budget effect -347 3,105 8,638 11,557 3,633 26,586 Office of the Secretary of the Treasury Office of Tax Analysis August 8, 1977 Excise Tax on Business Use of Oil and Natural Gas Under Title II of H.R. 8444, the "National Energy Act," As Passed by the House of Representatives: 1/ Relationship of Tax without Investment Rebate to Final Tax ($ millions) ~~ : Fiscal Years : 1979: 1979 : 1980 : 1981 : 1982 : 1983 : 1984 : 1985 : 1985 Tax without rebate for qualified investment - 1734 2796 3642 4678 7574 8524 28,948 Qualified investment rebate - -1298 -2686 -3421 -3990 -6651 -7506 -25,552 2/ Reduced industry income tax-' -25 -38 -22 -57 Net effect on receipts -25 398 88 164 592 813 878 2908 Office of the Secretary of the Treasury August 6, 1977 Office of Tax Analysis 1/ Industry and utility taxes. 27 Results from less than full pass-through of tax to prices. -96 -110 -140 -488 Estimated Receipts Effects of Title II of H.R. 8444, the "National Energy Act," as Passed by the House of Representatives ($ millions) Fiscal Years 1978 " 1979 ' 1980 " 1981 " 1982 * 1983 ' 1984 ' 1985 19781985 Part I. Residential energy tax credits: Credit tor insulation and other energy-conserving components Credit for solar and wind energy expenditures ". Total, Part I -361 -466 -491 -518 -546 -576 -608 -541 -4,107 ^26 -387 __54 -520 ^62 -553 __71 -589 __87 -633 -HI -637 -140 -748 -169 -710 -720 -4,827 150 160 170 915 Part II. Transportation tax provisions: Gas guzzler tax -- 100 100 100 135 Repeal of deduction for state and local tax on gasoline Extension of existing tax rate on gasoline and other motor fuels .... Amendment of motorboat fuel provisions Repeal of excise tax on buses Repeal of excise tax on bus parts ... Removal of excise tax on certain items used in connection with buses Credit for qualified electric motor vehicles Total, Part II Part III. Crude oil equalization and natural gas liquids tax: 1/.. 859 944 1,039 1,143 1,,257 1,383 7,520 3,404 4 -9 -3 3,496 4 -9 -3 3,585 21,236 4 -9 -3 3 ,677 4 -9 -3 3,772 -9 -3 3,302 4 -9 -3 4 -9 -3 29 -76 -24 -13 -13 -13 -13 -13 -13 -13 -13 -104 * 87 * 859 -1 4,239 -1 4,426 -2 4,647 -4 4,853 __ 5 ,073 5,304 29,488 -347 3,971 8,638 11,557 3,633 _,_, __. __ 27,452 -25 398 88 164 592 .. 592 715 784 2,716 98 813 94 87& 2,90e 261 298 345 34 295 73 371 69 414 115 780 -1 -13 -3 — 4 __ -8 Business use of oil and natural gas Parts IV, V: Excise tax on business use of oil and natural gas: 2' Industry — Total, Parts iv] V*........ — ^25 398 ~88 "l64 Part VI, Denial of investment credit or. property financed with credit: Industry 23g m Ut i^,*par;-:r:::::::::::::::: -^ ^ ^ ^ ^ 192 1,614 176 1,790 Total business use of oil and _ — — — j^j£ 1,292 4,695 natural gas business credits. Part VI. excluding denial of ir.vesrrer.t credit on pr.-pertv financed «< fh credit: Alternative conservation and nev technology credits Investment credit denied, and depreciation li=ited to straight-line or oil cr gas burning equipment, and air-conditioning and apace heaters Total business credits Part VII. Miscellaneous provisions: Treatment of intangible drilling costs for purposes of tLiniTrus. tax Option to deduct intangible drilling costs on geotherrzal deposits 10 Percent depletion in case of geother___l deposits Rerefmed lubricating oil Total, Part VII 7 VT Total receipts effects, Parts I-WI _?89 _491 3>293 "40y ui:> -22 -316 ±i± -30- ^ J*> .559 .586 99 -392 _93 93 _88 88 822 -2,471 ^ ^_ _4_ -48 -56 -65 -74 -354 ^ _n -20 -20 -32 -54 -179 ^ _2 Tjg _2 -3 .^s -2 -3 -73 -2 -3 -81 -2 -3 -102 -2 -3 -133 -13 -24 -570 12,453 15,093 7,283 4 ,580 5,500 5,841 53,770 103 "5 " _1"* -072 "97Z ^ , -j-r * T~992 >,"<• Office of the Secretary of the Treasury Office of Tax Analysis *Less than S500 thousand. after per taxpayer credits. 1/ Tax re- of business income tax offse. ana re.u 2/ Tax net of income tax offset and rebates. 0 1 c\n~) SUMMARY OF TAX PROVISIONS OF H.R. 8444 A. Residential Energy Credit !• General provisions A nonrefundable Federal income tax credit is provided for individuals who make certain energy-related expenditures. The credit is available for installations of qualified property made from April 20, 1977 through December 31, 1984. Qualifying installations may be made only with respect to the principal residence of the taxpayer and only if that residence is located in the United States. Thus, installations made with respect to vacation homes will not qualify. if less than 80 percent of the use of a residence is solely for residential purposes, a proportionate allocation of expenditures must be made to the nonresidential use. The amount of expenditures eligible for the credit must be reduced by any prior expenditures taken into account in determining the credit. Owners (including co-op and condominium owners) as well as renters are eligible for the credit. A change of principal residence restarts the amount of qualified expenditures eligible for the credit. The credit must be allocated where a single principal residence is jointly occupied. For administrative convenience, no credit of less than $10 per return will be allowed. All eligible property must meet performance and quality standards prescribed by the Secretary of the Treasury which are in effect at the time of acquisition. The original use of the property must commence with the taxpayer. To the extent that the tax basis of the residence is increased by the qualifying expenditures, the basis must be reduced by the amount of any credit allowed. 2. Energy conservation credit. This portion of the credit is available only for residences substantially completed before April 20, 1977. The amount of the credit is equal to 20 percent of the first $2,000 of qualified expenditures on insulation and other energy-conserving components (including original installation thereof) for a maximum credit of $400. Insulation means any item that is specifically and primarily designed to reduce the heat loss or gain of the residence or a water heater therein, and which may reasonably be expected to remain operation for at least 3 years. This would include attic, floor, and wall insulation made of fiberglass, rock wool, cellulose or styrofoam. Energy-conserving components include a replacement burner for a furnace that provides increased combustion efficiency, devices to modify flue openings, furnace ignition systems that replace a gas pilot light, exterior storm or thermal doors or windows, clock 2 thermostats, and exterior caulking or weatherstripping of windows and doors. The Secretary of the Treasury may odd to the list of energy-conserving items other items that are designed to increase energy efficiency. 3. Solar and wind energy credits. This portion of the credit is available for new as well as existing residences. The amount of the credit is equal to 30 percent of the first $1,500 and 20 percent of the next $8,500 (for a maximum total credit of $2,150) o£ qualified expenditures on solar and wind energy equipment, includinq certain labor costs allocable thereto. Expenditures on new and reconstructed dwellings are treated as having been made when original use begins. Eligible property must reasonably be expected to remain in operation for at least 5 years. Qualified solar energy property uses solar energy for the purpose of heating or cooling the residence or providing hot water for use therein. Qualified wind energy property uses wind energy for any nonbusiness residential purpose. Back-up systems of conventional heating or cooling equipment and expenditures properly allocable to swimming pools are not included in this credit. B. Transportation 1. Gas guzzler tax. A manufacturer's excise tax is imposed upon the sal? of new automobiles based upon their EPA-certified fuel efficiencies. The tax first applies to 1979 model year automobiles with fuel efficiencies of less than 15 miles pet gallon. The minimum fuel efficiency above which no tax is imposed increases each year so that, for model years 1985 uh\ thereafter, the tax applies to automobiles whose fuel efficiency is less than 23.5 miles per gallon. (These threshold levels range from 3 to 5.5 miles per gallon below the fleetwide average standards imposed under the Energy Policy and Conservation Act.) The tax applies to automobiles with gross vehicle weights of not more than 6,000 pounds, but ^°nnnn0t a £ p l y t 0 t r U C k s w i t h a c a r 9 ° capacity of at least J 1,000 pounds. inrrJcl^ ^ automobiles with a given fuel efficiency increases each year. For example, the tax on a 14-mile-per-gallon automobile starts at $339 for the 1979 furthere?o'S^««TS \° $428 the next **«' and -Ureases maxima rate of , f ° r ^ and later m o d e l Y**™- The maximum rate of tax applies to automobiles with less than 13 ?or the m l ' S o ^ ? efficiencies, and ranges from $553 the 1979 model year to $3,856 for the 1985 model year. to their moderPyearS an^H •"* ^ im?0^e6 cars, according moaei year, and is imposed on the importer. Where 3 automobiles are leased by the manufacturer, the first lease is treated as a sale subject to the tax. The amount of the gas guzzler tax may not be included in the owner's tax basis for the automobile for any purpose. Thus, no income tax benefit may be derived from payment of the gas guzzler tax, thereby excluding investment tax credit and depreciation benefits. All gas guzzler tax revenues are to be deposited into a Public Debt Retirement Trust Fund, the proceeds of which are to be used to retire obligations of the United States that are included in the national debt. 2. Repeal of personal deduction for State and local taxes on gasoline and other motor fuels. Effective after December 31, 1977, the personal deduction for State and local taxes on gasoline and other motor fuels is repealed. 3. Extension of excise tax on gasoline and other motor fuels. The Federal excise tax of 4 cents per gallon on gasoline and other motor fuels will be continued at that rate through September 30, 1985. This tax is currently scheduled to be reduced to 1-1/2 cents per gallon after September 30, 1979. The Committee took no action with respect to the Highway Trust Fund, which is scheduled to be phased out after September 30, 1979. Accordingly, after that date, gasoline tax receipts will be paid over into the general fund of the Treasury. 4. Amendment of motorboat fuel provisions. The Act repeals the 2-cents-per-gallon refund payment to the purchaser of gasoline and special motor fuels used in a motorboat. The motorboat fuel payment is presently made because this is a nonhighway use of gasoline. The Act conforms the tax on motorboat use of fuel to the tax on highway use. Following the treatment accorded to the current 2-cents-per-gallon tax, the increased tax on motorboat fuel will also go into the Land and Water Conservation Fund. 5. Repeal of excise tax on buses and bus parts. The 10-percent excise tax on sales of buses and the 8-percent excise tax on sales of bus parts and accessories will be repealed. Floor stocks refunds (as of the date of enactment) and consumer refunds (as of April 20, 1977) are provided where the 10-percent excise tax has already been paid. Parts and accessories that may be interchangeable between trucks and buses will continue to be taxed on sale unless the purchaser provides an exemption certificate which 4 indicates that the part or accessory is purchased for use on a bus. 6. Removal of excise taxes on items used with certain buses. The Act repeals the excise taxes on tires, inner tubes and tread rubber, gasoline and other motor fuels, and lubricating oil sold for use with intercity, local, and school buses. With respect to these excise taxes, this action places private transit and private school bus operators on a par with governmental and nonprofit school bus operators. This action applies to an intercity or local bus, and a school bus. The term "intercity or local bus" means a bus used predominantly in furnishing passenger land transportation to the general public for compensation if such transportation is scheduled and along regular routes or the passenger seating capacity of the bus is at least 20 adults, not including the driver. The term "school bus" means a bus substantially all the use of which is in transporting students and employees of schools. 7. Tax credit for electric motor vehicles. New electric cars acquired for personal use after April 20, 1977, and before January 1, 1983, will be eligible for a Federal income tax credit of the first $300 of the purchase price. A qualified electric motor vehicle is a four-wheeled vehicle manufactured primarily for use on public roads that is powered primarily by an electric motor which draws current from rechargeable storage batteries or other portable sources of electric current. c * Crude Oil Equalization Taxes and Rebates 1- Crude oil equalization tax. In l ^ a n S ' l i ™ * * ? ! ! 9 ^ l n t ° e f f e c t i n t h r e e a n " ^ l ^ages. nn „ i ' t h e t a x 1 S lmPosed on lower tier controlled 11979) If the d?ff qUal ' V 0 P e r c e n t ( 1 9 7 8 > o r " 0 percent tier oil anS%h ? n ° e b e t w e e n the ceiling price of upper tier oil and the ceiling price of lower tier oil of the same 5 classification. In 1980 and thereafter, the tax applies to all controlled crude oil, and is equal to the difference between the controlled price and the world market price for crude oil of the same classification. The tax terminates after September 30, 1981. Lower tier oil is the amount of oil produced on a property, up to the lesser of 1972 or 1975 production, and is now controlled at an average price of S5.16 per barrel. Upper tier oil is oil produced on a property in excess of the lower tier production level. Upper barr l*1 1 S D ° W c o n t r o l l e d a t a n average price of $10.97 per Crude oil used in the production of crude oil, natural gas liquids, or natural gas is not subject to the tax. In addition, the crude oil tax does not apply to the extent crude oil is refined into products that are in turn used in the production of crude oil, natural gas liquids, or natural gas. A credit or refund of the crude oil tax is also provided for crude oil that is used as a raw material to produce natural gas liquids, but only if the refiner demonstrates that he has not passed on the crude oil tax attributable to his production of natural gas liquids. 2 « Natural gas liquids equalization tax. This tax is imposed after December 31, 1977, on sales for end use (as opposed to first purchases), and on certain uses where there is no prior sale, of natural gas liquids. The tax applies to liquids sold or used in the United States, Puerto Rico and the possessions, and in the related continental shelf areas. The purpose of this tax is to bring the price of controlled natural gas liquids up to the price of energy-equivalent No. 2 distillate oil. Accordingly, the tax is based upon the difference between the price for No. 2 distillate in the region in which the taxable sale or use occurred (adjusted for differences in energy content and seasonal variations in price) and the controlled price of the natural gas liquid. The tax is brought into effect in three equal annual stages in 1978, 1979, and 1980. The tax terminates on September 30, 1981. Exemptions are provided for agricultural uses, uses in a residence, hospital, school, or church, and use as a feedstock in the production of natural gas liquids. 3. Presidential authority to suspend equalization taxes. The President is granted authority to suspend all or any part of an equalization tax increase which would result from an increase in the world price of oil where such tax increase will have a substantial adverse economic effect. A tax 6 increase suspension may not exceed a period of 1 year, and is subject to veto by either house of Congress within 15 legislative days after submission by the President of a plan implementing such suspension. 4. Crude oil tax credits, special payments, and refunds. Tax credits. The net receipts from the crude oil equalization taxes in 1978 will be allocated to each adult. Net receipts are equal to gross revenues derived from these taxes, less: (a) the reduction in Federal income taxes resulting from the imposition of the crude oil taxes, (b) the administrative costs related to the tax credit, special payment, and refund programs, (c) the amount of the heating oil refund, and (d) the amount of the refund to refiners for refining crude oil into natural gas liquids. Single taxpayers and married persons filing separately will each be entitled to one tax credit. Married persons filing joint returns and heads of households will be entitled to two credits. The tax credits are limited to the taxpayer's tax liability, except for taxpayers entitled to the earned income credit. Withholding tax schedules for 1978 will be adjusted to reflect these tax credits. Estates, trusts, and nonresident alien individuals are not entitled to this credit. Special payments. Special payments are provided for adults who are not taxpayers. These payments will be made in May or June of 1979 to recipients of benefits under Social Security, Railroad Retirement, and supplemental security income programs To the extent not covered under these programs, individuals may receive payments through State aid to families with dependent children programs. The amount of the special payment is equal to the amount of the tax credit referred to above, reduced by the amount of any crude oil tax credit claimed by the individual. Adults who do not receive a tax credit or a special payment may file an appropriate form with the Secretary of the Treasury in order to receive the payment. Lump-sum payments are also authorized for the S a n r a r e ^ n h ^ ^ ^ ^ R ^ ° an6 t h G Possessions if acceptable plans are submitted to the Secretary of the Treaqnrv for fho theSttaxUcreSi?f T™** ™**' P " * ™ " * s i m U a ^ ? f T l h l l l to* and s ecial ih!«! f P Payment programs described above ln and^IpSr^:^?^ ^ '^ <* i n d i v i d u a l SSSIta 7 tax for each gallon sold provided that the amount of the retund is passed through completely to the customers in the torm of lower prices. 5. Miscellaneous. Study of small and independent refiners. The Secretary of Energy is to conduct a study of the impact of the crude oil tax on the competitive viability of small and independent refiners. The Secretary is to report to the Congress not ^ ^ than 90 days a f t e r t h e d a t e o f enactment of the tax with his findings, together with legislative recommendations. Natural gas contracts. The crude oil taxes are not to be taken into account for purposes of determining.or redetermining natural gas prices under any contract which was entered into before the date of enactment of the Act. D - Tax on Business Use of Oil and Gas and Related Credit 1. Use tax. In general. An excise tax would be imposed on the use after December 31, 1978, of oil or natural gas as fuel in a trade or business. Three different sets of tax rates are provided: the highest rates (referred to as tier 2) apply where conversion to a fuel other than oil or gas is feasible; a lower industrial rate (tier 1) applies where conservation in fuel consumption is feasible; and a third rate (tier 3) applies to electric utility use (including production of steam by an electric utility), certain industrial electric generating use and use in a qualifying cogeneration facility. Tier 2 applies generally to uses in a boiler or in a turbine or other internal combustion engine, except for such uses classified in tier 3. Tiers 1 and 2 apply to uses in 1979 and thereafter; tier 3 applies to uses in 1983 and thereafter. Tax on oil. The tier 2 tax begins at 30 cents per barrel in 1979, and increases to $3 per barrel in 1985 and later years. The tier 1 rate begins at 30 cents per barrel in 1979, and increases to $1 per barrel in 1981 and later years. Tier 3 uses are taxed at a rate of $1.50 per barrel in 1983 and later years. Inflation adjustments apply to 1981 and later year rates. Oil subject to the tax includes crude oil, refined petroleum products, and natural gas liquids (other than liquids which have an API gravity of 110 or more) but excludes natural gas, gasoline, and substances that are not generally marketable for use as a fuel. Tax on natural gas. A variable tax is imposed, based upon the difference between a target price and the user's acquisition cost for natural gas. The purpose of this variable tax system is gradually to raise the price of 8 natural gas to slightly less than the price of energy equivalent oil. Accordingly, the target price is based upon the cost of all No. 2 grade distillate oil sold in the relevant region, adjusted by a subtraction factor (which decreases each year, thereby increasing the after-tax price of natural gas) and for inflation. Tier 3 use of natural gas is subject to a tax rate beginning at 55 cents per million Btu in 1983, and reaching 75 cents per million Btu in 1985 and later years. (One thousand cubic feet of natural gas contains approximately one million Btu.) These rates would be adjusted for inflation beginning in 1981. The tier 3 tax rate is limited so that the cost of natural gas never exceeds the cost of energy equivalent residual oil in the region where the gas is used. A 10 percent discount is provided for tier 1 and tier 2 uses subject to interruptible contracts. Natural gas subject to the tax includes natural gas, petroleum, or a product of natural gas or petroleum, having an API gravity of 110 or more. The tax does not apply to substances that are not generally marketable for use as a fuel, such as still gas. Suspension power. The President may suspend the imposition of part or all of the use tax for a period of up to one year if he determines that the imposition of such tax would have an adverse economic effect. A suspension plan must be submitted to Congress, and would be subject to a veto by either house of Congress before the end of 15 legislative days after submission. Exemptions. Since the tax applies only to use as fuel, uses of oil and natural gas as raw materials, such as petrochemical feedstocks, are not subject to tax. An industrial process use would be exempt from tax where the use of any fuel other than oil or gas would materially and adversely affect the manufacturing process or the quality of the manufactured product, or the use of such alternative fuel would not be economically and environmentally feasible. Also exempt are uses in: any residential facility; any vehicle, aircraft, vessel, or transportation by pipeline; agriculture; nonmanufacturing commercial buildings; and the exploration, development and production of oil and gas. An exemption is provided where use of a fuel other than oil or gas is precluded by applicable air pollution control laws. In addition, each taxpayer is provided an annual exempt amount equal to the energy content of 50,000 barrels of oil. For this purpose, greater-than-50-percent commonly-controlled organizations, whether or not incorporated, are considered a single taxpayer. Where a taxpayer suffers a substantial regional competitive disadvantage as a result of the use tax, publish amounts additional the Secretary the for exempt names individual of the of amounts. Treasury taxpayers plants.may and The provide plants Secretary additional receiving is required * such exempt to 9 Reclassifications. The Secretary of the Treasury must establish a procedure for reclassifying taxable uses to lower rates of use tax. Reclassification may include complete exemption from the tax. Reclassifications are to be made only if the Secretary determines that such action is not inconsistent with the goal of encouraging the conversion from, or significant conservation in, the use of oil and gas as a fuel. The Secretary is not authorized to reclassify a use to a higher rate of tax. 2. Credit against use tax. In general. A person subject to the use tax may elect eeither an additional 10 percent investment tax credit (discussed below), or a dollar-for-dollar credit against the use tax, for qualified expenditures made in alternative energy property. The credit is allowable up to current use tax liability. Excess credits may be carried forward. In addition, 1979 and 1980 taxes (including any tax carried forward from 1979) which are not offset by the credit may be carried over to 1981. Qualified progress expenditures are available under rules similar to the investment tax credit rule. The credit terminates after 1990 except for carryovers and where construction of alternative energy property began, or such property was acquired, before the end of that year. Alternative energy property. Qualified investments (which generate the use tax credit on a dollar-for-dollar basis) consist of investments in alternative energy property. Generally, this is new tangible property used in the taxpayer's trade or business, which is subject to the allowance for depreciation (or amortization), which has a useful life of at least 3 years and which is not used predominantly outside the United States. The determination of whether property is "new" depends on the extent to which it is constructed, or whether it is acquired, on or after April 20, 1977. The original use of acquired property must begin with the taxpayer. Alternative energy property consists of: (a) a boiler not fueled by oil or gas; (b) a burner for a combustor (other than a boiler) not fueled by oil or gas; (c) nuclear, hydroelectric, or geothermal energy equipment; (d) equipment for producing synthetic gas; (e) pollution control equipment required in (a), (b), or (d); (f) coal utilization equipment; and (g) the basis for plans and designs for all of the above equipment. Alternative energy property does not include buildings and structural components thereof and property used in the trade or business of leasing. Election. A taxpayer must specifically elect to treat qualified investments as a credit against the use tax. Otherwise, such investments will be available only for the 10 investment tax credit. This election applies to all the alternative energy property of the taxpayer. For this purpose, greater-than-50-percent commonly-controlled organizations, whether or not incorporated, are considered a single taxpayer. Where the qualified investment exceeds the tax liability for a calendar year, the excess may be treated as eligible for the regular (but not the additional 10 percent) investment tax credit. To the extent such election is made, the use tax credit is no longer available. Normally, qualified investments used to offset the use tax would not be eligible for either the regular or the additional investment tax credit, but would otherwise be treated as part of the tax basis for the property. Special rules. Dispositions of alternative energy property are subject to recapture rules similar in form to the rules for the regular investment credit. In addition, utilities are allowed the credit against the use tax for investment in new boilers only to the extent that old oil or gas boilers are replaced or phased down. For this purpose, phase-down is based upon less than 1500 hours of use per year. Special penalties and recapture rules apply to phased-down boilers that are subsequently used for more than 1500 hours per year. Property which is financed by industrial development bonds is eligible for only a 50-percent use tax credit. No Federal income tax deduction is allowed with respect to any portion of the use tax offset by the use tax credit. E. Business Energy Tax Credit and Special Investment Credit and Depreciation Changes 1. Business energy credit. In general. An additional 10 percent investment tax credit is allowed for business investments in qualifying property intended to reduce energy consumption in heating or cooling or in an industrial process. The additional credit is available for qualifying investments made after April 19, 1977, and before January 1, 1983. In the case of alternative energy property, the additional credit may offset up to 100 percent of the taxpayer's income tax liability as opposed to the 50 percent limitation provided under current law. This additional credit may be elected as an alternative to the credit against the use tax. J-a. Qualifying property. Energy property eligible for the additional investment tax credit consists of: (a) alternative energy property (as described above in the use tax credit explanation); (b) the expansion of cogeneration capacity; (c) advanced technology property; (d) specially defined energy property; and (e) certain recycling equipment. Alternative energy property is eligible for a maximum 11 additional investment tax credit of 10 percent, even if described in another category of energy property. Advanced technology property uses solar, geothermal, or wind energy to provide heat, cooling, or electricity in connection with an existing building and (where applicable) an existing industrial or commercial process. Specially defined energy property (such as recuperators, heat wheels and energy control systems) includes equipment which would recover waste heat in gases or otherwise reduce energy consumption, and equipment to modify existing facilities to allow the use of oil or gas in conjunction with another fuel. Energy property must be completed or acquired after April 19, 1977, in conjunction with a building or other structure located in the United States. Such property must be subject to the allowance for depreciation (or amortization) and have a useful life of at least 3 years. All business energy property (other than alternative energy property) must meet performance and quality standards which have been prescribed by the Secretary of the Treasury, and which are in effect at the time the property is acquired or construction is begun. Utilities are subject to a phase-down requirement similar to the requirement incorporated in the use tax credit provision. In the case of property financed by industrial development bonds the additional energy investment tax credit is 5 percent. Insulation installed in connection with an existing building or industrial facility will be made eligible (to the extent not already eligible) for the regular investment tax credit through 1982. Insulation must be specifically and primarily designed to reduce the heat loss or gain of an existing building or facility. The original use of the property must begin with the taxpayer. In addition, the property must reasonably be expected to remain in operation for at least 3 years, and meet performance and quality standards prescribed by the Secretary of the Treasury. 2. Denial of investment credit and accelerated depreciation. Air conditioning units and boilers fueled by oil or gas will no longer qualify for any investment tax credit. In addition, such boilers will be limited to straight-line depreciation and denied the 20-percent variance from guideline lives under ADR. If the use of a fuel other than oil or gas is precluded by applicable air pollution laws or qualifies as an exempt use under the oil and natural gas consumption tax, these restrictions on the investment credit and depreciation will not apply. 12 3. Accelerated depreciation for phased-down boilers. If a taxpayer certifies that he plans to replace or retire a boiler or other combustor which use oil or gas, he may depreciate the remaining basis of such property over the phase-down period. Under current law, the taxpayer would ordinarily deduct the remaining basis when the old equipment is retired. F. Miscellaneous Provisions 1. Minimum tax on intangible drilling costs. The Act makes permanent a provision applicable only for 1977 that applies the minimum tax to intangible drilling costs for oil and gas only to the extent that such costs exceed the sum of the taxpayer's income from oil and gas production plus the result of 10-year amortization of the intangible drilling costs. 2. Tax treatment of geothermal expenses. The expensing of intangible drilling cost treatment now provided for oil and gas will be extended to the exploration and development costs of geothermal resources. Such intangible drilling costs will be subject to the same minimum tax treatment described above for oil and gas, except that oil and gas properties will be treated separately from geothermal properties for purposes of determining income. The recapture rules and at risk rules applicable to oil and gas are extended to geothermal properties. Percentage depletion is provided at a 10-percent rate for geothermal deposits, subject to the limitation that the total amount of depletion may not exceed the taxpayer's adjusted basis in the property. 3. Rerefined lubricating oil. New lubricating oil would be exempt from the 6-cents-per-gallon excise tax if such oil is combined with rerefined oil and the new oil makes up not more than 55 percent of the mixture. If the new oil in the mixture exceeds 55 percent, the exemption would apply only to the new oil that would make up 55 percent of the mixture. In any rpr^inoS ^tur\must contain at least 25 percent waste or rerefined lubricating oil in order to qualify for the exemption. 4. Annual report by the PrPsiHpnf Beginning in August 1978, the President will reoort each r n r r g ^ c o n L S i r °!S t h % " ^ u e impact, and'incrSseV"" P^viLSSSSSrSSe°Xc??d P r 0 d U C t l 0 n ^ i „ g from the tax FOR IMMEDIATE RELEASE August 9, 1977 TREASURY ANNOUNCES COUNTERVAILING DUTY INVESTIGATION ON IMPORTS OF DIURON FROM ISRAEL The Treasury Department announced today a formal notice of investigation under the U.S. Countervailing Duty Law (19 U.S.C. 1303) with respect to imports of diuron from Israel. Notice to this effect will be published in the Federal Register of August 10, 1977. Diuron is a chemical compound used as a herbicide. The Countervailing Duty Law requires the Treasury Secretary to collect an additional customs duty that equals the size of a "bounty or grant" (subsidy) which has been found to be paid on imported merchandise. This action is being taken pursuant to a petition alleging that imports of diuron from Israel benefit from several government subsidies upon the production or exportation of that item. A preliminary determination in this case must be made on or before December 13, 1977 and a final determination by June 13, 1978. Should the Treasury Department final determination be affirma tive, the International Trade Commission must determine that a U.S. industry is being, or is likely to be, injured before countervailing duties can be imposed. The statute requires an injury determination in the case of duty-free items. Imports of diuron from Israel are currently entitled to duty-free treatment under the Generalized System of Preferences (GSP) of the Trade Act of 1974. Imports of diuron are classified under a basket provision of the tariff schedules; imports of that product from Israel were estimated to be no more than $500,000 during calendar year 1976. • * * B-385 FOR RELEASE AT 4:00 P.M. August 9, 1977 TREASURY'S WEEKLY BILL OFFERING The Department of the Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $5,700 million, to be issued August 18, 1977, as follows: 91-day bills (to maturity date) for approximately $2,300 million, representing an additional amount of bills dated May 19, 1977, and to mature November 17, 1977 (CUSIP No. 912793 L3 8), originally issued in the amount of $3,203 million, the additional and original bills to be freely interchangeable. 182-day bills for approximately $3,400 million to be dated August 18, 1977, and to mature February 16, 1978 (CUSIP No. 912793 N7 7). The 182-day bills, with a limited exception, will be available in book-entry form only. Both series of bills will be issued for cash and in exchange for Treasury bills maturing August 18, 1977, outstanding in the amount of $5,707 million, of which Government accounts and Federal Reserve Banks, for themselves and as agents of foreign and international monetary authorities, presently hold $2,857 million. These accounts may exchange bills they hold for the bills now being offered at the weighted average prices of accepted competitive tenders. The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest. 91-day bills will be issued in bearer form in denominations of $10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), as well as in book-entry form to designated bidders. Bills in book-entry form will be issued in a minimum amount of $10,000 and in any higher $5,000 multiple. Except for 182-day bills in the $100,000 denomination, which will be available in definitive form only to investors who are able to show that they are required by law or regulation to hold securities in physical form, the 182-day bills will be issued entirely in book-entry form on the records either of the Federal Reserve Banks and Branches, or of the Department of the Treasury. B-386 -2Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of the Public Debt, Washington, D C 20226, up to 1:30 p.m., Eastern Daylight Saving time, Monday, August 15, 1977. Form PD 4632-2 should be used to submit tenders for bills to be maintained on the book-entry records of the Department of the Treasury. Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,U00. In the case of competitive tenders the price offered must be expressed on the basis of 100, with not more than three decimals, e.g., 99.925. Fractions may not be used. Banking institutions and dealers who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names of the customers and the amount for each customer are furnished. Others are only permitted to submit tenders for their own account. Payment for the full par amount of the 182-day bills applied for must accompany all tenders submitted for such bills to be maintained on the book-entry records of the Department of the Treasury. A cash adjustment will be made on all accepted tenders for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities for the 91-day bills and 182-day bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, or for 182-day bills issued in bearer form, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their tenders. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and the Secretary's action shall be final. Subject to these reservations, noncompetitive tenders for each issue for $500,000 or less without stated price from any one bidder will be accepted in full at the weighted average price (in three decimals) of accepted competitive bids for the respective issues. -3Settlement for accepted tenders for the 91-day and 182-day bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and 182-day bills issued in bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt on August 18, 1977, in cash or other immediately available funds or in Treasury bills maturing August 18, 1977. Cash adjustments will be made for differences between the par value of the maturing bills accepted in exchange and the issue price of the new bills. Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, No. 418 (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. oOo Department of theJR[/\$URY WASHINGTON, D.C. 20220 WrQ'i TELEPHONE 566 2041 Contact: Alvin M. Hattal (202)566-8381 August 10, 1977 FOR IMMEDIATE RELEASE Certification Agreement With Finland The Department of the Treasury announced today the conclusion of a formal certification agreement with Finland to permit importation, under the Rhodesian Sanctions Regulations, of specialty steel products from Finland. The agreement replaces the interim arrangement which has been in effect since March 18, 1977. Under the new agreement the Government of Finland has full responsibility for administration of the detailed control measures provided for in the certification agreement. The Board of Customs of the Government of Finland will authorize producers of ferrochromium and specialty steel products to state on the commercial invoice covering products being exported to the United States that the goods have been produced under the agreed certification procedures. This special certification will be presented to Customs at the time of importation and will serve to establish that specialty steel products from Finland do not contain any chromium of Rhodesian origin. oOo B-387 toftheTREASURY , D.C. 20220 TELEPHONE 566*2041 FOR RELEASE AT 4:00 P.M. August 11, 1977 TREASURY'S 52-WEEK BILL OFFERING The Department of the Treasury, by this public notice, invites tenders for $2,953 million, or thereabouts, of 364-day Treasury bills to be dated August 23, 1977, and to mature August 22, 1978 (CUSIP No. 912793 R4 0). The bills, with a limited exception, will be available in book-entry form only, and will be issued for cash and in exchange for Treasury bills maturing August 23, 1977. This issue will not provide new money for the Treasury as the maturing issue is outstanding in the amount of $2,953 million, of which $1,992 million is held by the public and $ 961 million is held by Government accounts and the Federal Reserve Banks for themselves and as agents of foreign and international monetary authorities. Additional amounts of the bills may be issued to Federal Reserve Banks as agents of foreign and international monetary authorities. Tenders from Government accounts and the Federal Reserve Banks for themselves and as agents of foreign and international monetary authorities will be accepted at the average price of accepted tenders. The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest. Except for definitive bills in the $100,000 denomination, which will be available only to investors who are able to show that they are required by law or regulation to hold securities in physical form, this series of bills will be issued entirely in book-entry form on the records either of the Federal Reserve Banks and Branches, or of the Department of the Treasury. Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time, Wednesday, August 17, 1977, Form PD 4632-1 should be used to submit tenders for bills to be maintained on the book-entry records of the Department of the Treasury. Each tender must be for a minimum of $10,000. be in multiples of $5,000. Tenders over $10,000 must In the case of competitive tenders, the price offered must be expressed on the basis of 100, with not more than three decimals, e.g., 99.925. B-388 Fractions may not be used. (OVER) -2Banking institutions and dealers who make primary markets in Government securities and report dally to the Federal Reserve Bank of New York their positions with respect to Government securities and borrowings thereon may submit tenders for account of customers, provided the names of the customers are set forth in such tenders. Others will not be permitted to submit tenders except for their own account. Payment for the full par amount of the bills applied for must accompany all tenders submitted for bills to be maintained on the book-entry records of the Department of the Treasury. A cash adjustment will be made for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities, for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, or for definitive bills, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Those submitting competitive tenders will be advised of the acceptance or rejection thereof. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and his action in any such respect shall be final. Subject to these reservations, noncompetitive tenders for $500,000 or less without stated price from any one bidder will be accepted in full at the average price (in three decimals) of accepted competitive bids. Settlement for accepted tenders for bills to be maintained on the records of Federal Reserve Banks and Branches must be made or completed at the Federal Reserve Bank or Branch on August 23, 1977, in cash or other immediately avail- able funds or in Treasury bills maturing August 23, 1977. Cash adjustments will be made for differences between the par value of maturing bills accepted in exchange and the issue price of the new bills. Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which bills issued hereunder are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of bills (other than life insurance companies) issued hereunder must -3include in his Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on a subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. epartmentoftheJREASURY *SHINGTON, O.C. 20220 TELEPHONE 566-2041 FOR RELEASE AT 4:00 P.M. August 12, 1977 TREASURY TO AUCTION $2,900 MILLION OF 2-YEAR NOTES The Department of the Treasury will auction $2,900 million of 2-year notes to refund $1,898 million of notes held by the public maturing August 31, 1977, and to raise $1,002 million new cash. Additional amounts of these notes may be issued at the average price of accepted tenders to Government accounts and to Federal Reserve Banks for their own account in exchange for $123 million maturing notes held by them, and to Federal Reserve Banks as agents of foreign and international monetary authorities for new cash only. Details about the new security are given in the attached highlights of the offering and in the official offering circular. oOo Attachment B-389 HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF 2-YEAR NOTES TO BE ISSUED AUGUST 31, 1977 Amount Offered: To the public Description of Security: Term and type of security Series and CUSIP designation August 12, 1977 $2,900 million 2-year notes Series T-1979 (CUSIP No. 912827 GY 2) Maturity date August 31, 1979 Call date Interest coupon rate No provision To be determined based on the average of accepted bids Investment yield To be determined at auction Premium or discount To be determined after auction Interest payment dates February 28 and August 31 Minimum denomination available $5,000 Terms of Sale: Method of sale Yield auction Accrued interest payable by investor None Preferred allotment Noncompetitive bid for $1,000,000 or less Deposit requirement 5% of face amount Deposit guarantee by designated institutions Acceptable Key Dates: Deadline for receipt of tenders Tuesday, August 23, 1977, by 1:30 p.m., EDST Settlement date (final payment due) a) cash or Federal funds b) check drawn on bank within FRB district where submitted c) check drawn on bank outside FRB district where spitted nol. Delivery date for coupon securities. Wednesday, August 31, 1977 Friday, August 26, 1977 Thursday, August 25, 1977 Friday, September 2, 1977 C O N T A C T : George G. Ross (202) 566-2356 FOR IMMEDIATE RELEASE August 12, 1977 Treasury Issues New Boycott Guidelines Invites Public Comments The Secretary of the Treasury today issued new guidelines, consisting of questions and answers, relating to provisions of the Tax Reform Act of 1976 which deny certain tax benefits for participation in or cooperation with international boycotts. The new guidelines supersede earlier sets of guidelines, also questions and answers, issued November 4, 1976 (Treasury News Release WS-1156) and December 30, 1976 (WS-1239) and published in the Federal Register on November 11, 1976 and January 5, 1977. The new guidelines issued today generally are effective for operations occurring after, requests received after, and agreements made after November 3, 1976. Ebwever, if a particular answer in the new guidelines, when compared with an answer in the guidelines outstanding on August 11, 1977, results in an increase in the reporting burden or tax liability of a person, the new answer will be effective only for operations, requests, and agreements after August 22, 1977. In addition, in the case of operations that constitute participation in or cooperation with an international boycott under the new guidelines, but do not do so under the previous guidelines outstanding on August 11, 1977, and that are carried out in accordance with the terms of a binding contract entered into before August 23, 1977, such operations will not constitute participation in or cooperation with an international boycott until after Dscember 31, 1977. Written comments may be submitted (preferably six copies) to the Assistant Secretary for Tax Policy, U. S. Treasury Department, Washington, D. C. 20220. All comments will be available for public inspection and copying. Thus, a person submitting written comments should not include any material that is confidential or inappropriate for disclosure to the public. B-390 - 2A public hearing will be held upon written request to the Assistant Secretary for Tax Policy by any person who has submitted a written comment. If a public hearing is held, notice of the time and place will be published in the Federal Register, Written comments and requests for a public hearing must be delivered or mailed by September 30, 1977. This announcement and the new guidelines will appear in the Federal Register of August 17, 1977. oOo D E P A R T M E N T OF THE TREASURY GUIDELINES Boycott Provisions (section 999) of the Internal Revenue Code Table of Contents A. Boycott Reports B. Definition of "Operations'1 C. Definition of "Reason to Know11 of Official Requirement of Boycott Participation D. Definition of "Clearly Separate and Identifiable Operations" E. Effective Date Provisions F. International Boycott Factor G. Determinations H. Definition of an Agreement to Participate in or Cooperate with a Boycott (section 999(b)(3)) L Refraining from Doing Business with or in a Boycotted Country (section 999(b)(3)(A)(i)) J. Refraining from Doing Business with any United States Person Engaged in Trade in a Boycotted Country (section 999(b)(3)(A)(ii)) K. Refraining from Doing Business with any Company Whose Ownership or Management is Made Up, in Whole or in Part, of Individuals of a Particular Nationality, Race or Religion (section 999(b)(3)(A)(iii)) L. Refraining from Employing Individuals of a Particular Nationality, Race or Religion (section 999(b)(3)(A)(iv)) M. Asa Condition of the Sale of a Product, Refraining from Shipping or Insuring that Product on a Carrier Owned, Leased, or Operated by a Person who does not Participate in or Cooperate with an International Boycott (section 999(b)(3)(B)) N. Reduction of Foreign Tax Credit a Subpart F Income - 2In the questions and answers: (a) Company A and Company B are companies organized under the laws of one of the states of the United States; (b) Company C and Company D, unless otherwise stated in the question, are companies organized under the laws of any country, including the United States; (c) Country X is a boycotting country, which, inter alia, boycotts Country Y; (d) Country Y is a country boycotted by Country X; (e) Country Z is any country and may be the United States, a boycotting country or a boycotted country; (f) All references to "Sections" are to Sections of the Internal Revenue Code of 1954, as amended; (g) In parts H-M in instances where the action described in the question by itself does not, according to the answer, provide sufficient evidence to support an inference that an agreement under section 999(b)(3) exists, an overall course of conduct which includes such action in addition to other actions could support such an inferenc (h) In many questions in parts H-M, a person deals with either Country X or the government, a company or a national of Country X. The result reached in the answer to each of those questions would be the same irrespective of whether the person is an individual, a company or any other type of person, and whether the person dealt with is Country X or the government, a company or a national of Country X. A. Boycott Reports, A-l. Q: Who must report as required by section 999(a)? A: Generally, a United States person (within the meaning of section 7701(a)<30» is required to report under section 999(a) if it1. has operations; or 2. is a m e m b e r of a controlled group, " a m e m b e r of which has operations; or 3. is a United States shareholder within the meaning of section 951(b) of a foreign corporation that has operations, but only if the United States shareholder owns within the meaning of section 958(a) stock of that foreign corporation; or 4. is a partner in a partnership that has operations; or 5. is treated under section 671 as the owner of a trust that has operations in or related to a boycotting country (or with the government, a company, or a national of a boycotting country). A person (within the meaning of section 7701(a)(1)) that is not a United States person is required to report under section 999(a) if it satisfies any one of the five conditions specified above and it claims either the benefit of the foreign tax credit under section 901 or owns stock of a DISC. If a person controls a corporation within the meaning of section 304(c) and that person is required to report under section 999(a), then under section 999(e) that person must report whether the corporation participated in or cooperated with the boycott. If the corporation is required to report under section 999(a), then under section A-2 999(e) the corporation must report whether the person participated in or cooperated with the boycott. A boycotting country is (i) any country that is on the list maintained by the Secretary under section 999(a)(3), or (ii) any country not on the list maintained by the Secretary under section 999(a)(3), in which the person required to file the report (or a m e m b e r of the controlled group that includes that person) has operations, and which that person knows or has reason to know requires any person to participate in or cooperate with an international boycott that is not excepted by section 999(b)(4)(A), (B), or (C). Thus, even if the boycott participation required of the person reporting the operation is excepted by section 999(b)(4)(A), (B), or (C), if that person knows or has reason to know that boycott participation not excepted by section 999(b)(4)(A), (B), or (C) is required of any other person, the country is a boycotting country. If the person required to file the report (or a m e m b e r of the controlled group that includes that person) has operations related to a country, but not operations in that country, that country is not a boycotting country unless it is on the list maintained by the Secretary under section 999(a)(3). (For the definition of operaticis :.n or related to a country, see the questions and answers under part B.) A-3 A-2. Q: Do the reporting requirements of section 999(a) that refer to "United States shareholders" of foreign corporations require U.S. minority shareholders to report the operations of such foreign corporations? A: Yes. Under section 951(b) the term "United States shareholder" includes any United States person who owns (within the meaning of section 958(a)), or is considered as owning (by the application of the rules of ownership of section 958(b)), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation. The reporting requirement applies even if the United States shareholder is a minority shareholder and even if the foreign corporation is not a controlled foreign corporation within the meaning of section 957(a). However, as stated in Answer A-l, the reporting requirement applies only to minority shareholders that actually own some stock within the meaning of section 958(a). A-3. Q: If one m e m b e r of a controlled group of corporations (within the meaning of section 993(a)(3)) files a report under section 999(a) with respect to the reportable operations of all members of that group, is this sufficient to discharge the reporting obligation of all members of the group? A: Yes, provided that the common parent (as defined in the regulations under section 1504) files a consolidated return and the report on behalf of all members of the controlled group. In the absence of a consolidated return, each m e m b e r of the controlled group must individually file the section 999(a) report. If a consolidated return is filed on behalf of some members of the controlled group, only one report need be filed with respect to those members. However, each A-4 other m e m b e r must individually file the report. A-4. Q: If one United States shareholder of a foreign cor- poration files a report under section 999(a) in respect of the reportable operations of the foreign corporation, is this sufficient to discharge the reporting obligations of all United States shareholders of the foreign corporation in respect of that corporation's operations? A: No. Each United States shareholder of a foreign corporation must file the section 999(a) report in respect of the activities of that corporation. However, if two or more United States shareholders of a foreign corporation are included in the same consolidated return, only one report need be filed with respect to all United States shareholders included in the return. A-5. Q: H D W will the reporting requirements under section 999(a), "International Boycott Reports by Taxpayers", be satisfied? A: A taxpayer required to file an international boycott report under section 999(a) will fulfill this requirement by filing a new IRS Form 5713, "International Boycott Report", and all applicable supporting schedules and forms contained in the taxpayer's income tax returns which indicate the amounts and computations of benefits denied under sections 908(a), 952(a)(3) and 995(b)(1)(F) of the Internal Revenue Code. A-6. Q: What degree of confidentiality will the international boycott reports submitted by taxpayers receive? A: The reports by taxpayers will be submitted as part of the income tax return and. therefore, will be accorded the same degree of confidential treatment under section 6103 as any other information contained in an income tax return. A-5 A-7. Q: Where and how should the "international Boycott Report" be filed ? A: The "international Boycott Report", Form 5713, should be filed in duplicate by all reporting taxpayers. One copy of Form 5713 should be sent to the Internal Revenue Service, 11601 Roosevelt Blvd., Philadelphia, Pennsylvania, 19155, and the other copy of Form 5713 should be attached to the taxpayer's income tax return that is filed with the taxpayer's customary Internal Revenue Service Center. A-8. Q: Do individuals as well as corporations use Form 5713, "International Boycott Report"? A: Yes. All taxpayers required to file a report under section 999(a) will use IRS Form 5713. However, some parts of the form apply to corporations only; individual taxpayers can ignore these parts and complete only the questions relevant to individuals. While all taxpayers reporting under section 999(a) are required to file Form 5713, the filing of Form 5713 does not necessarily fulfill all of the reporting requirements under section 999(a). (See Answer A-5.) A-9. Q: Section 999(b)(4) permits a person to agree to comply with certain laws without being treated as having agreed to participate in or cooperate with an international boycott. In the course of its operations in or related to a boycotting country, a person agrees to comply with a prohibition on importation and exportation that is described in section 999(b)(4)(B) and section 999(b)(4)(C). Is that person required to report the operations on Form 5713, the "International Boycott Report"? A: Yes, although agreements described in section 999(b)(4) (B) and (C) do not constitute participation in or cooperation with an A-6 international boycott, the operations in or related to a boycotting country must be reported on F o r m 5713. A-10. Q: Section 999(b)(4)(A) permits a person to meet require- ments imposed by a foreign country with respect to an international boycott if United States law or regulations, or an Executive Order, sanctions participation in or cooperation with that .international boycott. If a person's operations fall within this exception, is the person required to report such operations ? A: No. The reporting requirements with respect to opera- tions under such international boycott agreements are waived. A-ll. Q: Company C sells goods or services to a person other than a boycotting country, or the government, a company, or a national of a boycotting country (or does other business with that person) outside a boycotting country. Company C knows or has reason to know that that person in turn will either use the goods or services in a boycotting country or sell the goods or services for use in a boycotting country. Is Company C required to report its sale of goods or services to that person? A: Although the sale of the goods or services by Company C constitutes an operation related to a boycotting country of Company C (see Answer B - D , the requirement that Company C report the sale is waived, provided that in connection with the operation Company C does not receive a request to participate in or cooperate with an international boycott (within the meaning of section 999(b)(3)), Company C does not participate in or cooperate with an international boycott, and Company C did not establish its relationship with that person to facilitate participation in or cooperation with an international boycott. A-7 A-12. Q. Company A is a U. S. shareholder (within the meaning of section 951(b)) of Company C. a foreign corporation. Company A has a taxable year ending January 31, and Company C has a taxable year ending June 30. Both companies have operations in Country X, which is on the list maintained pursuant to section 999(a)(3). Who should file Form 5713 and for what period ? A: As indicated in Answer A-l, Company C need not file Form 5713 unless it claims the benefit of the foreign tax credit under section 901 or owns stock of a DISC. Company A must file Form 5713 for its taxable year ending January 31, and must report operations of Company C during Company C's taxable year ending within the period covered by Company A f s report. A-l 3. Q: In the case of an International Boycott Report, Form 5713, filed by a m e m b e r of a controlled group, what period of time should be reflected in the report, and when should the report to be filed? A: Each person described in Answer A-l ("reporting - ing person") is required to report all reportable operations, requests and participation or cooperation of each member of the controlled group for each member's taxable year that ends with or within the taxable year of the controlled group's common parent that ends with or within the taxable year of the reporting person. In addition, each reporting person is required to report all reportable operations, requests and participation or cooperation of each foreign corporation that has a United States shareholder that is a m e m b e r of the controlled group. Such operations, requests and A-8 participation or cooperation of a foreign corporation are reported f the foreign corporation's taxable year that ends with or within the taxable year of the United States shareholder that ends with or with_ in the taxable year of the common" parent that ends with or within the taxable year of the reporting person. In the event that no c o m m o n parent exists,, the members of the controlled group are to elect the taxable year of one of the members to serve as the c o m m o n taxable year of the group. Procedures for making the taxable year election are specified in the instructions to the "International Boycott Report, " Form 5713. The taxable year election is a binding election and is made only once. Approval of the Secretary of the Treasury or his delegate is required for any changes in the group taxable year. Each reporting person will use its normal taxable year for making adjustments required under sections 908(a), 952(a)(3) and 995(b) (1)(F), and for all purposes other than reporting and computing the international boycott factor. For example, if the reporting person uses the international boycott factor, the international boycott factor will be applied to the reporting person's normal taxable year for determining the reporting person's adjustments under sections 908(a), 952(a)(3) and 995(b)(1)(F). More details concerning the time period covered in the international boycott report are contained in the instructions to Form 5713. Details concerning the time period covered in the international boycott factor are contained in the instructions to Form 5713 and in A-9 Temp. Regs. §7.999-1 and Proposed Regs. §1.999-1. As stated in Answer A-7, the reporting person's "international Boycott Report, " Form 5713, is filed at the time the reporting person files its income tax return. A-14. Q: Company C is either a U. S. corporation or a foreign corporation and is required to report under section 999(a). Company C is also a subsidiary or a sister of a foreign corporation that is not required to report under section 999(a). Is Company C required to report the operations, requests and participation or cooperation of the foreign parent or sister corporation? A: Generally, under section 999(a) and Answer A-l, a per- son required to report must report the operations, requests and participation or cooperation of all members of the controlled group of which it is a member. However, if the foreign parent or sister corporation is not otherwise required to report, the requirement that Company C report the operations, requests and participation or cooperation of the foreign parent or sister corporation will be waived if Company C-1. is not entitled to any benefits of deferral, DISC, or the foreign tax credit, or 2. applies the international boycott factor, and forfeits all the benefits of deferral, DISC and the foreign tax credit to which it is entitled (i. e., applies an international boycott factor of one under sections 908(a), 952(a)(3), and 995(b)(1)(F)), or A-10 3. identifies specifically attributable taxes and income, and forfeits all the benefits of deferral, DISC, and the foreign tax credit in respect of which it is unable to demonstrate that the foreign taxes paid and the income earned are attributable to specific operations in which there was no participation in or cooperation with an international boycott. Although the requirement that Company C report the operations, requests and participation or cooperation of its foreign parent or sister corporations m a y be waived, Company C must report all operations, requests and participation or cooperation-i) of itself, and ii) of all domestic members of each controlled group of which Company C is a member, and iii) if Company C is a United States company, of all foreign corporations of which Company C is a United States shareholder within the meaning of section 951(b), but only if Company C owns within the meaning of section 958(a) stock of the foreign corporation, or iv) if Company C is a foreign company, of all foreign corporations more than 50 percent of the stock of which is owned, directly or indirectly, by Company C. If Company C is required to report on behalf of a foreign corporation (including itself if Company C is a foreign corporation), it must report aU operations, requests and participation or cooperation of the foreign corporation, even if conducted by or received by the foreign corporation in connection with operations that are not effectively connected with a A-ll United States trade or business. A-l5. Q: Company C receives from Country X an unsolicited invitation to tender for a contract for the construction of an industrial plant in Country X. The tender documents contain a provision stating that Country X will not enter into the contract unless the successful tenderer makes an agreement described in section 999(b)(3). Company C does not respond to the unsolicited invitation. Is Company C required to report the invitation under section 999(a)(2) as a request to participate in or cooperate with an international boycott? A: No. The section 999(a)(2) reporting requirement will be waived provided that Company C neither solicited the invitation to tender nor responded to the invitation. A-16: Q: Before May 13, 1977, Company C received requests to comply with international boycotts. Company C preserved the requests that were evidenced in writing and preserved the notations it made concerning the details of oral requests. When Form 5713 was issued on M a y 13, 1977, it required more details concerning the requests made of Company C than were preserved, and many of those details can no longer be ascertained. Will Company C's report under section 999(a)(2) be deemed deficient? A: Oi October 4, 1976, Company C was put on notice that it would be required to document boycott requests received after November 3, 1976. F o r m 5713 does not require any details that would not have been preserved by a prudent person having such notice. In addition, under Answer A-15, the reporting requirements of section A-12 999(a)(2) have been waived for certain unsolicited boycott requests. If Company C does not supply the required information with respect to the remaining requests that were either solicited or responded to, its report will be deficient. A-17. Q: A United States partnership consisting of 100 United States partners has operations in a boycotting country. Is each partner required to file F o r m 5713? A: Generally, if a partnership has operations in a boy- cotting country, each partner is required to file F o r m 5713. However, if the partnership files F o r m 5713 with its information return and has no operations for the taxable year that constitute participation in or cooperation with an international boycott, then the requirement that each partner file F o r m 5713 will be waived for each partner that has no operations in or related to a boycotting country, or with the government, a company, or a national of a boycotting country other than operations that are reported on the F o r m 5713 filed by the partnership. A-l8. Q: Company A owns 10 percent or m o r e of the outstanding stock of Company C. a foreign corporation that has operations in Country X. but Company A does not have effective control over Company C. Company C participates in or cooperates with an international boycott. Company A requests information from Company C in order to meet its reporting obligations under section 999(a). Company C refuses to provide (or is prohibited by local law. regulation, or practice from providing) that information. Will Company A be subject to the section 999(f) penalites for willful failure to report the activities of C o m p a n y C ? A-13 A: Company A must report on the basis of that informa- tion that is reasonably available to it. For example, in most cases Company A will be aware that Company C has operations in Country X. even though Company A is not aware of the operational details. Company A must report on Form in Country X. 5713 that Company C has operations Company A should also describe in a statement attached to Form 5713 the good faith efforts that it has made to obtain all the information required under section 999(a). Although each case must be resolved on the basis of the particular facts and circumstances, Company A will not be subject to the section 999(f) penalties for willful failure to provide information if it can demonstrate that it made good faith efforts to obtain the information but was denied the information by Company C. A-l9. Q: The facts are the same as in A-18 above except that Company A owns less than 50 percent of the stock of Company C, and Company C is not a controlled foreign corporation. What are the tax sanctions to which Company A will be subject? A: Since Company C is neither a controlled foreign cor- poration nor a DISC, the sanctions of section 952(a)(3) and 995(b)(1)(F) are not relevant. However, Company A will be subject to the sanctions of section 908(a). Thus, if Company A applies an international boycott factor, that factor is applied to Company A's foreign tax credit in accordance with Answers F-5. N-l and N-2. If Company A identifies specifically attributable taxes and income under section 999(c)(2), Company A will lose its section 902 indirect foreign tax credit for the taxes paid by Company C that Company A cannot demonstrate are A-14 attributable to specific operations in which there was no boycott particij tion or cooperation. (To determine whether Company A will lose its section 901 direct foreign tax credit for income tax withheld by Country X on dividends paid by Company C to Company A, see Answer N-3.) A-20. Q : Individual G is a national of Country X, which is on the list maintained by the Secretary. G engages in an operation with C o m p a n y C. For example, if Company C were a bank, the operation might involve a deposit by G, or, if Company C were an automobile dealer, the operation might involve the purchase of a car, or, if Company C were a stockbroker, the operation might involve the purchase or sale of a security, or if Company C were a hotel, the operation might involve the letting of a room. Irrespective of the specific nature of the operation, the agreement under which the operation is consummated is the s a m e agreement that Company C requires of all other customers. Company C is aware of G's nationality, but participation in or cooperation with an international boycott is neither contemplated nor required as a condition of G's willingness to enter into the operation with Company C. Under section 999(a), what are the reporting obligations of Company C with respect to these operations ? A: In m a n y business operations, there will be incidental contacts between the nationals or business enterprises of boycotting countries and persons from other countries. Company C's obligation to report these incidental contacts under section 999(a) will be waived provided that the contacts satisfy the following criteria: A-15 1. all aspects of the operation contemplated by the parties are carried on outside a boycotting country; and 2. the operation does not contemplate any agreement which would constitute participation in or cooperation with an international boycott; and 3. no request for such an agreement is actually m a d e or received by any party to the operation; and 4. there is no such agreement in connection with the operation; and 5. a. the operation does not involve the importation of property, funds or services from or produced in a boycotting country and Country C does not know or have reason to know that the property, funds or services will be used, consumed or disposed of in a boycotting country, or b. the value of the property, funds or services furnished or obtained in the operation does not exceed $5,000. The answer to the question would be the same if Company C were an individual or if G were a corporation. A-21. Q : Individual G, a U.S. citizen, owns 15 percent of the stock of C o m p a n y A. Company A has operations in Country X . Is Individual G required to report the operations of Company A ? A-16 A: An individual generally is not required to report the operations of a domestic corporation of which the individual is a shareholder. However, if Individual G controls (within the meaning of section 304(c)) Company A and if Individual G is required to report under section 999(a), then under section 999(e) Individual G must report whether Company A participated in or.cooperated with an international boycott. A-22. Q: Companies A, B and C are all U.S. corporations re- porting on a calendar year basis. Companies A, B and C each had operations in Country X during the calendar year. From January 1 to June 1, Company A owned more than 50 percent of the stock of Company B. On June 1, Company C acquired more than 50 percent of the stock of Company B. What operations must be reflected in the Forms 5713 filed by Companies A, B and C for the calendar year ? A: The F o r m 5713 filed by Company A must reflect the operations of Company A for the entire calendar year and the operations of Company B for the period January 1-May 31. The Form 5713 filed by Company C must reflect the operations of Company C for the entire calendar year and the operations of Company B for the period June 1December 31. The F o r m 5713 filed by Company B must reflect the operations of Company B for the entire calendar year, the operations of Company A for the period January 1-May 31 and the operations of Company C for the period June 1-December 31. If the sale of stock had occurred during the first 30 days of the calendar year, the requirement that Company A report the operations of Company B and that Company B report the operations of Company A for the period of 30 days or less A-17 would be waived unless under Reg. §1.1502-76(b)(5) Company B is included in the consolidated return filed by Company A for that period. The requirement that Company B report the operations of Company C, and that Company C report the operations of Company B, for that period of 30 days or less, would also be waived unless under Reg. §1.1502-76(b)(5) Company B is included in the consolidated return filed by Company C for that period. Similarly, if the sale of stock had occurred during the last 30 days of the calendar year, the requirement that Company A report the operations of Company B and that Company B report the operations of Company A for the period of 30 days or less would be waived unless under Reg. §1.1502-76(b)(5) Company B is included in the consolidated return filed by Company A for that period, and the requirement that Company B report the operations of Company C and that Company C report the operations of Company B for the period of 30 days or less would be waived unless under Reg. §1.1502-76(b)(5) Company B is included in the consolidated return filed by Company C for that period. A-23. Q: In 1977, Company A owns more than 50 percent of the stock of Company C, a foreign corporation that has operations in Country X that constitute participation in or cooperation with an international boycott. Companies A and C both report on a calendar year basis. Company C pays no dividend in 1977, but pays a dividend in 1978, a year in which neither Company A nor Company C has operations in any boycotting country. Company A claims a foreign tax credit under section 902 in 1978 in respect of the taxes paid by Company C. For which year, 1977 or 1978, must Company A report the operations of Company C; A-18 for which year are Company C's operations reflected in Company A's international boycott factor; and for which year is the sanction of se tion 908(a) applicable? A: Company C's operations are reported by Company A and are reflected in Company A's international boycott factor for 1977 The operations of Company C during 1977 will not be reflected in Company A's Form 5713 or international boycott factor for 1978. However, if in 1978 Company A chooses to determine its loss of tax benefits usi the specifically attributable taxes and income method described in se tion 999(c)(2), in 1978 Company A will lose that portion of the sectio 902 foreign tax credit specifically attributable to Company C's 1977 boycott operations. In this case, even though in 1978 Company A and Company C have no operations that are required to be reported by Company A on Form 5713, Company A must nevertheless file Form 5713 in 1978 (which will show no operations) and complete Schedules B and C to Form 5713, on which Company A will show the loss of the section 902 foreign tax credit attributable to Company C's boycott operations for 1977. B. DBfinitionof "Operations". B-l. Q: Under what circumstances does a person have operations in. or related to. a boycotting country (or with the government, a company, or a national of that country)? A: A person has operations in, or related to, a boycotting country (or with the government, a company, or a national of that country) if the operation in which it engages: 1. is carried on in whole or part in a boycotting country ("in a country"); 2. is carried on outside a boycotting country either for or with the government, a company, or a national of a boycotting country ("with the government, a company, or a national of a country"); or 3. is carried on outside a boycotting country for the government, a company, or a national of a non-boycotting country if the person having the operation knows or has reason to know that the specific goods, services or funds produced by the operation are intended for use in a boycotting country or for the government, a company, or a national of a boycotting country ("related to a country"). The term "operation" encompasses all forms of business or commercial activites whether or not productive of income, including, but not limited to, selling; purchasing; leasing; licensing; banking, financing and similar activities; extracting; processing; manufacturing; producing; constructing; transporting; performing activities ancillary to the foregoing (e. g., contract B-2 negotiating, advertising, site selecting, etc.); and performing service whether or not ancillary to the foregoing. Operations described in principles 2 and 3 are illustrated in the following two examples: (a) Company C engages in a joint venture manufac- turing operation in a non-boycotting country with Company D, a company incorporated under the laws of Country X. Company C has operations "with" a company of a boycotting country. (b) D, a national of a non-boycotting country has a contract to construct a dam in Country X. D subcontracts to Company C for the manufacture of a generator for the dam. Tne contract between D and Company C and the generator specifications indicate that the generator is for use in Country X. Tne contract specifies delivery of the generator to D f. o. b. New York. Company C has operations "related to" a boycotting country. B-2. Q: Individual G is a U. S. citizen living in Country X. G is retired. G receives social security payments and a pension, but has no business activities. Does G have "operations" in, or related to. Country X ? A: No. G is not engaged in any business or commercial Q: Individual H is a U. S. citizen living in Country X and activities. B-3. working there as an employee. H earns a salary and has passive in- vestment income, but has no business income. Does H have "operations" in or related to Country X ? B-3 A: No. The performance of personal services as an employee does not constitute an "operation. " C. Definition of "Reason To Know" Requirement of Boycott Participation. C-l. Q: Under what circumstances, in the absence of a Treasury listing of a country under section 999(a)(3), will it be deemed under section 999 (a)(1)(B) that a person knows or has reason to know that participation in or cooperation with an international boycott is required as a condition of doing business within such country or with the government, a company, or a national of such country? A: A person will be deemed to know or have reason to know that a country requires participation in or cooperation with an international boycott as a condition of doing business within a country or with the government, a company, or a national of a country, if that person receives what could be interpreted as an official request of that country to participate in or cooperate with an international boycott or if that person knows that others have received such requests. Whether a request could be interpreted as an official request of a country depends on an analysis of the facts and circumstances surrounding the request. However, the request need not be made directly by a government official or representative in order to be interpreted as an official request. Thus, for example, assume that Company C has a contract with the government of a boycotting country to build a dam in that country and is required under the contract to require its subcontractors to agree to participate in or cooperate with the boycott. Assume further that Company C requires Subcontractor D to make such an agreement as a condition of receiving the subcontract to build a generator for the dam. Subcontractor D will be deemed to have reason to know that participation in or cooperation with an international boycott is a condition of doing business within C-2 the boycotting country or with the government, a company, or a national of such country. D - Definition of D-l. Q: If a "Clearly Separate and Identifiable O n ^ ^ o " person or a member of a controlled group (within the meaning of section 993(r)(3)) enters into an agreement that constitutes participation in or cooperation with an international boycott (within the meaning of section 999(b)(3)), what operations of that person or group will be considered to be operations in connection with which such participation or cooperation occurred? A: All operations of that person or any m e m b e r of that (a) the country in connection with which the group in agreement is made; and (b) any other country that requires participation in or cooperation with the boycott with respect to which the agreement is m a d e will be presumed to be operations in connection with which there was participation in or cooperation with an international boycott. (See, however. Answer D-4 for an exception to the presumption in the case of agreements that are unintentional and unauthorized and that relate to a minor aspect of an operation.) This presumption m a y be rebutted, however, if the person (or, if applicable, the U.S. shareholder of a foreign corporation) or m e m b e r of the group clearly demonstrates that a particular operation is a clearly separate and identifiable operation from the operation in connection with which the agreement was made, and that no agreement constituting participation in or cooperation with an international boycott was m a d e in connection with such separate and identifiable operation, D-2 The presumption of participation in or cooperation with the boycott will not apply with respect to operations outside the countries described in (a) and (b) above, but such operations will be considered to be operations in connection with which there was participation in or cooperation with an international boycott if so warranted by the facts. D-2. Q: W h o has the burden of proof of clearly demonstrating that a particular operation is a "clearly separate and identifiable operation" and that there was no participation in or cooperation with an international boycott in connection with that operation? A: If a person or a m e m b e r of a controlled group has participated in or cooperated with an international boycott in connection with one or m o r e of its operations, that person (or, if applicable, the U.S. shareholder of a foreign corporation) or that group bears the burden of proof of clearly demonstrating that any other operation is clearly separate and identifiable from the operation in connection with which such participation or cooperation occurred and that no such participation or cooperation occurred in connection with the separate and identifiable operation. D-3. Q: H o w can a taxpayer determine what constitutes a "clearly separate and identifiable operation"? A: The determination whether an operation constitutes a clearly separate and identifiable operation must be based on an examination of all the facts and circumstances. The following factors are a m o n g those that m a y be considered in determining whether an operation is clearly separate and identifiable from an operation in connection D-3 with which participation in or cooperation with an international boyc ott occurred: 1. W e r e the two operations conducted by different corporations, partnerships, or other business entities ? 2. W e r e the operations, whether conducted by separate entities or not, supervised by different m a n a g e m e n t personnel? 3. Did the operations involve distinctly different products or services ? 4. W e r e the operations undertaken pursuant to separate and distinct contracts? 5. If business operations in the countries conducting the international boycott in question w e r e not continuous over time, w a s each transaction separately negotiated and performed? T h e factors listed above are not intended to represent all the factors that will be considered in determining whether an operation is a clearly separate and identifiable operation. Additional factors will be considered if so warranted by the facts. N o relative weight is assigned to any specific factor; instead, the weight to be given to any factor will depend on the facts and circumstances of each individual case. In addition, a positive answer to all the listed factors will not necessarily result in a determination that an operation is a clearly separate and identifiable operation if other facts and circumstances D-4 suggest that the operation is not clearly separate and identifiable. D-4 Q: Company C has operations in or related to Country X. In connection with a minor aspect of that operation, an employee of Company C enters into an unintentional and unauthorized boycott agreement. For example, a clerk of Company C signs an invoice for office supplies. On the reverse side of the invoice, a boycott clause is printed in fine print or in a foreign language. Will that agreement give rise to the presumption that all the operations of Company C in or related to a boycotting country are operations in connection with which there is participation in or cooperation with international boycott? A: No. An agreement to participate in or cooperate with an international boycott made in connection with a minor aspect of an operation will not taint the operations of Company C in or related to a boycotting country if the agreement was unintentional, Company C has not authorized the employee to agree to participate in or cooper with the international boycott and Company C does not comply with the terms of the unauthorized boycott clause. E. Effective Date Provisions. E-l. Q: What are the effective dates of the reporting requirements and sanctions of the international boycott provisions? A: Generally, the reporting requirements and the sanctions of the international boycott provisions apply to agreements to participate in or cooperate with an international boycott made after November 3, 1976, and to agreements made on or before November 3, 1976, that continue in effect thereafter. However, there are two exceptions to this general rule. First, the reporting requirements of section 999(a) apply to operations referred to in section 999(*)(1) or (2) after November 3, 1976, whether or not there has been an agreement to participate in or cooperate with an international boycott, and whether or not the operations are carried out in accordance with the terms of a binding contract entered into before September 2, 1976. Operations on or before November 3, 1976, are reportable if there has been participation in or cooperation with the boycott during the taxable year after November 3, 1976 (see Answer E-2). Second, in the case of operations carried out in accordance with the terms of a binding contract entered into before September 2, 1976, the sanctions of the international boycott provisions apply only to agreements to participate in or cooperate with an international boycott made on or after September 2, 1976, and to agreements made before that date that continue in effect after December 31, 1977. More details concerning reporting requirements and the application of sanctions for years affected by the effective date of the international boycott provisions are contained in the instructions to F o r m 5713, in Temp. Regs. §7. 999-1 and in Proposed Regs. §1.999-1. E-2 E-2. Q: If a person who reports tax liability on a calendar year basis m a k e s an agreement on November 20, 1976, to participate in or cooperate with an international boycott, which of that person's operations conducted during the taxable year are reportable, which operations are included in the international boycott factor calculations, and how are the sanctions applied? A: All operations of the person during the entire 1976 taxable year (including pre-November 20, 1976, operations) in or related to a boycotting country or with the government, a company, or a national of such country must be reported under section 999(a) and will be considered in calculating the international boycott factor (or the amount of taxes or income specifically attributable to operations in which there w a s participation in or cooperation with an international boycott) for the taxable year. However, under section 999(c) (1), operations for which the presumption of participation in or cooperation with the boycott has been rebutted need not be reflected in the numerator of the international boycott factor (or under section 999(c)(2), the tax benefits specifically attributable to specific operations for which that presumption has been rebutted will not be denied). See also Temp. Regs. §7.999-1 and Proposed Regs. §1.999-1. The sanctions are applied to the year 1976 on a pro rata basis. If a person uses the international boycott factor for 1976, the factor is applied under sections 908(a), 952(a)(3), and 995(b)(1)(F) after it has been multiplied by the fraction 58/366, representing the number of days after the November 3, 1976 effective date remaining during the calendar year. If a person identifies specifically attributable taxes E-3 and income, the tax benefits denied under sections 908(a), 952(a)(3), and 995(b)(1)(F) are computed by first ascertaining the tax benefits of the foreign tax credit, deferral, and DISC, respectively, for the taxable year attributable to operations for which the presumption of boycott participation has not been rebutted, and then multiplying those amounts by 58/366. E-3. Q: If a person having a July 1-June 30 taxable year carries out operations in accordance with the terms of a binding contract entered into before September 2, 1976, and, in furtherance of that contract, m a k e s an agreement on February 15, 1978, to participate in or cooperate with an international boycott, which of the person's operations conducted during the taxable year July 1, 1977-June 30, 1978 are reportable, which operations are included in the international boycott factor calculations, and how are the sanctions applied? A: All operations of the person during the entire July 1, 1977-June 30, 1978 taxable year (including pre-February 15, 1978 operations) in or related to a boycotting country or with the government, a company, or a national of such country, must be reported under section 999(a) and will be considered in calculating the international boycott factor (or the amount of taxes or income specifically attributable to operations in which there was participation in or cooperation with an international boycott) for the taxable year. However, under section 999(c)(1), operations for which the presumption of participation in or cooperation with the boycott has been rebutted need not be reflected in the numerator of the international boycott factor, and, under section 999(c)(2), the tax benefits specifically attributable to specific operations for which that presumption has been rebutted will not be denied. E-4 The sanctions are applied to the July 1, 1977-June 30, 1978 taxable year on a pro rata basis. If a person uses the international boycott factor for the taxable year, the factor is applied under sections 908(a), 952(a)(3), and 995(b)(1)(F) after it has been multiplied by the fraction 181/365, representing the number of days after the December 31, 1977 effective date remaining during the taxpayer's taxable year. (See also Temp. Regs. §7. 999-1 and Proposed Regs. §1. 999-1.) If a person identifies specifically attributable taxes and income, the benefits to be denied under section 908(a), 952(a)(3), and 995(b)(1)(F) are computed by first ascertaining the tax benefits of the foreign tax credit, deferral, and DISC, respectively, for the taxable year attributable to operations for which the presumption of boycott participation has not been rebutted and then multiplying those amounts by 181/365. E-4. Q: What is a binding contract for purposes of the binding contract rule ? A: A binding contract with respect to a person, a member of a controlled group that includes that person, or a foreign corporation of which that person is a United States shareholder is a contract that was, on September 1, 1976, and is at all times thereafter, binding on that person, foreign corporation or member, and under which all material terms are fixed or are ascertainable with reference to an objectively determinable standard. E-5. Q: If, under a binding contract existing before September 2, 1976, a person made an agreement described in section 999(b)(3), will operations under the contract be subject to the international boycott provisions in years after 1977? E-5 A: Yes, unless the person establishes that, before December 31, 1977, the agreement to participate in or cooperate with the boycott was renounced, the renunciation was communicated to the government or person with which the agreement was made, and the agreement was not reaffirmed after 1977. E-6. Q: If, under a contract made in 1979, a person who reports tax liability on a calendar year basis makes an agreement described in section 999(b)(3), but does not comply with the agreement after 1980, will operations under the contract be subject to the international boycott provisions in years after 1980? A: Yes, unless the person establishes that, before December 30, 1980, the agreement to participate in or cooperate with the boycott was renounced, the renunciation was communicated to the government or person with which the agreement was made, and the agreement was not reaffirmed after 1980. E-7. Q: If. under a contract made after January 1, 1977, a person makes an agreement described in section 999(b)(3), and later renounces the agreement and communicates such renunciation to the government or person with which the agreement was made, which operations of such person during the taxable year of the renunciation are reportable, which operations are included in the international boycott factor calculations, and how are the sanctions to be applied? A: All operations of the person during the entire taxable year within which the agreement was renounced (including post-renunciation operations) in or related to a boycotting country or with the government, a company, or a national of such country must be reported E-6 under section 999(a) and will be considered in calculating the international boycott factor (or the amount of taxes or income specifically attributable to operations in which there was participation in or cooperation with an international boycott) for the taxable year. However, under section 999(c)(1), operations for which the presumption of participation in or cooperation with the boycott has been rebutted need not be reflected in the numerator of the international boycott factor, and the tax benefits specifically attributable to specific operations for which such presumption has been rebutted will not be denied. There is no proration between the pre-renunciation and post-renunciation portions of the taxable year of either the boycott factor or the specifically attributable taxes and income. E-8. Q: Before September 2, 1976, C o m p a n y A entered into a binding contract that did not contain an agreement to boycott or by itself support an inference of the existence of an agreement to boycott. However, C o m p a n y A's course of conduct in carrying out operations in accordance with the terms of the contract evidences that there is an implied agreement that constitutes participation in or cooperation with an international bpycott. Will the sanctions of sections 908(a), 952(a)(3), and 995(b)(1)(F) be applied to such participation or cooperation that takes place prior to January 1, 1978 (see section 1066(a) of the Tax Reform Act of 1976)? A: If the course of conduct from which the existence of the implied agreement was inferred took place before September 2, 1976, then the sanctions of sections 908(a), 952(a)(3), and 995(b)(1)(F) will not be applied to such participation in or cooperation with an international E-7 boycott that takes place prior to January 1, 1978. However, if the inference of the existence of the implied agreement would depend on conduct on or after September 2, 1976, then those sanctions will be applied to participation in or cooperation with the international boycott after November 3, 1976 (see section 1066(a)(1) of the Tax Reform Act of 1976). E-9. Q: Company C entered into a binding contract prior to September 2, 1976 to manufacture and deliver equipment to a customer located in Country X. The contract requires Company C to use no components that are manufactured by blacklisted United States companies. The contract also requires that the vessel on which the equipment is shipped not be blacklisted. On January 15, 1977, Company C is able to have the contract amended to eliminate the requirement regarding components, but is unable to secure any change regarding vessels. Will the amendment regarding components remove the binding contract protection otherwise afforded until December 31, 1977 that Company C has regarding vessels? A: No. Since Company C could have waited to abrogate or renegotiate its contract until the end of 1977 and since it is in accord with the legislative purpose for Company C to accelerate elimination of the provision regarding components, it will remain protected until December 31, 1977 from the consequences of its continuing to refrain from shipping the goods on blacklisted vessels. E-10. Q: If before December 31, 1977 a person carries out several different operations in boycotting countries and the only operation of that person that constitutes participation in or cooperation with E-8 an international boycott is carried out in accordance with the terms of a binding contract entered into before September 2. 1976, will the existence of that one boycotting operation trigger the section 999(b)(1) presumption that the other operations of that person in boycotting countries are also operations in connection with which boycott participation or cooperation occurred? A: No. Operations carried out before December 31, 1977, in accordance with the terms of a binding contract entered into before September 2, 1976, will not trigger the section 999(b)(1) presumption. E-ll. Q: Are operations of a person that constitute partici- pation in or cooperation with an international boycott factor reflected in the numerator of a person's international boycott factor before December 31, 1977 if those operations are carried out in accordance with the terms of a binding contract entered into before September 2, 1976? A: No. Boycotting operations carried out before December 31, 1977 in accordance with the terms of a binding contract entered into before September 2, 1976 are not reflected in the numerator of the international boycott factor. They are reflected in the denominator, however. See Temp. Regs. §7.999-1 and Proposed Regs. §1.999-1. E-12. Q: Oi June 30, 1976, Company A, a domestic corporation that reports its operations on a calendar basis, disposed of all of its stock in Company C, a foreign corporation. Will Company A be required to report any operations, requests or participation or cooperation of E-9 Company C for calendar year 1976? Will the operations of Company C be included in Company A's international boycott factor for 1976? A: No. Since Company A did not own any stock of Company C after the effective date of the boycott provisions, Company A is not required to report any operations, requests or participation or cooperation of Company C in 1976 and will-exclude Company C's operations from its international boycott factor computations. E-13. Q: Are operations, requests or participation in or coopera- tion with an international boycott of a person for that person's taxable year that ends before November 4, 1976 required to be reported, either by that person or by any other person? A: No, operations, requests and participation in or coopera- tion with an international boycott of a person for that person's taxable year that ends before November 4, 1976 need not be reported by any person. However, as stated in Answers E-l and E-2, operations, requests and participation in or cooperation with an international boycott occurring or received before November 4, 1976 during a taxable year that ends on or after that date are reportable if there has been participation in or cooperation with an international boycott during that taxable year but on or after that date. F. International Boycott Factor. F-l. Q: How is the international boycott factor computed? A: Section 999(c)(1) provides that the international boy- cott factor is determined under regulations prescribed by the Secretary. The international boycott factor is a fraction, the numerator of which reflects the boycotting operations of a person (or group) in or related to countries associated in carrying out the international boycott and the denominator of which reflects the person's (or group's) worldwide foreign operations. Temporary and proposed regulations setting forth the method of determining the international boycott factor were issued in February, 1977. See Temp. Regs. §7.999-1 and Proposed Regs. §1.999-1. F-2. Q: In the case of a controlled group (within the meaning of section 993(a)(3)) is a single international boycott factor computed for the entire group ? A: Yes. All members of a controlled group share a single, c o m m o n international boycott factor which reflects the operations of all m e m b e r s of the controlled group. F-3. Q: Once an international boycott factor has been computed for a controlled group (within the meaning of section 993(a)(3)), how is the factor applied to individual members of the group? A: The international boycott factor of a controlled group is applied separately under sections 908(a), 952(a)(3), and 995(b)(1)(F) to each individual m e m b e r of the controlled group. F-4. Q: If a person applies the international boycott factor to some operations during the taxable year, must the factor be applied to all operations of that person for the taxable year? F-2 A: Yes. If a person applies the international boycott factor to one operation during the taxable year, the factor must be applied to all operations during the taxable year under each of sections 908(a), 952(a)(3), and 995(b)(1)(F). If a person identifies specifically attributable taxes and income under section 999(c)(2), that method must be applied to all operations during the taxable year and must be applied under each of sections 908(a), 952(a)(3), and 995(b)(1)(F). F-5. Q: In the case of a controlled group (within the meaning of section 993(a)(3)), m a y one m e m b e r use the international boycott factor under section 999(c)(1) and another member identify specifically attributable taxes and income under section 999(c)(2)? A: Yes. Each m e m b e r may independently choose either to apply the international boycott factor under section 999(c)(1) or to identify specifically attributable taxes and income under section 999 (c)(2). The method chosen by each member for determining the loss of tax benefits must be applied consistently to determine all loss of tax benefits of that member. For example, if one member of a con- trolled group. Company A, chooses to use the international boycott factor, then it must apply the international boycott factor to determine its loss of the section 902 indirect foreign tax credit in respect of a dividend paid to it by another member of the controlled group, Company C, even if Company C determines its loss of tax benefits by identifying specifically attributable taxes and income. Company A would also determine the amount deemed distributed to it under sections 995(b) (1)(F) and 952(a)(3) by applying its international boycott factor to the otherwise deferrable earnings of its DlSCs or controlled foreign F-3 corporations. In addition, if an affiliated group of corporations files a consolidated return, then the affiliated group must determine its loss of tax benefits either by applying the international boycott factor to the consolidated return, or by having each m e m b e r determine its loss of tax benefits by identifying specifically attributable taxes and income. F-6. Q: If a person chooses to determine its loss of tax benefits by applying the specifically attributable taxes and income method set forth in section 999(c)(2), m a y it demonstrate the amount of foreign taxes paid and income earned attributable to the specific operations by applying an overall effective rate of foreign taxes and an overall profit margin to each operation? A: N o . A person must clearly demonstrate foreign taxes paid and income earned attributable to specific operations by performing an in-depth analysis of the profit and loss data of each separate and identifiable operation. The principles of Regs. §1.861-8 are applicable in determining income and taxes attributable to specific operations. F-7. Q: A United States partnership has operations in a boy- cotting country. Is the international boycott factor computed at the partnership level? A: No. The international boycott factor is computed sepa- rately by each partner based on information submitted by the partnership and on other activities of that partner. Of course, if the partner can meet the conditions of section 999(c)(2) of the Code, he need not use the international boycott factor. F-4 F-8. Q: A person desires to determine its loss of tax benefits by applying the specifically attributable taxes and income method set forth in section 999(c)(2). That person is able to clearly demonstrate that a specified portion of its operations in or related to a boycotting country constitute clearly separate and identifiable operations in connection with which there was no participation in or cooperation with an international boycott. That person is also able to clearly demonstrate the taxes and income attributable to those operations. With respect to the remainder of its operations in or related to a boycotting country, that person is either unable to clearly demonstrate clearly separate and identifiable operations in connection with which there w a s no participation in or cooperation with an international boycott or to identify taxes and income specifically attributable to operations in connection with which there was such participation or cooperation. Under these facts, will that person be required to determine its loss of tax benefits by applying the international boycott factor? A: N o . That person m a y compute its loss of tax benefits by applying the specifically attributable taxes and income method if it forfeits the benefits of deferral, DISC and the foreign tax credit attributable to: L the portion of its operations for which it can determine taxes and income specifically attributable to separate and identifiable operations in connection with which there was participation in or cooperation with an international boycott, and F-5 2. the remaining portion of its operations for which it cannot demonstrate that the taxes and income are specifically attributable to separate and identifiable operations in connection with which there was no participation in or cooperation with an international boycott. F-9. Q: If a person choses to compute its loss of tax benefits in one year by applying the international boycott factor, may that person compute its loss of tax benefits in another year using the specifically attributable taxes and income method? A: Yes. The election to use the international boycott factor or the specifically attributable taxes and income method is an annual election. The election is made by completing the appropriate Schedule A or B to F o r m 5713. F-10. Q: In 1978 a person computes its loss of tax benefits using the international boycott factor. On audit, it is determined that adjustments are to be made to the international boycott factor. May that person then recompute its loss of tax benefits for 1978 using the specifically attributable taxes and income method? A: Yes. A person may change its method of computing loss of tax benefits under the international boycott provisions at any time for any open taxable year. G. Determinations. G-l. Q: What degree of confidentiality will determinations, and requests for determinations, under section 999(d) receive? A: A determination under section 999(d) will be treated as a "written determination" within the meaning of section 6110(b)(1). Therefore the determination and any background file document related thereto will be subject to public inspection in accordance with the rules set forth in section 6110, and subject to the deletions set forth in section 6110(c). G-2. Q: What procedures are applicable to requests for, and the issuance of, determinations under section 999(d)? A: The procedures applicable to requests for, and the issuance of, determinations under section 999(d) are set forth i Revenue Procedure 77-9, 1977-10 IRB 12. H. Definition of an Agreement to Participate in or Cooperate with a Boycott (section 999(b)(3)). H-l. Q: Company C, a trading company, signs a contract with Country X to export goods to Country X. The contract contains a clause requiring Company C not to obtain any of the goods from any person blacklisted by Country X. Does Company C's entering into the contract constitute an agreement according to section 999(b)(3)? A: Generally, entering into a written or oral agreement that includes a provision requiring a person to refrain from doing business with a person blacklisted by Country X (or by a group of countries associated with Country X in carrying out an international boycott directed against Country Y) constitutes participation in or cooperation with an international boycott within the meaning of section 999(b)(3). Blacklists are normally maintained to provide a convenient list of persons that engage in business with Country Y or engage in other activities that are inconsistent with the boycott. Thus, reference in an agreement to a "blacklist" can normally be assumed to be to such a list. However, entering into the agreement does not constitute participation in or cooperation with an international boycott if it is established that the blacklist is maintained for reasons other than furtherance of the boycott or if it is established that no person on the blacklist is either (1) blacklisted because it is the government, a company or a national of Country Y or because its ownership, management or directors is made up of individuals of a particular nationality, race or religion or (2) a U. S. person blacklisted because it is engaged in trade with Country Y or with the government, a company or a national of Country Y. H-2 H-2. Q: During the course of negotiations concerning a contract for the export of goods to Country X. Company C, a trading company, and Country X agree orally that Company C will not purchase any of the goods from any company included on a blacklist shown to -Company C's representatives. They also agree that this agreement will not be reflected in the written contract for the export of the go or in any other writing. Does the oral understanding between Company C and Country X constitute an agreement according to section 999(b)(3) A: Generally, yes. See Answer H-l. H-3. Q: Company C signs a contract with Country X to construct an industrial plant in Country X. The contract states that the laws, regulations, requirements or administrative practices of Country X will apply to Company C's performance of the contract in Country X. The laws, regulations, requirements or administrative practices of Coun try X prohibit the importation into Country X of goods manufactured by any company engaged in trade in Country Y or with the government, companies or nationals of Country Y. Does Company C's action constitut an agreement according to section 999(b)(3)? A: No. The existence of an agreement will not be inferred solely from the inclusion in a contract of a provision stating that the laws, regulations, requirements or administrative practices will apply to the performance of the contract in that country. However a course of conduct of complying with such laws, regulations, requirements or administrative practices may evidence such an agreement. H-3 H-4. Q: The facts are the same as those in Question H-3, except that the contract states that Company C will comply with the laws, regulations, requirements or administrative practices of Country X in its performance of the contract in Country X. Does Company C's action constitute an agreement according to section 999(b)(3)? A: Yes. Entering into a contract that requires com- pliance with the laws, regulations, requirements or administrative practices of Country X constitutes an agreement according to section 999(b)(3), if some of those laws prohibit the importation into Country X of goods manufactured by any company engaged in trade in Country Y or with the government, companies or nationals of Country Y. H-5. Q: Company C, a trading company, signs a contract with Country X to export goods to Country X. The contract contains no clause concerning a boycott, nor does it require Company C to comply with the laws, regulations, requirements or administrative practices of Country X, which, among other things, prohibit the importation into Country X of goods manufactured by persons engaged in trade in Country Y. Company C does not purchase any goods with which to fulfill its obligations under the contract from any U.S. company engaged in trade in Country Y or with the government, companies or nationals of Country Y. Does Company C's action constitute an agreement according to section 999(b)(3)? A: Where there is no express agreement, the existence of an agreement will not be inferred solely from the fact that Company C has not, consistent with the laws, regulations, requirements or administrative practices of Country X, purchased goods with which to H-4 fulfill its obligations under the contract from any-U. a company engaged in trade in Country Y or with the government, companies or nationals of Country Y. However, the fact that Company C has not purchased goods manufactured by persons engaged in trade in Country Y suggests that Company C has entered into such an agreement. Thus, Company C's course of conduct pursuant to its contract with Country X is evidence that, together with other evidence, could be sufficient to establish an implied agreement unless Company A could show to the contrary. An example of other sufficient evidence is proof that Company C had in the past purchased goods from persons engaged in trade in Country Y but such purchases were reduced in volume or brought to a halt following the execution of the contract. An example of proof to the contrary is proof that the reduction in purchases from persons engaged in trade in Country Y was attributable to valid business reasons apart from the boycott. H-6. Q: Questions and Answers H-l, H-2, H-4, and H-5 all involve contracts for the export of goods by Company C to Country X and either an explicit agreement, or an inferred agreement, by Company C to refrain from doing business with companies that are blacklisted by Country X. The issue of whether an agreement exists for purposes of section 999(b)(3) would be resolved in the same way as in each of the answers above were the contract for (a) the supply of services to Country X or (b) a construction project in Country X. H-7. Q: (a) Company C incorporates a subsidiary in Country X. In the documents submitted by Company A relating to the incorporation of the subsidiary there is a general acknowledgement that the H-5 subsidiary is subject to the laws, regulations, requirements and administrative practices of Country X. (b) Company C establishes a branch in Country X. In the documents relating to its registration of the branch there is a general acknowledgement that the laws, regulations, requirements and administrative practices of Country X apply to the branch. Included in the laws, regulations, requirements or administrative practices of Country X is a requirement that companies incorporated in Country X and branches registered in Country X refrain from doing business with any person engaged in trade in Country Y. Does either the acknowledgement of the subsidiary or the undertaking of the branch constitute an agreement by Company C for purposes of section 999(b)(3)? A: The mere acknowledgement in incorporation or regis- tration documents of the general applicability of the laws of a boycotting country will not support the inference of the existence of an agreement under section 999(b)(3). However, a course of conduct of complying with such laws, regulations, requirements or administrative practices m a y evidence such an agreement. In addition, if the incorporation or registration documents state that the subsidiary or branch will comply with the laws, rules, regulations, requirements or administrative practices, there is an agreement according to section 999(b)(3). H-8. Q: Company C, a trading company, signs a contract with Country X to export goods to Country X. The contract contains no clause concerning a boycott, nor does it require the contract to be carried out in accordance with the laws, regulations, requirements H-6 or administrative practices of Country X. which prohibit the importation into Country X of goods manufactured by persons engaged in trade with Country Y. Payment is made by means of a letter of credit that requires, as a condition of payment, that Company C provide Bank D with a certificate that the goods were not manufactured by a person blacklisted by Country X. Company C provides the required certificate to Bank D. Does Company C's action constitute an agreement according to section 999(b)(3)? A: Generally, yes. See Answer H-l. The terms of the letter of credit are part of the agreement entered into by Company C. H-9. Q: Company C signs a contract with Country X to carry out a construction project in Country X. The contract says nothing about the nationality, race or religion of the individuals who are to employed to carry out the contract within Country X. However, Company C is aware that the laws, regulations, requirements or administrative practices of Country X may prohibit the issuance of visas by Country X to individuals of religion R to work on projects in that country. Company C excludes from consideration for employment individuals of that religion to work on the project in Country X. Does Company C's action constitute an agreement according to section 999(b)(3)? A: In the absence of an express agreement, the existence of an agreement normally will not be inferred solely from the fact that a person's action is apparently consistent with the boycott requ ments of Country X, although such action may evidence the existence of an agreement. However, since Company C's action in excluding from H-7 employment consideration individuals of religion R violates other statutes and since it is highly unlikely that there are valid busine reasons for such action, an agreement under section 999(b)(3) will be inferred unless Company C can establish that such action was not related to the boycott requirements. It would be unusual if Company C were able to establish that such action were not related to the boy cott requirements. H-10. Q: Company C signs a contract for a construction project with Country X. The contract says nothing about the nationality, rac or religion of the individuals who are to be employed to carry out th contract within Country X. However, Company C is aware that the laws, regulations, requirements or administrative practices of Coun- try X may prohibit the issuance of visas to individuals of religion R Company C, in recruiting people for the project, informs all applica that if they cannot obtain a visa to enter Country X, their employmen will be terminated. It employs several individuals of religion R who are unsuccessful in obtaining visas and whose employment is subsequently terminated. Does Company C's action constitute an agreement according to section 999(b)(3)? A: No. Company C has not refrained from employing individuals of religion R for the project. The existence of an agreement to refrain from employing individuals of religion R will not be inferred from Company C's action. H-ll. Q: The facts are the same as those in Question H-10, except that Company C makes its employment contracts with all indi- viduals for work on the project subject to the condition that they o H-8 visas from Country X that will permit them to work in Country X. Few, if any, individuals of religion R to whom Company C offers employment in Country X are successful in obtaining visas. Does such action by Company C constitute an agreement according to section 999(b)(3)? A: No. Company C has offered employment to all indi- viduals who are able to obtain visas. If an individual is unable to obtain a visa, it is due to the requirements of Country X. The existence of an agreement by Company C will not be inferred from Company C's action. H-12. Q: The facts are the same as those in Question H-10, except that no individuals of religion R are willing to accept employment on the terms offered by Company C. Does such action by Company C constitute an agreement according to section 999(b)(3)? A: H-13. Q: No, for the reasons given in Answer H-10. Company C signs a contract with Country X to carry out a construction project in Country X. The contract says nothing about who may or may not be a subcontractor to do certain work in Country X other than that Country X has the right to prior approval of any subcontractors. Does Company C's action constitute an agreement according to section 999(b)(3)? A: The contract provision giving the project owner a right of prior approval does not itself constitute an agreement according to section 999(b)(3). However, the provision m a y be evidence which, together with other evidence, could be sufficient to establish the existence of an implied agreement, unless Company C could show to the contrary. There may be valid business reasons for the provision apart from the boycott. H-9 On the other hand, the provision m a y be merely a subterfuge for Company C's cooperation in the exclusion of subcontractors that are engaged in trade in Country Y. H-14. Q: Company C signs a contract with Country X to carry out a construction project in Country X. The contract specifies a number of permissible subcontractors. All the subcontractors, in the view of Company C, are capable of carrying out the work, but non of them appears on a list of companies that are blacklisted by Count X. Company C has previously done business with each of the specified companies, but it has also done business with certain of the blackli companies with which it has had satisfactory relations. Does Company C's action constitute an agreement according to section 999(b)(3)? A: By entering into a contract that on its face indicates a pattern of exclusion of certain companies, including companies wit which Company C has no particular reason not to do business, it woul appear that Company C has agreed to refrain from doing business with the boycotted companies, unless Company C is able to show that the boycotted companies were not included on the list for reasons not related to the boycott. See Answer H-l. H-15. Q: Company C signs a contract with Country X.to carry out a construction project in Country X. The contract provides that Country X is to engage all the subcontractors that are to be engaged from outside Country X but that are to perform all or part of their services in Country X. Company C, however, is given the right to disapprove any company that Country X proposes to engage for a subcontract. While the contract is being carried out, none of the H-10 companies that Country X proposes to prequalify or invite to bid are included on a list of companies blacklisted by Country X. Does Compan C's action constitute an agreement according to section 999(b)(3)? A: Under the language of the contract, Company C has not agreed to refrain from doing business with companies that are on the blacklist. The contract moreover does not give Company C the right to select subcontractors other than those nominated by Cou X. Therefore, Company C's action does not constitute an agreement according to section 999(b)(3). Nevertheless, an agreement may be inferred if Company C cooperates in the exclusion of blacklisted subcontractors. See Answer H-13. H-16. Q: Company C signs a contract for a construction project with Country X. The contract states that any disputes arising under the contract will be resolved in accordance with Country X's laws. The laws of Country X contain boycott provisions. Does Company C's action constitute an agreement according to section 999(b)(3)? A: No. The provision that disputes will be resolved in accordance with Country X's laws does not constitute Company C's agreement to comply with Country X's boycott laws with respect to the carrying out of the contract. H-17. Q: Company C receives an inquiry from Country X about certain goods that Company C manufactures. The inquiry also requests Company C to furnish information about the following matter whether it does business with Country Y and whether it does business with any United States person engaged in trade in Country Y. Company H-ll C furnishes the requested information to Country X. Later Company C signs a contract with Country X to export goods to Country X. Does Company C's action constitute an agreement according to section 999(b)(3)? A: By furnishing such information Company C has not agreed to take any action, as a condition of doing business with Country X, that is described in section 999(b)(3). Nevertheless, the furnishing of such information is suspect and, when combined with a course of conduct that is consistent with an agreement to participate in or cooperate with an international boycott, will support an inference that such an agreement exists. H-18. Q: Company C, a trading company, signs a contract with Country X to export goods to Country X. The contract contains a clause requiring Company C not to obtain any of the goods from any company blacklisted by Country X. Company C, however, purchases some of the goods from one of the listed companies. Does Company C's entering into this contract constitute an agreement according to section 999(b)(3)? A: Generally, entering into a written contract that includes a provision requiring Company C to refrain from doing business with a person blacklisted by Country X constitutes participation in or cooperation with an international boycott within the meaning of section 999(b)(3), even if Company C, fully or partially, does not abide by the boycott provisions. See Answer H-l. H-19. Q: Company C signs a contract with Country X to export goods to Country X. Included in the contract is a provision that Company H-12 C will refrain from doing business with Country Y. Company C has done considerable business with Country Y in the past, but soon after it concludes that contract with Country X its distributor in Country Y, learning of the contract with Country X. refuses to continue to handle Company C's products and Company C tries but is unable to conclude any other satisfactory distribution arrangement in Country Y Does Company C's entering into this contract constitute an agreement according to section 999(b)(3)? A: Yes. Entering into an agreement to refrain from doing business with a boycotted country constitutes participation in or coo tion with an international boycott within the meaning of section 999( (3)(A)(i). even if Company C does not abide by, or intend to abide by, the terms of the agreement. H-20. Q: Company C has been unable to do business with Country X because Company C has been on a blacklist of companies maintained by an organization of countries to which Country X belongs. Company A agrees, as a condition of being removed from the list. to refrain from doing business with Country Y. Does Company C's agreement constitute an agreement according to section 999(b)(3)? A: Yes. Even though Company C has not yet entered into a contract to do business with any boycotting country, it has ag as a condition for being in a position to do business with one or more of the countries maintaining the blacklist, to refrain from doing bus with Country Y. This action constitutes an agreement according to section 999(b)(3)(A)(i). H-13 H-21. Q: The facts are the same as those in Question H-20, except that Company C does several different types of business with Country Y. It is requested to, and agrees to, refrain from doing only o of those types of business with Country Y, and in fact continues to do the other types of business with Country Y. Does Company C's agreement constitute an agreement according to section 999(b)(3)? A: Yes. An agreement to refrain from some, but not all, business with a boycotted country constitutes an agreement according to section 999(b)(3)(A)(i). Answer H-20 is also relevant to this context. H-22. Q: Company C is doing business in Country X. It contracts with Company D, which is not related to Company C, for Company D to build an office building for Company C's use in Country X. In the course of constructing the building. Company D participates in or cooperates with an international boycott imposed by Country X. Does Company C's actions constitute an agreement according to section 999(b A: Unless Company C directs or requires Company D to take action that constitutes participation in or cooperation with th boycott by Company D, or unless Company C's relationship with Company D is established to facilitate participation in or cooperation with the boycott, Company D's action will not be attributable to Company C under section 999(b)(3), and Company C will not be deemed to be participating in or cooperating with an international boycott. H-23. Q: Company C signs a contract with Country X for the export of goods to Country X. The contract does not contain any provisions as to which ships should be y^.ei••/•.-.• -..hipping the goods to Count H-14 which insurance companies should be used. The laws, regulations, requirements, or administrative practices of Country X do not permit the importation of goods carried on a ship owned by, or insured by, companies that trade in Country Y. Company C is aware of this requirement and ships the goods on the ships of a company, and insures the goods with a company, that does not trade in Country Y. Does Company C's action constitute an agreement according to section 999(b)(3)? A: As indicated by Answer H-5, the existence of an agree- ment will not be inferred solely from the fact that Company C ships it goods on ships of, or insures the goods with, a company that does not trade in Country Y. However, those facts, together with additional fa may be sufficient to establish that such an agreement exists. H-24. Q: Company C is competing for an industrial plant construction contract for which Country X is inviting international tenders. The tender documents contain a provision to the effect that Country X will not enter into the contract unless the successful tenderer certifies that in carrying out the contract it will refrain from doing business with companies blacklisted by Country X. Company C does not win the tendering, but in its tender it has indicated that it will sign a contract, in the form indicated in the tender doc and has given Country X a tender bond to that effect. Does Company C's action constitute an agreement according to section 999(b)(3)? A: Since its offer was not accepted. Company C has not entered into any agreement to refrain from doing business with the blacklisted companies that would constitute participation in or H-15 cooperation with an international boycott. Nevertheless, Company C's stated willingness to cooperate with Country X's boycott will be contributing factor in establishing a course of conduct from which to infer the existence of an agreement in other transactions between Company C and Country X. H-25. Q: Company C successfully prequalifies to tender for a contract for the construction of an industrial plant that will be owned by Country X. At the time it attempts to prequalify, Company C is required to state that it understands that the successful tenderer for the contract will have to agree not to do business in connection with the project with any company blacklisted by Country X or with the government, companies or nationals of Country Y. After it prequalifies, Company C decides not to tender for the contract. Does Company C's action constitute an agreement according to section 999(b)(3)? A: Since Company C did not tender, it did not enter into an agreement to refrain from doing business with the blacklisted companies. Thus, there was no agreement that would constitute participation in or cooperation with an international boycott. Nevertheless, Company C's stated willingness to cooperate with Country X's boycott will be a contributing factor in establishing a course of conduct from which to infer the existence of an agreement in other transactions between Company C and Country X. H-26. Q: Company C competes for an industrial plant construction contract for which Country X is inviting international tenders. The tender documents contain a provision to the effect that Country X will not enter into a contract unless the successful tenderer certifies that H-16 in carrying out the contract it will refrain from doing business with any company blacklisted by Country X. Company C wins the tender and successfully convinces Country X that the boycott clause should be deleted from the final contract. Does Company C's action constitute an agreement according to section 999(b)(3)? A: No. Company C's success in deleting the boycott clause from the final contract refutes the provision of the tender documents that would have required Company C to agree to participate in or cooperate with an international boycott according to section 999(b)(3). However, if the deletion of the boycott clause is not accomplished in good faith or is a subterfuge to mask an unstated understanding to participate in or cooperate with an international bo cott, the existence of an agreement will be inferred. H-27. Q: Company A charters a vessel to Company C to be used by Company C in carrying its goods to Country X. Company C, at the request of Company A, agrees in the charter agreement not to take any action with respect to, or issue any orders to, the vessel that would result in limiting the vessel's ability to call at ports in Country X or subject the vessel to arrest or confiscation in Country X. Does the action of Company C constitute participation in or co- operation with an international boycott according to section 999(b)(3 A: No. In the agreement, Company C has not agreed to refrain from taking any of the actions enumerated in section 999(b as a condition of doing business directly or indirectly within a boyc country or with the government, a company, or a national of a boycott country. H-17 H-28. Q: Company A charters a vessel to Company C to be used by Company C in carrying its goods to or from specifically named ports or a range of ports within a specified geographical area. Company A an Company C agree on a charter agreement which would, in effect, preclud that vessel from calling at a number of countries, including Country Y Does the action of Company C constitute participation in or cooperatio with an international boycott under section 999(b)(3)? A: No. In the agreement, Company C has not agreed to refrain from taking any of the actions enumerated in section 999(b)(3) as a condition of doing business directly or indirectly within a boyco country or with the government, a company or a national of a boycottin country. H-29. Q: Company A signs a contract with Country X for the export of goods to Country X. The contract provides that Company A will not trade in Country Y, and that payment will be made by means of a letter of credit confirmed by Bank C in the United States. The letter of credit requires Company A to provide to Bank C a certificate that it has not engaged in trade with Country Y before it can be paid by Bank C. Bank C confirms the letter of credit and later makes payment to Company A after determining that all documents, including the boycott certificate, are in order. Does Bank C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)? H-18 A: Yes. Bank C's action constitutes an agreement by it to refrain from doing business with a United States person (Company A) engaged in trade with Country Y. Therefore Bank Os action con- stitutes participation in or cooperation with an international boycott according to section 999(b)(3)(A)(ii). (Company A's action constitutes participation in or cooperation with an international boycott by Comp A according to section 999(b) (3)(A)(i). ) H-30. Q: Company C signs a contract with Country X for the supply of goods. The contract provides that Company C will not trade with Country Y, and that payment will be made by means of a letter of credit confirmed by Bank D in the United States provided that Bank D certifies to Country X that it will not confirm letters of credit relating to the export of goods to Country Y. Bank D confirms the lett of credit, after issuing the requested certificate. Does Bank D's act constitute participation in or cooperation with an international boyc under section 999(b)(3)? A: Yes. Bank D has agreed to refrain from doing business with or in Country Y, or with the government, companies or nationals of Country Y, and with U. S. persons engaged in trade in Cou try Y or with the government, companies or nationals of Country Y. This action constitutes participation in or cooperation with an inter boycott according to section 999(b) (3)(A)(i) and (ii). H-19 H-31. Q: Company C signs a contract with Country X for the export of goods to Country X. The contract, consistent with the laws of Country X, provides that the goods may not be produced in whole or in part in Country Y or contain any parts, raw materials or labor originating in Country Y. The contract also provides that payment will be made by means of a letter of credit confirmed by Bank D. The letter of credit requires Company C to provide to Bank D a certificate that the goods were not produced in whole or in part in Country Y and contain no parts, raw materials or labor originating in Country Y before it can be paid by Bank D. Bank D confirms the letter of credit and later makes payment to Company C after determinin that all documents, including the certificate, are in order. Does Bank D's action constitute a participation in or cooperation with an intern boycott under section 999(b)(3)? A: No. Bank D's action constitutes an agreement to comply with a prohibition on the importation of goods produced in whole or in part in a country that is the object of an international boycott. Therefore Bank D's action, according to section 999(b)(4)(B), does not constitute participation in or cooperation with an internatio boycott. (Similarly, Company Os action does not constitute participation in or cooperation with an international boycott. See Answer 1-1. H-32. Q: Company C, a trading company, signs a contract with Country X to export goods to Country X. The contract contains no clause concerning a boycott, nor does it require the contract to be carried out in accordance with the laws, regulations, requirements or administrative pracL- .- , ->i Country X, which prohibit the H-20 importation into Country X of goods manufactured by persons engaged in trade with Country Y and which require import licenses. In order to obtain an import license. Company C provides a certificate indica ing that the goods were not manufactured by a person engaged in trad in Country Y or with the government, companies or nationals of Country Y. Does Company C's action constitute an agreement according to section 999(b)(3)? A: No. The signing (at the time of import) of a certi- fication as to content, which is required to obtain an import licens does not by itself constitute an agreement. However, a course of conduct of providing such certificates may, along with other factors be evidence of the existence of an agreement according to section 999(b)(3)(A)(ii). L Refraining from Doing Business with or in a Boycotted Country (section 999(b)(3)(A)(i)). 1-1. Q: Company C signs a contract with Country X for the export of certain goods to Country X. In that contract, consistent with the laws of Country X, there is a provision that none of the goods to be provided thereunder shall be produced in whole or in part in Country Y or contain any parts, raw materials or labor from Country Y. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(i)? A: No. Company C in entering into such a contract is complying with the prohibition by Country X on the importation of goods produced in whole or in part in any country which is the object of an international boycott. Such action, according to section 999(b) (4)(B), does not constitute participation in or cooperation with an international boycott. 1-2. Q: Company C owns a number of ships. It understands that if one of its ships visits Country Y, that ship will thereafter be unable to visit Country X. Company C has some ships which visit Country Y but not Country X and other ships which visit Country X but not Country Y. Does Company Cls action constitute participation in or cooperation with an international boycott under section 999(b) (3)(A)(i)? A: ND. Company C has not agreed to refrain from doing business with Country Y. Therefore Company C's action does not constitute participation in or cooperation with an international boycott according to section 999(b)(3)(A)(i). 1-2 1-3. Q: Company C signs a contract with Country X, licensing a company in Country X to use certain of its patents and trademarks in Country X. The contract provides that Company C will not enter into an agreement with any national of Country Y with respect to the use in Country Y of patents and trademarks. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(i)? A: Yes. Company C has agreed to refrain from doing business with any national of Country Y and such action constitutes participation in or cooperation with an international boycott according to section 999(b)(3)(A)(i). 1-4. Q: The facts are the same as in Question 1-3, except that Company C has a number of other licensing agreements with Country Y and enters into still more such agreements after it signs the contract with Country X. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(i)? A: Yes, for the same reasons as stated in Answer 1-3 above. Answer H-18 is relevant in this context. 1-5. Q: Company C signs a contract with Country X to export some products from Country X. The contract, consistent with the laws of Country X, requires Company C to certify that the goods will not be sent to Country Y. Company A so certifies. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(i)? A: No. Company C's compliance with Country X's pro- hibition on the exportation of products of Country X to Country Y does 1-3 not constitute participation in or cooperation with an international cott, according to section 999(b)(4)(C). 1-6. Q: Company C signs a contract with Country X for the export of goods to Country X. In the contract there is a provision that no capita!of Country Y origin will be used in the production or manufacturing of the goods. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(i)? A: Yes. Under the terms of the agreement Company C has agreed to refrain from doing business with the government, a company or a national of Country Y. 1-7. Q: Company C enters into a contract with Country X for the manufacture and sale of goods and the provision of customer support services. The contract provides that Company C may assign its rights and obligations under the contract. The contract further provides that the rights and obligations cannot be assigned to a comp incorporated under the laws of Country Y without the express approval of Country X. There is no similar requirement with respect to compani incorporated under the laws of other countries. Does Company C's action constitute participation in or cooperation with an internation boycott under section 999(b)(3)(A)(i)? A: The contract provision requiring Company C to obtain the approval of Country X prior to an assignment of the rights and obligations to a company incorporated under the laws of Country Y does not itself constitute an agreement under section 999(b)(3)(A)(i) 1-4 However, the provision is strong evidence that, and is sufficient to create a presumption that. Company C has an implied agreement to refrain from doing business with a company of Country Y. Company C may overcome this presumption by establishing the existence of valid business reasons for this provision apart from the boycott or by establishing that Country X approves, as a matter of course, assignments of rights and obligations under the contract to compani in Country Y. J. Refraining from Doing Business with any United States Person Engaged in Trade in a Boycotted Country (section 999(b)(3)(A)(ii)). J-l. Q: Company C signs a contract with Country X for the turn-key construction of an industrial plant. The contract provides that Company C will not use as subcontractors a number of named U. S. firms whose past performance on contracts in Country X has been unsatisfactory, according to Country X, for reasons unrelated to the boycott. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(ii)? A: No. The exclusion of subcontractors based on their performance is not covered by section 999(b)(3). J-2. Q: Company C enters into a contract with Country X to export certain goods to Country X. The contract provides that Company C shall not use any goods manufactured by Company A in performing the contract since Company A is blacklisted by Country X even though Company A does not engage in any kind of trade in a country which is the object of the boycott or with the government companies, or nationals of that country. Does Company C's action constitute participation in or cooperation with an international boyc under section 999(b)(3)(A)(ii)? A: Generally, entering into a written or oral agreement that includes a provision requiring a person to refrain from doing bus ness with a person blacklisted*by Country X (or by a group of countrie associated with Country X in carrying out an international boycott di against Country Y) constitutes participation in or cooperation with an J-2 international boycott within the meaning of section 999(b)(3). If Company C can establish that Company A is not engaged in trade in Country Y or with the government, companies or nationals of Country Y, Company C's agreement to refrain from doing business with Company A does not come within the scope of section 999(b)(3)(A)(ii). However, Company C's action may constitute an agreement under section 999(b)(3)(A)(iii) unless Company C can establish that Company A is not blacklisted because of the nationality, race or religion of its owners, management or directors. Answer H-l is relevant in this context. J-3. Q: Company C competes for an industrial plant construc- tion contract for which Company P of Country W is inviting internatio tenders. The contract is to be financed by Country X, which maintains a blacklist of companies. Country X requires contracts which it finan to state that the contractor is required to refrain from making any purchases for the project from any of the blacklisted companies. Coun W does not boycott those companies. Company C wins the tender and signs the contract with Company P with the blacklist provision. Does Company C's action constitute participation in or cooperation with an international boycott according to section 999(b)(3)(A)(ii)? A: Generally, yes. See Answer H-l. Although the boycott is not implemented by Country W, but by Country X, and the project is being carried out in Country W, Company C may have agreed not to do business with blacklisted U.S. companies as a condition of doing business indirectly with Country X. J-3 J-4. Q: Company C signs a contract with Country X to export certain goods to Country X. The contract provides that Company C will not do business with any company blacklisted by Country X. Company C establishes that although a number of the blacklisted companies are foreign subsidiaries of U. S. companies, no U. S. companies are on the list. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(ii)? A: No. According to section 999(b)(3)(A)(ii), refraining from doing business with any United States person engaged in trade in a boycotted country constitutes participation in or cooperation with an international boycott. For purposes of this particular section "United States ^ person" does not include foreign subsidiaries of a United States person. However, Company C's action may constitute an agreement under section 999(b)(3)(A)(i) or (iii). Answer H-l is relevant in this context. J-5. Q: Bank C advises Country X on its investments in the United States. Country X instructs Bank C not to recommend for investment any shares of certain companies that are blacklisted by Country X. Bank C follows these instructions. Does Bank C's action constitute participation in or cooperation with an international boycott according to section 999(b)(3)(A)(ii)? A: No. The recommendation of shares of certain companies by Bank C does not constitute "doing business" with those companies. Therefore Bank C's action does not constitute participation in or cooperation with an international boycott according to section 999(b)(3)(A)(ii). Nor does Bank C's action constitute an agreement under section 999(b)(3)(A)(i) or (iii). J-4 J-6A. Q: Bank C manages Country X's investment portfolio in the United States. Bank C has been given certain powers to act for Country X, pursuant to instructions that, among other things, require Bank C not to invest Country X's funds in stocks and bonds issued by certain blacklisted United States companies. Bank C is authorized by Country X to purchase and sell stocks and bonds only through recognized exchanges. Does Bank C's action constitute participation in or cooperation with an international boycott according to section 999 (b)(3)(A)(ii)? A: No. Since purchasing stocks or bonds issued by a company, through recognized exchanges, does not constitute "doing business" with that company, an agreement to refrain from purchasing stocks or bonds issued by a company does not constitute an agreement to refrain from doing business with that company. Accordingly, Bank C's action does not constitute participation in or cooperation with an international boycott, according to section 999(b)(3)(A)(ii). Nor does Bank C's action constitute an agreement under section 999(b)(3)(A)(i) or (iii). J-6B. Q: Tne facts are the same as in Question J-6A, except that Bank C is also authorized to purchase original issues of stocks and bonds directly from the issuing company. Does Bank C's action constitute participation in or cooperation with an international boycott according to section 999(b)(3)(A)(ii)? A: Generally, yes. An agreement not to purchase original issues of stocks or bonds from a company blacklisted by Country X may J-5 constitute-participation in or cooperation with an international boycott according to section 999(b)(3)(A)(ii). In addition, the agreement may constitute participation in or cooperation with an international boyc according to section 999(b)(3)(A)(i) and (iii). Answer H-l is relevant in this context. J-7. Q: Company C signs a contract with Country X to con- struct an industrial plant in Country X. The laws, regulations, requi ments or administrative practices of Country X prohibit the entry int Country X of goods produced by blacklisted companies. The contract states that the laws and regulations of Country X will apply to Compa C's performance of the contract in Country X. In carrying out the project, Company C invites bids to furnish all goods and equipment on a delivered-in-Country X basis. No company on the blacklist maintained by Country X bids. Does Company C's action, as described in this question, constitute participation in or cooperation with an internat boycott under section 999(b)(3)(A)(ii) ? A: No. By the terms of the agreement Company C has not agreed to refrain from doing business with any of the blacklisted companies. The fact that blacklisted companies are unable to meet the conditions that Company C establishes is not due to any agreement by Company C with Country X, but is due to Country X's laws, regulations, requirements or administrative practices. J-8. Q: The facts are the same as those in Question J-7, except that Company C's purchase contracts require vendors to reimburse Company C for the purchase price and transportation costs, plus interest, of any goods that Company C cannot import into Country J-6 X because of Country X's import restrictions. In this case, does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(ii)? A: No, for the reasons given in Answer J-7. J-9. Q: Company C signs a contract with Country X to produce goods in Country X for export. The contract requires Company C to certify that, consistent with the laws of Country X, the goods will not be sent to Country Y and that Company C will require any purchaser of the products to certify that the goods will not be sent to Country Y if they are substantially unaltered at the time of the res by the purchaser. Company C thereafter sells these goods to Company A, requiring the certification. Does Company C's action constitute participation in or cooperation with an international boycott under se 999(b)(3)(A)(ii)? A: No. Company C's agreement to refrain, and to require Company A in the resale to refrain, from sending Country X's unaltered products to Country Y. according to section 999(b)(4)(C), does not constitute participation in or cooperation with an international boyco J-10. Q: Company C, a trading company, signs a contract with Country X for the export of goods to Country X. The contract requires that the goods be produced by Company A and that a certain component in the goods be produced by Company B. The laws, regulations, requirements or administrative practices of Country X prohibit the importation into Country X of goods manufactured by any company blacklisted by Country X Company A and Company B are not blacklisted by Country X. Does Company Cls action constitute an agreement, CLCCOJ uiig to section 999(b)(3)(A)(i J-7 A: No. The existence of an agreement to refrain from doing business with a person blacklisted by Country X will not be inferred solely from the inclusion of a requirement in a contract that the goods or components be produced by a specific company that does not in fact appear on the blacklist. Accordingly. Company C's action does not constitute an agreement under section 999(b)(3)(A)(i), (ii) or (iii). K. Refraining from Doing Business with any C o m p a n y Whose Ownership or Management is Made up, in Whole or in Part, of Individuals of a Particular Nationality, Race or Religion (section 999(b)(3)(A)(iii)). K-l. Q: Company C signs a contract with Country X for the export of certain goods to Country X. In the contract it is provided that the goods shall not bear any mark symbolizing Country Y or religion R. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(iii) ? A: No. Section 999(b)(3)(A)(iii) prohibits agreements to refrain from doing business on the basis of the nationality, race or religion of the owners or management of the organization and to refrain from selecting (or to remove) directors of a particular nationality, race or religion. It does not prohibit agreements not to import goods bearing certain marks into a country. No part of section 999(b)(3) concerns refusals to purchase goods bearing marks symbolizing a certain country or religion. K-2. Q: As a condition of doing business in Country X, Company C's subsidiary in Country X agrees that the board of directors of the subsidiary must consist of a specified number of nationals of Country X. Does such action constitute participation in or cooperation with an international boycott according to section 999(b)(3)(A)(iii)? A: No. Such action will not be deemed to constitute an agreement to participate in or cooperate with an international boycott according to section 999(b)(3)(A)(iii). K-3. Q: Company C is the leader of a syndicate of U. S. and foreign banks that is underwriting a public bond issue of Country X. K-2 Company D is a member of that syndicate. Daring the loan negotiations, Country X indicates that Company E, which is not a U. S. company, should be excluded from the syndicate because of the religion of some of its directors. Company C and Company D did not contemplate that Company E would be a member of the syndicate in any event and they agree to comply with the request of Country X. Does the action of Company C and Company D constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(iii)? A: Yes. The action of Company C and Company D is an agreement to refrain from doing business with a company whose management are individuals of a particular religion. According to section 999(b)(3)(A)(iii) this constitutes participation in or cooper with an international boycott. K-4. Q: The facts are the same as in Question K-3, except that Country X indicates that Company E may be included only if it removes several of its directors who are of nationality Y. Does the action of Company C and Company D constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)( A: Yes. The action of Company C and Company D is an agreement to obtain the removal of corporate directors of a particula nationality as a condition of including Company E. This constitutes an agreement under section 999(b)(3)(A)(iii). L. Refraining from Employing Individuals of a Particular Nationality, Race or Religion (section 999(b)(3)(A)(iv)). L-l. Q: Company C signs a construction contract with Country X that provides that Company C is not to employ individuals of religion R to work on the project in Country X. Does such action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(iv)? A: Yes. Company C has clearly agreed to refrain from employing individuals of religion R. Section 999(b)(3)(A)(iv) defines an agreement, made as a condition of doing business with the government of a country, to refrain from employing individuals of a particular religion, as participation in or cooperation with an international boycott. L-2. Q: Company C signs a contract with Country X for a construction project in Country X. The contract specifies that only individuals who are nationals of the United States or Country X will be allowed to work on the project. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(iv)? A: No. There is no evidence of an attempt to specifically exclude persons of a particular nationality. Persons of a number of different nationalities, including those from both friendly and unfriendly countries, have been evenhandedly excluded. L-3. Q: As a condition of doing business in Country X. Company C agrees to employ a specified percentage of nationals of Country X or to employ increasing numbers of nationals of Country X. Does such action constitute participation in or cooperation with an international boycott according to section 999(b)(3)(A)(iv)? L-2 A: No. Such action does not constitute an agreement to participate in or cooperate with an international boycott under section 999(b)(3)(A)(iv). L-4. Q: Company C, incorporated under the laws of Country Z, signs a contract with Country X for the engineering and construction of an industrial plant in Country X. The contract excludes from working in Country X nationals of Country Z who are also nationals of Country Y or who were formerly nationals of Country Y. Does Company C's action constitute participation in or cooperation with an international boycott according to section 999(b)(3)(A)(iv)? A: Yes. Any agreement to differentiate among citizens of Country Z on the basis of dual nationality or national origin for employment on a project constitutes participation in or cooperation with an international boycott, according to section 999(b)(3)(A)(iv). L-5. Q: Company C signs a contract with Country X for the engineering and construction of an industrial plant in Country X. The contract provides that Company C is not to employ in its home office any individuals who are nationals of Country Y to work on the design of the plant. Does Company C's action constitute participation in or cooperation with an international boycott according to section 999(b) (3)(A)(iv)? A: Yes. Company C has agreed to refrain from employing individuals who are nationals of Country Y, and such agreement constitutes participation in or cooperation with an international boycott according to section 999(b)(3)(A)(iv). M . As a Condition of the S?le of a Product, Refraining from Shipping or Insuring That Product on a Carrier Owned, Leased, or Operated by a Person Who Does Not Participate In or Cooperate with an International Boycott (section 999(b)(3)(B)). M-l. Q: Company C enters into a c.i.f. contract for the export of goods to Country X. The contract states that the goods are not to b shipped on a ship blacklisted by Country X. The blacklist contains the names of vessels that have called at ports in Country Y, vessels that are owned, leased or operated by the government, a company or a national of Country Y, and vessels that are owned, leased or operated by persons who engage in activities that are inconsistent with the boycott. Does Company C's action constitute an agreement described in section 999(b)(3)? A: Yes. Company C has entered into an agreement described in section 999(b)(3)(A)(i), (ii) and (iii) and section 999(b M-2. Q: Company C enters into a f. a.s. Port of New York contract with Country X for the sale of goods to Country X. While no overseas shipping or insurance provisions are contained in the contra Company C has reason to believe that arrangements will be made by Country X to see that the goods are not shipped on a carrier owned, leased, or operated by a person who does not participate in or cooper with Country X's boycott of Country Y. Does Company C's action con- stitute participation in or cooperation with an international boycott according to section 999(b)(3)(B)? A: No. Company C has not agreed as a condition of sale to refrain from shipping on a carrier owned, leased or operated M-2 by a person who does not participate in or cooperate with an international boycott. It has not agreed to any shipping or insurance arrangements. Its action thus does not constitute participation in or cooperation with an international boycott according to section 999(b) (3)(B). M-3. Q: Company C, having its place of business in Country Z, is requested by Country X to enter into a c. i. f. contract for the ex of goods to Country X. However, to avoid participating in or cooperati with a international boycott, Company C successfully convinces Country X that the contract should specify shipment f. a.s. port of Country Z. The remainder of the circumstances are as described in Question M-2 above. Does Company C's action constitute participation in or cooperat with an international boycott according to section 999(b)(3)(B)? A: No, for the reasons given in Answer M-2. M-4. Q: Company C, a freight forwarding company having its place of business in Country Z, has a contract with Country X to make, as an agent of Country X, shipping and insurance arrangements for goods which Country X purchases in Country Z on a f.a.s. port of Country Z basis. The contract provides that no shipments will be made on a carrier owned, leased, or operated by a person who does not participate in or cooperate with an international boycott. Company C then makes shipping and insurance arrangements on that basis. Does Company C's action constitute participation in or cooperation with an international boycott according to section 999(b)(3)(B)? A: Company C's agreement not to make shipping arrange- ments on a carrier of a person who does not participate in Country X's M-3 boycott of Country Y is not made as a condition of the sale of a product that is to be shipped to Country X. Therefore, Company C's action does not constitute participation in or cooperation with an international boycott according to section 999(b)(3)(B). However, Company C's agreement would constitute participation in or cooperation with an international boycott pursuant to section 999(b)(3)(A)(i), (ii) or (iii). M-5. Q: Company C enters into a contract with Country X for the export of goods to Country X. As a precaution to protect against war risk or confiscation, the contract requires Company C not to ship the goods on a Country Y flag vessel or on a ship which during the voyage calls at Country & enroute to Country X. Does Company C's action constitute participation in or cooperation with an international boycott? A: No. The requirement in the contract is not a restric- tive boycott practice. Rather, the requirement arises from the need to protect goods from damage or loss. M-6. Q: Company C enters into a contract with Country X for the export of goods to Country X. The contract requires Company C to ship the goods only on a ship registered in Country X. Does Company C's action constitute participation in or cooperation with an international boycott, according to section 999(b)(3)(B)? M-4 A: No. An agreement to ship the goods only on a ship registered in Country X does not constitute an agreement to refrain from shipping or insuring those goods on a carrier owned, leased, or operated by a person who does not participate in or cooperate with an international boycott. Therefore, Company C's action does not constitute participation in or cooperation with an international boyc according to section 999(b)(3)(B). M-7. Q: Company A signs a contract with Country X for the export of goods to Country X. The contract provides that the goods may not be shipped on a vessel that has been blacklisted by Country X because it has called at Country Y in the past. Does Company C's action constitute participation in or cooperation with an internation boycott according to section 999(b)(3)(B)? A: Yes. The reason for those vessels being blacklisted was that at some time in the past the owner, lessor or operator of the vessel did not comply with the requirement of Country X that the vessel not call at Country Y. Therefore, Company C's signing the contract constitutes participation in or cooperation with an internat boycott, according to section 999(b)(3)(B). M-8. Q: Company C signs a contract with Country X for the export of goods to Country X. The contract contains no requirement that the seller refrain from shipping the goods on a vessel that has been blacklisted by Country X. Company C does not ship the goods on a blacklisted vessel. Does Company C's action constitute participa in or cooperation with an international boycott according to section 999(b)(3)(B)? M-5 A: Nc, an agreement to participate in or cooperate with an international boycott, according to section 999(b)(3)(B), will not be inferred from Company C's action. M-9. Q: Company C signs a c.i.f. contract with Country X for the export of goods to Country X to be paid for by means of a let of credit. The letter of credit for this transaction requires, as a condition of payment, Company C to certify as to the identity of the vessel and the identity of the insurer. Company C provides such a certificate to the paying bank. Does Company C's action constitute participation in or cooperation with an international boycott? A: The existence of an agreement to participate in or cooperate with an international boycott will not be inferred solely the basis of Company C's certification. However, repetitive certific tion by Company C identifying vessels and insurers that are not blac listed by Country X may suggest that Company C chooses its shippers and insurers on the basis of Country X's blacklist (in anticipation Country X's certification request). Such a course of conduct may be a sufficient basis from which to infer the existence of an agreement. N. Reduction of Foreign Tax Credit. N-l. Q: How is the reduction of the foreign tax credit for participation in or cooperation with an international boycott computed under section 908(a)? A: . The method of computation of the reduction of the foreign tax credit under section 908(a) differs depending on whether the person applying section 908(a) applies the international boycott factor under section 999(c)(1) or identifies specifically attributable taxes and income under section 999(c)(2). If the person chooses to identify specifically attributable taxes and income, the person reduces the amount of foreign taxes paid (before the determination of the section 904 limitation) by the sum of the foreign taxes paid that the person has not clearly demonstrated are attributable to specific operations in which there has been no participation in or cooperation with an international boycott. If the person applies the international boycott factor, the reduction of the foreign tax credit under section 908(a) is computed by first determining the foreign tax credit that would be allowed under section 901 for the taxable year if section 908(a) had not been enacted. The amount of credit allowed under 901 would, of course, reflect the credits allowable under sections 902 and 960, and would also reflect the limitations of both sections 904 and 907. The credit allowed under section 901 would then be reduced by the product of the section 901 credit (before the application of the section 908(a) reduction) multiplied by the international « boycott factor. N-2 N-2. Q: After the reduction of credit has been determined in accordance with the process described in Answer N-l, the taxes denied creditability may be deductible under section 908(b). If the taxes are deducted, is a new section 904 limitation, a new section 901 amount and a new section 908(0 reduction of credit computed based on the income reduced by the taxes deducted? A: No. The process described in Answer N-l is applied only once and the reduction of credit is determined as a result of that single application. If the taxes denied creditability are deducted, no further adjustment is made under sections 904, 901 or 908(a) as a result of the deduction. N-3. . Q: Company A owns 20 percent of the stock of Company C, a corporation organized under the laws of Country Z, a foreign country. Company C participates in an international boycott in connection with all its operations. Company C pays a dividend to Company A and Country Z withholds income tax on the dividend paid to Company A. Company A computes its loss of tax benefits by identifying specifically attributable taxes and income under section 999(c)(2). Will C o m pany A be denied its section 901 direct foreign tax credit in respect of the income tax withheld by Country Z on the dividend paid by Company C? A: If Company A can clearly demonstrate that its invest- ment in Company C is a clearly separate and identifiable operation in connection with which Company A did not participate in or cooperate with an international boycott, Company A will not be denied its section 901 direct foreign tax credit in respect of the withholding tax on the dividend paid by Company C. Qi the other hand, even if Company C does not participate N-3 in an international boycott, if Company A agreed to participate in or cooperate with an international boycott in connection with its investment in Company C, C o m p a n y A will lose its foreign tax credit in respect of the withholding tax on the dividend. Thus, whether Company C participates in an international boycott is not relevant to the determination of Company A's loss of foreign tax credit under the facts of this question. (To determine the denial of the section 902 indirect foreign tax credit for foreign income taxes paid by C o m p a n y C, see Answer A-l9.) N-4. Q: A s a result of participation in or cooperation with an international boycott and the application of section 908(a), Company A loses a portion of its foreign tax credit under both sections 901 and 902. Are the foreign taxes denied creditability under both sections 901 and 902 deductible under section 908(b)? A: The section 901 taxes denied creditability by reason of section 908(a) are deductible, but the section 902 taxes are not. Section 908(b) merely renders sections 275(a)(4) and 78 inapplicable to taxes denied creditability under section 908(a). Since section 902 taxes are not otherwise deductible under the Code, and since no section 78 gross-up is required in respect of section 902 taxes denied creditability, no deduction is allowed for those section 902 taxes. N-5. Q: C o m p a n y A has foreign tax credits under both sections 901 and 902. C o m p a n y A applies the international boycott factor to determine its loss of foreign tax credits under section 908(a). What portion of the taxes denied creditability will be deductible under section 908(b)? N-4 A: Since the section 901 taxes denied creditability under section 908(a) are deductible but the section 902 taxes are not, C o m p a n y A m a y deduct that portion of the total taxes denied creditability under section 908(a) that the total section 901 taxes (before application of section 908(a)) bear to the total section 901 and 902 taxes (before application of section 908(a)). O. Subpart F Income O-l. Q: In determining the amount of subpart F income included in gross income by reason of section 952(a)(3), may any deductions be taken into account? A: Yes. In computing subpart F income included in gross income under section 952(a)(3), a reasonable allowance may be made for deductions properly allocable to that income. Dated: August 1977. W. Michael Blumenthal Secretary FOR IMMEDIATE RELEASE Contact: Charles Arnold 566-2041 August 15, 1977 TREASURY ANNOUNCES FINAL DETERMINATION OF SALES AT LESS THAN FAIR VALUE ON RAILWAY TRACK MAINTENANCE EQUIPMENT FROM AUSTRIA The Treasury Department announced today that railway track maintenance equipment from Austria is being sold at less than fair value within the meaning of the Antidumping Act. Sales at less than fair value generally occur when the price of the merchandise sold for export to the United States is less than the price of comparable merchandise sold in the home market or to countries other than the U.S. Interested persons were offered the opportunity to present oral and written views prior to this determination. The case, under the Antidumping Act, has been referred to the U.S. International Trade Commission which must determine within three months whether a U.S. industry is being, or is likely to be, injured by the imports. Dumping occurs only when both sales at less than fair value and injury have been determined. If the Commission finds injury, a "Finding of Dumping" will be issued and dumping duties will be assessed on an entry-by-entry basis. Imports of this merchandise from Austria during calendar year 1976 were valued at roughly $4.5 millionNotice of this action will be published in the Federal Register of August 16, 1977. * * * B-391 department of theTREASURY ASHINGTON,D.C. 20220 TELEPHONE 566-2041 August 15, 1977 FOR IMMEDIATE RELEASE RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS Tenders for $2,301 million of 13-week Treasury bills and for $3,402 million of 26-week Treasury bills, both series to be issued on August 18, 1977, were accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: 13-week bills maturing November 17, 1977 Price High Low Average Discount Rate 98.593 98.561 98.567 5.566% 5.693% 5.669% 26-week bills maturing February 16, 1978 Investment Rate 1/ Discount Investment Price Rate Rate 1/ 5. 5. 5. 97.000 a/5.934% 96.973 5.987% 96.978 5.978% 6.20% 6.26% 6.25% a./ Excepting one tender of $865,000 Tenders at the low price for the 13-week bills were allotted Tenders at the low price for the 26-week bills were allotted 78%. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Received Accepted Received Accepted $ 7,130,000 2,966,710,000 33,280,000 14,550,000 21,330,000 17,465,000 122,890,000 12,945,000 8,450,000 20,755,000 8,895,000 167,360,000 $ 20,305,000 Boston 3,146,170,000 New York 23,460,000 Philadelphia 35,750,000 Cleveland 19,390,000 Richmond 22,800,000 Atlanta 262,525,000 Chicago 42,295,000 St. Louis 5,380,000 Minneapolis 67,485,000 Kansas City 17,230,000 Dallas 370,050,000 San Francisco $ 20,305,000 1,733,920,000 23,460,000 35,750,000 19,390,000 22,800,000 145,525,000 28,295,000 5,380,000 67,485,000 16,230,000 182,500,000 $ 27,130,000 4,458,710,000 33,280,000 26,050,000 30,550,000 17,465,000 406,890,000 28,945,000 15,450,000 20,755,000 9,895,000 582,460,000 245,000 245,000 95,000 Treasury TOTALS $4,033,085,000 $2,301,285,000 b/: $5,657,675,000 b/Includes $ 329,985,000 noncompetitive tenders from the public. £/Includes $ 140,025,000 noncompetitive tenders from the public. ^/Equivalent coupon-issue yield. B-392 95,000 $3,401,855,OOOc Contact: Robert Nipp 566-5328 August 15, 1977 FOR A.M. RELEASE, TUESDAY, AUGUfT 16 U.S. AND JAPAN AGREE ON NEW ARRANGEMENTS FOR ACQUISITION OF JAPANESE YEN The Governments of the United States and Japan today announced agreement on new arrangements for the acquisition of Japanese yen by the U.S. to meet official Government needs. The change is designed to bring yen acquisition procedures into conformity with the normal commercial procedures in use for U.S. Government purchases of other foreign currencies to meet official requirements. Currently, official U.S. Government requirements are met by direct purchases of yen from the Government of Japan. Under the new arrangements, the U.S. will acquire the currency through purchases in the foreign exchange market. Procedures for such market purchases of yen are being developed and are expected to go into effect in the near future. In 1976, the U.S. requirements for yen amounted to about $700 million, largely to meet the needs of the U.S. military forces. oOo B-393 FOR IMMEDIATE RELEASE Contact: Alvin M. Hattal 566-8381 August 16, 1977 TREASURY DEPARTMENT ANNOUNCES A MODIFICATION IN THE FOREIGN BANK ACCOUNT REPORTING REQUIREMENTS OF THE BANK SECRECY ACT Under Secretary Bette B. Anderson and Commissioner of Internal Revenue Jerome Kurtz today announced that persons having a financial interest in 25 or more foreign financial accounts who are required to file a Form 468 3 (Information Return on Foreign Bank, Securities and Other Financial Accounts) with their federal income tax returns in 1977 will be permitted to follow a modified filing procedure. A person who has a financial interest in 25 or more foreign financial accounts need only note that fact on Part II of the Form 468 3 that he files; he is not required to provide the information requested in Part II of the form. He is, however, still subject to the provisions in instruction K, which require him, when requested by the Internal Revenue Service, to provide such information concerning each account as may be necessary to determine his federal income tax liability. Form 4683 was revised in November, 1976, to reflect changes made by the Tax Reform Act of 19 76 and other legislation. The Act altered only the reporting requirements for transfers of money or property to a foreign trust after May 21, 1974. The new Form 4683 reflects this revision. In addition, however, Form 468 3 was changed by eliminating the provision that if the taxpayer had a "financial interest" in 25 or more foreign accounts, detailed information concerning those accounts was not to be attached but should be available for audit. The revised form requires that the detailed information be filed with the tax return if the taxpayer had a "financial interest" in one or more foreign accounts, and the total maximum value of those accounts exceeded $10,000 in the taxable year. (OVER) B-394 - 2 Although Form 4683 was revised in November, 1976, the first public announcement by Internal Revenue Service was in March, 1977 (Announcement 77-34, IRB 1977-11, 36, March 14, 1977). This was too late to provide for orderly data gathering by many taxpayers for returns filed in 1977. A large corporation which does business in several foreign countries may have a large number of foreign financial accounts to report. Requiring detailed information on all such accounts to be filed with the return would entail a considerable burden on those taxpayers. Therefore, the above procedure may be used for returns filed in 1977. It is expected that Form 46 83 will be revised before it is time to file returns due in 197 8. oOo FOR RELEASE AT 4:00 P.M. August 16, 1977 TREASURY'S WEEKLY BILL OFFERING The Department of the Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $5,700 million, to be issued August 25, 1977, as follows: 92-day bills (to maturity date) for approximately $2,300 million, representing an additional amount of bills dated May 26, 1977, and to mature November 25, 1977 (CUSIP No. 912793 L4 6 ) , originally issued in the amount of $3,201 million, the additional and original bills to be freely interchangeable. 182-day .bills for approximately $3,400 million to oe dated August 25, 1977, and to mature February 23, 1978 (CUSIP No. 912793 N8 5 ) . The 182-day bills, with a limited exception, will be available in book-entry form only. Both series of bills will be issued for cash and in exchange for Treasury bills maturing August 25, 1977, outstanding in the amount of $5,704 million, of which Government accounts and Federal Reserve Banks, for themselves and as agents of foreign and international monetary authorities, presently hold $2,654 million. These accounts may exchange bills they hold for the bills now being offered at the weighted average prices of accepted competitive tenders. The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest. 92-day bills will be issued in bearer form in denominations of $10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), as well as in book-entry form to designated bidders. Bills in book-entry form will be issued in a minimum amount of $10,000 and in any higher $5,000 multiple. Except for 132-day bills in the $100,000 denomination, which will be available in definitive form only to investors who are able to show that they are required by law or regulation to hold securities in pnysical form, the 182-day bills will oe issued entirely in book-entry form on the records either of the Federal Reserve Banks B-395 and Branches, or of the Department of the Treasury. -2Tendors will be it'ircivod at Federal Heser ve ll<mkH and Blanches and at the I U I M M U ot the Public Debt, Washington, 1). C. 20226, up to 1 z 30 p.m., Kant e m Daylight Having time, Monday, Aim us I -•-•, I (>7 7. Foi in 1M) 4612-2 should be u.ied to submit tenders loi bills to be maintained on the book-entry records ol the Department ol the Treasury. F.ach tender nui:;t be lot a minimum ol $10,000. Tenders over $10,000 must be in multiples ot $fj,U00. In the case of competitive tender..; the pi ice offered must be expressed on the basis ot 100, with not more than three dec hua I s, e.g., S^.S-V). Fi act ions may not be used. Hank i nt) inst itut ions ^i\(\ dealers who make pi imary markets in Government secur it ies and report daily to the Feaeial Kesei ve Hank ot New York their positions in and borrowings on such socur it ies may submit tenders for account ot customers, it t he names ot t tit* customers and the amount tor each customer are furnished. Others are only permitted to submit tenders tor their own account. Payment tor the full par amount of the 182-day bills applied tor must accompany all tenders submitted for such biJ1s to be maintained on the book-entry records of the Department ot the Treasury. A cash adjustment will be made on all accepted tenders tor the difference between the par payment submitted and the actual issue pi ice as determined in t he auct ion. No deposit need accompany tenders from incorporated hanks and trust companies and from responsible and recognized dealers in investment securities lor the 92-day Dills and 182-day bills to be maintained on the book-entry records of Federal Reserve Banks ana Branches, or for 182-oay bills issued in bearer form, where authorized. A deposit of 2 percent ot the par amount of the bills applied toi must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their tenders. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and the Secretary's action shall be final. Subject to these reservations, noncompetitive tenders for each issue for $500,000 or less without stated price from any one Didder will be accepted in full at the weighted average price (in three decimals) of accepted competitive bids for the respective issues. -3Settlement for accepted tenders for the 92-day and 182-day bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and 182-day billB issued In bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Buieau of the Public Debt on August 25, 1977, in cash or other immediately available funds or in Treasury bills maturing August 25, 1977. Cash adjustments will be made for differences between the par value of the maturing bills accepted in exchange and the issue price ot the new bills. Unuer Sections 454(b) ana 1221(5) of the Internal Revenue Coile ot 1954 the amount of discount at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year tor which the return is made. Department of the Treasury Circulars, No. 41b (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. wtmentoftheJREASURY KINGTON, D.C. 20220 TELEPHONE 566-2041 FOR IMMEDIATE RELEASE August 16, 1977 TREASURY DEPARTMENT ANNOUNCES TWO ACTIONS UNDER THE ANTIDUMPING ACT The Treasury Department announced today that it will issue a "Notice of Modification or Revocation of Dumping Finding" with respect to potassium chloride, otherwise known as muriate of potash, from two Canadian firms. The Treasury will also issue a "Tentative Determination to Modify or Revoke Dumping Finding" with respect to roller chains, other than bicycle, from two Japanese firms. Notice of both actions will appear in the Federal Register of August 17, 1977. In the case of potassium chloride from Canada, a "Finding of Dumping" was published in the Federal Register of December 19, 1969, and subsequent modifications excluding 10 Canadian potash firms have been issued. A "Notice of Tentative Determination to Modify or Revoke Dumping Finding" with respect to two Canadian firms, Amax Potash, Ltd. and Duval Corporation of Canada, was published in the Federal Register of February 11, 1977, after it had been determined that the two companies had met the statutory requirements for such action. The decision to issue a final modification or revocation was made after an allowance for oral and written presentations. Before a tentative modification or revocation of dumping finding can be issued, Treasury requires that the finding have been in effect for at least two years, that there be established a two-year period of no sales at less than fair value subsequent to the finding, and that price assurances be submitted. After an allowance for oral and written presentations, Treasury then considers whether to issue a final modification or revocation. During calendar year 1976, imports of potash produced by Duval and Amax were valued at $19.2 million and $17.1 million, respectively. B-396 -2In the case of roller chains, other than bicycle, from Japan, a finding of dumping was publsihed in the Federal Register of April 12, 1973. The Treasury Department has now determined that the above criteria for issuance of a "Tentative Determination to Modify or Revoke Dumping Finding" with respect to that chain produced and sold by Honda Motor Company, Ltd., and Enuma Chain Manufacturing Company, Ltd., have been met and the tentative determination will be published and an allowance for oral or written views will be made. Imports of roller chain, other than bicycle, from Japan were valued at approximately $17 million during calendar year 1976. * * * * FOR IMMEDIATE RELEASE August 17, 1977 TREASURY DEPARTMENT ANNOUNCES TENTATIVE DETERMINATION TO MODIFY OR REVOKE DUMPING FINDING WITH RESPECT TO CLEAR SHEET GLASS, WEIGHING OVER 28 OUNCES PER SQUARE FOOT, FROM FRANCE The Treasury Department announced today that it will issue a "Tentative Determination to Modify or Revoke Dumping Finding" with respect to clear sheet glass, weighing over 28 ounces per square foot, from France, produced by Saint-Gobain Industries. Notice of this action will appear in the Federal Register of August 18, 1977. The "Finding of Dumping" in this case was published in the Federal Register of December 9, 1971. Information presently available indicates that Saint-Gobain has not exported the subject glass to the United States since 1972, and the company has given assurances that it does not intend to resume shipments of such glass in the future. Before a tentative modification or revocation of a dumping finding can be issued, Treasury generally requires that the finding have been in effect for at least two years, that there be established a two-year period of no sales at less than fair value subsequent to the finding, and that price assurances be submitted. This criteria having been met, interested persons are invited to comment on this action and, after an allowance for oral and written presentations, Treasury will consider whether to issue a final modification or revocation. There have been no imports of clear sheet glass of any dimension from France since 1972. * * * B-397 FOR IMMEDIATE RELEASE August 17, 1977 RESULTS OF TREASURY'S 52-WEEK BILL AUCTION Tenders for $2,954 million of 52-week Treasury bills to be dated August 23, 1977, and to mature August 22, 1978, were accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $75,000) Investment Rate Price Discount Rate High - 93.834 6.098% 6.48% Low 93.822 Average 93.827 (Equivalent Coupon-Issue Yield) 6.110% 6.105% 6.50% 6.49% Tenders at the low price were allotted 73%. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Received Accepted $ 33,630,000 4,590,200,000 321,350,000 133,875,000 24,195,000 57,925,000 460,740,000 30,425,000 16,640,000 8,820,000 7,215,000 408,920,000 $ 8,280,000 2,592,385,000 1,350,000 45,335,000 14,195,000 2,925,000 105,980,000 7,225,000 1,640,000 8,820,000 2,215,000 163,415,000 Treasury 20,000 20,000 TOTAL $6,093,955,000 $2,953,785,000 The $2,954 million of accepted tenders includes $ 70 million of noncompetitive tenders from the public and $716 million of tenders from Federal Reserve Banks for themselves and as agents of foreign and international monetary authorities accepted at the average price. An additional $ 50 million of the bills will be issued to Federal Reserve Banks as agents of foreign and international monetary authorities for new cash. . B-398 FOR IMMEDIATE RELEASE August 19, 1977 TREASURY DEPARTMENT ANNOUNCES INITIATION OF ANTIDUMPING INVESTIGATION ON SORBATES FROM JAPAN The Treasury Department announced today that it would begin an antidumping investigation of sorbates from Japan. Notice of this action will appear in the Federal Register of August 23, 1977. The Treasury Department's announcement followed a summary investigation conducted by the U.S. Customs Service after receipt of a petition alleging that sorbates from Japan were being dumped in the United States. The information received indicates that the prices of sorbates from Japan, exported to the United States, are less than the prices of sorbates sold in the home market. The petition includes information indicating that establishment of a U.S. industry is being prevented by reason of the alleged "less than fair value" imports. If sales at less than fair value are determined by Treasury, the injury question would be subsequently decided by the U.S. International Trade Commission. Sorbic acid and potassium sorbate, referred to as "sorbates," are widely used antimicrobial food preservatives. Imports of this merchandise from Japan during calendar year 1976 were valued at approximately $11 million. * * * B-399 Contact: Jack Plum 566-2615 FOR IMMEDIATE RELEASE August 19, 1977 USE OF ENGRAVED CERTIFICATES TO BE DISCONTINUED FOR 13-WEEK TREASURY BILLS The third and final phase of the program to eliminate the use of engraved certificates for new offerings of Treasury bills will begin with the September 1 issue of 13-week bills. That issue, and all subsequent 13-week issues, will be in book-entry form only. The Treasury will announce the terms of the September 1 issue on Tuesday, August 23, and auction the bills on Monday, August 29. Under the book-entry system, the securities are recorded in the accounts of the Treasury or a Federal Reserve Bank, or in the accounts of banks or other financial institutions acting as custodians for investors. Instead of an engraved certificate, the purchaser is given a receipt as evidence of the purchase. The program to issue Treasury bills only in book-entry form began with the 52-week bill issue of December 14, 197 6. In the second phase of the program, the system was extended to 26-week bills, beginning with the June 2, 1977, issue. The conversion of 13-week bills will complete the transition of all regular Treasury bill issues to the total book-entry system. A limited exception to the offering of Treasury bills only in book-entry form will be continued for those institutional investors required by law or regulation to hold securities in definitive form. Definitive bills in the $100,000 denomination will be available to such investors for all issues through December 1978. It is anticipated that the program will be extended to selected new offerings of other Treasury marketable securities during the latter part of 1978. oOo B-400 FOR RELEASE AT 4:00 P.M. August 19, 1977 TREASURY TO AUCTION $2,500 MILLION OF 4-YEAR 1-MONTH NOTES The Department of the Treasury will auction $2,500 million of 4-year 1-month notes to raise new cash. Additional amounts of the notes may be issued to Federal Reserve Banks as agents of foreign and international monetary authorities at the average price of accepted tenders. Details about the new security are given in the attached highlights of the offering and in the official offering circular. oOo Attachment B-401 HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF 4-YEAR 1-MONTH NOTES TO BE ISSUED SEPTEMBER 7, 1977 Amount Offered: To the public Description of Security: Term and type of security Series and CUSIP designation Maturity date September 30, 1981 Call date Interest coupon rate August 19, 1977 $2,500 million 4-year 1-month notes Series K-19bl (CUSIP No. 912827 GZ 9) No provision To be determined oased on tne average ot accepted bids Investment yield To be determined at auction Premium or discount To be determined after auction Interest payment dates March 31 and September 30 (first payment on March 31, i97tf] Minimum denomination <t\/<i i. 1 .-i'o"J e ^>1,0 00 Terms of Sale: Method of sale Yieid auction Accrued interest payable by investor None Preferred allotment Noncompetitive bid for $1,U00,000 or less Deposit requirement 5% of face amount Deposit guarantee by desijnaU-jd j ii.--.i-. i. N a t i o n s Acceptable Key Dates: Deadline tor receipt of tenders Tuesday, August 30, 1977, by 1:30 p.m., EDST Settlement date (final payment due) a) cash or federal funds Wednesday, September 7, 1977 b) check drawn on bank within FRB district where submitted Friday, September 2, 1977 c) check drawn on bank outside FRft district where submitted.. Thursday, September 1, 19 77 Delivery date for coupon securities. Tuesday, September 13, 1977 CONTACT: George G. Ross 202-566-2356 FOR IMMEDIATE RELEASE August 19, 1977 Treasury Revises Effective Dates of Certain New Boycott Guidelines The Treasury Department today announced a delay in the effective dates of answers H-8 and H-29 of the new boycott guidelines released on August 12, 1977 (Treasury News Release B-390). These answers relate to letters of credit. The effective dates for the remainder of the new guidelines were left unchanged. The guidelines relate to the provisions of the Tax Reform Act of 1976 which deny certain tax benefits for participation in or cooperation with international boycotts. The new guidelines superseded earlier sets of guidelines issued by the Treasury on November 4, 1976, and December 30, 1976. Answers H-8 and H-29 of the new guidelines will be effective only for operations, requests, and agreements after September 21, 1977. In addition, in the case of operations carried out in accordance with the terms of a binding contract entered into before September 22, 1977, answers H-8 and H-29 will not be effective until after June 30, 1978. This announcement will appear in the Federal Register at a future date. B-402 oOo partmentoflheTREASURY SHINGTON, OX. 2Q220 TELEPHONE 566-2041 FOR IMMEDIATE RELEASE August 22, 1977 RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS Tenders for $2,300 million of 13-week Treasury bills and for $3,403 million of 26-week Treasury bills, both series to be issued on August 25, 1977, /ere accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: High Low Average 13-week bills maturing November 25, 1977 Price Discount Rate 98.604 98.571 98.581 5.463% 5.592% 5.553% Investment Rate 1/ 5. 5.75% 5.71% 26-week bills maturing February 23, 1978 Price Discount Rate Investment Rate 1/ 97.033a/ 5.869% 6.13% 97.015 5.904% 6.17% 97.022 5.891% 6.16% a/ Excepting 2 tenders totaling $600,000 Tenders at the low price for the 13-week bills were allotted Tenders at the low price for the 26-week bills were allotted TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: -.ocation Received Boston $ 26,290,000 tew York 3,210,275,000 18,790,000 Philadelphia 26,970,000 Cleveland 24,210,000 Richmond 21,830,000 Vtl^nta 374,575,000 Chicago 36,790,000 St. Louis 10,960,000 linneapolis 21,205,000 Cansas City 17,485,000 )allas 239,615,000 >an Francisco 110,000 treasury TOTALS $4,029,105,000 Accepted $ 26,290,000 1,788,675,000 18,790,000 26,970,000 24,210,000 21,830,000 179,575,000 34,310,000 10,960,000 21,205,000 17,485,000 129,615,000 110,000 Received Accepted $ 45,335,000 4,656,065,000 39,845,000 99,135,000 22,755,000 70,435,000 818,970,000 31,980,000 8,900,000 32,150,000 10,540,000 526,535,000 30,000 $ 30,335,000 2,565,065,000 29,845,000 94,065,000 11,755,000 70,435,000 272,970,000 15,260,000 8,900,000 32,150,000 10,540,000 261,535,000, 30,000 $2,300,025,000 b/ $6,362,675,000 .ncludes $ 306,480,000 noncompetitive tenders from the public. .ncludes $158,475,000 noncompetitive tenders from the public. Equivalent coupon-issue yield. 03 $3,402,885,000c/ FOR RELEASE AT 4:00 P.M. August 23, 1977 TREASURY'S WEEKLY BILL OFFERING The Department of the Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $5,600 million, to be issued September 1, 1977. This offering will not provide new cash for the Treasury as the maturing bills are outstanding in the amount of $5,606 million. The two series offered are as follows: $F 91-day bills (to maturity date) for approximately $2,300 million, representing an additional amount of bills dated June 2, 1977, and to mature December 1, 1977 (CUSIP No. 912793 L5- 3), originally issued in the amount of $3,102 million, the additional and original bills to be freely interchangeable. *#•• 182-day bills for approximately $3,300 million to be dated September 1, 1977, and to mature March 2, 1978 (CUSIP No. 912793 N9 3). t Both series of bills will be issued for cash and in exchange for Treasury bills maturing September 1, 1977. Federal Reserve Banks, for themselves and as agents of foreign and international monetary authorities, presently hold $2,615 million of the maturing bills. These accounts may exchange bills they hold for the bills now being offered at the weighted average prices of accepted competitive tenders. The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest. Except for definitive bills in the $100,000 denomination, which will be available only to investors who are able to show that they are required by law or regulation to hold securities in physical form, both series of bills will be issued entirely in book-entry form in a minimum amount of $10,000 and in any higher $5,000 multiple, on the records either of the Federal Reserve Banks and Branches, or of the Department of the Treasury. B-404 -2Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time, Monday, August 29, 1977. Form PD 4632-2 (for 26-week series) or form PD 4632-3 (for 13-week series) should be used to submit tenders for bills to be maintained on the book-entry records of the Department of the Treasury. Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,000. In the case of competitive tenders the price offered must be expressed on the basis of 100, with not more than three decimals, e.g., 99.925. Fractions may not be used. Banking institutions and dealers who make primary -^ markets in Government securities and report daily to the Federal Reserve Bank of New York their positions in and it borrowings on such securities may submit tenders for account of customers, if the names of the customers and the amount for each customer are furnished. Others are only permitted to submit tenders for their own account. Payment for the full par amount of the bills applied for must accompany all tenders submitted for bills to be maintained on the book-entry records of the Department of the Treasury. A cash adjustment will be made on all accepted tenders for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities for bills to oe maintained on the book-entry records of Federal Reserve Banks and Branches, or for bills issued in bearer form, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their tenders. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and the Secretary's action shall be final. Subject to these reservations, noncompetitive tenders for each issue for $500,000 or less without stated price from any one bidder will be accepted in full at the weighted average price (in three decimals) of accepted competitive bids for the respective issues. -3Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and bills issued in bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt on September 1, 1977, in cash or other immediately available funds or in Treasury bills maturing September 1, 1977. Cash adjustments will be made for differences between the par value of the maturing bills accepted in exchange and the issue price of the new bills. Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of the bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actual received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, No. 418 (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. oOo FOR IMMEDIATE RELEASE August 23, 1977 RESULTS OF AUCTION OF 2-YEAR NOTES The Department of the Treasury has accepted $2,913 million of $6,966 million of tenders received from the public for the 2-year notes, Series T-1979, auctioned today. The range of accepted competitive bids was as follows: Lowest yield 6.65% 1/ Highest yield Average yield 6.68% 6.68% The interest rate on the notes will be 6-5/8%- At the 6-5/8% rate, the above yields result in the following prices: Low-yield price 99.954 High-yield price 99.899 Average-yield price 99.899 The $2,913 million of accepted tenders includes $379 million of noncompetitive tenders and $2,419 million of competitive tenders (including 84% of the amount of notes bid for at the high yield) from private investors. It also includes $115 million of tenders at the average price from Federal Reserve Banks as agents for foreign and international monetary authorities in exchange for maturing securities. In addition, $559 million of tenders were accepted at the average price from Government accounts and Federal Reserve Banks for their own account in exchange for securities maturing August 31, 1977, ($123 million) and from Federal Reserve Banks as agents for foreign and international monetary authorities for new cash ($436 million). 1/ Excepting 4 tenders totaling $25,000 B-405 Contact: Alvin M. Hattal 566-8381 FOR IMMEDIATE RELEASE August 25, 1977 TREASURY DEPARTMENT REMOVES TWO CANADIAN FIRMS FROM "FINDING OF DUMPING" POTASH IN THE UNITED STATES The Treasury Department announced today that two Canadian firms were removed from a dumping finding against potash from Canada. Accordingly, a "Notice of Modification or Revocation of Dumping Finding" appeared in the August 17, 1977, Federal Register. As a result of the revocation, the companies, Amax Potash, Ltd. and Duval Corporation, are no longer subject to the assessment of dumping duties. A "Finding of Dumping" of potassium chloride, otherwise known as muriate of potash, was published in the Federal Register of December 19, 1969. Since then, the United States has also revoked its finding against 10 other Canadian firms that had been subject to the finding of dumping. One major firm remains subject to the finding. The Treasury Department said it has now determined that the two named companies are not dumping their products in the United States market. Technically, that means they have not done so for at least two years and have submitted assurances that they will not do so in the future. During calendar year 1976, imports of potash produced by Duval and Amax were valued at $19.2-million and $17.1million, respectively. oOo B-406 Contact: Alvin M. Hattal 566-8381 FOR IMMEDIATE RELEASE August 25, 1977 TREASURY DEPARTMENT ISSUES SHOW-CAUSE NOTICE IN EQUAL-EMPLOYMENT INVESTIGATION The Treasury Department notified the Harris Trust and Savings Bank of Chicago yesterday to show cause why a complaint should not be issued charging discrimination against female employees of the bank. The notice cited the bank's repeated failure to provide an adequate response to the Treasury Department's findings in an investigation to determine whether the bank has discriminated against a class of employees and whether it has adopted an adequate Affirmative Action Plan as required under Executive Order 11246. The show-cause notice could lead to the first enforcement action by the Treasury Department against a bank in a case involving alleged discrimination against a class of employees. The bank has 30 days in which to respond. William J. Beckham, Jr., Assistant Secretary of the Treasury for Administration, said, "This step reflects the determination of the Treasury Department to take vigorous action to ensure equal opportunity and the elimination of discrimination in the nation's banks." Banks that serve as federal depositories for public funds or act as issuing and paying agents of U.S. Savings Bonds and Notes are subject to Executive Order 11246 as federal contractors. The Executive Order bars employment discrimination by federal contractors and requires them to develop Affirmative Action Plans to ensure equal employment opportunity. Failure to comply with the Order can result in the loss of all federal or federally assisted contracts. (over) B-407 - 2 - The Treasury Department's investigation resulted from a routine review of the bank's compliance with the Executive Order. In its show-cause notice, the Treasury Department stated its readiness to advise and assist the bank in "resolving deficiencies and developing an acceptable program." oOo '_= & o" <* scleral hnanang .E sD </> C\J 2> o a. ™ WASHINGTON, D.C. 20220 FOR IMMEDIATE RELEASE August 25, 1977 SUMMARY OF FEDERAL FINANCING BANK HOLDINGS July 1-July 31, 1977 Federal Financing Bank activity for the month of July, 1977 was announced as follows by Roland H. Cook, Secretary: On July 1, the National Rail Passenger Service (Amtrak) repurchased the following principal amounts: Note # 11 13 Face Amount Repurchase Price Effective Rate $54,417,699.00 58,000,000.00 $54,432,644.48 57,992,360.33 5.114% 5.114% Amtrak also made the following drawdowns guaranteed by the Department of Transportation: Interest Date Note # Amount Maturity Rate 7/18 $10,000,000.00 11 9/12/77 5.444% 7/21 7,000,000.00 11 9/12/77 5.488% 7/26 6,000,000.00 11 9/12/77 5.415% On July 5, the FFB advanced $144,423 to the Chicago, Rock Island and Pacific Railroad at a rate of 7.515%. The note matures on June 21, 1991 and is guaranteed by the Depart ment of Transportation. The Bank purchased the following notes from the Student Loan Marketing Association (SLMA): Interest Date Amount Maturity Rate 5.305% 7/5 10/04/77 $25,000,000.00 7/12 20,000,000.00 10/11/77 5.428% 7/19 15,000,000.00 10/18/77 5.482% 7/26 10/25/77 5.429% 15,000,000.00 B-408 2 - The FFB purchased the following notes from utility companies guaranteed by the Rural Electrification Administration: Amount Maturity Interest Rate $ 6,870 000 12/31/11 7.66» 000 12/31/11 7.6755 7/8 Continental Telephone Corp. 1,105 118 12/31/11 7.700! 7/11 Murraysville Telephone Co. 1,025 000 12/31/11 7.719! 7/18 Cooperative Power Assn. 15,000 000 12/31/11 7.7165 7/19 Big River Elect. Corp. 3,193 000 12/31/11 Date Borrower 7/1 Oglethorpe Elect. Membership 7/5 United Power Assn. . 10,600 7/20 South Mississippi Elect. Power 28 000 7/25 East Kentucky Power Corp. 7,422 000 7/23/79 12/31/11 6.433! .ay 7.717' Si 7/25 Tri-State Generation $ Transmission Assn. 4,070 000 12/31/11 9". 717! 000 12/31/11 7-f:708! 7/29/79 6.5715 12/31/11 7.7695 7/26 Arizona Elect. Power Coop. 9,362 7/29 Southern Illinios Power Coop. 3,100 000 7/29 Arkansas Elect. Coop. Corp. 1,958 000 Interest payments on the above notes are made on a quarterly basis. The Bank purchased the following notes from the Secretary of the Treasury pursuant to the New York City Seasonal Financing Act of 1975 FFB Purchase Face Face Purchase Date Note # Price Amount Rate Maturity Rate (millions) $301,987,543.55 5.775^ $300 4/20/78 17 6.65% 7/5 5.925< 100,639,856.68 100 4/20/78 18 6.80% 7/18 5.975! 151,057,632.06 150 5/20/78 19 6.85% 7/18 6.055! 201,217,045.46 200 4/20/78 20 6.93% 7/29 - 3 The Federal- Financing Bank made advances to the following foreign governments under loans guaranteed by the Department of Defense: Interest Amount Borrower Maturity Date Rate Argentina 7/6 ;7/22 $ 18,135.00 370,000.00 4/30/83 6/30/83 6.709% 6.885% Bolivia 7/18 2,137,500.00 6/30/83 6.821% China 7/28 1,941,809.71 12/31/82 6.870% Columbia 7/12 2,070,420.00 6/30/83 Ecuador Israel 7/6 7/15 7/21 7/26 ' 7/15 229,401.50 17,880.00 7,689.75 36,950.00 52,992,863.41 6/30/83 6/30/83 6/30/83 ; 6/30/83 5/12/07 6.727% 6.751% 6.858% 6.841% 7.726% Korea 7/28 2,077,038.07 6/30/84 7.023% Malaysia » 7/20 128,180.80 12/31/52 6.783,% Thailand 7/22 108,160.47 6/30/83 6.808% ' 6.886% . On July 5, the Bank purchased a $200 million 15-year Certificate of Beneficial Ownership from the Farmers Home Administration. The maturity is July 5, 1992 and the interest rate is 7.70% on an annual basis. On July 25, the Bank also purchased-Certificates as follows: Interest ~" Amount Maturity Rate $125,000,000 7/25/82 - 7.18% 150,000,000 7/25/87 7.64% 175*000,000 7/25/92 7.76% 100,000,000 7/25/97 7.92% Interest payments on the above Certificates are made on an annual basis. On July 6,- the Bank advanced $1,551,835 to the Missouri, Kansas, Texas Railroad (KATY) at an interest rate of 7*565%. The note, under which the advance was made, was signed on June 15, 1977 in the amount of $12 million with a final maturity of November 15, 1997. All KATY borrowings from the Bank are guaranteed by.the Department of Transportation. - 4 The FFB purchased participation certificates from the General Services Administration in the following amounts: v .* < Date Series 7/7 7/12 7/18 M L L Amount $5,362,032.52 1,438,809.84 1,855,666.77 Maturity Interest Rate 7/31/03 11/15/04 11/15/04 7.7501 7.7601 7.7501 The U.S. Railway Association (USRA) made the following borrowings against Note #8 guaranteed by the Department of Transportation: Interest Date Amount Maturity Rate * 7/11 $ 347,700 4/30/79 6.29£)% .7/15 1,391,200 4/30/79 6.3''"' "7/26 8,435,000 4/30/79 6.38|t 7/29 12,191,750 4/30/79 6.5 ~ On July 12, the Department of Health, Education an| Welfare (HEW) made the third drawdown of $3,645,553.13 <|n a block of Health Maintenance Organization notes sold to ffjf FFB on April 29, 1977. The notes mature July 1, 1996 a$$ were sold to the FFB at a price to yield 7.53%. The notgs are guaranteed by HEW. On July 20, the Bank purchased $12.9 million of del^ntures from Small Business Investment Companies. The amqynts are guaranteed by the Small Business Administration. •e Interest Amount $ 550,000 7/01/84 7.295% 12,350,000 Maturity 7/01/87 Rate 7.515% On July 20, the FFB advanced $6,550,000 to the Western Union Space Communications at a rate of 7.502% on an annual basis. The Note, under which the advance was made, matures on October 1, 1989 and is guaranteed by the National Aeronautics and Space Administration. On July 29, the Tennessee Valley Authority issued a short-term note in the amount of $80 million to the Bank. The note matures on October 31, 1977 and bears interest at a rate of 5.612%. Federal Financing Bank holdings on July 31, 1977 totalled $32.4 billion. # 0 # STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON UNDER SECRETARY FOR MONETARY AFFAIRS U.S. DEPARTMENT OF THE TREASURY COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS UNITED STATES SENATE AUGUST 29, 1977 The Subcommittee is performing a valuable service by providing this opportunity for public discussion of the rapid growth of international debt in recent yearsf and the questions this may raise for world monetary stability. The structure of international debt in large measure reflects the structure of the international balance of payments. Thus, a description of the pattern of world payments sets the proper framework for considering the questions which the Subcommittee is addressing• The five-fold increase in oil prices in 1973-74 not only transformed profoundly the pattern of world payments, it also altered traditional attitudes toward payments deficits and surpluses. With OPEC countries suddenly accumulating export revenues far beyond their capacity to spend, it became obvious that the oil importing countries had to accrue large and unprecedented deficits as the counterpart. The industrial nations as a group had to accustom themselves to running payments deficits and borrowing capital, in contrast to their usual role of running surpluses and lending capital, while the developing nations had to adapt themselves to much larger deficits and much larger borrowing than they had previously experiencedIn the initial phases of these wrenching changes in the world payments pattern, there were deep-rooted fears that the oil importing nations, trying individually to balance their own payments positions, would all harm each other by external restrictions and excessive domestic retrenchment, as they tried to eliminate deficits which as the counterpart of the OPEC surplus were collectively irreducible. Recognizing these dangers, the IMF membership agreed in January 1974 in the Rome Communique to forswear such self-defeating actions. B-409 -2Accordingly, in the early aftermath of the oil price increases, emphasis was placed — and appropriately placed — on assuring the adequacy of resources for financing the balance of payments costs of higher oil prices. Nations were encouraged, at least temporarily, to ''accept" the oil deficit and finance it, rather than to try individually to eliminate their deficits at the expense of other oil importing countries. To facilitate the financing, the IMF established a temporary "Oil Facility," which channeled nearly $8 billion to member nations, allocated largely in relation to the increase in oil import costs, and with much less than the usual emphasis on the IMF's traditional requirement that its financing be linked to carefully negotiated adjustment programs on the part of the borrowers. In the circumstances, nations therefore borrowed very heavily in the years 1974-76 to finance large payments deficits deficits swollen not only by high oil costs but also by severe world inflation and recession, by inappropriate domestic policies in some cases, and by a variety of other factors. The borrowing took many forms. While official financing through the IMF during this period was far above historical levels, private markets provided about three-quarters of total financing during the three year period. Conditions on the supply side of the market were also conducive to a rapid growth in private financing during that period. Huge OPEC surpluses, of course, brought large deposits and placements to the banks and other financial intermediaries, and greatly expanded the liquiditv of those institutions. In addition, the period was one of rapid secular expansion of the international banking system. Many institutions were competing eagerly for new customers, as they sought to establish themselves in new activities and new geographic areas, and endeavored to broaden their scope of operations so as to spread risks and diversify portfolios at a time when domestic loan demand was less buoyant than in immediately preceding years. Using such data as are available — unreliable, inexact and incomplete — we can sketch out a pattern of world payments in the period 1974 through 1976 with roughly the following dimensions: — The cumulative current account deficits financed equaled about $225 billion or so (after the receipt of grant aid), representing the counterpart of the lendable surpluses of OPEC plus those of certain industrial countries registering surpluses during the period. -3— About $15 billion of these deficits, or 7% of the total, was financed through the IMF, the bulk of it through the temporary "Oil Facility11 and the "Compensatory Finance Facility," both of which provide financing largely on the basis of "need" with relatively little emphasis on "conditionality" or the adoption of corrective adjustment measures by the borrower. — About $40 billion of the deficits, or 18% of the total, was financed through a variety of other official sources — development lending by industrial countries and OPEC, by the IBRD and regional development banks, and other sources. — The remaining current account deficits, some $170 billion, plus about $40 billion of debt repayments, were financed largely through market-oriented borrowing. Most of these funds were obtained through banks and securities markets. Some came from governments seeking investment outlets for their surpluses or as export financing. As these numbers suggest, the accumulations of debt, especially debt owed to private lenders, have been large, by historical standards extremely large. While the above estimates extend only through 1976, the pattern has probably continued this year. It is the purpose of these hearings to examine whether this rapid and unprecedented enlargement of lending activity and debt has reached a danger point for the monetary system — either in the sense that large numbers of countries have borrowed beyond their capacity to service debt, or in the sense that our banks and other institutions are overextended. My own assessment is that the system is not in any such position of danger, either as a result of excessive borrowing by large numbers of debtor nations — though some have doubtlessly approached or reached the limits of financial prudence — or as a result of our financial institutions being over-stretched In formulating its judgments on the "burden" of these debts on borrowers, the Subcommittee should be aware of certain reasons why the burden may not be as severe as the numbers suggest. Let me mention several such reasons: — First, economic growth and expanding trade tend to increase a nation's capacity to service debt. Some -4continuing increase in debt can thus be accommodated without added burden. Some of the debt increase is simply the increase in trade financing that accompanies the increase in the value of imports. For instance, the debt service ratio for developing countries as a group was no higher at the end of 1976 than it was in 1973. — Second, inflation has substantially reduced the burden of previously incurred debt measured in real terms. Furthermore, in real terms interest rates which countries are paying on funds they borrow are substantially less than the nominal rates. — Third, the borrowing is not being undertaken on balance by the poorer less developed group of nations. IMF studies show that as a group non-oil developing nations are borrowing little or no more at present — adjusted for inflation and real growth — than they borrowed in the years before the oil price increases of 1973-1974. The main structural change in world payments since that time is that the industrial nations, as a group, now borrow large sums from OPEC — sums which finance both the current account deficits of the industrial countries and their exports of capital to the developing nations. The developing countries now obtain some capital directly from OPEC while continuing to obtain the bulk of their credit from industrial nations. — Fourth, statistics often exaggerate debt servicing needs, by listing as "short-term" loans for which there are commitments or understandings to extend or roll-over. Also, the most commonly used aggregated data on foreign loans by banks involve a substantial amount of double counting because they include loans to other banks in major industrial countries. An accurate appraisal requires the elimination of most inter-bank loans. — Fifth, many of the countries which have increased their debt have also increased their official reserves. On the question of whether the banks are getting overextended, you will receive testimony from commercial bankers and from the Federal Reserve through Governor Wallich. I will offer only a few comments which might be relevant: — Historical data on loan losses incurred through international lending by U.S. banks do not support the view that such loans jeopardize bank stability. Various studies indicate that the loan losses from foreign loans have been considerably less than for domestic loans in recent years. -5— The statistics on the volume of bank credit overstate the extent of bank exposure since some of these credits are guaranteed either by a government agency or by a multinational corporation whose head office in in the lending country, — Statistics on the maturity structure of international loans by banks also provide some encouragement. A high percentage of loans to foreigners represents self-liquidating trade credits with a maturity of less than one year. — In his appearance April 5 before a House Committee the Acting Comptroller pointed out that the extensive examinations his agency performs on national banks engaged in international lending did not reflect cause for serious concern. He also said that the loan problems of major banks were concentrated in the real estate field and in various domestic industries. — I am encouraged that as our international banking system grows and evolves, both the institutions themselves and the government regulators are developing more sophisticated procedures, and gathering more detailed information, to increase understanding and to protect depositors, A number of banks are devoting more care and more resources to analysis of individual borrowing countries. Both the Comptroller of the Currency and the Federal Reserve have introduced major new measures to obtain more timely and more useful information. These moves will improve and strengthen the system. But it is not good enough, clearly not good enough, simply to assure that debtor nations as a group have not thus far overborrowed, or that our private credit institutions as a group are not at present overextended. Combining all borrowers in a group or all banks in a group can conceal major differences in individual cases. The poorer countries which have never had significant access to the private markets will, no doubt, continue to be dependent primarily on bilateral aid and loans from international development lending institutions. They will no doubt have to continue to limit their deficits basically to the amount of the new flow of funds which they can expect from these official sources. If the flow of aid increases steadily as now expected they should be able both to service their accumulated debt and run somewhat larger current account deficits. -6There are other countries — certainly not a large number but a signficicant number — that have reached or are approaching the limits of their ability to borrow• These are countries that are beset by economic distortion, that still face large payments deficits, where the need for corrective measures and adjustment is compelling. We must assure ourselves that such countries, and others which may in future face similar difficulties, are encouraged, and permitted, to adjust their economies in ways that are compatible with our liberal trade and payments objectives, in ways that avoid discrimination against others and disruption of the world economy. We must assure ourselves that our monetary system will foster such adjustment, and that it will be able to cope with new stresses that may arise in the future. While our international monetary system is at present strong and functioning effectively, we do not have in place all the machinery needed to insure against such future risks. It is for that reason that the Administration is proposing that the United States and other strong industrial nations join with major OPEC creditors to establish within the IMF a new facility — the Witteveen facility — to fill that critical need. We will shortly be proposing legislation to authorize United States participation in this facility, and I would like to describe its main features today. The rationale for the Witteveen facility — its formal name is the IMF Supplementary Financing Facility — rests on three main premises: — First, that large payments imbalances will continue for the next several years. Certainly our expectation is that the OPEC surplus will diminish only gradually, in line with the growth of OPEC spending and with the implementation of effective energy conservation programs in the United States and elsewhere. — Secondly, that there will be a need for greater emphasis on "adjustment" of imbalances, rather than simply "financing" imbalances, especially by those countries facing relatively large payments deficits. With the passage of time, the need for countries to adapt to higher energy costs and other economic developments has been increasingly recognized. At the Manila IMF adjustment should be symmetrical meeting last fall, it was recognized that -7- deficit countries should shift resources to the external sector and bring current account positions into line with sustainable capital inflows - countries in strong payments positions should maintain adequate demand consistent with antiinflationary policies - exchange rates should play their proper role in adjustment, — Third, that the resources of the IMF must be adequate both to enable it to foster responsible adjustment policies by members facing severe payments difficulties, and also to provide confidence that it can cope with any potential problems that may arise. There is concern that without additional funds the IMF's resources may not be adequate to meet demands which may be placed on it over the next several years. With the relatively large amount of use in the past three years, the IMF's usable resources are at present extremely low at about $5 billion. These usable resources will be increased by about $6 or $7 billion with the coming into effect of the sixth quota review approved in 1976 and now being ratified, and about $3 billion remains available under certain conditions through the General Arrangements to Borrow, Even with those additions, and the repayments which may be expected, the IMF*s resources look sparse in a world in which total imports are running at an annual level of nearly a trillion dollars, and in which OPEC surpluses are likely to decline only gradually from the current $40-45 billion level. In order to provide the added resources, at a meeting in Paris earlier this month, the United States agreed with six other industrial countries and seven OPEC countries on an arrangement which would assure the availability of about $10 billion to the IMF for the proposed Witteveen facility. The industrial countries would provide $5,2 billion, of which the U.S. share — subject to Congressional authorization — would be about $1.7 billion. The OPEC members would provide about $4.8 billion, or nearly half the total, with Saudi Arabia the largest single participant at $2.5 billion. This $10 billion would be used for a special facility in the IMF. It is a temporary facility — countries could apply within the next 2 to 3 years, and could draw down funds over a period of 2 to 3 years, though the total period of disbursements could not exceed 5 years. It would be available for use by members only in clearly defined circumstances. Specifically, a member drawing under the facility: -8- — Must have a balance of payments financing need that is large in relation to its IMF quota and exceeds the amount available to it under the IMF's regular policies; — Requires a period of adjustment that is longer than provided for under regular IMF policies; — Must enter into a standby agreement with the IMF in which it undertakes to adopt corrective economic policy measures adequate to deal with its balance of payments problem. The facility, in short, is designed to encourage those countries with particularly severe payments problems to adopt internationally responsible adjustment programs -~ and to avoid the unwelcome alternatives of resort to the controls, trade restrictions, and beggar-thy-neighbor policies which can be so harmful to world prosperity and so disruptive to our liberal trade and payments order. It is not a device for augmenting development assistance. The IMF provides only balance of payments support. The member drawing on the facility receives more financing than is otherwise available from the IMF: a longer period of adjustment Ca 2 to 3 year program as compared with the 1 year normally applicable in the IMF) ; and a longer period of repayment (3 to 7 year maturity, as compared with the IMF's normal 3 to 5 year maturity). Since interest on the financing provided to the Fund is market-related, the borrowing country would also pay a somewhat higher charge. Participation in the facility is also advantageous to the United States and others who are providing the financing. In addition to our interest in assuring a strong and smoothly functioning international monetary system, we receive in exchange for our participation a strong, liquid and interestearning monetary asset. Technically, the United States (or other participant) agrees to provide currency to the IMF in exchange for an automatic drawing right on the IMF, which is counted as part of our international reserve assets and which can be drawn down at any time the United States can sell or transfer the asset to others if there is agreement to do so. The interest rate we receive is linked to U.S. Treasury issues of comparable maturity, so there is no net cost to the Treasury. As the drawings are repaid by the borrower, the IMF returns the dollars to the U.S., U,S, reserve assets are reduced, and the transaction is reversed. The Witteveen facility will make a major contribution to strengthening the international monetary system against the problems the Subcommittee is addressing. First, it -9encourages countries to initiate needed adjustment measures before their debts become too large for them to handle or credit is no longer available, and it encourages them to adjust through sound and internationally responsible policies. Second, the fact that the facility is available will improve the creditworthiness of the international monetary system and confidence in the system. It is not constructed and will not be used to help any banks that may have lent excessively or unsoundly. It will help countries that are in need, not financial institutions. Nor will it be used to take over the private banks' regular lending activities. For one thing, the amounts involved are far, far below the levels of private lending — although the IMF may in the period ahead account for a share of total balance of payments financing larger than the 7 percent provided in 1974-76, it will remain small in comparison with the share channeled through the private market. For another, experience indicates that after the IMF enters into a standby agreement with a borrowing country, private lending tends to expand rather than contract. The banks will benefit from the Witteveen facility, but only indirectly — through an improved international environment and stronger monetary system that will benefit all parties, including American industry, workers and farmers. The Subcommittee has asked whether consideration should be given to other new forms of cooperation between public and private institutions to improve assessments of creditworthiness. The Federal Reserve has shown considerable interest in this question and I know Governor Wallich will want to discuss it, so I will comment only briefly. I think we must be receptive to new ideas along these lines, and be willing to explore the prospects for closer interaction. The IMF is at present examining its procedures, and considering whether the provision of more information about individual economies would be of value to both borrowers and lenders and thus facilitate the continued flow of private capital. Looking beyond the question of providing more information, the idea of cooperation between the IMF and private banks, through joint loans to country borrowers, or IMF guarantees of private loans, has been mentioned. There is great reluctance on the part of many IMF members to move in this direction — which they see as a fundamental shift in the character of the IMF — and it is not realistic to expect such moves in the foreseeable future. Nonetheless we must, as Secretary Blumenthal has said, be prepared to review old premises and consider innovations, to assure that our institutions grow and adapt, and are used with maximum effectiveness. A final question raised by the Subcommittee relates to formalizing procedures for debt reschedulings. Under Secretary -10Cooper will discuss this issue in greater detail, I merely want to say that it is not in the interest of either debtors or creditors to undermine the basic principle that reschedulings should be accepted only in absolutely unavoidable cases. I think the arrangements by creditor clubs have worked well, although there is room for some improvement. Presently the IMF role, in actual creditor club negotiations, is limited to of a technical observer and supplier of statistical information. I have an open mind as to whether a greater IMF role in rescheduling than presently exists would be helpful, but in general I think there is some advantage in keeping these cases ad hoc and informal, Conclusion The conclusions I would like to leave the Subcommittee with are as follows: 1. Debt is not necessarily bad. As shown by the experience of the United States in the nineteenth century, and Canada and others at present, borrowed money, if productively invested, provides the capacity to service the underlying debt, and need not represent a serious burden. 2. The large growth in international debt is a natural consequence of the pattern of world payments of recent years, and of the recognized need to finance the imbalances resulting from the oil price increases, while we put in place energy policies needed to reduce the imbalances, 3. There is no evidence that the international monetary system is presently in danger either from general overborrowing by uncreditworthy countries or general overextension of the banking system. Several countries have made encouraging progress in their adjustment efforts, 4. Several oil producing countries will continue to run substantial payments surpluses with some resultant strain on the world payments system, for some years to come. 5, A few countries are approaching or have reached the limits of prudence in borrowing and may experience considerable difficulties in financing their current account deficits, The countries experiencing such difficulties should pursue policies which will reduce their deficits and preserve their creditworthiness so -11that private lenders may, without undue risk, continue to provide the bulk of the needed financing, 6. Adequate conditional financing should be made available through the IMF to encourage the adoption of stabilization programs by countries which need to take such steps and to give such countries the financing needed to permit them to adjust at a politically tolerable pace by policies acceptable to the world community, and without an undue impact on world growth. 7. Bank supervisory agencies should continue to exercise surveillance over external lending, as they do with domestic lending, to preserve the soundness of banking systems, 8. And, finally, countries should resist pressures for domestic protection and keep their markets open for international trade, In sum, Mr, Chairman, the system has performed well under difficult circumstances. Yet it contains some weaknesses and we are moving on a number of fronts to strengthen it. Your Subcommittee will shortly be considering legislation to authorize U.S. participation in a central aspect of this effort — the supplemental IMF facility — and I hope you will give it your strong support. oOo FOR RELEASE AT 4:00 P.M. August 26, 1977 TREASURY'S WEEKLY BILL OFFERING The Department of the Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $5,400 million, to be issued September 8, 1977. This offering will not provide new cash for the Treasury as the maturing bills are outstanding in the amount of $5,410 million. The two series offered are as follows: 91-day bills (to maturity date) for approximately $2,200 million, representing an additional amount of bills dated June 9, 1977, and to mature December 8, 1977 (CUSIP No. 912793 L6 1 ) , originally issued in the amount of $3,002 million, the additional and original bills to be freely interchangeable. 182-day bills for approximately $3,200 million to be dated September 8, 1977, and to mature March 9, 1978 (CUSIP No. 912793 P2 6). Both series of bills will be issued for cash and in exchange for Treasury bills maturing September 8, 1977. Federal Reserve Banks, for themselves and as agents of foreign and international monetary authorities, presently hold $2,526 million of the maturing bills. These accounts may exchange bills they hold for the bills now being offered at the weighted average prices of accepted competitive tenders. The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest. Except for definitive bills in the $100,000 denomination, which will be available only to investors who are able to show that they are required by law or regulation to hold securities in physical form, both series of bills will be issued entirely in book-entry form in a minimum amount of $10,000 and in any higher $5,000 multiple, on the records either of the Federal Reserve Banks and Branches, or of the Department of the Treasury. Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of tne Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time, Friday, September 2, 1977. Form PD 4632-2 (for 26-week series) or form PD 4632-3 (for 13-week series) should be used to submit tenders for bills to be maintained on the book-entry records of tne Department of the Treasury. B-410 -2Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,000. In the case of competitive tenders the price offered must be expressed on the basis of 100, with not more than three decimals, e.g • / 99.925. Fractions may not be used. Banking institutions and dealers who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names of tne customers and the amount for each customer are furnished. Others are only permitted to submit tenders for their own account. Payment for the full par amount of the bills applied for must accompany all tenders submitted for bills to be maintained on the book-entry records of the Department of the Treasury. A cash adjustment will be made on all accepted tenders for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities for bills to be maintained on tne book-entry records of Federal Reserve Banks and Branches, or for bills issued in bearer form, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of tne acceptance or rejection of their tenders. rThe Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and the Secretary's action shall be final. Subject to these reservations, noncompetitive tenders for each issue for $500,000 or less without stated price from any one bidder will be accepted in full at tne weighted average price (in three decimals) of accepted competitive bids for the respective issues. Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and bills issued in bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public DeDt on September 8, 1977, in cash or other immediately available funds or in Treasury bills maturing September 8,exchange 1977. Cash adjustments will be the made for differences accepted in between the andpar thevalue issueof price the maturing of new bills bills. -3Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, No. 418 (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. oOp Contact: FOR IMMEDIATE RELEASE Robert Nipp 577-5328 August 26, 19 77 TREASURY ANNOUNCES U.S.-SAUDI ARABIAN JOINT COMMISSION HIGHWAY DEPARTMENT PROJECT The Secretary of the Treasury today announced the signing of a 6-year highway development technical assistance agreement between the governments of the United States and the Kingdom of Saudi Arabia. Participating in the agreement for the United States will be the U.S. Department of Treasury and the U.S. Department of Transportation's Federal Highway Administration (FHWA) . Under the agreement, the FHWA will furnish a 15-member technical assistance team, 12 of whom will be located in Riyadh, Saudi Arabia, and three in Washington, D.C., to provide technical advisory services in the field of highway organization, planning, programming, design, construction, and maintenance. The government of the Kingdom of Saudi Arabia will reimburse the FHWA for services provided under this agreement, estimated at $6.3 million. This agreement will be carried out under the auspices of the Saudi Arabian - U.S. Joint Commission on Economic Cooperation. Overall coordination of the project with other Joint Commission activities and provision of certain administrative facilities and support will be the responsibility of the U.S. Treasury Department. The government of the Kingdom of Saudi Arabia has projected highway development expenditures of about $5 billion during the next five years. Deputy Federal Highway Administrator, Karl S. Bowers, signed the agreement on behalf of the Department of Transportation. This completes the formal signing process which began in Riyadh on August 16, 1977. At that time, the agreement was signed by John P. Hummon, Director, U.S. Representation, Joint Commission on Economic Cooperation, U.S. Department of the Treasury; Dr. Nasser Al-Salloum, Deputy Minister of Communications and Dr. Mansoor Alturki, Deputy Minister of Finance and National Economy on behalf of their respective Departments. In attendance at the Department of Transportation for the signing ceremony were Dr. Al-Salloum, Deputy Minister of Communications, Chester Davenport, Assistant Secretary for Policy, Plans and International Affairs, Department of Transportation, and Lewis W.Treasury. Bowden, Deputy for ment of the oOoSaudi Arabian Affairs, Depart- kpartmentoftheTREASURY WASHINGTON, O.C. 20220 TELEPHONE 566-2041 FOR IMMEDIATE RELEASE August 29, 1977 RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS Tenders for $2,300 million of 13-week Treasury bills and for $3,304 million of 26-week Treasury bills, both series to be issued on September 1, 1977, ere accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: High Low Average 13-week bills maturing December 1. 1977 Price Discount Rate Investment Rate 1/ 98.599 98.588 98.591 5.542% 5.586% 5.574% 5.70% 5.74% 5.73% 26-week bills maturing; March 2, 1978 Price Discount Rate 97.049a/ 97.040 97.043 5.837% 5.855% 5.849% Investment Rate 1/ 6.10% 6.12% 6.11% a/ Excepting 1 tender of $530,000 Tenders at the low price for the 13-week bills were allotted 81%. Tenders at the low price for the 26-week bills were allotted TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Received Accepted Boston $ 27,265,000 New York 3,789,990,000 Philadelphia 19,905,000 Cleveland 47,820,000 Richmond 30,365,000 Atlanta 28,955,000 Chicago 297,960,000 St. Louis 38,125,000 Minneapolis 16,090,000 Kansas City 47,495,000 Dallas 70,910,000 San Francisco 202,245,000 $ 21,315,000 1,846,540,000 19,905,000 27,820,000 28,415,000 28,860,000 95,075,000 23,935,000 12,520,000 42,965,000 70,410,000 82,245,000 Treasury 50,000 TOTALS 50,000 $4,617,175,000 Received $ 41,385,000 5,940,160,000 105,870,000 43,805,000 18,530,000 46,235,000 783,650,000 44,995,000 29,580,000 21,520,000 16,440,000 524,905,000 280,000 $2,300,055,000 b/ $7,617,355,000 Includes $317,645,000 noncompetitive tenders from the public. Includes $149,615,000 noncompetitive tenders from the public. Equivalent coupon-issue yield. -412 Accepted $ 21,385,000 2,541,160,000 80,870,000 23,805,000 10,530,000 10,235,000 447,905,000 26,015,000 13,580,000 17,470,000 15,440,000 95,505,000 280,000 $3,304,180,000 c/ FOR IMMEDIATE RELEASE August 29, 1977 John M. Samuels appointed Deputy Tax Legislative Counsel at Treasury Secretary of the Treasury W. Michael Blumenthal today announced the appointment of John M. Samuels of New York, New York, as Deputy Tax Legislative Counsel. Mr. Samuels, 33, has been a special consultant to the Treasury Department since June 1977. Prior to joining Treasury, he had been a partner in the New York law firm of Dewey, Ballantine, Bushby, Palmer & Wood. Mr. Samuels also was an adjunct professor of law at New York University. As Deputy Tax Legislative Counsel, Mr. Samuels will assist the Tax Legislative Counsel, Daniel I. Halperin, in heading a staff of lawyers and accountants who provide assistance and advice to the Assistant Secretary of the Treasury for Tax Policy, Laurence N. Woodworth. The Office of Tax Legislative Counsel participates in the preparation of Treasury Department recommendations for Federal tax legislation and also helps develop and review tax regulations and rulings. The Office of Tax Legislative Counsel is one of four major units under the direction of the Assistant Secretary for Tax Policy. The other three are the Office of Tax Analysis, the Office of International Tax Counsel, and the Office of Industrial Economics. A native of Hollywood, Florida, Mr. Samuels received a B.A. degree from Vanderbilt University in 1966 and J.D. degree from the University of Chicago Law School in 1969. He received an LL.M. (in Taxation) from New York University School of Law in 1975. B-413 oOo FOR IMMEDIATE RELEASE CONTACT: Alvin M. Hattal (202) 566-8381 September 8, 1977 UNITED STATES-MOROCCO INCOME TAX TREATY SIGNED The Treasury Department announced today that an income tax treaty between the United States and Morocco was signed in Rabat on August 1, 1977, by U.S. Ambassador Robert Anderson and Finance Minister Abdelkader Benslimane of Morocco. The treaty must be approved by the U.S. Senate before becoming official. The U.S.-Morocco income tax treaty is the first such agreement between the two countries. It is also the first income tax treaty signed by the United States with a developing country in Africa, although there are in effect some income tax treaties with African countries that are extensions of treaties originally signed with the United Kingdom or Belgium. The U.S.-Morocco treaty follows the basic pattern of the Model Draft treaty developed by the Fiscal Committee of the Organization for Economic Co-operation and Development and other recent U.S. treaties. Thus, it provides rules for determining which country has the prior right to tax various types of income, as well as providing for nondiscrimination, administrative cooperation and relief from double taxation. The treaty sets reciprocal limits of tax at source of 15 percent on portfolio investment dividends, 10 percent on dividends from 10 percent-owned subsidiaries, exemption of interest paid to the other Government, 15 percent on other interest, and 10 percent on royalties. The treaty is subject to ratification by the two Governments. Once ratified, it will apply to withholding taxes on income, such as dividends, interest, and royalties, paid after the first day of the month following exchange of official documents. It will also apply to other taxes on income for taxable years beginning on or after January 1 of the year of ratification. The treaty will remain in force indefinitely unless terminated. Either country may terminate the treaty after five years by giving six months written notice through diplomatic channels before June 30 of # any year. ## B-414 CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE KINGDOM OF MOROCCO FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME The Government of the United States of America and the Government of the Kingdom of Morocco, desiring to conclude a convention for the avoidance of double taxation of income and the prevention of fiscal evasion have agreed upon the following articles. Article 1 TAXES COVERED (1) The taxes which are the subject of this Convention are: (a) In the case of the United States, the Federal income taxes imposed by the Internal Revenue Code, hereinafter referred to as the "United States Tax," and (b) In the case of Morocco the agricultural tax; the taxes on urban property; the tax on public and private salaries, emoluments, fees, wages, pensions, and annuities; the complementary tax; the business profits tax; and the compulsory loan for investment by the - 2 - Moroccan government as provided in Article 37 of Royal Decree No. 1.010-65 of the 8th of Ramadan 1385 (31 December 1965) containing the Finance Law for the year 1966, hereinafter referred to as the "Moroccan tax.11 (2) This Convention shall also apply to taxes substantially similar to those covered by paragraph (1) which are imposed in addition to, or in place of, existing taxes after the date of signature of this Convention. (3) For the purpose of Article 22 (Nondiscrimination) the taxes covered by this Convention also include taxes of every kind imposed at the National, State, or local level. For the purpose of Article 26 (Exchange of Information) the taxes covered by this Convention also include taxes of every kind imposed at the National level. Article 2 GENERAL DEFINITIONS (1) In this Convention, unless the context otherwise requires: (a) (1) The term "United States" means the United States of America; and (ii) When used in a geographical sense, the term "United States" means the states thereof and the District of Columbia. term also includes: Such - 3- (A) The territorial sea thereof, (B) The seabed and subsoil of the and submarine areas adjacent to the coast thereof, but beyond the territorial sea, over which the United States exercises sovereign rights, in accordance with international law, for the purpose of exploration and exploitation of the natural resources of such areas (continental shelf), but only to the extent that the person, property, or activity to which this Convention is being applied is connected with such exploration or exploitation. (i) The term "Morocco" means the Kingdom of Morocco; and (ii) When used in a geographical sense the term "Morocco" includes: (A) The territorial sea thereof, (B) The seabed and subsoil of the and submarine areas adjacent to the coast thereof, but beyond the territorial sea, over which Morocco exercises sovereign rights, in accordance with international M 4M law, for the purpose of exploration and exploitation of the natural resources of such areas (continental shelf), but only to the extent that the person, property, or activity to which this Convention is being applied is connected with such exploration or exploitation, (c) The term "one of the Contracting States" or "the other Contracting State11 means the United States or Morocco, as the context requires. (d) The term "personn includes an individual, a partnership, a corporation, an estate, a trust, or any body of persons. (e) (i) The term "United States corporation" or "corporation of the United States" means a corporation which is created or organized under the laws of the United States or any state thereof or the District of Columbia or any unincorporated entity treated as a United States corporation for United States tax purposes; and (ii) The term "Moroccan corporation" or "corporation of Morocco" means any body corporate or any entity which is treated as a body corporate under Moroccan tax law and which is resident within Morocco for Moroccan tax purposes. - 5- (f) The term "competent authority" means: (i) In the case of the United States, the Secretary of the Treasury or his delegate, and (ii) In the case of Morocco, the Minister in Charge of Finance or his delegate. (g) The term "State" means any National State, whether or not one of the Contracting States. (2) Any other term used in this Convention and not defined in this Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of the Contracting State whose tax is being determined. Article 3 FISCAL RESIDENCE (1) In this Convention: (a) The term "resident of Morocco" means: (i) (ii) A Moroccan corporation, and Any person (except a corporation or any entity treated under Moroccan law as a corporation) resident in Morocco for purposes of its tax. (b) The term "resident of the United States" means: (i) (ii) A United States corporation, and Any person (except a corporation or aiU<ue^tity treated under United States law as - 6 - a corporation) resident in the United States for purposes of its tax, but in the case of a person acting as a partner or fiduciary only to the extent that the income derived by such person in that capacity is taxed as the income of a resident. (2) Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States: (a) He shall be deemed to be a resident of that Contracting State in which he maintains his permanent home. If he has a permanent home in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of that Contracting State with which his personal and economic relations are closest (center of vital interests); (b) If the Contracting State in which he has his center of vital irterests cannot be determined, he shall be deemed to be a resident of that Contracting State in which he has a habitual abode; (c) If he has a habitual abode in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of the Contracting State of which he is a citizen; - 7- (d) If he is a citizen of both Contracting States or of neither Contracting State the competent authorities of the Contracting States shall settle the question by mutual agreement. For purposes of this paragraph, a permanent home is the place where an individual dwells with his family. (5) An individual who is deemed to be a resident of one of the Contracting States and not a resident of the other Contracting State by reason of the provisions of paragraph (2) shall be deemed to be a resident only of the first-mentioned Contracting State for all purposes of this Convention, including Article 20 (General Rules of Taxation). Article 4 PERMANENT ESTABLISHMENT (1) For the purpose of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in industrial or commercial activity. (2) The term "fixed place of business" includes but is not limited to: (a) A seat of management; (b) A branch; (c) An office; (d) A factory; (e) A workshop; (f) A warehouse; (g) A store or other sales outlet; M 8 (h) M A mine, quarry, or other place of extraction of natural resources; and (i) A building site or construction or installation project which exists for more than six months. (3) Notwithstanding paragraphs (1) and (2), a permanent establishment shall not include a fixed place of business used only for one or more of the following: (a) The use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the resident; (b) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display, or delivery; (c) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person; (d) The maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information, for the resident; (e) or The maintenance of a fixed place of business for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the - 9 - (4) Notwithstanding paragraphs (2) and (3), a resident of one of the Contracting States shall be deemed to have a permanent establishment in the other Contracting State if it maintains substantial equipment for rental within the other Contracting State for a period of more than six months. (5) A person acting in one of the Contracting States on behalf of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (6) applies, shall be deemed to be a permanent establishment in the first-mentioned Contracting State if such person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of that resident, unless the exercise of such authority is limited to the purchases of goods or merchandise for that resident. (6) A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident engages in industrial or commercial activity in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business. (7) The fact that a resident of one of the Contracting States is a related person with respect to a resident of the other Contracting State or with respect to a person who engages in industrial or commercial 'activity in that other Contracting State - 10 - (whether through a permanent establishment or otherwise) shall not be taken into account in determining whether the resident of the first-mentioned Contracting State has a permanent establishment in that other Contracting State. Article 5 SOURCE OF INCOME For purposes of this Convention: (1) Dividends shall be treated as income from sources within a Contracting State only if paid by a corporation of that Contracting State. (2) Interest shall be treated as income from sources within a Contracting State only if paid by such Contracting State, a political subdivision or a local authority thereof, or by a resident of that Contracting State. Notwithstanding the preceding sentence -(a) If the person paying the interest (whether or not such person is a resident of one of the Contracting States) has a permanent establishment in one of the Contracting States in connection with which the indebtedness on which the interest is paid was incurred and such interest is borne by such permanent establishment, or (b) If the person paying the interest is a resident of one of the Contracting States and has a permanent establishment in a State - 11 - with which the indebtedness on which the interest is paid was incurred and such interest is paid to a resident of the other Contracting State, and such interest is borne bv SMC1^ permanent establishment, such interest shall be deemed to be from sources within the State in which the permanent establishment is situated. (3) Royalties described in paragraph (3) of Article 12 (Royalties) shall be treated as income from sources within a Contracting State to the extent that such royalties (a) are for the use of, or the right to use, property or rights described in such paragraph and the performance of accessory services within that Contracting State or (b) are paid for technical and economic studies described in paragraph 3(c) thereof. (4) Income from real property and royalties from the operation of mines, quarries, or other natural resources (including gains derived from the sale of such property or the right giving rise to such royalties) shall be treated as income from sources within a Contracting State only if such property is situated in that Contracting State. (5) Income from the rental of tangible personal (movable) property shall be treated as income from sources within a Contracting State only if such property is situated in that Contracting State. - 12 - (6) Income received by an individual for his performance of labor or personal services, whether as an employee or in an independent capacity, shall be treated as income from sources within a Contracting State only to the extent that such services are performed in that Contracting State. Income from personal services performed aboard ships or aircraft operated by a resident of one of the Contracting States in international traffic shall be treated as income from sources within that Contracting State if rendered by a member of the regular complement of the ship or aircraft. For purposes of this paragraph, income farom labor or personal services includes pensions (as defined in paragraph (3) of Article 19 (Private Pensions and Annuities)) paid in respect of such services. Notwithstanding the preceding provisions of this paragraph, remuneration described in Article 17 (Governmental Functions) shall be treated as income from sources within a Contracting State only if paid by or from the public funds of that Contracting State or a political subdivision or local authority thereof. (7) Income from the purchase and sale of intangible or tangible personal (including movable) property (other than gains defined as royalties by paragraph (3) (b) of Article 12 (Royalties))shall be treated as income from sources within a Contracting State only if such property is sold in that Contracting - 13 - (8) Notwithstanding paragraphs (1) through (7), industrial or commercial profits which are attributable to a permanent establishment which the recipient, a resident of one of the Contracting States, has in the other Contracting State, including income derived from real property and natural resources and dividends, interest, royalties (as defined in paragraph (3) of Article 12 (Royalties)), and capital gains, but only if the property or rights giving rise to such income, dividends, interest, royalties, or capital gains are effectively connected with such permanent establishment, shall be treated as income from sources within that other Contracting State. (9) The source of any item of income to which paragraphs (1) through (8) are not applicable shall be determined by each of the Contracting States in accordance with its own law. Notwithstanding the preceding sentence, if the source of any item of income under the laws of one Contracting State is different from the source of such item of income under the laws of the other Contracting State or if the source of such income is not readily determinable under the laws of one of the Contracting States, the competent authorities of the Contracting States, may in order to prevent double taxation or further any other purpose of this Convention, establish a common source of the item of income for purposes of this Convention. - 14 - Article 6 INCOME FROM REAL PROPERTY (1) Income from real property, including royalties in respect of the operation of mines, quarries, or other natural resources and gains derived from the sale, exchange, or other disposition of such property or of the right giving rise to such royalties, is taxable in the Contracting State in which such real property, mines, quarries, or other natural resources are situated. For purposes of this Convention, interest on indebtedness secured by real property or secured by a right giving rise to royalties in respect of the operation of mines, quarries, or other natural resources shall not be regarded as income from real property. (2) Paragraph (1) shall apply to income derived from the usufruct, direct use, letting, or use in any other form of real property. Article 7 BUSINESS PROFITS (1) Industrial or commercial profits of a resident of one of the Contracting States shall be exempt from tax by the other Contracting State unless such resident is engaged in industrial or commercial activity in that other Contracting State through a permanent establishment situated therein. If such resident is so engaged, tax may be imposed by that other Contracting State on the industrial or commercial - 15 - profits of such resident but only on so much of such profits as are attributable to the permanent establishment. (2) Where a resident of one of the Contracting States is engaged in industrial or commercial activity in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to the permanent establishment the industrial or commercial profits which would be attributable to such permanent establishment if such permanent establishment were an independent entity engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident of which it is a permanent establishment. (3) In the determination of profits of a permanent establishment, deductions shall be allowed for expenses incurred for the purposes of the permanent establishment, including costs and general expenses related to services rendered for the benefit of the permanent establishment whether rendered in the state where the permanent establishment is located or elsewhere. (4) (a) The term "industrial or commercial profits of a resident" means income derived from an industrial, commercial, agricultural or mining activity, from fishing, from the operation of ships or aircraft, from the rental of personal property, and from insurance. It also means income derived from real property and natural resources, dividends, interest, royalties (as described in Article 12), and capital gains, but only if the property or the rights giving - 16 - rise to such income, dividends, interest, royalties or capital gains are effectively connected with a permanent establishment which the recipient, being a resident of one of the Contracting States, has in the other Contracting State. It does not include income received by an individual in the form of remuneration for services rendered as an employee or in the exercise of an independent profession. (b) To determine whether property or rights are effectively connected with a permanent establish' ment, the factors taken into account shall include whether the rights or property are used in or held for use in carrying on industrial or commercial activity through such permanent establishment and whether the activities carried on through such permanent establishment were a material factor in the realization of the income derived from such property or rights. For this purpose, due regard shall be given to whether or not such property or rights or such income were accounted for through such permanent establishment. (5) Where industrial or commercial profits include items of income which are dealt with separately in other articles of this Convention, the provisions of those articles shall, except as otherwise provided therein, supersede the provisions of this article. - 17 ~ Article 8 SHIPPING AND AIR TRANSPORT (1) Notwithstanding Article 7 (Business Profits) and Article 13 (Capital Gains), income which a resident of one of the Contracting States derives from the operation in international traffic of ships registered in that Contracting State, and gains which a resident of one of the Contracting States derives from the sale, exchange, or other disposition of such ships operated in international traffic by such resident and registered in that Contracting State, shall be exempt from tax by the other Contracting State. (2) Notwithstanding Article 7 (Business Profits) and Article 13 (Capital Gains), income which a resident of one of the Contracting States derives from the operation in international traffic of aircraft registered in either Contracting State or in a State with which the other Contracting State has an income tax convention exempting such income, and gains which a resident of one of the Contracting States derives from the sale, exchange, or other disposition of such aircraft operated in international traffic by such resident and registered in either Contracting State or in a State with which the other Contracting State has an income tax convention exempting such income and gains, shall be exempt from tax by the other Contracting State. - 18 - Article 9 RELATED PERSONS (1) Where a resident of one of the Contracting States and a resident of the other Contracting State are related and where such related persons make arrangements or impose conditions between themselves which are different from those which would be made between independent persons, any income, deductions, credits, or allowances which would, but for those arrangements or conditions, have been taken into account in computing the income (or loss) of, or the tax payable by, one of such persons, may be taken into account in computing the amount of the income subject to tax and the taxes payable by such person. (2) A person is related to another person if either person owns or controls directly or indirectly the other, or if any third person or persons own or control directly or indirectly both. For this purpose, the term "control" includes any kind of control, whether or not legally enforceable, and however exercised or exercisable,, Article 10 DIVIDENDS (1) Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. - 19 (2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed -(a) Fifteen per cent of the gross amount actually distributed; or (b) When the recipient is a corporation, ten per cent of the gross amount actually distributed if -(i) During the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least ten per cent of the voting shares of the paying corporation was owned by the recipient corporation, and (ii) Not more than twenty-five per cent of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business or dividends or interest received from subsidiary corporations, fifty per cent or more of the outstanding shares of the voting stock of which is owned by the paying corporation at the time such dividends or interest is received) . ~ 20 (3) Paragraph (2) shall not apply if the recipient of the dividends, being a resident of one of the Contracting States, has a permanent establishment in the other Contracting State and the shares with respect to which the dividends are paid are effectively connected with such permanent establishment. In such a case, see paragraph (4)(a) of Article 7 (Business Profits). (4) Dividends paid by a corporation of one of the Contracting States to a person other than a resident of the other Contracting State (and in the case of dividends paid by a Moroccan corporation, to a person other than a citizen of the United States) shall be exempt from tax by that other Contracting State. This paragraph shall not apply if the recipient of the dividends has a permanent establishment in that other Contracting State and the shares with respect to which the dividends are paid are effectively connected with such permanent establishment. Article 11 INTEREST (1) Interest derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. (2) The rate of tax imposed by one of the Contracting States on interest derived from sources within that Contracting State by a resident of the other Contracting State shall not excee^ fifteen percent. - 21 - (3) Paragraphs (1) and (2) shall not apply if the recipient of the interest, being a resident of one of the Contracting States, has a permanent establishment in the other Contracting State and the indebtedness giving rise to the interest is effectively connected with such permanent establishment. In such a case, the provisions of Article 7 (Business Profits) shall apply. (4) The term "interest" as used in this Article means income from Government securities, bonds, or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income has its source. (5) Where, owing to a special relationship between the payer and the recipient or between both of them and some other person, the amount of the interest paid, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. - 22 - (6) Interest received by one of the Contracting States, or by an instrumentality of that State not subject to income tax by such State, shall be exempt in the State in which such interest has its source. Article 12 ROYALTIES (1) Royalties derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. (2) The rate of tax imposed by a Contracting State on royalties derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed ten percent. (3) The term "royalties" as used in this Article means ~~ (a) payment of any kind made as consideration for the use of, or for the right to use, copyrights of literary, artistic, scientific works, copyrights of motion picture films or films or tapes used for radio or television broadcasting, patents, designs or models, plans, secret processes or formulae, trademarks, or other like property rights, or knowledge, experience, or skill (know-how), including the performance of accessory technical assistance for the use of such property or rights to the extent that such assistance is performed in the Contracting State where the payment for - 23 - (b) gains derived from the sale, exchange or other disposition of other such property or rights to the extent that the amounts realized on such sale, exchange or other disposition for consideration are contingent on the productivity, use, or disposition of such property, or rights, and (c) remuneration for technical and economic studies paid for out of public funds of the Moroccan Government in the discharge of functions of a governmental nature by the Moroccan Government or a political subdivision or a local authority thereof. (4) Paragraph (2) shall.not apply if the recipient of the royalty, being a resident of one of the Contracting States, has in the other Contracting State a permanent establishment and the property or rights giving rise to the royalty is effectively connected with such permanent establishment. In such a case, see paragraph (4) (a) of Article 7 (Business Profits). (5) Where any royalty paid by xa person to any related person exceeds an amount which would have been paid to an unrelated person, the provisions of this article shall apply only to so much of the royalty as would have been paid to an unrelated person. In such a case, the excess payment may be taxed by each Contracting State according to its own law, including the provisions of this Convention where applicable. - 24 - Article 15 CAPITAL GAINS (1) A resident of one of the Contracting States be taxable only in that State on gains from the or exchange of capital assets. (2) Paragraph (1) of this Article shall not apply (a) The gain is received by a resident of one of the Contracting States and arises out of the sale or exchange of property described in Article 6 (Income from Real Property) located within the other Contracting State or of the sale or exchange of shares or comparable interests in a real property cooperative or of a corporation whose assets consist principally of such property. (b) The recipient of the gain, being a resident of one of the Contracting States, has a permanent establishment in the other Contracting State and the property giving rise to the gain is effectively connected with such permanent establishment, or (c) The recipient of the gain, being an individual resident of one of the Contracting States (i) Maintains a fixed base in the other Contracting State and the property giving rise to such gain is effectively connected to such fixed base, or (ii) Is present in the other Contracting State for a period or periods exceeding in the aggregate one hundred eighty-three days during the taxable year. - 25 (3) In the case of gains described in paragraph (2)(b), the provisions of Article 7 shall apply. Article 14 INDEPENDENT PERSONAL SERVICES (1) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity, may be taxed by that Contracting State. Except as provided in paragraph (2), such income shall be exempt from tax by the other Contracting State. C2) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity in the other Contracting State may be taxed by that other Contracting State, if: (a) The individual is present in that other Contracting State for a period or periods aggregating one hundred eighty-three days or more in the taxable year, or (b) The individual maintains a fixed base in that other Contracting State for a period or periods aggregating ninety days or more in the taxable year, but only so much of it as is attributable to such fixed base, or (c) The gross amount of such income exceeds $5,000 or the equivalent amount in Moroccan dirhams. (3) The term "personal services in an independent capacity" means all the activities—other than commercial, - 28 - (3) The provisions of paragraph (1) do not apply to income from services performed in a Contracting State by a non-profit organization of the other Contracting State or by members of the personnel of such an organization unless the latter are acting for their own account. Article 17 GOVERNMENTAL FUNCTIONS Wages, salaries, and similar remuneration, including pensions or similar benefits, paid by or from public funds of one of the Contracting States, to a citizen of that Contracting State for labor or personal services performed for that Contracting State, or for any of its political subdivisions or local authorities, in the discharge of governmental functions shall be exempt from tax by the other Contracting State. Article 18 STUDENTS AND TRAINEES (1) (a) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for the primary purpose of -(i) Studying at a university or other recognized educational institution in that other Contracting State, or (ii) Securing training required to qualify him to practice a profession JI ~ 29 - (iii) Studying or doing research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization, shall be exempt from tax by that other Contracting State with respect to amounts described in subparagraph (b) for a period not exceeding five taxable years from the date of his arrival in that other Contracting State. (b) The amounts referred to in subparagraph (a) are -(i) Gifts from abroad for the purpose of his maintenance, education, study, research, or training; (ii) The grant, allowance, or award; and (iii) Income from personal services performed in that other Contracting State in an amount not in excess of 2,000 United States dollars or its equivalent in Moroccan dirhams for any taxable year. Article 19 PRIVATE PENSIONS AND ANNUITIES (1) Except as provided in Article 17 (Governmental Functions), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that Contracting State. - 30 - (2) Alimony and annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that Contracting State. (3) The term "pensions and other similar remuner- ation," as used in this article, means periodic payments made after retirement or death in consideration for services rendered, or by way of compensation for injuries received, in connection with past employment. (4) The term "annuities," as used in this article, means a stated sum paid periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). (5) The term "alimony," as used in this article, means periodic payments made pursuant to a decree of divorce, separate maintenance agreement, or support or separation agreement which is taxable to the recipient under the internal laws of the Contracting State of which he is a resident. Article 20 GENERAL RULES OF TAXATION (1) A resident of one of the Contracting States may be taxed by the other Contracting State on any income from sources within that other Contracting State and only on such income, subject to any limitations set forth in this Convention. For this purpose, the rules set forth in Article 5 (Source of Income) shall be applied to - 31 - (2) The provisions of this Convention shall not be construed to restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded -(a) By the laws of one of the Contracting States in the determination of the tax imposed by that Contracting State, or (b) By any other agreement between the Contracting States. (3) Notwithstanding any provisions of this Convention except paragraph (4), a Contracting State may tax a citizen or resident of that Contracting State as if this Convention had not come into effect. (4) The provisions of paragraph (3) shall not affect: (a) The benefits conferred by a Contracting State under Articles 21 (Relief from Double Taxation), 22 (Nondiscrimination), and 25 (Mutual Agreement Procedure); and (b) The benefits conferred by a Contracting State under Articles 18 (Students and Trainees), and 17 (Governmental Functions), upon individuals who are neither citizens of, nor have immigrant status in, that Contracting State. (5) The United States may impose its personal holding company tax and accumulated earnings tax as if this Convention had not come into effect. However: - 32 - Ca) A Moroccan corporation shall be exempt from the United States personal holding company tax in any taxable year if all of its stock is owned by one or more individual residents of Morocco in their individual capacities for that entire year. (b) A Moroccan corporation shall be exempt from the United States accumulated earnings tax in any taxable year unless such corporation is engaged in trade or business in the United States through a permanent establishment at any time during such year. (6) The competent authorities of the two Contracting States may prescribe regulations necessary to carry out the provisions of this Convention. (7) Where, pursuant to any provision of this Convention, a Contracting State reduces the rate of tax on, or exempts income of a resident of the other Contracting State and under the law in force in that other Contracting State the resident is subject to tax by that other Contracting State only on that part of such income which is remitted to or received in that other Contracting State, then the reduction or exemption shall apply only to so much of such income as is remitted to or received in that other Contracting State. - 33 - Article 21 RELIEF FROM DOUBLE TAXATION Double taxation of income shall be avoided in the following manner: (1) The United States shall allow to a citizen or resident of the United States as a credit against the United States tax specified in paragraph (1)(a) of Article 1 the appropriate amount of income taxes paid to Morocco. Such appropriate amount shall be based upon the amount of tax paid to Morocco, but shall not exceed that portion of the United States tax which such citizen's or resident's net income from sources within Morocco bears to his entire net income for the same taxable year. (2) For purposes of computing the appropriate amount of taxes paid to Morocco, a citizen or resident of the United States who receives income or dividends from Morocco may elect to include in the computation of Moroccan tax for purposes of paragraph (1) the amount required to be invested in Moroccan equipment bonds under Article 37 of the Royal Decree No. 1.010-65 of the 8th of Ramadan 1385 (December 31, 1965) containing the Finance Law for the year 1966, in accordance with regulations issued by the Secretary of the Treasury or his delegate; provided that the United States citizen or resident agrees that any repayment by the Moroccan Government of such bonds shall be treated for purposes of this Article as a refund of Moroccan tax for the year of such repayment. (3) Morocco shall allow to a citizen or resident of Morocco" as a credit against the Moroccan tax specified - 34 - in paragraph (1) (b) of Article 1 the appropriate amount of income taxes paid to the United States. Such appropriate amount shall be based upon the amount of tax paid to the United States but shall not exceed that portion of the Moroccan tax which such citizen's or resident's net income from sources within the United States bears to his entire net income for the same taxable year. Article 2 2 NONDISCRIMINATION (1) A citizen of one of the Contracting States who is a resident of the other Contracting State shall not be subjected ,in that other Contracting State to more burdensome taxes than a citizen of that other Contracting State who is a resident thereof. (2) A permanent establishment which a resident of one of the Contracting States has in the other Contracting State shall not be subject in that other Contracting State to more burdensome taxes than a resident of that other Contracting State carrying on the same activities. This paragraph shall not be construed as obliging a Contracting State to grant to individual residents of the other Contracting State any personal allowances, reliefs, or deductions for taxation purposes on account of civil status or family responsibilities which it grants to its own individual residents. (3) A corporation of one of the Contracting States, the capital of which is wholly or partly owned or - 35 - controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which a Qorporation of the first-mentioned Contracting State carrying on the same activities, the capital of which is wholly owned or controlled by one or more residents of the firstmentioned Contracting State, is or may be subjected. Article 2 3 DIPLOMATIC AND CONSULAR OFFICERS Nothing in this Convention shall affect the fiscal privileges of diplomatic and consular officials under the general rules of international law or under the provisions of special agreements. Article 24 INVESTMENT OR HOLDING COMPANIES A corporation of one of the Contracting States deriving dividends, interest, royalties, or capital gains from sources within the other Contracting State shall not be entitled to the benefits of Article 10 (Dividends), 11 (Interest), 12 (Royalties), or 13 (Capital Gains) if -(a) By reason of special measures the tax imposed on such corporation by the first-mentioned Contracting State with respect to such dividends, interest, royalties, or capital gains is - 36 - substantially less than the tax generally imposed by such Contracting State on corporate profits, and Cb) Twenty^five percent or more of the capital of such corporation is held of record or is otherwise determined, after consultation between the competent authorities of the Contracting States, to be owned directly or indirectly, by one or more persons who are not individual residents of the first-mentioned Contracting State Cor, in the case of a Moroccan corporation, who are citizens of the United States), Article 25 MUTUAL AGREEMENT PROCEDURE (1) Where a resident of one of the Contracting States considers that the action of one or both of the Contracting States results or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of the Contracting States, present his case to the competent authority of the Contracting State of which he is a resident. Should the resident's claim be considered to have merit by the competent authority of the Contracting State to which the claim is made, it shall endeavor to come to an agreement with the competent authority of the other Contracting State with a view to the avoidance of taxation contrary to the provisions of this Convention. - 37 - (2) The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the application of this Convention. In particular, the competent authorities of the Contracting States may agree -(a) To the same attribution of industrial or commercial profits to a resident of one of the Contracting States and its permanent establishment situated in the other Contracting State; Cb) To the same allocation of income, deductions, credits, or allowances between a resident of one of the Contracting States and any related person; (c) To the same determination of the source of particular items of income; or (d) To the same meaning of any term used in this Convention. (3) The competent authorities of the Contracting States may communicate Kith each other directly for the purpose of reaching an agreement in the sense of this article. When it seems advisable for the purpose of reaching agreement, the competent authorities may meet together for an oral exchange of opinions. (4) In the event that the competent authorities reach such an agreement, taxes shall be imposed on such income and refund or credit of taxes shall be allowed, by the Contracting States in accordance with such agreement. - 38 - Article 26 EXCHANGE OF INFORMATION (1) The competent authorities of the Contracting States shall exchange such information as is pertinent to carrying out the provisions of this Convention and of the domestic laws of the Contracting States concerning taxes covered by this Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those Concluding a court or administrative body) concerned with assessment, collection, enforcement, or prosecution in respect of the taxes which are the subject of this Convention. (2) In no case shall the provisions of paragraph (1) be construed so as to impose on one of the Contracting States the obligation -(a) To carry out administrative measures at variance with the laws or the administrative practice of that Contracting State or the other Contracting State; (b) To supply particulars which are not obtainable under the laws, or in the normal course of the administration, of that Contracting State or of the other Contracting State; (c) or To supply information which would disclose any trade, business, industrial, commercial, or professional secret or trade process, or information, the disclosure of which would be contrary to public policy. - 39 - (3) The exchange of information shall be either on a routine basis or on request with reference to particular cases. The competent authorities of the Contracting States may agree on the list of information which shall be furnished on a routine basis. (4) The competent authorities of the Contracting States shall notify each other of any amendments of the tax laws referred to in paragraph (1) of Article 1 (Taxes Covered) and of the adoption of any taxes referred to in paragraph (2) of Article 1 (Taxes Covered) by transmitting the texts of any amendments or new statutes at least once a year. (5) The competent authorities of the Contracting States shall notify each other of the publication by their respective Contracting States of any material concerning the application of this Convention, whether in the form of regulations, rulings, or judicial decisions by transmitting the texts of any such materials at least once a year. Article 27 EXTENSION TO TERRITORIES (1) Either one of the Contracting States may, at any time while this Convention continues in force, by a written notification given to the other Contracting State through diplomatic channels, declare its desire that the operation of this Convention, either in whole of m part or with such modifications as may be found necessary fox. special application in a particular case, - 40 - shall extend to all or any of the areas (to which this Convention is not otherwise applicable) for whose international relations it is responsible and which impose taxes substantially similar in character to those which are the subject of this Convention. When the other Contracting State has, by a written communication through diplomatic channels, signified to the first-mentioned Contracting State that such notification is accepted in respect of such area or areas, and the notification and communication have been ratified and instruments of ratification exchanged, this Convention, in whole or in part, or with such modifications as may be found necessary for special application in a particular case, as specified in the notification, shall apply to the area or areas named in the notification and shall enter into force and effect on and after the date or dates specified therein. None of the provisions of this Convention shall apply to any such area in the absence of such acceptance and exchange of instruments of ratification in respect of that area. (2) At any time after the date of entry into force of an extension under paragraph (1), either of the Contracting States may, by six months' prior notice of termination given to the other Contracting State through diplomatic channels, terminate the application of this Convention to any area to which it has been extended under paragraph CI), and in such event this Convention shall cease to apply and have force and effect, beginning on or after the first day of January next - 41 - following the expiration of the six month period, to the area or areas named therein, but without affecting its continued application to the United States, Morocco, or to any other area to which it has been extended under paragraph (1). (3) In the application of this Convention in relation to any area to which it is extended by notification by the United States or Morocco, reference to the "United States" or "Morocco" as the case may be, shall be construed as referring to that area. (4) The termination in respect of the United States or Morocco of this Convention under Article 29 (Termination) shall, unless otherwise expressly agreed by both Contracting States, terminate the application of this Convention to any area to which the Convention has been extended under this article by the United States or Morocco. Article 28 ENTRY INTO FORCE (1) The present Convention shall be ratified and the instruments of ratification shall be exchanged as soon as possible thereafter at Washington, D. C. (2) The present Convention shall enter into force upon the exchange of instruments of ratification and will apply as follows: (a) To taxes due at the source on income payable or paid on and after the first day of the month following the exchange of instruments of ratification, and - 42 - (b) In the case of other taxes imposed on income for taxable years beginning on and after the first of January of the year of ratification. Article 29 TERMINATION The present Convention will remain in force indefinitely; however, each Contracting State may, prior to the 30th of June in.any calendar year at any time after five years from the date on which this Convention enters into force, terminate the Convention in writing submitted through diplomatic channels to the other Contracting State. In the event of a termination before July 1 of any such year, the Convention will continue to apply for the last time: (1) To taxes due at the source on income payable or paid not later than December 31 of the year in which such termination occurs, and (2) In the case of other taxes imposed on income for taxable periods ending not later than December 31 of the same year. DONE in triplicate, in the English, French and Arabic languages, the three texts having equal authenticity, this First day of August , 1977 FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA FOR THE GOVERNMENT OF THE KINGDOM OF MOROCCO v\Q\^X y , Robert Andersoh Ambassador of the United States of America Abdelkader Benslimane Minij^l Uf riYHKice Rabat, August 1 , 1977 His Excellency Mr. Abdelkader Benslimane Minister of Finance Rabat Excellency: In your letter of today's date you kindly informed me of the following: "During the discussions which were held in both Rabat and Washington for the purpose of concluding a convention to avoid double taxation between the United States and Morocco, the Moroccan delegation emphasized to the American delegation that the Moroccan Government, for the purpose of promoting private investment, will exempt certain profits and interest payments from taxation. The Moroccan delegation expressed its hope that the U.S. Government would accordingly grant citizens and residents of the United States a 'tax-sparing' credit against the U.S. tax. The U.S. delegation indicated that the Senate has been reluctant to approve such a provision in other tax conventions. However, the U.S. delegation has promised to review its position should the Senate reconsider its decision on this matter. "I would be grateful to you if you would confirm your government's commitment to resume discussions on this point should the Senate approve a provision of this kind in the interest of another country." 2 Please accept, Mr. Ambassador, assurances of my highest esteem. Abdelkader Benslimane Rabat, August 1, 1977 The Honorable Robert Anderson American Ambassador Rabat Dear Mr. Ambassador: During the discussions which were held in both Rabat and Washington for the purpose of concluding a convention to avoid double taxation between the United States and Morocco, the Moroccan delegation emphasized to the American delegation that the Moroccan Government, for the purpose of promoting private investment, will exempt certain profits and interest payments from taxation. The Moroccan delegation expressed its hope that the U.S. Government would accordingly grant citizens and residents of the United States a "tax-sparing" credit against the U.S. tax. The U.S. delegation indicated that the Senate has been reluctant to approve such a provision in other tax conventions. However, the U.S. delegation has promised to review its position should the Senate reconsider its decision on this matter. I would be grateful to you if you would confirm your government's commitment to resume discussions on this point should the Senate approve a provision of this kind in the interest of another country. 2 I have the honor to confirm the above-mentioned commitment. Please accept, Excellency, the assurances of my highest consideration. Robert Anderson FOR IMMEDIATE RELEASE August 30, 1977 RESULTS OF AUCTION OF 4-YEAR 1-MONTH TREASURY NOTES The Department of the Treasury has accepted $2,511 million of $5,141 million of tenders received from the public for the 4-year 1-month notes, Series K-1981, auctioned today. The range of accepted competitive bids was as follows: Lowest yield 6.80% 1/ Highest yield Average yield 6.85% 6.84% The interest rate on the notes will be 6-3/4%. At the 6-3/4% rate, the above yields result in the following prices: Low-yield price 99.811 High-yield price Average-yield price 99.636 99.671 The $2,511 million of accepted tenders includes $249 million of noncompetitive tenders and $2,262 million of competitive tenders (including 71% of the amount of notes bid for at the high yield) from private investors. In addition, $450 million of tenders were accepted at the average price from Federal Reserve Banks as agents for foreign and international monetary authorities for new cash. 1/ Excepting 2 tenders totaling $35,000 B-415 FOR IMMEDIATE RELEASE August 31, 19 77 TREASURY OFFERS $1,800 MILLION OF TREASURY BILLS Tne Department ot the Treasury, by this public notice, invites tenders tor two series ot Treasury Dills totaling approximately $1,800 million, to be issued September 6, 1977, as follows: 9-day bills (to maturity date) for approximately $900 million, representing an adaitional amount of oills dated Marcn 17, 1977, and to mature September 15, 1977 (CUSIP No. 912793 K2 1), and 16-day bills (to maturity date) for approximately $900 million, representing an additional amount of bills dated March 24, 1977, and to mature September 22, 1977 (CUISP No. 912793 K3 9 ) . Tne oills will be issued on a discount basis under competitive Didaing, and at maturity their face amount will be payable without interest. Tney will be issued in bearer form in denominations of 510,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000 [maturity value), and in DooK-entry form to designated bidders. Tenders will be received at ail Federal Reserve BanKs and .ranches up to 1:30 p.m., Eastern Daylight Saving time, Thursday, September 1, 1977. Tenders will not be received at the Department of :ne Treasury, Washington. Wire and telephone tenders may be received it the discretion of each Federal Reserve Bank or Branch. bach :ender for each issue must be for a minimum of $10,000,000. Tenders )ver $10,000,000 must be in multiples of $1,000,000. The price on lenders offered must be expressed on the basis of 100, with not more :nan three decimals, e.g., 99.925. Fractions may not be usea. Banking institutions and dealers who make primary markets in Jovernment securities and report daily to the Federal Reserve Bank of lew York their positions in and borrowings on such securities may iubmit tenders for account of customers, if the names of the 'ustomers and the amount for each customer are furnished. Others are >nly permitted to submit tenders for their own account. Tenders will »e received without deposit from incorporated banks and trust •ornpanies and from responsible and recognized dealers in investment ecurities. Tenders from others must be accompanied by payment of 2 •ercent of the face amount of bills applied for, unless the tenders re accompanied by an express guaranty of payment by an incorporated ank or trust company. -416 (OVER) -2Puolic announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Those submitting tenders will be advised of the acceptance or rejection of tneir tenders. The Secretary of tne Treasury expressly reserves tne right to accept or reject any or all tenders, in wnole or in part, and tne Secretary's action shall be final. Settlement for accepted tenaers in accordance with the bids must be made or completed at the Feaeral Reserve Bank or Brancn on September 6, 1977, in immediately availaole funds. under Sections 454(D) and 1221(5) of the Internal Revenue Code ot 1954 the amount of discount at which tnese Dills are sold is considered to accrue wnen the Dills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or ner Federal income tax return, as ordinary gain or loss, the difference between tne price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity auring the taxable year for which the return is made. Department of the Treasury Circular No. 4ib (current revision) and this notice, prescribe tne terms of tne Treasury bills and govern tne conditions ot their issue. Copies of tne circular may be obtained from any Federal Reserve Bank or Brancn. oOo FOR IMMEDIATE RELEASE September 1, 1977 RESULTS OF AUCTION OF 9-DAY AND 16-DAY TREASURY BILLS Tenders for $ 901 million of 9-day Treasury bills and for $ 903 million of 16-day Treasury bills, both series to be issued on September 6, T977" were accepted at the Federal Reserve Banks today. The details are as follows: RANGE OF ACCEPTED BIDS: 9-day bills maturing September 15, 1977 Discount Investment Price High Low Average 99.858 99.855 99.856 Rate 5.680% 5.800% 5.760% Rate 1/ 5.77% 5.89% 5.85% 16-day bills maturing September 22, 1977 Discount Investment Price Rate Rate 1/ 99.747 99.743 99.744 5.693% 5.783% 5.7 5.79% 5.88% 5. Tenders at the low price for the 9-day bills were allotted 53%. Tenders at the low price for the 16-day bills were allotted 6o/e. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS: Location Received Accepted $ 10,000,000 $ 10,000,000 Boston 745,190,000 3,309,000,000 New York Philadelphia Cleveland 60,000,000 Richmond Atlanta 123,250,000 400,000,000 Chicago St. Louis Minneapolis Kansas City Dallas 22,600,000 537,000,000 San Francisco TOTALS $4,316,000,000 $901,040,000 1/ Equivalent coupon-issue yield. B-417 Received $ 10,000,000 4,158,000,000 Accepted $ 758,000,000 60,000,000 560,000,000 30,000,000 10,000,000 50,000,000 400,000.000 $5,278,000,000 144,800,000 $902,800,000 Department of theTREASURY TELEPHONE 566-2041 WASHINGTON, D.C. 20220 September 2, 1977 FOR IMMEDIATE RELEASE RESULTS OF TREASURY1S WEEKLY BILL AUCTIONS Tenders for $2,202 million of 13-week Treasury bills and for $3,200 million of 26-week Treasury bills, both series to be issued on September 8, 1977, were accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: Discount Investment Price High Low Average 26-week bills maturing March 9, 1978 13-week bills maturing December 8, 1977 98.604 98.593 98.596 Rate 5.523% 5.566% 5.554% Discount Investment Price Rate Rate 1/ Rate 1/ 5.68% 5.72% 5.71% 97.051 a/ 5.833% 6.09% 97.042 5.851% 6.11% 97.045 5.845% 6.11% a/ Excepting 1 tender of $65,000 Tenders at the low price for the 13-week bills were allotted 81%. " Tenders at the low price for the 26-week bills were allotted 79%. _^S^? TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Received Boston $ 25,085,000 New York 3,142,060,000 Philadelphia 22,835,000 Cleveland 37,025,000 Richmond 34,565,000 Atlanta 24,370,000 Chicago 328,985,000 St. Louis 33,720,000 Minneapolis 17,395,000 Kansas City 20,315,000 Dallas 23,740,000 San Francisco 300,890,000 Treasury TOTALS 115,000 $4,011,100,000 Accepted :. Received $ 24,135,000 1,670,265,000 22,835,000 31,950,000 28,565,000 24,370,000 167,915,000 18,720,000 17,395,000 20,315,000 23,740,000 152,140,000 14,310,000 :$ :: 5,126,155,000 : 6,880,000 : 71,555,000 : 36,415,000 : 26,455,000 687,285,000 29,775,000 17,300,000 16,860,000 27,070,000 « 508,580,000 : $ 4,310,000 2,831,595,000 6,880,000 31,555,000 17,365,000 13,355,000 104,260,000 13,395,000 17,300,000 16,860,000 16,070,000 127,230,000 70,000 70,000 115,000 • $2,202,460,000 b/$6,568,710,000 ]vIncludes $303,920,000 noncompetitive tenders from the public. c/lncludes $134,170,000 noncompetitive tenders from the public. ^/Equivalent coupon-issue yield. Accepted $3,200,245,000 c_/ FOR RELEASE AT 4:00 P.M. September 6, 1977 TREASURY'S WEEKLY BILL OFFERING Tne Department of the Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $6,U00 million, to be issued September 15, 1977. Tnis offering will not provide new cash for the Treasury as the maturing bills are outstanding in the amount ot $6,007 million ($901 million of which represent 9-day Dills issued September 6, 1977). The two series offered are as follows: 91-day bills (to maturity date) for approximately $2,500 million, representing an additional amount of bills dated June 16, 1977, and to mature December 15, 1977 (CCJSIP No. 912793 L7 9), originally issued in the amount of $3,001 million, tne additional and original bills to be freely interchangeable. Ib2-day oiils for approximately $3,500 million to be dated September 15, 1977, and to mature March 16, 1978 (CUSIP No. 912793 P3 4) . Botn series of bills will be issued for cash ana in exchange for Treasury oiils maturing September 15, 1977. Federal Reserve Banks, for themselves and as agents of foreign and international monetary authorities, presently hold $2,870 million of the maturing bills. These accounts may exchange Dills they nold for the bills now being offered at the weighted average prices of accepted competitive tenders. Tne bills will be issued on a discount oasis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest. Except for definitive bills in tne $10u,000 denomination, which will oe available only to investors wno are able to show that they are required oy law or regulation to hold securities in physical form, Dotn series of bills will be issued entirely in book-entry form in a minimum amount of $10,u00 and in any higher $5,000 multiple, on tne records either of the Federal Reserve banks and Branches, or of the Department of the Treasury. Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of the Public Deot, Washington, D. C. 2U226, up to 1:30 p.m., Eastern Daylight Saving time, Monday, September 12, 1977. Form PD 4632-2 (for 26-week series) or form PD 4632-3 (for 13-week series) should be used to submit tenders for bills to oe maintained on tne book-entry records of tne Department ot the Treasury. B-419 -2Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,000. In the case of competitive tenders the price offered must be expressed on the basis of 100, with not more than three decimals, e.g., 99.925. Fractions may not be used. Banking institutions and dealers who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names of the customers and the amount for each customer are furnished. Others are only permitted to submit tenders for their own account. Payment for the full par amount of the bills applied for must accompany all tenders submitted for bills to be maintained on the book-entry records of the Department of the Treasury. A cash adjustment will be made on all accepted tenders for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, or for bills issued in bearer form, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their tenders. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and the Secretary's action shall be final. Subject to these reservations, noncompetitive tenders for each issue for $500,000 or less without stated price from any one bidder will be accepted in full at the weighted average price (in three decimals) of accepted competitive bids for the respective issues. Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and bills issued in bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt on September 15, 1977, in cash or September other differences accepted immediately in 15,between exchange 1977.available the Cash andpar the adjustments value funds issueor of price in the will Treasury of maturing be the made new bills bills for bills. maturing as- under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, No. 418 (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. September 6, 1977 MEMORANDUM TO THE PRESS- Mrs. Azie T. Morton will be sworn in as Treasurer of the United States on September 12, 1977. The ceremony will take place at 6:30 p.m. at the Federal Deposit Insurance Corporation, 550 17th Street, N.Wf, Penthouse, Seventh Floor. oOo B-420 FOR RELEASE UPON DELIVERY Expected at 9:30 a.m. September 7, 1977 STATEMENT OF DANIEL I. HALPERIN TAX LEGISLATIVE COUNSEL BEFORE THE WAYS AND MEANS SUBCOMMITTEE ON MISCELLANEOUS REVENUE MEASURES Mr. Chairman and Members of this Subcommittee: We welcome the opportunity to present the Treasury Department's views on the 21 miscellaneous bills to be considered by your Subcommittee. Because of the broad application of the tax laws to the diverse personal, charitable and business sectors of our society, it is extremely important that a vehicle such as this Subcommittee exist to consider legislative recommendations of both general and specific concern that might otherwise not be considered by the Congress. As we have previously stated, in the near future, we hope to present recommendations of our own for consideration by your Subcommittee. The Treasury Department applauds the procedures adopted by this Subcommittee which provide for a full and fair hearing of opposing views. This is beneficial no matter how minor or technical a bill might be. We appreciate the opportunity to comment on the bills presently before your Subcommittee. The Treasury Department notes that a number of these bills create special exceptions presumably designed to improve the equity of the tax laws. We are not always in agreement that these changes promote equity but we, of course, recognize that opinions may differ on such matters. We believe, however, that more attention needs to be paid to the increased complexity of the tax law, as these exceptions multiply, particularly if further refinement is needed to prevent abuse. I am sure we all agree that these factors - complexity and potential for abuse - must be weighed against the intended equity gains. B-421 -2Consistent with these views the Treasury would prefer a general lowering of the excise tax on private foundations to an attempt to single out a newly defined special category of foundations as H.R. 112 would do. Further, while we appreciate the fairness of allowing a child care credit for payments to relatives in certain circumstances, we oppose H.R. 8535 because we believe the potential for abuse outweighs the equity gains. Last year Congress sought to curb abuse by allowing the credit only where social security taxes were required. As the sponsor of H.R. 8535 (Mr. Conable) has pointed out this leads to inconsistent treatment of apparently similar cases. Rather than introducing further refinement to prevent abuse, we believe it is preferable to deny the credit for all payments to relatives. The Treasury's specific recommendations and comments on the miscellaneous bills are summarized below and are more fully set forth in the attached memorandum. I would like to refer, at this time, to our statement concerning H.R. 2714 because I believe the bill presents an excellent example of the difficulty I have attempted to describe. Under present law an employee is not in general able to assign his vested benefits under a pension, profit-sharing or stock bonus plan as collateral for loans from banks or insured credit unions. The bill would permit a participant in a profitsharing, stock bonus or money purchase pension plan to assign as collateral for a loan from a bank or credit union, the lesser of (A) his accrued benefit under the plan derived from his own contributions, or (B) the total amount of his contributions to the plan, reduced by his withdrawals and any other outstanding security interests in those contributions. In general, the policy of the Employee Retirement Income Security Act (ERISA) is to insure that amounts set aside will be available after retirement. ERISA does not fully carry out this purpose as it allows early withdrawals or loans from the plan in certain circumstances. H.R. 2714 attempts to be consistent with these exceptions to retention of benefits until retirement, and, except for mandatory contributions to money purchase plans, permits a pledge as security for a loan only where withdrawal would be allowed. -3The Treasury, however, believes we should move in the opposite direction and increase the chances that funds will remain for retirement. Moreover, the Treasury is concerned about the tax shelter aspects of the permitted assignments. The proposed bill would permit a participant to claim an immediate deduction for interest on the borrowed funds, while deferring payment of tax on the income earned by his contributions used as collateral for the loan until such income is distributed to him. The Treasury Department strongly believes a taxpayer should not be entitled to a current deduction for interest paid on amounts borrowed to purchase or carry investments the income from which is not taxed currently. The bill attempts to defer a deduction for interest if the loan is used directly or indirectly to finance a contribution to the plan. There is no reason to complicate the Code by an effort to draw this distinction. Even if the interest deduction were to be denied in all cases, the carryforward provision involves additional complexity. The Treasury Department opposes H.R. 2714. To summarize, in attempting to limit the possibility of an unwarranted tax advantage from the opportunity it creates, the bill develops a huge layer of complexity. The alleged problem is just not big enough to justify solution if the only equitable route is as complicated as this. The law may be best left alone. I will not take the time to read the rest of the Treasury statement but would be pleased to answer any questions you may have concerning our recommendations and comments. Summary of Treasury Department Positions Income Taxes H.R. 3050 (Accounting for sale of magazines) Supports in principle but suggests modifications, p. H.R. 4089 (Indian Tribes) - Does not oppose, p. 24 H.R. 8535 (Child Care Payments to Relatives) - Opposes.p. H.R. 8857 (Corporate liquidations) - Supports, p. 40 -4Retirement Income H.R. 2714 (Security for Loans) - Opposes, p. 9 H.R. 6635 (Retirement Bonds) - Supports if effective date is changed, p. 30 H.R. 8811 (Tax Court Judges) - Supports, p. 39 Exempt Organizations H.R. 112 (Foundation Excise Tax) - Not opposed to general reduction of tax but opposes special exception, p. 1 H.R. 810 (Foreign Travel - Government Officials) Not opposed in principle. Suggests modifications, p.18 H.R. 3630 (Cooperative Telephone Companies) - Supports in principle but suggests another approach, p. 19 H.R. 4030 (Foundation Business Holdings) - Opposes, p. 22 H.R. 7003 (Leasing by Private Foundation) - Does not oppose if bill amended to conform with bill reported by Senate Finance Committee, p. 33 Excise Taxes H.R. 1337 (Constructive Sale Price) - Supports. Suggests clarification, p. 4 H.R. 1920 (Repayment after certain losses) - Opposes, p. 6 H.R. 2028 (Home Production) - No objection, p. 8 H.R. 2852 (Farm Use) - Opposes use tax exemption. Supports refund to crop sprayer if farmer waives rights in writing, p. 11 H.R. 2984 (Trailers for Farm Use) - Opposes. p. 14 H.R. 3633 (Ammunition Components) - Does not oppose but suggests postponement of effective date. p. 21 H.R. 4458 (Distilled Spirits) - No objection, p. 26 H.R. 5103 (Tire Warranty Adjustments) - Not opposed in principle. Suggests modifications, p. 28 H.R. 6853 (Fishing Equipment) - Opposes, p. 31 -5The Department has been advised by the Office of Management and Budget that there is no objection from the standpoint of the Administration's program to the submission of this report to your Subcommittee. Attachment Treasury Department Recommendations on the 21 Bills to be Considered by the Subcommittee on Miscellaneous Revenue Measures 1. H.R. 112. Under present law (section 4940) a 4% excise tax is imposed on the net investment income of all private foundations, including operating foundations. The bill would reduce the 4% excise tax on net investment income to 2% in the case of private operating foundations that operate long-term care facilities. The Treasury Department opposes special exceptions to the tax on investment income because they introduce unwarranted complexity in an already complex area. We suggest that if the 4% tax on investment income is to be reduced to 2% for private foundations that operate long-term care facilities, the tax should also be reduced to 2% for all private foundations. One of the purposes of the 4% excise tax on investment income was to provide sufficient revenues to cover the cost of the Internal Revenue Service's administration of the tax laws pertaining to private foundations. If the tax imposed by section 4940 were reduced from 4% to 2% on the net investment income of all private foundations it is estimated that the revenues raised by the 2% tax would be $35 million. The cost of auditing all tax-exempt organizations, including private foundations, is estimated to be $29 million. Accordingly, reducing the 4% tax on investment income to 2% for all private foundations would produce more than sufficient revenues to cover the cost of auditing the entire -2nonprofit sector. Treasury would not oppose H.R. 112 if the 4% excise tax imposed on the net investment income of private foundations were reduced to 2% for all private foundations. -32. H.R. 810. The Tax Reform Act of 1969 added a provision to the Code (section 4941) which in general prohibits certain transactions between private foundations and certain "disqualified persons," by imposing a graduated series of excise taxes on the disqualified person (and in certain circumstances on the foundation manager). Government officials are "disqualified persons" for this purpose except for certain specifically set forth transactions including the payment of expenses of domestic travel. The bill would provide an additional exception for payment or reimbursement of foreign travel expenses of a government official by a private foundation. The Treasury Department recommends that H.R. 810 be amended so that the amount of allowable foreign travel expenses of a government official that can be paid or reimbursed by a private foundation is consistent with the amount of expenses that can be deducted by taxpayers attending foreign conventions. With this change permitted reimbursable expenses for any one foreign trip by a government official would be the lowest coach or economy air fare charged at the time of travel, such amount not to exceed $2,500 or the actual cost of the transportation involve plus an amount for all other traveling expenses not in excess of 100% of the per diem rates allowed Federal employees for governme trips to the same locations for a maximum of four days. Treasury would not oppose H.R. 810 if these changes were made. -43. H.R. 1337. Present law provides that for purposes of computing a manufacturer's excise tax on sales at retail of trucks, buses, and trailers the taxable price is the lower of (1) the price for which the article is sold or (2) the highest price at which competing articles are sold to wholesale distributors in the ordinary course of trade. In the case of trucks and trailers, the Internal Revenue Service has ruled that where the manufactur does not ordinarily sell such articles to wholesale distributors (and few do), a constructive price for sales at retail is 75% of the manufacturer's retail selling price. However, this constructive price cannot be less than the manufacturer's cost where the manufacturer has an established retail price, and cost plus 10% where (as in the case of custom work) he does not have an established retail price. H.R. 1337 would eliminate the use of an individual manufacturer's costs (or cost plus 10%) in determining a constructive price in the situation where the 75% rule is now applied, i.e. , sales at retail where the manufacturer does not sell such articl to wholesale distributors. The Treasury Department supports H.R. 1337. The not less than cost rule produces uncertainty at the time of sale as to the amount of the manufacturer's excise tax liability. Computing "costs" is always complicated, especially the problem of allocating overhead costs. A straight percentage of retail -5price would greatly simplify matters for the trade and the Internal Revenue Service. Even though the not less than cost rule is deleted, it should be made clear that the rule continues to be available for use in constructing a taxable price where a person makes and uses a taxable item (sec. 4218 of the Internal Revenue Code). Such item may be a specialized unit which is never sold, so that no market price is available from which to construct a manufacturer's price. In this case, cost of production is the only realistic tax base. -64. H.R. 1920. The proposed bill would require the Treasury Department to repay the amount of internal revenue tax paid (or determined) and customs duty paid on distilled spirits, wine, rectified products, and beer which are lost, rendered unmarketable, or condemned by duly authorized officials, by reason of fire, flood, casualty, or other disaster, or breakage, destruction, or other damage (excluding theft) resulting from vandalism or malicious mischief. No reimbursement would be made for tax losses of less than $250 per occurrence, or for losses covered by insurance Present law provides for similar payments (without the $250 minimum requirement) , only in the case of a "major disaster" as declared by the President. The Treasury Department is opposed to H.R. 1920. The dollar a business invests in inventory is a dollar of cost irrespective of the factors going to make up the cost, whether such factors be raw materials, wages, transportation, or taxes. Past Congressional policy as to casualty losses has recognized this fact and, as a consequence, losses by handlers of alcoholic beverages, except in the case of natural disasters of extraordina severity, have been treated as ordinary business hazards to be borne by the holder of the beverages or his insurance company. H.R. 1920 would provide an exception to this general policy by, in effect, making the Federal government an insurer. By so -85. H.R. 2028. Under present law, the head of any family may, after registering, produce up to 200 gallons of wine a year for family use without payment of tax. An individual or married woman who is not the head of any family is not covered under this exemption. Existing law has no provision which authorizes the home production of beer. H.R. 2028 would permit any duly registered individual 18 years of age or older to produce specified amounts of wine and beer without payment of tax for personal and family use and not for sale. The exemption under Federal law would not serve to authorize the home production of beer contrary to State law. The Treasury Department has no objection to the enactment of H.R. 2028. However, we suggest that the requirement for registration by producers of wine for personal or family use be deleted. Registration of producers of wine for personal or family use has proven of little use to the Bureau of Alcohol Tobacco and Firearms and is burdensome to the public. However, for enforcement and revenue protection purposes, registration is necessary in the case of home brew since the process entails the production of a mash fit for distillation. -96. H.R. 2714. Under present law an employee is not in general able to assign his vested benefits under a pension, profit-sharing or stock bonus plan as collateral for loans from banks or insured credit unions. The bill would permit a participant in a profit-sharing, stock bonus or money purchase pension plan to assign as collateral for a loan from a bank or credit union the lesser of (A) his accrued benefit under the plan derived from his own contributions, or (B) the total amount of his contributions to the plan, reduced by his withdrawals and any other outstanding security interests in those contributions. In general, the policy of the Employee Retirement Income Security Act (ERISA) is to insure that amounts set aside will be available after retirement. ERISA does not fully carry out this purpose as it allows early withdrawals or loans from the plan in certain circumstances. H.R. 2714 attempts to be consistent with these exceptions to retention of benefits until retirement, and, except for mandatory contributions to money purchase plans, permits a pledge as security for a loan only where withdrawal would be allowed. The Treasury, however, believes we should move in the opposite direction and increase the chances that funds will remain for retirement. Moreover, the Treasury is concerned about the tax shelter aspects of the permitted assignments. -10The proposed bill would permit a participant to claim an immediate deduction for interest on the borrowed funds, while deferring payment of tax on the income earned by his contributions used as collateral for the loan until such income is distributed to him. The Treasury Department strongly believes a taxpayer should not be entitled to a current deduction for interest paid on amounts borrowed to purchase or carry investments the income from which is not taxed currently. The bill attempts to defer a deduction for interest if the loan is used directly or indirectly to finance a contribution to the plan. There is no reason to complicate the Code by an effort to draw this distinction. Even if the interest deduction were to be denied in all cases, the carryforward provision involves additonal complexity. The Treasury Department opposes H.R. 2714. -117. H.R. 2852. The bill would exempt from the annual use tax on civil aircraft, aircraft used primarily for agricultural operation. The bill also would provide that an aerial crop sprayer would be entitled to a credit or refund of gasoline and special fuels excise taxes used in crop dusting on a farm, if the farmer has waived any rights to that credit or refund. The. Treasury Department opposes the provision of the bill that would exempt agricultural aircraft from the use tax. The argument for exemption of agricultural (and horticultural) aircraft from the annual use tax is that these planes make little or no use of facilities and services provided by the Federal government. Quite often the operators use their own private fields, fly short distances to and from their work, and fly below normal flight levels when dusting or seeding. However, the planes do add to air congestion in some areas and have the benefit of the airways systems if the operators need to use it. Furthermore, the Department of Transportation study of air user charges concluded that general aviation as a whole greatly underpays its share of airways costs. The Treasury Department supports the provision of the bill that would permit aerial crop sprayers to receive credits -12or refunds of the fuels taxed if the farmers otherwise eligible for those credits or refunds have waived in writing their rights in favor of those aerial crop sprayers. The restriction of the farm fuel tax refund to the owner, tenant or operator of a farm was intended by the Congress to assure that the farmer received the benefit of the refund. It was felt that if the refund were given directly to the custom operator, the farmer would not benefit through a lower price for the custom work. Over the years, it has been argued that the farmer still doesn't get the benefit of the refund for custom work because the custom operator doesn't give him the information as to gallons used so that he (the farmer) can claim the refund. The instant bill, as we understand it, would attempt to solve these problems by permitting an aerial applicator doing custom work to apply for the farm fuel refund himself, but give the farmer a chance of knowing what was involved in that the farmer would have to waive in writing his right to a refund. This approach was taken in a bill ordered reported out by the Ways and Means Committee in the mid-1960's. That bill, although approved by Treasury and the Department of Agriculture, was never enacted. -13The Treasury Department suggests that H.R. 2852 be extended to cover all custom work, not just aerial application, since custom work is also done in plowing and harvesting where taxable fuel is also used. -148. H.R. 2984. The bill would exempt from the 10% manufacturer's excise tax on trucks, truck trailers, and buses those trailers or semitrailers which are suitable for use with a towing vehicle having a gross vehicle weight of 10,000 pounds or less and which are designed to be used for farming purposes or for transporting horses or livestock. The Revenue Act of 1971 (Public Law 92-178) exempted from the manufacturer's excise tax trucks with a gross vehicle weight of 10,000 pounds or less and trailers and semitrailers with a gross vehicle weight of 10,000 pounds or less if suitable for use with a vehicle having a gross vehicle weight of 10,000 pounds or less. The proposed bill would remove the present 10,000 pound limit for the exemption of trailers and semitrailers provided they were designed to be used for farming purposes or for transporting horses and other animals. Because the trailers proposed to be exempted would have a gross vehicle weight in excess of 10,000 pounds, the exemption would be accorded to trailers with a gross vehicle weight at which single unit trucks are taxable. The proposed exemption for trailers thus would constitute an obvious discrimination against single unit trucks in the 10,000 to 20,000 pound class. -15The bill also would create a dual standard for trailers over 10,000 pounds gross vehicle weight which are suitable for use with pickup trucks. Those designed for farming purposes or the hauling of animals would be exempt, while trailers of the same capacity designed for hauling general merchandise, or supplies and equipment for mechanics, would continue to be taxable. The Treasury opposes H.R. 2984 because the bill would discriminate against single unit trucks and non-farm trailers and semitrailers of the same carrying capacity. -169- H.R. 3050. To ensure that retail outlets have an adequate number of copies of magazines or other periodicals, publishers and distributors often distribute more copies of the periodical than it is anticipated the retailer can sell. When the next issue of the periodical is published and shipped to the retailer the retailer returns the unsold copies of the earlier issue to the issuer. The Internal Revenue Service has taken the position that accrual basis publishers and distributors must include the sales of the periodicals in income when they are shipped to the retailers and may exclude from income the returns only when the periodicals are actually returned by the retailer during the taxable year. The bill would allow accrual basis publishers and distributors of magazines or other periodicals to elect to exclude from income for the year of the sale amounts attributable to the sale of periodicals for display purposes where the periodicals are returned no later than the 15th day of the third month after the close of the taxable year in which the sale was made. In order to be equitable to taxpayers who are similarly situated, the Treasury Department recommends that the bill be extended to cover two additional industries which experience -17significant returns, the paperback book industry and the sound recording industry. The Treasury Department believes that the special relief provided by the bill should be allowed only to industries that have substantial returns of goods after year end attributable to sales during the prior taxable year. Finally, to prevent an estimated revenue loss of $50 million in the year of enactment resulting from deductions during that year for returned items sold in the prior year as well as returned items sold in the year of enactment, Treasury proposes that taxpayers electing the new method be required to establish a suspense account to delay the deduction for goods returned during the first 2% months of the year the election is made. The estimated revenue loss of $50 million is based upon extending the bill to cover the paperback book industry and the sound recording industry. Requiring a suspense account is consistent with the prior transitional rules approved by the Congress to prevent the doubling up of deductions when the Code has been amended to permit deductions for estimated expenses that previously had been nondeductible under the accrual method of accounting. For example, in permitting accrual basis taxpayers to deduct reserves for certain guaranteed debt obligations (section 166(f)) and accrued vacation pay (section 463) the Congress has required the establishment of a suspense account to prevent revenue losses attributable to the doubling up of deductions. The Treasury Department does not believe -18accrual basis magazine publishers and distributors should be treated differently from taxpayers electing to deduct these estimated expenses. -1910. H.R. 3630. Under present law to qualify for exemption from income tax cooperative telephone companies must derive at least 85% of their annual income from payments from members (section 501(c) (12)). Compliance with the 85% requirement is based on gross income and computed on a yearly accounting period. The Internal Revenue Service has taken the position that amounts received by a telephone cooperative from a non-member telephone company in connection with servicing calls to or from the cooperative's members constitute non-member income which, if such income exceeds 15% of the cooperative's gross income, will prevent the telephone cooperative from qualifying for exempt treatment. The bill would provide that amounts or credits received by a mutual or cooperative telephone company from a non-member telephone company in connection with the servicing of calls to or from the cooperative's members shall not enter into the 85% member-income test in determining the telephone cooperative's tax-exempt status. The Treasury supports the underlying principle of H.R. 3630 that the receipt of amounts from a non-member telephone company, in connection with the servicing of calls to or from a telephone cooperative's members, should not -20jeopardize the exempt status of the telephone cooperative. However, Treasury recommends that this result be accomplished by amending H.R. 3630 (i) to eliminate the requirement of present law that 85% of the income of the cooperative be derived from its members, (ii) to treat all income integrally related to the exempt function of the cooperative as exempt from tax (such as amounts received from a non-member telephone company in connection with servicing telephone calls to or from the cooperative's members), and (iii) to tax the cooperative on all unrelated business income, including passive investment income. These changes would treat telephone cooperatives and other entities exempt under section 501(c)(12) in the same manner as entities exempt under section 501(c)(7) (social clubs) are treated under present law. The Treasury Department would support H.R. 3630 if these changes were made. -2111. H.R. 3633 (Title II). Under present law, a 10% excise tax is imposed on sales by manufacturers and importers of pistols and revolvers and an 11% excise tax is imposed on sales of other types of firearms and upon shells and cartridges used in firearms. Amounts equivalent to the receipts from these taxes are covered into the Wildlife Restoration Fund, from which appropriations are authorized to the States (on a sharing basis) for use in carrying out wildlife restoration projects and hunter safety projects. The bill would impose the 11% manufacturer's excise tax on the sale of component ammunition parts by the manufacturer. The tax would apply to sales of cartridge cases, primers, percussion caps, bullets, shots, wads, and powders which are used by consumers to load or reload their own ammunition for firearms (including pistols and revolvers). The Treasury Department opposes the general principle of "earmarking" revenues. However, if it is considered important to be consistent and apply the excise tax on shells and cartridges to ammunition components, the Treasury Department would not oppose H.R. 3633. The Treasury Department recommends, however, that the effective date of H.R. 3633 (October 1, 1977) be postponed to the first day of the first calendar quarter that begins more than 20 days after enactment of the bill, to give sufficient notice to persons who will be liable for this tax. -2212. H.R. 4030. The bill would create an exception to the tax on the excess business holdings of a private foundation in cases in which a private foundation owned over 50% of the voting stock of a public utility which had taxable income of less than $1 million during its first taxable year ending after May 26, 1969, and which meets certain other conditions. One of the basic goals of the Tax Reform Act of 1969 was to eliminate the use of private foundations to maintain control of business enterprises. Foundation control of business interests had produced a number of undesirable results: competing businesses owned and operated by taxable entities were placed at a competitive disadvantage; benefits to charity were deferred through the accumulation of funds in controlled businesses; and foundation managers became primarily concerned with business affairs rather than with the charitable objectives of their foundations. A provision was added to the Code by Congress in 1969 (section 4943) to limit the involvement of private foundations in business enterprises by imposing a tax of up to 2 00% on the business holdings of private foundations in excess of certain prescribed percentages. The adoption of special exceptions to the excess business holding provisions would undermine one of the basic goals of the Tax Reform Act of 1969. While we recognize that an -23exception to the tax on excess business holdings for business holdings by a private foundation in a public utility would not run counter to all of the arguments advanced for the adoption of the tax on excess business holdings (e.g., a public utility operates as a regulated monopoly in a certain area and, therefore, does not "compete" with other businesses) we are, nevertheless, opposed to creating exceptions on an ad hoc basis to the limitations imposed by section 4943. Regardless of the nature of the business controlled by the foundation and its donor or donors, the mere existence of foundation control inevitably tends to direct the foundation's efforts to operating the business and thus to divert attention from the charitable purposes of the foundation. The Treasury Department opposes H.R. 4 030. -2413. H.R. 4089 The bill would accord to "recognized" Indian tribes the tax treatment now available to governmental units. For example, the bill would provide beneficial tax treatment with respect to retirement income derived from employment by a recognized Indian tribe, permit a credit for contributions made to those seeking election to a tribal office, treat interest paid on bonds issued by tribes (including industrial development bonds) as tax-exempt, exclude from gross income scholarship and fellowship grants made by tribes, permit a deduction for real property and income taxes imposed by tribes, allow deductions for charitable contributions to tribes, and grant tribes exemption from certain excise and user taxes accorded other governmental uhits. The term "recognized Indian tribe" would include any tribe, band, community, village or group of Indians or Alaskan Natives which is recognized by the Secretary of the Treasury, after consultation with the Secretary of the Interior, as performing substantial governmental functions. The Treasury Department recommends that the term "Indian Tribe" be substituted where the term "recognized Indian tribe" appears in the bill. The term "recognized" has many connota- tions associated with the provision of services by the Department of the Interior. It would be misleading and in- appropriate to create a new designation of "recognized" tribes -25under the auspices of the Secretary of the Treasury when alternative wording is possible. Treasury would not oppose H.R. 4089 if this change were made. -2614. H.R. 4458. Section 1 of the bill would amend section 5233(c) of the Code to eliminate, in the case of gin and vodka for export, the requirement that the label show the real name of the distiller in whose name the spirits were produced if the label contains a trademark. This label requirement now is applicable to all spirits bottled in bond. The bottling in bond of gin and vodka is principally for export purposes. Both gin and vodka are made from neutral spirits, and several of the principal brands of gin and vodka are distilled by firms which purchase the neutral spirits from grain processing plants. These distillers do not desire the name of the grain processing plant to appear on their brand labels. The Treasury Department has no objection to section 1 of the bill. However, the Treasury Department recommends that section 1 of the bill be extended so as to delete the requirement of identification of the distiller in all cases, not merely as to gin and vodka, and whether or not the spirits are bottled for export. Present law does not require the name of the actual distiller to be shown on the label of distilled spirits not bottled in bond. Such requirement for spirits -27bottled in bond and withdrawn for domestic use serves no purpose other than to provide a marketing advantage to those bottlers of bottled in bond products who do their own distilling Sections 2 through 7 of the bill consist of a series of administrative amendments to which the Treasury Department has no objection. -2815. H.R. 5103. The bill would make the following changes in the excise tax provisions as they relate to warranty adjustments of tires and tread rubber in recapped tires. 1. The amount of excise tax refunded to the manufacturer would be in proportion to the adjustment of the sales price of the original tire. Under current law the adjustment is determined with respect to the sales price of the replacement tire. 2. In computing the amount of excise tax to be refunded to the manufacturer, where the manufacturer's warranty runs to the ultimate consumer, or the immediate vendee, the relevant price adjustment would be the adjustment to the ultimate consumer, or immediate vendee, as the contrast might provide. In the first case, the manufacturer could receive a refund even though he made no adjustment to the price which his immediate vendee paid for the tire, so long as an adjustment was made in the price which the ultimate consumer paid for the tire. Under current law, the adjustment is to be computed on the basis of the refund made by the manufacturer to his immediate vendee. The Internal Revenue Service announced this position in rulings in 1933 and 1959. 3. The amount of the excise tax to be refunded could be computed on an average basis. Under current law the refund must be computed on a per tire basis. As noted below, Treasury recommends a clarification of this aspect of the bill. -294. The bill would expand the statute of limitations to permit the filing of a claim for credit or refund of the tread rubber excise tax within one year after the day on which the price adjustment is made. Under current law, the statute of limitations runs either from the date the excise tax is initially paid or the date it is reported on a tax return. The Treasury Department does not believe a refund or credit of excise tax should be allowed where the manufacturer merely reduces his initial selling price to reflect anticipated warranty expenses which his vendee may incur. An example of an arrangement which in effect is an initial price reduction is set forth in Situation 3 of Rev. Rul. 76-423. The Treasury Department recommends that the provisions of the bill which would permit the refund to be computed on an average basis (lines 9 through 25 on page 2 of the bill) be clarified to assure that a refund or credit will not be allowed where the manufacturer in substance has merely reduced his initial selling price. With this modification the Treasury Department does not object to the bill. The Treasury Department notes that the predecessor of this bill, H.R. 2474 (94th Cong.), contained provisions dealing with tread rubber. The Treasury Department would not object if the tread rubber provisions were added to this bill. -3016. H.R. 6635. The bill would amend the Second Liberty Bond Act to allow the Secretary of the Treasury, with the approval of the President to increase the investment yield on outstanding United States retirement plan bonds and individual retirement bonds for each interest accrual period beginning after September 30, 1976, so that the investment yield on such bonds is consistent with the investment yield on Series E savings bonds. The Treasury Department recommends that the bill be amended to permit an increase in the investment yield for interest accrual periods beginning after September 30, 1977, rather than for periods beginning after September 30, 1976. The Treasury Department would support H.R. 6635 if this change were made. The bill will help to assure that the rate of return to holders of retirement plan bonds and individual retirement bonds is maintained at a level commensurate with the rate of return on Series E savings bonds. It will help maintain the competitiveness of retirement plan bonds and individual retirement bonds with other investment vehicles and, therefore, will assist the Treasury in the exercise of its borrowing authority. -3117. H.R. 6853. The bill would permit manufacturers and importers of fishing equipment to pay the 10% excise tax at the end of the quarter following the quarter in which the shipment was made. Under present regulations (the law has no time of payment provision), the Treasury requires payment (deposit) of all manufacturers' excises within 9 days after the end of each semimonthly period, if liability of a taxpayer for all manufacturers, retail and service (telephone, etc.) excises 1/ exceeds $2,000 for any month in the preceding calendar quarter. The Treasury Department opposes H.R. 6853. Manufacturers of fishing equipment give lengthy credit terms to encourage buying by dealers during the "off-season" so that the manufacturers can even out their production process. The apparent purpose of the bill is to delay tax payment until collection from the dealer. There is, however, no reason the manufacturers should be permitted delayed payment of tax merely because they, for their own advantage, give generous credit terms. The manufacturers cannot delay paying their employees, the landlord, the electric company, etc. -For alcohol and tobacco products payment is required by the end of the semimonthly period following the semimonthly liability period. -32It should be noted that the Ways and Means Committee on July 26, voted to impose a new tax, effective October 1, 1979, on fuel used in commercial transportation on inland waterways. Liability would be computed on a quarterly basis with, payment due the end of the month following the end of the quarter. The Treasury Department opposed this liberalization as being inconsistent with the payment rule for other excise taxpayers. -3318. H.R. 7003. The Tax Reform Act of 1969 added a provision to the Code (section 4941) which in general prohibits certain acts of "self-dealing" between private foundations and certain "disqualified persons" by imposing a graduated series of excise taxes on the self-dealer (and in certain circumstances on the foundation manager). H.R. 7003 would exempt permanently from the self-dealing tax imposed under section 4941 the leasing of property to a disqualified person by a wholly-owned subsidiary of a private foundation where (a) the lease is pursuant to a binding contract in effect on October 9, 1969, (b) the leasing arrangement at no time constitutes a prohibited transaction under section 503(b), (c) the lease terms are no more favorable to the disqualified person than such terms would be in an arms-length transaction, (d) the lessor is not a tax-exempt corporation, and (e) the disqualified person obtained that status solely because of contributions made to the private foundation prior to October 9, 1969. The bill would also extend the grace period for terminating a pre-existing lease between a private foundation and a disqualified person (as long as the lease is not disadvantageous to the foundation) from December 31, 1979 to December 31, 1989. The bill also would extend the deadline by which property leased by a private foundation to a disqualifie person may be sold (for at least fair market value) to the disqualified person from December 31, 1977 to December 31, 1989. -34In addition, the bill would extend the January 1, 1977 deadline by which a private foundation could sell stock to a disqualified person even though the transition rules of the 1969 Act did not require divesture at that time in order to avoid the tax on excess business holdings to January 1, 1990. We understand that Public Welfare Foundation, Inc. owns all of the stock of three corporations, The Gadsden Times, Inc., The Tuscaloosa News, Inc., and the Spartanburg Herald and Journal, Inc. These three wholly-owned subsidiaries have, for a substantial period of time, leased all of the assets of three newspapers to operating companies. Apparently, after the Internal Revenue Service suggested that the original rentals specified in the lease agreement were unreasonably high, the newspaper operators decided to make charitable donations to the Foundation in exchange for reduced rentals. Since each of the operators contributed more than $5,000 and more than two percent of the total contributions to the Foundations as of.October 31, 1969 (the end of the fiscal year which includes October 9, 1969), each operator is considered to be a "substantial contributor" to the Foundation, within the meaning of Code section 4946(a)(1)(A). Therefore, the operators -35are "disqualified persons" and their leasing arrangements with the private foundation (through its subsidiaries) fall within the statutory definition of "self-dealing." However, a "grandfather" clause in the Tax Reform Act of 1969 defers application of the self-dealing taxes to these leasing arrangements until taxable years beginning after December 31, 1979. A charitable organization, whether it be a public charity or a private foundation, must not operate to the benefit of private individuals. Prior to passage of the Tax Reform Act of 1969, this principle was applied to dealings between a charity and related parties by using the "prohibited transactions test of Code section 503(b). Generally, this standard demands that such dealings accord with the type of bargain that would be struck in an arm's-length transaction. In enacting the Tax Reform Act of 1969, Congress made the decision that the subjective arm's length test of section 503(b) was not satisfactory in the case of private foundations. Congress chose instead to eliminate completely self-dealing between a foundation and certain "disqualified persons" through the adoption of the self-dealing taxes under section 4941. It apparently believed that the interference with particular legitimate transactions was outweighed by the elimination of actual and potential abuse. The statutory self-dealing standards for private foundations are thus objective, inflexible rules which imply rejection of a case-by-case analysis. -36However, like any objective standard, the self-dealing provisions can apparently lead to harsh results, especially in view of the fact that an individual furnishing only two percent of a foundation's contributions is classified as a "disqualified person." Transactions will run afoul of section 4941 even though a subjective evaluation would suggest that a particular "disqualified person" had little control over the foundation's operations and that the transaction involved no overreaching. The lessee-operators in this case would appear to be at the outer spectrum of "disqualified persons" encompassed by the 1969 Act. Thus, (a) the lessees were not the major contributor to the foundation; (b) the newspaper leases were in existence long before the lessees made any donation to the foundation; (c) the "contributions" in this case were apparently offered by the newspaper operators as substitutes for rental payments; and (d) the consequences of such a recharacterization of payments to the foundation were unforeseen Therefore, the Treasury would not object to special consideration of this case provided the grant of relief is drawn more narrowly than H.R. 700 3. The Treasury Department recommends that the bill be amended to remove from the definition of "substantial contributor" a person who became a substantial contributor solely because of contributions prior to October 9, 1969 where such contributions were made to the private foundation in lieu of rent oricdnallv required by a -37leasing arrangement. Treasury believes that this approach is preferable to a general extension of the various grand- father clauses, which have already provided generous transition rules for private foundations. It may also be preferable to a narrowly defined exception to the grandfather clauses because it will not set a precedent which would indicate that in certain cases at least Congress is willing to consider allowing more time to unravel self-dealing transactions without any special showing of the inadequacy of the ten-year period originally granted. The Treasury Department would not oppose H.R. 7003 if this change were made. -3819. H.R. 8535. Under present law, the child care credit is not allowed for amounts paid to a relative unless (a) neither the taxpayer nor the taxpayer's spouse is entitled to a dependency personal exemption deduction with respect to that relative, and (b) the services provided by the relative constitute "employment" within the meaning of the Social Security taxes definition. The bill would allow the child care credit for amounts paid for child care services performed by relatives of the taxpayer whether or not such services constitute "employment" within the meaning of the Social Security taxes definition of that term, provided neither the taxpayer nor the taxpayer's spouse is entitled to a dependency personal exemption deduction with respect to that relative. Present law is inconsistent in permitting the child care credit for payments to relatives in certain circumstances and not in others. To eliminate this inconsistency the Treasury Department recommends disallowing the credit for amounts paid to relatives in all cases. The Treasury Department believes the potential abuses of permitting the child care credit for amounts paid to a relative of the taxpayer, including the splitting of income through gifts to relatives who are in lower income tax brackets or have incomes below taxable levels, outweigh the merits of granting the credit for such payments. -3920. H.R. 8811. Under present law if a United States Tax Court judge elects to come under the Tax Court retirement system, he is barred from ever receiving any benefits under Civil Service retirement system for any service performed before or after his election is made, even though he served as a Tax Court judge for less than the minimum 10-year period required to qualify for retired pay under the Tax Court retirement system. The bill would amend section 7447 to allow a Tax Court judge to revoke an election to receive retired pay under the Tax Court retirement system at any time before the first day on which retired pay would begin to accrue with respect to that individual. The bill would also provide that no Civil Service retirement credit would be allowed for any service as a Tax Court judge, unless with respect to such service the amount required by the Civil Service retirement laws has been deposited, with interest, in the Civil Service Retirement and Disability Fund. The Treasury Department supports H.R. 8811. -4021. H.R. 8857. Present law (section 337) in general terms provides that if a corporation adopts a plan of complete liquidation and within 12 months distributes to its shareholders all of its assets (less those retained to meet claims), then gain or loss is not to be recognized to the corporation for tax purposes with respect to property it sold (not including regular sales of inventory or similar property) during this 12-month period. The purpose of this provision (section 337) is to accord the same tax treatment where a corporation sells its property and distributes the proceeds to its shareholders as can be obtained by the corporation first distributing the property in kind to the shareholders who then sell the property. The benefit of nonrecognition afforded by section 337 is not available to a "collapsible corporation" as defined in section 341(b). The purpose of the "collapsible corporation" provision is to prevent the avoidance of gain at the corporate level and availability of nonrecognition of gain, even though the liquidation occurs within a 12-month period (section 337), would frustrate the intent of obtaining an income tax at the corporate level. As a result, this provision presently (in section 337(c)(1)(A)) provides that the section is not -41to apply to a "collapsible corporation." However, the sanctions in the case of a "collapsible corporation" are, in general, only applied for a limited period of time. A corporation which has owned "purchased assets" for more than three years is not, as a result of such holdings, defined as a "collapsible corporation." Therefore, such a corporation may avail itself of the benefits of nonrecognition in the case of a 12-month liquidation. The "collapsible corporation" provision also provides relief in the case of a corporation which has manufactured, constructed or produced its assets more than three years ago. In this case the statute does not exclude such a corporation from the definition of a "collapsible corporation" but, in most respects, provides what is the equivalent by providing that in such a case the sale of stock by the shareholders is not to give rise to ordinary income (under section 341(a)). However, since in the case of these manufactured, constructed or produced assets there is no special provision in the "collapsible corporation" definition excluding these corporations, the nonrecognition provision where liquidation occurs within 12 months is not available because the corporation, even three years after the completion of the manufacture, construction or production, technically is still a "collapsible corporation." -42The fact that corporations with purchased assets and constructed or produced assets are given the same tax treatment under present law where stock is sold, but different treatment when there is a distribution in complete liquidation within a 12-month period, indicates an inequality in treatment in these two situations where there is a distribution in liquidation. H.R. 8857 would amend present law to make available the nonrecognition of gain provision (section 337) where a liquidation occurs within a 12-month period in the case of a corporation holding manufactured, constructed or produced assets if none of the gain on the sale or exchange of the stock of such corporation would be treated as ordinary income under section 341(a) by reason of section 341(d)(3) because the corporation had held the assets manufactured, constructed or produced by it for more than three years after the completion of such manufacture, construction or production. Section 337 expressly provides nonrecognition treatment at the corporate level with respect to both gains and losses. However, the judicial acceptance of a so-called "straddle maneuver" in certain cases has permitted liquidating corporations to circumvent the expressed intention of that section. -43In such cases the corporation seeks to dispose of its loss assets prior to the adoption of a plan of liquidation (thus claiming the right to take losses into account at the corporate level) and dispose of its gain assets subsequent to the adoption of a plan of liquidation (thus avoiding any tax at the corporate level on assets that have appreciated in value). The Treasury Department regards the prospect of continued judicial acceptance of the so-called "straddle maneuver" as a serious problem which undermines the basic purpose of section 3 The bill would deal with the "straddle maneuver" by adding a new subsection (f) to section 337 that would require a liquidating corporation to recognize gain on the sale of its assets within the 12-month period to the extent that losses in the two years immediately prior to the adoption of the plan of complete liquidation were treated as ordinary losses and arose from the sale of property to which this nonrecognition provision (section 337) would have applied had such sales occurred after adoption of the plan of liquidation. The bill also provides that determination of the character of gain or loss from trade or business properties (section 1231 assets) is to be made in the year of the 12-month liquidation as if the liquidation has not occurred. This provision of the bill would prevent what would otherwise be a capital loss on the sale of trade or business properties (section 1231 assets) from being converted into an ordinary loss because -44the liquidation precludes the recognition of gain from the sale of other trade or business properties (section 1231 assets) which, if recognized, would have to be offset against the loss. The Treasury Department supports H.R. 8857. Contact: Alvin Hattal 566-8381 FOR IMMEDIATE RELEASE September 7, 1977 TREASURY DEPARTMENT ANNOUNCES INITIATION OF ANTIDUMPING INVESTIGATION ON PORTLAND HYDRAULIC CEMENT FROM CANADA The Treasury Department announced today that it would begin an antidumping investigation of portland hydraulic cement from Canada. Notice of this action will appear in the Federal Register of September 8, 1977. The Treasury Department's announcement followed a summary investigation conducted by the U.S. Customs Service after receipt of a petition alleging that portland hydraulic cement from Canada is being dumped in the United States. The information received indicates that the prices of portland hydraulic cement from Canada, exported to the United States, are less than the prices of portland hydraulic cement sold in the home market. The petition includes information indicating that the domestic U.S. industry may have been injured by reason of the alleged "less than fair value" imports. If sales at less than fair value are found by Treasury, the injury question would be subsequently decided by the U.S. International Trade Commission. For purposes of this investigation, the term "portland hydraulic cement" will refer to portland hydraulic cement, other than white, non-staining cement. Imports of this merchandise from Canada during calendar year 1976 were valued at approximately $26 million. * B-422 * * Contact: Alvin Hattal 566-8381 September 7, 1977 FOR IMMEDIATE RELEASE TREASURY ANNOUNCES COUNTERVAILING DUTY INVESTIGATION ON IMPORTS OF NON-RUBBER FOOTWEAR FROM URUGUAY The Treasury Department announced today that it is investigating under the Countervailing Duty Law whether non-rubber footwear imports from Uruguay are being subsidized. Nctice to this effect will be published in the Federal Register of September 8, 1977. The Countervailing Duty Law (19 U.S.C. 1303) requires the Secretary of the Treasury to collect an additional customs duty that equals the size of a "bounty or grant" (subsidy) which has been found to be paid on the exportation of merchandise. This action is being taken pursuant to a petition alleging that the non-rubber footwear industry in Uruguay receives benefits under several government programs which subsidize the manufacture/exportation of those products. Countervailing duty investigations involving these programs are presently being conducted with respect to the Uruguayan leather wearing apparel and handbag industries. A preliminary determination in this case must be made on or before January 8, 197 8, and a final determination no later than July 8, 19 78. Imports of non-rubber footwear from Uruguay during 1976 were valued at approximately $12 million. * B-423 * * RELEASE ON DELIVERY 10:00 A.M. E.D.T. Statement of Donald C. Lubick Deputy Assistant Secretary of Treasury for Tax Policy before the House Ways and Means Committee on H.R. 6715 Mr. Chairman and Members of the Committee: We welcome the opportunity to present the Treasury Department's views on H.R. 6715, the "Technical Corrections Act of 1977", which would make minor clarifying and conforming amendments to the Tax Reform Act of 1976 (P.L. 94-455). The 1976 Act was the product of more than three years of deliberation on which extensive hearings were held by this Committee both in 1974 and 1975. The final Act was very comprehensive. Virtually every taxpayer was affected by at least one of its more than 190 separate provisions. In the process of drafting the Act it was unavoidable that technical errors would appear in certain of its provisions. Our experience in drafting regulations after every major tax reform effort has shown the need for legislation to correct similar technical errors. However, H.R. 6715 marks the first time that a "clean up bill," making needed technical corrections has been proposed immediately following a major Act. We support the procedure innovated by H.R. 6715 as a precedent for future technical correction of major tax reform legislation. We are particularly concerned, as is the Committee, that, for this effort to succeed as a technical perfection of prior legislation, only minor clarifying and conforming amendments be included in the bill. We are anxious that the bill not fail in its purpose of making sorely needed technical corrections. In our view, the Committee should maintain the line of demarcation between needed technical legislation and legislation which requires substantial policy debate and B-424 - 2 avoid reopening in this bill the carefully considered policy decisions embodied in the 1976 Act. The provisions of H.R. 6715 were developed by the staff of the Joint Committee on Internal Revenue Taxation who worked closely with the Treasury staff. Since the bill was introduced by Mr. Ullman in April, we have had the opportunity to receive comments from interested groups. We welcome the comments of the American Bar Association, the American Institute of Certified Public Accountants and other groups in the professional tax community. We have incorporated those comments which we deemed appropriate in our recommendations. Our detailed recommendations with respect to H.R. 6715 are included in the Appendix. They fall into two basic categories. The first are those which relate to the provisions of H.R. 6715 as introduced. In most respects these recommendations involve conforming or clarifying changes to language of the Bill which we believe will implement more clearly the underlying policy decision embodied in the 1976 Act. For example, we have recommended an -amendment to section 3(a)(1) of the Bill to make clear that in the event of a sale or exchange of section 306 stock issued prior to January 1, 1977 which is carryover basis property in the hands of the seller, the amount realized will be reduced by the adjusted basis of the stock on December 31, 1976 plus any "fresh" start adjustment. As introduced, the Bill was interpreted by some as technically denying a reduction to the amount realized unless the pre-1977 section 306 carryover basis stock was eligible for a fresh start adjustment, as where there has been no appreciation in the value of the stock. In the same vein, we have also recommended that section 3(a)(2) of the Bill be amended to provide that section 303 of the Code be specifically applicable to redemption of section 306 stock. The purpose of section 303 is to relieve liquidity problems in estates holding large blocks of corporate stock by providing capital gains treatment for certain redemptions of that stock where the proceeds of the redemption are used to pay death taxes and administration expenses. Section 303, therefore, grants preferential treatment for redemptions which would otherwise be taxed as dividends. In this context we see no reason why the prior law treatment should not be continued rather than restricting section 303 to common stock redemptions. Our second category of recommendations relates to remedies 6715. Again, for technical we have confined defects beyond our recommendations those included to in H.R. - 3 proposals which implement" the expressed intent of Congress. For example, section 2137 of the 1976 Act allowed mutual funds to invest in municipal bonds and to pass through taxexempt interest to their" shareholders. The Congress clearly also meant that such interest should be treated as income for purposes of the 90 and the 30 percent of gross income limitations of Code section 851 dealing with sources of income so that these mutual funds are not inadvertently disqualified by doing what Congress intended to permit. We have recommended an amendment to make this clear. Another example is our recommendation regarding Code section 644, added by the 1976 Actl In the case of certain property sold or exchanged within two ye^rs of its transfer to a trust, section 644 imposes a' tax oil the trust in an amount not less than the amount which would have been paid by the transferor of such property had the transferor sold the property. The tax is imposed oh "includible gain" which includes in its measure of income gain realized by the trust on the sale or exchange. Section 644'thus imposes a tax oh r a realized gain from a nontaxable reorganization. The problem is the use of the-;Words "realized gain" rather than "recognized gain." The legislative history of section 644 indicates that only recognized gain was to be subject to tax. Consequently, we have recommended that section 644 be limited in application to sales or exchanges in which gain is recognized by the trust. We have also recommended an amendment to section 644 to clarify how the tax attributes of a transferor, such as capital losses or net operating losses, will be reflected in the computation of the tax on "includible gain". Under our proposal, the tax on includible gain will be calculated by reference to the taxable income of the transferor for the taxable year of the transferor in which the sale is made by the trust determined without regard to any tax attributes of the transferor which have been carried forward into the relevant taxable year, may be carried back or forward from that year or which are subsequently carried back into that year. Finally the 1976 Act provided that a notice of federal tax lien had to be filed not only in the office provided by local law, but also recorded in a special index maintained by the Service in its district office where the property is located. The purpose was to overrule a court decision that a properly filed, but improperly indexed, notice of lien did not impair the effectiveness of the filing against a purchaser - 4 who could not find the notice,of lien by an index search. The 1976 Act thus sought to preclude special treatment for federal tax liens. The concerned parties have now agreed upon a simpler, less expensive solution to the problem. We recommend elimination of the special indexing procedure, and we recommend with respect to personal property, that filing, even without proper indexing, is sufficient to give effect to a notice of tax lien. This is consistent with the Uniform Commercial Code rule for security interests in personal property. With respect to real property, we recommend that indexing be required for an effective filing in those states which require it for effective recordation of other instruments affecting real property. As a result, the federal government will be placed on an equal footing with other creditors with respect to filing requirements. In conclusion, the Treasury. Department strongly supports the concept of technical correction as a positive step in the legislative process. It is vital, however, to the integrity of that process that H.R. 6715 not be the mechanism to review the underlying policy decisions contained in the o 0 o purpose of technical correction 1976 Act —otherwise the limited will not be achieved. Appendix Treasury Department's Recommendations on H.R. 6715, the "Technical Corrections Act of 1977" The Treasury Department makes the following recommendations for clarifying and conforming amendments. 1. Minimum Tax Imposed on Trusts and Estates (Section 2(b)(3) of the bill and section 57 of the Code) The bill seeks to clarify the treatment of trusts and estates under the minimum tax in the case of the preference for excess itemized deductions. The bill provides that in the case of wholly charitable trusts under Code section 4947 (a) (1), the charitable contributions deduction is treated as a deduction in determining adjusted gross income. We recommend that in the case of charitable trusts under both Code sections 4947(a)(1) and (2) the deduction for charitable contributions be treated as a deduction in determining adjusted gross income. However, our recommendation does not extend to charitable income trusts established after January 1, 1976, the effective date of +.h& m ax Reform Act of 1976. 2 - Exchange Funds (Section 2(i) of the bill and section 368 of the Code) The bill seeks to close possible loopholes in the taxfree manipulation of investment companies in order to achieve diversification of investment, and also clarifies the language of Code section 368(a)(2)(F). The bill provides that no loss shall be recognized as the result of a reorganization of investment companies although gains realized in such transactions shall continue to be recognized under Code section 368(a)(2)(F). We recommend that to the extent a reorganization of investment companies is treated as a taxable transaction both gains and losses be recognized. 2 The bill makes all its amendments retroactive to the original effective date of Code section 368(a)(2)(F). We recommend that the amendments made by section 2(i)(l) not be applied retroactively, since transactions may have been effected in reliance on the clear language of Code section 368(a)(2)(F) as originally passed. 3. Certain Grantor Trusts Treated as Permitted Shareholders of Subchapter S Corporations (Section 2(u) of the bill and section 1371 of the Code) The bill provides that any trust all of which is treated, under Code sections 671-679, as owned by a grantor individual who is a citizen or resident of the United States will continue to be an eligible shareholder of a subchapter S corporation for sixty days after the death of the grantor. We recommend that such trusts, if included in the gross estate of the grantor, remain eligible shareholders for two years after the death of the grantor. 4. Fresh Start Adjustment for Certain Preferred Stock (Section 3(a)(1) of the bill and section 306 of the Code) The bill seeks to clarify Congressional intent that the dividend consequences upon a sale by or redemption from a holder of section 306 stock distributed before January 1, 1977 who has received such stock from a decedent dying after December 31, 1976 are limited to the difference between the amount received by the shareholder and the adjusted basis of such stock on December 31, 1976 plus any Code section 1023(h) "fresh start" adjustment. We recommend that: (1) carryover basis be available to reduce the amount realized whether or not the section 306 stock was eligible for a "fresh start" basis adjustment; (2) in the case of redemptions, the proposed Code section 306(a)(3) reduction be available only for transactions which would otherwise qualify for sale or exchange treatment under Code sections 302; and (3) Code section 301(c)(3) be amended to make clear that basis used to reduce the amount realized under Code section 301(a)(2) cannot be used again for the purposes of Code section 301(c). 3 r 5. Redemptions of Certain Preferred Stock to Pay Death Taxes (Section 3(a)(2) ot the bill and section 303 of the Code) The bill provides that the provisions of Code section 303, affording sale or exchange treatment for certain redemptions of shares of corporate stock, would generally not apply to redemptions of section 306 stock. We recommend that the provisions of Code section 303 be specifically applicable to redemptions of section 306 stock. 6. Fresh Start Adjustment for Certain Carryover Basis Property (Section 3(c)(1) of the bill and section 1023 of the Code) The bill seeks to eliminate the difficulty in determining the "fresh start" basis of tangible property where either or both the acquisition date and cost of the propery are unknown. The bill provides a formula to determine a minimum basis; December 31, 1976 value is determined by reference to date of death value and an assumed interest rate of eight percent. We recommend that the provision be limited to tangible personal property which is not used in a trade or business. We also recommend that estate tax value" (rather than date of death value only) be the starting point for the formula calculation. 7. Only One Fresh Start Adjustment for Carryover Basis Property (Section 3(c)(3) of the bill and section 102 3 of the Code) The bill provides that only one fresh start basis adjustment is to be made with respect to any carryover basis property. To make clear that the fresh start adjustment is to be made only at the death of the first decedent owning carryover basis property we recommend that the word "change" replace the word "increase" in proposed Code section 1023(h)(4). 8 - Adjustment to Carryover Basis Property for State Estate Taxes (Section 3(c)(5) of the bill and section 1023 of the Code) The bill clarifies the circumstances under which the payment of State estate taxes will result in an adjustment to the basis of carryover basis property. We recommend that the words "by the estate" be deleted from proposed Code section 1023(f) (3) (B) , thus permitting an adjustment to basis where the State estate tax liability has been discharged by an entity other than the estate, e.g., a funded inter vivos trust created by the decedent. 4 9. Gain Recognized on Use of Special Use Valuation Property to Satisfy Pecuniary Bequest (Section 3(d)(3) of the bill and section 1040 of the Code) The bill clarifies the application of Code section 1040 to pecuniary bequests of property subject to special use valuation under Code section 2D32A. It provides that gain will be recognized to the extent the fair market value of such property on the date of distribution exceeds the estate tax value of such property with both date of distribution and estate tax values to be determined without regard to Code section 2032A. Thus, appreciation calculated on the basis of the "highest and best use" value of such property from the estate tax valuation date to the date of distribution will be subject to tax under Code section 1040. We recommend that taxpayers be given the option to calculate the Code section 1040 gain by applying either "highest and best use" values or special use values on the relevant valuation dates. 10. Bond to Relieve Qualified Heir of Personal Liability for Recapture of Tax Where Special Use Valuation is Utilized (Section 3(d)(5) of the bill and section 2032A of the Code) The bill provides that a qualified heir may be discharged from personal liability for payment of the Code section 2032A recapture tax upon filing a bond in the amount of the maximum amount of additional tax which could be attributed to such heir's interest in the property. We recommend that this provision be extended to all persons party to the agreement required by Code section 2032A(d)(2). 11. Transfer Within Three Years of Death (Section 3(f) of the bill and section 2035 of the Code) The bill seeks to clarify the availability of the exception to automatic includibility of gifts made within three years of death for gifts excludable under the $3,000 annual present interest gift tax exclusion. It provides that the exception will be available for gifts to a donee made within three years of death if the donor was not required to file a gift tax return with respect to gifts made during the calendar year to such donee. 5 We recommend that (1) Code section 2035(a) and (b) be repealed; (2) Code section 2035(c) be redesignated section 2035 (a); (3) Code section 2036 be further amended to include in the gross estate of the transferor transfers within three years of death of shares of stock in which the transferor retained voting rights; and (4) Code section 2042 be amended to include in the gross estate of the transferor any transfer with respect to a life insurance policy made within three years of the transferor's death. 12. Coordination of Gift Tax Exclusion and Estate Tax Marital Deduction (Sections 3(g) (1) and (g)(2) of the bill and section 2056 of the Code) Section 3(g)(1) of the bill provides that the estate tax marital deduction will not be reduced under Code section 2056 (c) (1) (B) to the extent inter-spousal gifts of a decedent are subsequently included in the decedent's estate under Code section 2035. Section 3(g)(2) of the bill clarifies the method of computing the Code section 2056(c) (1) (B) reduction of the estate tax marital deduction on account of inter-spousal gifts of a decedent by excluding from the computation of the reduction any gift not required to be in a gift tax return. \ \ We recommend that (1) section 3(g)(1) be amended in a manner consistent with our recommendation regarding Code section 2035; and (2) section 3(g)(2) of the bill be deleted and instead that Code section 2056(c)(1)(B)(ii) be amended by inserting after the words "percent of" the words "the excess of the value of such gift over the section 2503(b) amount, if»any, allowable with respect to such gift." 13 • Split Gifts Made Within Three Years of Death (Section 3(h) of the bill and section 2001 of the Code) The bill clarifies the transfer tax consequences to a consenting spouse of gifts which were included in the estate of the donor spouse by reason of Code section 2035. It provides that the portion of such gifts attributable to the consenting spouse shall not be included in the total of adjusted taxable gifts of such spouse for estate and generation-skipping tax purposes and that any gift tax treated as a tax payable by the consenting spouse with respect to such gifts shall, for estate and generation-skipping tax computation purposes, be deducted from the aggregate amount of gift tax payable by such spouse. 6 If our recommendation regarding Code section 2035 is adopted, this provision should be applicable only to transfers within three years of death of shares of stock with voting rights retained by the transferor or transfers with respect to a life insurance policy. 14. Inclusion in Gross Estate of Stock Transferred by the Decedent Where the Decedent Retained Voting Rights (Section 3(i) of the bill and section 2036(b) of the Code) The bill clarifies the intended scope of Code section 2036(b) by providing that the section will apply (1) only where the decedent and his relatives own, or the decedent possessed the right to vote, at least 20 percent of the combined voting power of the corporation the shares of stock of which have been transferred, and (2) where a decedent directly or indirectly retains the voting rights in the transferred shares. We recommend that (1) proposed Code section 2036(b)(1) be amended by deleting the words "with respect to" and substituting the words "in transferred stock of"; (2) the Secretary be granted specific authority to promulgate regulations regarding the application of the attribution rules of Code section 318 to proposed Code section 2036(b) (2) in a manner consistent with the purposes of that section; and (3) proposed Code section 2036(b) (3) be amended in a manner consistent with our recommendations regarding Code section 2035. 15. Amendments Relating to Orphan's Exclusion (Section 3(1) (1) of the bill and section 2057(d) of the Code) The bill clarifies the scope of the orphan's deduction by creating a statutory entity, the "qualified minor's trust" to which a decedent's property may pass and qualify for the orphan's deduction. We recommend that section 3(1)(1) be deleted from the bill and that the Secretary be granted specific authority to promulgate regulations regarding the type of trust to which property may pass and qualify for the orphan's deduction. 7 16. Disclaimers (Section 3(m) of the bill and section 2518 of the Code) The bill clarifies Code section 2518(b) (4) by providing that a disclaimer by any party (including a surviving spouse) will constitute a qualified disclaimer for purposes of Code section 2518 where the surviving spouse receives an interest in the disclaimed property. We oppose the enactment of section 3(m) of the bill. We recommend instead that Code section 2518 be amended to make clear that a qualified disclaimer will not result if, pursuant to the disclaimer, the disclaimed property passes to a trust or trust equivalent in which the disclaiming party has an interest. 17. Termination of Certain Powers of Independent Trustees Not Subject to Tax on Generation-Skipping Transfers (Section 3(n)(l) of the bill and section 2614 of the Code) The bill clarifies the situations in which an individual trustee having discretionary powers to allocate trust income and principal among beneficiaries will be treated as a beneficiary of such trust by reason of holding such powers. The bill provides that an individual trustee will not be treated as having a power in a trust where such individual has no interest in the trust, is not a related or subordinate trustee, and has no present or future power in the trust other than the power to dispose of trust income and corpus among beneficiaries designated in the trust instrument. We recommend that the definition of related or subordinate trustee be expanded to include (1) partners and employees of the grantor or of any beneficiary and (2) employees of any partnership in which the partnership interest of any or all of the grantor, the trust, and the beneficiaries of the trust are significant from the viewpoint of either or both operating control and distributive share of partnership income. 18- Alternate Valuation Date in the Case of a GenerationSkipping Trust (Section 3(n)(3) of the bill and section 2602(d) of the Code) The bill provides that the alternate valuation date will be available for taxable terminations postponed beyond the death of a single deemed transferor because of the existence of an older generation beneficiary at the death of the deemed transferor. 8 We recommend that the alternate valuation date be available also where a taxable termination is postponed beyond the death of a single deemed transferor because of the existence, at the death of the deemed transferor, of a beneficiary in the same generation as the deemed transferor. 19. Erroneous Cross-References in Investment Credit (Section 4(a)(4) of the bill and section 48(d)(4)(D) of the Code) Code section 48(d)(2) permits the investment tax credit to be apportioned between the lessor and the lessee where the property meets the requirements of Code section 48(d)(4). Code section 48(d)(4)(D) provides that the property must not be leased "subject to a net lease (within the meaning of section 57(c)(2)." This is an erroneous cross-reference since this section does not define "net lease", but refers to multiple leases of a parcel of real property. Section 4 (a)(4) of the bill seeks to correct this cross-reference by striking out "section 57(c)(2)" and inserting "section 57(c)", which is the entire subsection defining a net lease. We recommend that the bill refer only to "section 57(c) (1) (B) ." The error in cross-reference began with the Revenue Act of 1971 (P.L. 92-178) when "section 57(c)(2)" was redesignated as "section 57(c)(1)(B)" and the cross-reference in Code section 48(d)(4)(D) was not changed. 20. Exempt-Interest Dividends of Regulated Investment Companies (Section 2137 of the Tax Reform Act of 1976 and section 851 of the Code) Section 2137 of the Tax Reform Act of 1976 amended Code section 851 to provide that a regulated investment company investing at least half of its assets in tax-exempt State and local governmental obligations may pay "exempt interest dividends" to their shareholders. Regulated investment companies seeking to qualify under the new provision may be subject to inadvertent disqualification. Code section 851(b) provides that a corporation will not be considered a regulated investment company unless at least 90 percent of its gross income is derived from dividends, interest, and gains from the sale or other disposition of stock or securities, and less than 30 percent of its gross income is derived from the sale or other disposition of stock or securities held for less than 3 months. Under Code section 103 gross income does not include interest on obligations of State or local governments. Consequently, a regulated investment company investing all, or most of, its 9 assets in tax-exempt obligations could encounter a qualification problem if it realized relatively minor amounts of incidental income from sources not qualifying for the 90 percent test or from gain from the sale or disposition of any of its assets held for less than 3 months (e.g., if bonds acquired by it were called by the issuer). 4 We recommend that Code section 851(b) be amended to provide that for purposes of applying the 90 and 30 percent limitations the terms "gross income" and "interest" include interest excludible from gross income under Code section 103. Also, a shareholder may invest in an open end mutual fund shortly before the expected declaration of a tax-exempt dividend and then tender his share for redemption immediately after receipt of the dividend. Since the fund's assets will have been depleted by the amount of the dividend distribution, the shareholder will generally recognize under present law a short term capital loss on the redemption in an amount approximately equal to the dividend. The shareholder thus can generate an artifical tax loss which is offset economically by the tax-exempt dividend. We recommend the solution suggested by Code section 852 (b) (4) which deals with the analogous situation in which a shareholder purchases stock shortly before the declaration of a long term capital gains dividend and then tenders his stock for redemption. Code section 852(b)(4) prevents a disparity in the treatment of the gain and loss in such circumstances by providing generally that the loss shall be treated as a long term capital loss to the extent of the capital gain dividend if the stock is held less than 31 days. In the case of the tender of the mutual fund shares held less than 31 days, there should be no recognition of any loss sustained to the extent of the tax-exempt interest dividend received by such shareholder. 21 - Disclosure of Returns and Return Information (Section 1202 (a)(1) of the Tax Reform Act of 1976 and Code section 6103(k)(4)) Code section 6103(k)(4) exempts from the general disclosure rules of Code section 6103 the disclosure of tax return information to a competent authority of a foreign government "which has an income tax convention with the United States but only to the extent provided in . . . such convention." (Emphasis supplied.) The provision inadvertantly excludes estate and gift tax conventions and the Swiss Mutual Assistance Treaty, which have tax exchange of information provisions. fiin-wi!? reconimend that the exemption provided by Code section bi03(k)(4) be revised to apply to a foreign government which a ^ a n l n c o m e t a x o r a n e s t a t e or gift tax convention or treaty with the United States. Also, the exemption should include a treaty such as the Swiss Mutual Assistance Treaty. 10 2 2. Declaratory Judgments Regarding Tax-Exempt Status of Charitable Organizations (Section 1306 of the Tax Reform Act of 1976 and Code section 7428) Section 1306 of the Tax Reform Act of 1976 added Code section 7428, which provides for declaratory judgments relating to the tax-exempt status or classification of charitable organizations. Code section 7428(c) provides that certain contributions shall remain deductible even though made during the period that the declaratory judgment litigation with respect to the revocation of the exempt status of the organization was pending and even though the court subsequently determines that the revocation was proper. As presently drafted, this provision only applies where the District Court or the Court of Claims decision is adverse to the organization. If the organization is successful in this Court but is reversed in a subsequent appeal, no protection is afforded to the donors during any period after the notification of revocation. However, if the declaratory judgment proceedings were initiated in the Tax Court, this is not the result. We recommend that contributions within the limits of Code section 7428(c)(2) remain deductible until a declaratory judgment proceeding instituted in the Tax Court or in the District Court or the Court of Claims is finally adjudicated, including the appellate process. 2 3. Gain on Sale of Certain Property Transferred in Trust (Section 701(e) of the Tax Reform Act of 1976 and section 644 of the Code) In the case of certain property sold or exchanged within two years of its transfer to a trust, Code section 644 imposes a tax on the trust in an amount not less than the amount which would have been paid by the transferor of such property had the transferor sold the property. The tax is imposed on "includible gain" which is the lesser of (1) gain realized by the trust on the sale or exchange or (2) the excess of the fair market value of the property at the time the property was transferred in trust over its adjusted basis at that time. Thus, tax liability results in all trust transactions in which gain is realized, notwithstanding the fact that in some circumstances the Code would permit nonrecognition of all or a part of the realized gain if the sale or exchange had been made by the transferor. 11 We recommend that, consistent with its legislative history (see, e.g., S. Rep. No. 94-938, 94th Cong., 2d Sess. 173 (1976)), Code section 644 be limited in application to sales or exchange in which gain is recognized by the trust. Property received by the trust in a nonrecognition transaction would be subject to Code section 644 within the same time limits applicable to the original property transferred to the trust. It is also unclear how, under Code section 644, certain tax attributes of a transferor, such as capital or net operating losses, are to be reflected in the computation of the tax on includible gain. We recommend that the tax on includible gain be calculated by reference to the taxable income of the transferor for the taxable year of the transferor within which a sale is made by the trust determined without regard to any tax attributes of the transferor which have been carried forward into such year, may be carried back or forward from such year, or which are subsequently carried back into that year. 24. Treatment of Certain Amounts Deemed Distributed by Trust in Preceding Years (Section 701(a) (1) of the Tax Reform Act of 1976 and section 667 of the Code) The Tax Reform Act of 1976 changed substantially the treatment of distributions of income previously accumulated by a trust. In particular, accumulation distributions, other than those attributable to tax-exempt interest, do not retain, in the hands of a beneficiary, the character of the income (e.g., dividend, taxable interest, royalties, etc.) from which they were distributed. The failure to retain the general character of income rules has significant consequences in the case of distributions of accumulated trust income to nonresident alien and corporate beneficiaries. Without these rules it is difficult, if not impossible, to determine: (1) the source of the accumulation distribution; (2) whether the accumulation distribution is subject to withholding and the flat rate of tax as fixed or determinable, annual or periodical income; and (3) whether reduced rates of withholding for interest, dividends and royalties provided in tax treaties apply. We recommend that Code section 662(b) be applicable to determine the character of income included in accumulation distributions to nonresident beneficiaries of United States trusts. 12 The Tax Reform Act of 1976 also left open the following issueswith respect to trusts: (1) the method of computing the tax liability of a foreign beneficiary on a distribution from a U.S. trust. (2) whether a foreign beneficiary must include in gross income any expenses incurred by the trust and attributable to the income distributed to the beneficiary. (3) whether a trustee-withholding agent must withhold tax on a distribution from a U.S. trust under Code sections 1441 and 1442 if the beneficiary's liability for U.S. tax would be satisfied by the U.S. taxes imposed on the trust and deemed distributed under Code section 666. We recommend that: (1) Code sections 871, 881, 882, 1441 and 14 4 2 be revised to provide that a foreign beneficiary include in gross income any U.S. taxes attributable to an accumulation distribution and deemed distributed by Code section 666, and any expenses incurred in the production of income distributed by a trust and included in the taxpayer's gross income for U.S. purposes, including any expenses borne by another party on behalf of the trust (e.g., a "triple net lease" where the lessee pays taxes, insurance premiums and repair costs); (2) Code section 1441(c) be amended to provide that a trustee-withholding agent may withhold less than the applicable statutory or treaty withholding rate where he can establish that the U.S. taxes paid by the trust and attributable to the distribution under section 666 will satisfy, in whole or in part, the foreign beneficiary's U.S. tax liability on the accumulation distribution; and, (3) Code section 667 be amended to provide that the computation of the foreign person's tax on an accumulation distribution may be made without regard to the throwback rules of section 667 if, in the year in which the beneficiary's takes the accumulation distribution into income, he is neither engaged in a trade or business in the U.S. nor is the beneficiary of more than one trust. 25. Inclusion of Certain Generation-Skipping Transfers in the Gross Estate of a Deemed Transferor for Estate Tax Marital Deduction Purposes (Section 2006(a) of the Tax Reform Act of 1976 and section 2605(c)(5)(A) of the Code) Under Code section 2605(c)(5)(A) if a generation-skipping transfer occurs at, or within nine months of, the death of a deemed transferor, the amount of the generation-skipping transfer is included in the gross estate of the deemed transferor for estate tax marital deduction purposes. Thus, the amount of the marital bequest of a testator whose will or trust contains a formula marital deduction bequest is automatically increased if that testator is the deemed transferor of generation-skipping transfer occurring at or within nine months of death. To avoid the inclusion of such amounts i "A • 13 in a deemed transferor's gross estate, the will or trust of the deemed transferor must be specifically amended. We believe that the automatic increase of a marital bequest in these circumstances constitutes a trap for an individual who is unaware that at his death a generation-skipping transfer of which he is the deemed transferor may occur. We recommend that in the case of decedent whose will or trust contains a formula marital deduction bequest, the presumption of Code section 2602(c)(5)(A) be reversed so that a generation-skipping transfer of which the decedent is the deemed transferor will not be included in the decedent's gross estate for estate tax marital deduction purposes unless a contrary intention is specifically stated in the decedent's will or trust. 26. Use of Certain Appreciated Carryover Basis Property to Satisfy Pecuniary Bequest (Section 2005(b) of the Tax Reform Act of 1976 and section 1040 of the Code) Code section 1040, added by the Tax Reform Act of 19 76, provides that where appreciated property is used to satisfy a pecuniary bequest recognized gain will be limited to the difference between date of distribution and estate tax values. The purpose of Code section 1040 is to retain, under present law, the prior law income tax consequences of funding a pecuniary bequest with appreciated property. Two types of pecuniary bequests are commonly used in connection with funding marital bequests. The first type directs that the marital share be funded using property the value of which is determined at date of distribution. The second directs funding at estate tax values with a proportionate sharing of post-estate tax valuation date appreciation and depreciation ("Rev. Proc. 64-19 funding"). Under prior law, only the former type of pecuniary bequest resulted in gain recognition upon funding with appreciated property. Under Code section 1040, it is unclear whether Rev. Proc. 64-19 funding with appreciated carryover basis property will result in gain recognition. We recommend that Code section 1040 be amended to make clear that no gain shall be recognized where a pecuniary bequest is satisfied by the transfer of appreciated carryover basis property directed by a testator to be valued at federal estate tax value so long as such funding is determined with regard to a proportionate sharing of post-estate tax valuation date appreciation and depreciation. 14 27. Charitable Contribution Deduction for Certain Transfers of Partial Interests in Property (Section 2124(e)(4) of the Tax Reform Act of 1976, section 309(b)(2) of the Tax Reduction and Simplification Act of 1977 and sections 2055(e)(2)(B) and 2522(c) (2) (B) of the Code) The Tax Reform Act of 1976 amended Code section 170(f) (3) (B) by adding Code section 170(f) (3) (B) (iii) permitting a deduction for certain contributions of partial interests to be used exclusively for conservation purposes. Code section 170(f)(3) (B) (iii) was effective for transfers made between June 14, 1976 and June 13, 1977. In addition, Code sections 2055(e)(2)(B) and 2522(c)(2)(B) were amended by the 1976 Act to define deductible contributions of partial interests for estate and gift tax purposes by reference to those interests deductible for income tax purposes under Code section 170(f)(3)(B). The Tax Reduction and Simplification Act of 19 77 further amended Code section 170 (f)(3)(B) by revising the types of partial interests donated exclusively for conservation purposes which would continue to qualify for an income tax (and by cross-reference, an estate and gift tax) charitable contribution deduction. The 1977 Act changes are effective for transfers made before June 14, 1981. It has been suggested that the combination of substantive changes and effective date provisions of the 1976 and 1977 Acts may result in the loss of a transfer tax charitable contribution deduction for the transfer of a remainder interest in a personal residence or farm or the transfer of an undivided portion of a taxpayer's entire interest in property if such transfer (1) occurred before June 14, 1976 or (2) occurs after June 13, 19 81. Nothing in the legislative history of either the 19 76 or 19 77 Act indicates that Congress intended this result. We recommend that Code sections 2055(e)(2)(B) and 2522 (c)(2)(B) be amended to make clear that the limited time period for making transfers of qualified partial interests in property applies solely to contributions described in Code sections 170(f)(3)(B)(iii) and (iv). 15 28. Recapture in the Case of Satisfaction of a Pecuniary Bequest with Appreciated Carryover Basis Property (Section 200!)(b) of the Tax Reform Act of 1976 and sections 1040, 1245, 1250 and 1251(a) of the Code) Code section 1040, added by the Tax Reform Act of 1976, provides that where appreciated property is used to satisfy a pecuniary bequest recognized gain will be limited to the difference between date of distribution and estate tax values. The purpose of Code section 1040 is to retain, under present law, the prior law income tax consequences of funding a pecuniary bequest with appreciated property. However, it is unclear whether recapture under Code sections 617, 1245, 1250, 1251, 1252 and 1254 is limited by the amount of gain recognized upon the satisfaction of a pecuniary bequest with appreciated carryover basis property. We recommend that Code sections 1245(b), 1250(d), 1251(c), 1252 and .1254 be amended to make clear that recapture income is limited by the amount of gain recognized where appreciated carryover basis property is used to satisfy a pecuniary bequest. 29. Transfer to Foreign Trusts and Other Foreign Entities (Section 1015(a) of the Tax Reform Act of 1976 and section 1491 of the Code) Under Code section 1491 an excise tax is imposed upon the transfer of appreciated property to certain foreign entities by a citizen or resident of the United States, a domestic corporation or partnership or a trust which is not a foreign trust. We recommend that Code section 1491 be amended to include transfers of appreciated property by estates. 30. Indexing of Federal Tax Liens (Section 2008(c) of the Tax Reform Act of 1976 and section 6323(f)(4) of the Code) The Tax Reform Act of 1976 amended Code section 6323 (f)(4) to provide that a lien is not treated as meeting the filing requirements of Code section 6323(f) (1) unless it is also recorded in a special index maintained at the office of the district director of the Internal Revenue Service for the district in which the property is located. We recommend that separate, special indexing in Internal Revenue Service district offices be eliminated. With respect to personal property, we recommend that indexing not be required. With respect to real property, we recommend that indexing of federal tax liens be required in those states which require indexing for the effective recordation of other instruments affecting real property to the extent required for those instruments. FOR IMMEDIATE RELEASE September 8, 1977 ROBERT H. MUNDHEIM SWORN IN AS GENERAL COUNSEL OF THE TREASURY Robert H. Mundheim was sworn in today as General Counsel of the Treasury by Secretary of the Treasury W. Michael Blumenthal. As General Counsel, Mr. Mundheim is responsible for all legal work in the Department and serves as senior legal and policy advisor to the Secretary and other senior Departmental officials. He was nominated for the position by President Jimmy Carter on June 15, 1977 and confirmed by the Senate on August 2, 1977. Mr. Mundheim came to the Treasury Department from the University of Pennsylvania Law School where he was the Fred Carr Professor of Law and Financial Institutions; Professor of Finance at the Wharton School; and Director of the University of Pennsylvania Law School Center for Study of Financial Institutions. He was also a visiting professor of law at U.C.L.A. Law School in 1976-77; at Harvard Law School in 1968-69; and at Duke Law School in 1963-64. In 19 62 and 1963 Mr. Mundheim was the Special Counsel to the Securities and Exchange Commission on Investment Company Act matters. He was with the New York City law firm of Shearman & Sterling from 1958 to 1961. He is a member of the American Bar Association, American Law Institute, and the American Association of University Professors. He was born in Hamburg, Germany on February 24, 1933. He received his B.A. degree from Harvard College in 1954 and an LL.B degree from Harvard Law School in 1957. He served in the U.S. Air Force in 1961 and 1962. Mr. Mundheim and his wife, the former Guna Smitchens, have a son and daughter. The Mundheim family resides in Philadelphia. oOo B-425 MtmentoftheJREASURY TELEPHONE 566-2(H1 iSHINGTON. OX. 20220 FOR RELEASE AT 4:00 P.M. September 8, 1977 TREASURY'S 52-WEEK BILL OFFERING The Department of the Treasury, by this public notice, invites tenders for $ 2,917 million, or thereabouts,^of 364-day Treasury bills to be dated September 20, 1977, and to mature September 19, 1978 (CUSIP No. 912793 R5 7). The bills, with a limited exception, will be available in book-entry form only, and will be issued for cash and in exchange for Treasury bills maturing September 20, 1977. This issue will not provide new money for the Treasury as the maturing issue is outstanding in the amount of $2,917 million, of which $1,825 million is held by the public and $ 1,092 million is held by Government accounts and the Federal Reserve Banks for themselves and as agents of foreign and international monetary authorities. Additional amounts of the bills may be issued to Federal Reserve Banks as agents of foreign and international monetary authorities. Tenders from Government accounts and the Federal Reserve Banks for themselves and as agents of foreign and international monetary authorities will be accepted at the average price of accepted tenders. The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest. Except for definitive bills in the $100,000 denomination, which will be available only to investors who are able to show that they are required by law or regulation to hold securities in physical form, this series of bills will be issued entirely in book-entry form on the records either of the Federal Reserve Banks and Branches, or of the Department of the TreasuryTenders will be received at Federal Reserve Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time, Wednesday, September 14, 1977. Form PD 4632-1 should be used to submit tenders for bills to be maintained on the book-entry records of the Department of the Treasury. Each tender must be for a minimum of $10,000. be in multiples of $5,000. Tenders over $10,000 must In the case of competitive tenders, the price offered must be expressed on the basis of 100, with not more than three decimals, eg., 99.925. B-426 Fractions may not be used. (OVER) -2Banking institutions and dealers who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York their positio with respect to Government securities and borrowings thereon may submit tenders for account of customers, provided the names of the customers are set forth in such tenders. Others will not be permitted to submit tenders except for their own account. Payment for the full par amount of the bills applied for must accompany all tenders submitted for bills to be maintained on the book-entry records of the Department of the Treasury. A cash adjustment will be made for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities, for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, or for definitive bills, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Those submitting competitive tenders will be advised of the acceptance or rejection thereof. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and his action in any such respect shall be final. Subject to these reservations, noncompetitive tenders for $500,000 or less without stated price from any one bidder will be accepted in full at the average price (in three decimals) of accepted competitive bids. Settlement for accepted tenders for bills to be maintained on the records of Federal Reserve Banks and Branches must be made or completed at the Federal Reserve Bank or Branch on September 20, 1977, in cash or other immediately available funds or in Treasury bills maturing September 20, 1977. Cash adjustments wil] be made for differences between the par value of maturing bills accepted in exchange and the issue price of the new bills. Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which bills issued hereunder are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of bills (other than life insurance companies) issued hereunder must -3include in his Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on a subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. FOR RELEASE UPON DELIVERY EXPECTED AT 9:00 A.M. EDT SEPTEMEBER 8, 1977 STATEMENT OF THE HONORABLE C, FRED BERGSTEN ASSISTANT SECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS BEFORE THE' INTERNATIONAL FINANCE SUBCOMMITTEE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES Mr. Chairman and members of the International Finance Subcommittee. I appreciate this opportunity to testify on behalf of the Administration to present its views on H.R. 7738, a bill "With respect to the powers of the President in time of war or national emergency." I shall also comment on the amendments to that bill introduced by Senator Stevenson on August 5, 1977. •:_:.-.•. H.R. 7738 is the product of a cooperative effort between Congress and the Administration in response to the requirements of the National Emergencies Act enacted in the Fall of 1976. The Act provided that powers exercised pursuant to existing states of national emergency would terminate within two years of the date of its enactment. However, it exempted Section 5(b) of the Trading with the Enemy Act (and several B-427 - 2 other statutory provisions) from the two-year termination requirement to afford Congress opportunity for deliberate consideration of the Section's powers and procedures. The Administration believes that H.R. 7738 responds to the principal purpose of the National Emergencies Act: to place procedural constraints on any future exercise of national emergency powers by the President. The Administra- tion has also worked with Congress to insure that the bil_r*< satisfies modern needs for congressionally-delegated Presidential emergency powers. Accordingly, we support H.R. 7738. Our support of these reforms of the emergency powers conferred by Section 5(b) stems from our recognition that the Congress has a legitimate role to play in the exercise of such extraordinary powers. Furthermore, we are keenly aware that, on several occasions, Section 5(b) has been hurriedly broadened during moments of national crisis, in which little attention was given to procedural safeguards consonant with the constitutional balance of powers. In contrast, the reforms of' Section 5(b) contained in H.R. 7738 will have the benefit of calm deliberation which did not characterize earlier amendments of the Section. Our support - 3of this bill is qualified in two respects which I will explain in the course of my comments. The bill amends Section 5(b) of the Trading with the Enemy Act by transferring the non-wartime emergency powers to a new Act entitled the "International Emergency Economic. Powers Act," This new Act places the emergency powers previously available in Section 5(b) under several procedural constraints in addition to those imposed by the National Emergencies Act. The President is authorized to continue to exercise Section 5(b) powers invoked as of July 1, 1977, upon the expiration in September 1978, of the two-year period following the enactment of the National Emergencies Act. These extensions, which are authorized for one-year periods, must be based on Presidential determination that each is in the national interest of the United States. We believe that it would be desirable to avoid possible complications from application of the new procedures specified in the "International Emergency Economic Powers Act" to existing Section 5(b) activities. In testimony before the House Subcommittee on International Economic Policy and Trade, the Administration supported reforms in the manner in which Section 5(b) powers are exercised - 4 Both Assistant Secretary of State Katz and I testified in support of reforms designed to place certain procedural constraints on the President's exercise of Section 5(b) powers, and to insure that the Congress and the public were kept informed of the activities carried out under this Section. In addition, I proposed steps to avoid future emergency actions which rely on unrelated national emergency declarations. We believe that.the bill before you today accomplishes all of these purposes. Nonetheless, we have two objections to this bill. The first objection relates to the language of Section 203(b), referring to uncompensated transfers. Since the Act already sets rather stringent standards for the exiercise of its emergency powers, the Administration believes that this additional limitation is undesirable. In addition, the exemption could permit some dissipation of blocked assets through uncompensated transfers of blocked assets. Accordingly, the Administration urges that the amendment introduced to Senator Stevenson be adopted. The Stevenson amendment would limit the exemption to U.S. persons and thus prevent nationals of a blocked country from making any donations or other transfers" out of blocked assets. It authorizes donations of articles only, not funds, increasing the likelihood that the donation will - 5 be used for the intended purpose. Finally, the President is authorized to withdraw the exemption where it would impair his ability to deal with the national emergency. We think the Stevenson amendment strikes a reasonable balance between the effectiveness of any future embargo controls that may be in the national interest and the private convictions of American citizens. _. - We also object to the provisions of this bill which enable Congress to terminate a national emergency declared by the President, and to disapprove of regulations issued pursuant to a national emergency, by concurrent resolution. In view of the numerous reporting requirements and other procedural constraints which are placed on the President's power under the Act, we believe the use of concurrent resolution mechanisms is unnecessary. Furthermore, they violate constitutional principles of the separation of powers. The same constitutional considerations which motivate our support of procedural reforms of Section 5(b) require that we object to the use of concurrent resolutions in this manner. We particularly urge the committee to adopt Senator Stevenson's amendment which would strike out the Section 206 provision for congressional review and disapproval of regulations issued under the new Act. - 6 Let me comment on Section 301 of the bill which amends the Export Administration Act of 1969 by providing the authority to regulate exports extraterritorially under that Act, This Administration has already indicated in its testimony before the House of Representatives that it intends to apply any new extraterritorial controls sparingly. I stated before the House Subcommittee on International Economic Policy and Trade that we will weigh very carefully the foreign relations costs of extraterritorial extensions of any new measures pursuant to Section 5(b) (or the new "International Emergency Economic Powers Act"). Accordingly, our support of this amendment of the Export Administration Act should not be taken as an indication that this Administration anticipates using these extraterritorial powers extensively. Our support of Section 301 simply reflects our belief that we should improve the administrative mechanism for applying such powers when they are necessary. Finally, let me add that it is of great importance that the Government's export control program continue without interruption or lapse. We would strongly prefer to avoid having to use the authorities under discussion today for that purpose. Accordingly, the Administration urges that this legislative proposal include a provision amending the Export - 7 Administration Act to make it permanent legislation, as the Administration-supported draft recommends. oOo Contact: Alvin Hattal 566-8381 HOLD FOR RELEASE UNTIL 6 PM SEPT. 12 September 12, 1977 UNITED STATES TREASURER SWORN IN TODAY Mrs. Azie Taylor Morton, of Annandale, Va., was today sworn in as the 36th Treasurer of the United States and the eighth consecutive woman to hold the position. She took the oath of office from Treasury Secretary W. Michael Blumenthal at 6 PM. In addition to her duties as United States Treasurer, Mrs. Morton will be the National Director of the United States Savings Bonds Division. Mrs. Morton, 41, was born in Dale, Tx. and educated at Huston-Tillotson College, Austin, Tx. In 1961 she came to Washington, D. C , where she worked on President Kennedy's Committee on Equal Employment Opportunity (1961-63) and the President's Committee on Equal Opportunity in Housing (1963-66). In 1966-68 she was with the U. S. Equal Employment Opportunity Commission in Austin, Tx. and from 1968-71 she was Director of Social Services, Model Cities Program, Wichita, Ks. From 1971 to 1976 Mrs. Morton was Special Assistant to the Chairman, Democratic National Committee. Earlier this year she also worked for several months with the U. S. House of Representatives Committee on the District of Columbia. Mrs. Morton is married to James H. Morton, and is the mother of two daughters. She is a member of Alpha Kappa Alpha sorority and is listed in the current editions of Who's Who Among Women Internationally and Who's Who Among Black Americans. B-428 FOR RELEASE UPON DELIVERY EXPECTED AT 9:30 A.M. SEPTEMBER 12, 1977 STATEMENT OF THE HONORABLE ROBERT H. MUNDHEIM GENERAL COUNSEL OF THE TREASURY DEPARTMENT BEFORE THE SUBCOMMITTEE ON GOVERNMENT INFORMATION & INDIVIDUAL RIGHTS OF THE HOUSE COMMITTEE ON GOVERNMENT OPERATIONS WASHINGTON, D.C. Mr. Chairman and Distinguished Members of this Subcommittee: I am Robert H. Mundheim, General Counsel for the Treasury Department. With me today is Robert E. Chasen, Commissioner of the United States Customs Service. We welcome this opportunity to appear before you to discuss the current practice of the Customs Service to open, without a search warrant, international sealed letter class mail addressed for delivery within the Customs territory of the United States as it crosses our nation's border, when a Customs officer has a reasonable cause to suspect that there is merchandise or contraband in the envelope. The problem about which the Committee has manifested concern requires the accommodation of two important interests. On the one hand, there is the desire to preserve the confidentiality of correspondence entrusted to the mails. This desire is embodied in the statutory prohibition against the opening of domestic first class mail, unless a search warrant has been obtained. (39 U.S.C. 3623(d)) Protection of the interest in privacy is one Treasury takes very seriously. On the other hand, there is the desire not to provide a secure channel by which prohibited items such as narcotics or child pornography can enter the country or high value items such as jewelry or gold coins can be imported without payment of appropriate duties. B-429 - 2 In that connection, it is important to note exactly what is meant by the term "sealed letter class mail." Under the postal conventions, there are several classes of mail. "LC" or letter class is the international equivalent of domestic first class mail. Customs refers to "LC" mail as sealed letter class mail. Contrary to popular belief, "LC" mail is not limited to envelopes containing only business or personal correspondence or even to envelopes which are like those ordinarily used to mail business or personal correspondence. "LC" mail may be up to 24 inches in length, weigh up to 4 pounds or 60 pounds if it is from Canada, and may include expensive items such as diamonds or gold if it is registered. "LC" mail which includes merchandise is required by the Universal Postal Union Convention to bear a green Customs label, which states that Customs may open the envelope. Senders frequently mail these items without the label. The term "first class mail," as used in the Postal Regulations, is not used in the international conventions. Thus, "LC" mail affords ample opportunity for smuggling into the United States contraband and high value items. Even if we focus on the normal, long thin business type of envelopes, they can contain (and have contained) small amounts of heroin and cocaine (which in a pure state are extremely valuable) or small, high value items such as diamonds and gold jewelry. How has Customs accommodated the principle of preserving the individual's right of privacy in the mails, with the congressionally mandated responsibility to prevent the importation of prohibited items and to collect prescribed duties on merchandise? Since 1789, Customs officers have had broad statutory authority to search vessels for merchandise and to seize any merchandise which was concealed to avoid payment of duties. The statute permitted the search if a Customs officer had a "reason to suspect" that any goods subject to duty were concealed. The main purpose of giving Customs this search authority was not to uncover criminal violations of law, but to insure that all dutiable articles were properly declared, that the appropriate duty was being collected, and that no prohibited articles would enter the United States. This broad authority to search items entering at the border is grounded in the recognized right of the sovereign to control who and what may enter the country. - 3 Over the years, as land commerce increased with the expansion of our boundaries, Congress correspondingly broadened Customs search authority; for example, legislation enacted in 1815 authorized the search of persons traveling on foot when the Customs officer "shall suspect there are goods, wares, or merchandise, which are subject to duty, or which shall have been introduced into the United States in any manner contrary to law." In 1866, Congress extended the authority of Customs officers to include the search of "any trunk, or envelope, wherever found." The standard required to conduct such searches was phrased as "a reasonable cause to suspect there is merchandise which is imported contrary to law." This statute, in virtually identical language, is presently codified in section 482 of title 19 of the United States Code. Pursuant to the authority granted in 1866, Customs began to screen mail including sealed letter class mail. However, except for a brief period of time in the late 1860's, Customs took the position that it would not open suspect sealed letter class mail without the consent of the addressee. This situation was altered slightly in 1924 when the Universal Postal Union Convention was modified to permit for the first time the insertion of certain dutiable articles into sealed letter class mail. The sender was required to complete and attach to the envelope a prescribed "green label" form describing the nature of the contents and their value. Since the green label specifically stated that Customs could open the envelope, neither the consent nor the presence of either the addressee or the sender was necessary or required. Envelopes without a green label continued to be opened only with the express consent of the addressee. It was required that the postmaster send a notice to the addressee that his mail was suspected of containing merchandise, and thus required a Customs examination. If, after 30 days, the addressee refused to consent to the opening, or simply ignored the notice, the mail was returned to the sender. The inherent weakness of the consent procedure is evident: the sender simply would continue to mail the item until it escaped Customs detection. - 4 In some cases, Customs did obtain warrants when there was probable cause to believe there was a violation of 18 U.S.C. 545, importation contrary to law. There does not seem to be any available statistics of the number of warrants obtained. However, warrants do not seem to have been a practical device for preventing the mails from becoming a channel for improperly introducing merchandise into the country. During the 1960's, smuggling in international sealed letter class mail appeared to increase dramatically, especially in items such as heroin, hashish, gold coins, and diamonds. As a direct consequence, the Customs and Postal Services proposed new joint regulations which would subject all sealed letter class international mail to Customs examination without the requirement of first obtaining the addressee's consent. The proposed change was considered in the course of the 1970 congressional debates on the Postal Reorganization Bill. Amendments were specifically introduced which were designed to prohibit the broadened Customs inspection which the Regulations contemplated. These amendments were defeated and what emerged was a law providing that there shall be one class of mail "of domestic origin" which may not be opened except under authority of a search warrant. (39 U.S.C. 3623(d)). There were some who argued that the inspection procedure contemplated by Customs was unconstitutional. This issue was addressed directly by the United States Supreme Court in United States v. Ramsey, decided on June 6, 1977. In the Ramsey case, a Customs officer screening a sack of incoming international mail from Thailand spotted eight bulky envelopes which he believed might contain merchandise. All of the envelopes appeared to have been typed on the same typewriter, were addressed to different locations in Washington, D.C., felt as if there was something other than plain paper inside, weighed three to six times the normal weight of a letter, and came from a country which is a known source of narcotics. Upon inspection, all the envelopes were discovered to contain heroin. The Court held that the statute under which the officer acted (19 U.S.C. 482), whose forerunner was the 1866 statute to which I referred earlier, was constitutional and that the circumstances under which the letters were opened provided the statutorily required "reasonable 'cause to suspect' that there was merchandise or contraband in the envelopes." - 5 This decision effectively validated the Customs practice of opening sealed international letter class mail without a search warrant so long as there is a reasonable cause to suspect the presence of merchandise or contraband. The opinion went further and read the long history of the border search exception to the full reach of the Fourth Amendment protections as justifying the search of mail coming over the border. The Court pointed out that "[I]t was conceded at oral argument that Customs officials could search, without probable cause and without a warrant, envelopes carried by an entering traveler, whether in his luggage or on his person." It further stated: "Surely no different constitutional standard should apply simply because the envelopes were mailed, not carried. The critical fact is that the envelopes cross the border and enter this country, not that they are brought in by one mode of transportation rather than another." The issuance of the Ramsey opinion roughly coincided with my coming to the Treasury Department. I thought the case provided an opportune time for Treasury to review and reevaluate the Customs Regulations and procedures relating to the opening of sealed international letter class mail. Because section 145.3 of the Customs Regulations was silent as to the circumstances under which such mail could be opened, we thought it wise to set them out specifically. As I indicated before, the Supreme Court had suggested that Customs power to open sealed international letter class mail might constitutionally exceed the limitations contained in 19 U.S.C. 482. We, however, wanted it to be clear that Customs had no intention to extend its authority beyond those parameters. We also wanted to issue a Policy Statement which would state the basic principles which would govern Customs procedures in its examination of sealed international letter class mail. These principles include: a) A prohibition against opening any mail which appears to contain only correspondence. b) A flat prohibition against reading (or allowing anyone else to read) any correspondence without a search warrant. - 6 c) A prohibition on seizure of correspondence without a warrant. This prohibition would prevail even if merchandise has been seized, and even though the correspondence would be considered as additional evidence or as an instrumentality of the crime. Under accepted rules of criminal procedure, such correspondence could lawfully be seized and read without a warrant. d) A prohibition against referral of correspondence to any other agency without a search warrant. Commissioner Chasen in his statement will talk about the enforcement of these guidelines. A key concept governing Customs mail opening procedures is that there must be reasonable cause to suspect that merchandise or contraband is contained in sealed international letter class mail before it may be opened. The proposed Policy Statement attempts to give guidance on the meaning of this concept by spelling out certain fact situations which would provide reasonable cause to suspect. Let me mention two examples: 1) a positive reaction by detector dogs; 2) the weight, shape or feel of the envelope may indicate the presence of merchandise. We also wanted to set out a few examples of circumstances which, standing alone, would not provide reasonable cause to suspect. For example, the mere fact that letters are sent from a country which is a known source of heroin would not alone be a basis for opening them. The proposed change to the regulations was published in the Federal Register as required by law. We also published our proposed Policy Statement in the Federal Register so that we could receive public comments on it. This is the first time to my knowledge that the Treasury Department has published such a Policy Statement in the Federal Register, and underscores our desire to get as much help as possible in assuring that we achieve the proper accommodation between the interests of privacy and control of goods entering this country. As of yet, we have received no substantive comments on our proposed changes to the regulations or on our proposed Policy Statement. However, 16 days remain in the comment period. - 7We welcome the comments and questions which the hearings being conducted by this Committee will elicit as an aid to our review of the proposed regulations and Policy Statements. 0O0 partmentoftheTREMURY TELEPHONE 566-2041 MNGTON,D.C. 20220 FOR IMMEDIATE RELEASE September 12, 1977 RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS Tenders for $ 2,500 million of 13-week Treasury bills and for $3,501 million of 26-week Treasury bills, both series to be issued on September 15, 1977, were accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: 13-week bills maturing December 15, 1977 Price High Low Average Discount Rate 98.524a/ 5.839% 98.502 5.926% 98.512 5.887% 26-week bills maturing March 16, 1978 Investment Rate 1/ Discount Investment Price Rate Rate 1/ 6.01% 6.10% 6.06% 96.933 6.067% 6.35% 96.908 6.116% 6.40% 96.917 6.098% 6.38% / Excepting 1 tender of $300,000 Tenders at the low price for the 13-week bills were allotted 72%. Tenders at the low price for the 26-week bills were allotted 28%. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Received Boston $ 21,875,000 New York 3,280,920,000 Philadelphia 17,355,000 Cleveland 34,235,000 Richmond 17,745,000 Atlanta 24,820,000 Chicago 322,720,000 St. Louis 42,000,000 Minneapolis 18,285,000 Kansas City 35,420,000 Dallas 15,560,000 San Francisco 237,305,000 120,000 Treasury TOTALS $4,068,360,000 Accepted Received Accepted 120,000 $ 28,175,000 4,863,000,000 5,105,000 46,155,000 14,955,000 32,430,000 764,405,000 35,635,000 36,650,000 23,865,000 14,245,000 273,690,000 350,000 $ 23,175,000 2,859,800,000 5,105,000 46,155,000 11,955,000 32,430,000 342,805,000 23,635,000 36,650,000 23,865,000 14,245,000 80,69d;000 350,000 $2,500,360,000b/ $6,138,660,000 $3,500,860,000c/ $ 21,875,000 2,017,920,000 17,355,000 34,235,000 17,745,000 24,820,000 197,720,000 38,000,000 18,285,000 35,420,000 15,560,000 61,305,000 Includes $308,370,000 noncompetitive tenders from the public. Includes $ 168,535,000 noncompetitive tenders from the public. Equivalent coupon-issue yield. 430 FOR RELEASE AT 4:00 P.M. September 13, 1977 TREASURY'S WEEKLY BILL OFFERING The Department or tne Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $6,U0U million, to oe issued September 22, 1977. TAis offering will not provide new cash tor tne Treasury as the maturing bills are outstanding in the amount of $6,007 million ($903 million of which represent 16-day bills issued September 6, 1977). The two series offered are as follows: 91-day bills (to maturity date) for approximately $2,500 million, representing an additional amount of bills dated June 23, 1977, and to mature December 22, 1977 (CUSIP No. 912793 L8 7), originally issued in tne amount of $3,001 million, the additional ana original bills to be freely interchangeable. 182-day bills for approximately $3,500 million to be dated September 22, 1977, and to mature Marcn 23, 1978 (CUSIP No. 912793 P4 2) . Both series of bills will be issued for cash and in exchange for Treasury Dills maturing September 22, 1977. Federal Reserve Banks, for themselves and as agents of foreign and international monetary authorities, presently nold $2,612 million of the maturing bills. These accounts may exchange bills they hold for tne bills now being offered at tne weignted average prices of accepted competitive tenders. Tne bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payaole without interest. Except for definitive bills in the $100,000 denomination, which will be available only to investors who are able to snow that they are required by law or regulation to nold securities in physical form, both series of bills will be issued entirely in book-entry form in a minimum amount of $10,000 and in any higher $5,000 multiple, on tne records either of the Federal Reserve Banks and Branches, or of the Department of the Treasury. Tenders will be received at Federal Reserve BanKs and Branches and at the Bureau of tne Public Debt, Washington, D. C. 2U226, up to 1:30 p.m., Eastern Daylignt Saving time, Monday, September 19, 1977. Form PD 4632-2 (for 26-weeK series) or Form PD 4632-3 (for 13-week series) should be used to submit tenders tor bills to be maintained on tne oooK-entry records of the department of the Treasury. B-431 -2Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,000. In the case of competitive tenders the price offered must be expressed on the basis of 100, with not more than three decimals, e.g., 99.925. Fractions may not be used. Banking institutions and dealers who make primary markets in Government securities and report daily to the Federal Reserve Bank of New *York their positions in and borrowings on such securities may submit tenders for account of customers, if the names of the customers and the amount for each customer are furnished. Others are only permitted to submit tenders for their own account. Payment for the full par amount of the bills applied for must accompany all tenders submitted for bills to be maintained on the book-entry records of the Department of the Treasury. A cash adjustment will be made on all accepted tenders for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, or for bills issued in bearer form, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless- an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their tenders. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and the Secretary's action shall be final. Subject to these reservations, noncompetitive tenders for each issue for $500,000 or less without stated price from any one bidder will be accepted in full at the weighted average price (in three decimals) of accepted competitive bids for the respective issues. Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and bills issued in bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt on September 22, 1977, in cash or other immediately available funds or in Treasury bills maturing differences accepted September in 22,. exchange between 1977. the Cash andpar the adjustments value issueof price the will of maturing be the made new bills for bills. -3Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discqunt at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, No. 418 (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. oOo FOR RELEASE AT 4:00 P.M. September 13, 1977 TREASURY TO AUCTION $3,136 MILLION OF 2-YEAR NOTES The Department of the Treasury will auction $3,136 million of 2-year notes to refund $3,136 million of notes held by the public maturing September 30, 1977. Additional amounts of these notes may be issued at the average price of accepted tenders to Government accounts and to Federal Reserve Banks for their own account in exchange for $90 million maturing notes held by them, and to Federal Reserve Banks as agents of foreign and international monetary authorities for new cash only. Details about the new security are given in the attached highlights of the offering and in the official offering circular. oOo Attachment B-432 HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF 2-YEAR NOTES TO BE ISSUED SEPTEMBER 30, 1977 September 13, 1977 Amount Offered: To the public Description of Security: Term and type of security. ., Series and CUSIP designation Maturity date September 30, 1979 Call date Interest coupon rate $3,136 million 2-year notes Series U-1979 (CUSIP No. 912827 HA 3) No provision To be determined based on ; the average of accepted bic Investment yield To be determined at auctior Premium or discount To be determined after auction Interest payment dates March 31 and September 30 Minimum denomination available $5,000 Terms of Sale: Method of sale Yield auction Accrued interest payable by investor None Preferred allotment Noncompetitive bid for $1,000,000 or less Deposit requirement 5% of face amount Deposit guarantee by designated institutions Acceptable Key Dates: Deadline for receipt of tenders Wednesday, September 21, 1977, by 1:30 p.m., EDST Settlement date (final payment due) a) cash or Federal funds Friday, September 30, 19^ b) check drawn on bank within FRB district where submitted Monday, September 26, 1"' c) check drawn on bank outside FRB district where «.. submitted Friday, September 23, l9' Delivery date for coupon securities.... Friday, September 30, 19' wtmentoftheTREASURY MGTON.D.C. 20220 TELEPHONE 566-2041 FOR RELEASE ON DELIVERY EXPECTED AT 10:00 A.M. SEPTEMBER 14, 1977 STATEMENT BY ARNOLD NACHMANOFF DEPUTY ASSISTANT SECRETARY OF TREASURY FOR DEVELOPING NATIONS BEFORE THE SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT INSTITUTIONS AND FINANCE OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS Mr. Chairman and Members of the Committee, it is an honor to appear before your today to discuss the subject of illegal immigration and what the international development banks can do to help alleviate the problem. In order to keep our remarks as brief as possible, and facilitate the discussion, my colleagues and I propose to divide our initial remarks along the following lines: My remarks will focus primarily on the nature and causes of the undocume nted alien problem, and how development assistance may be helpful. Mr. Arellano will expand on these subjects as wel 1 as discuss the impact of the problem on our bilateral relat ions with source countries, with particular emphasis on Mex ico; the U.S. Executive Directors of the World Bank and the In ter-American Development Bank, Mr. Fried and Mr. Dungan, wil 1 address the question of what their respective institutions ar e doing and what they might be able to do in the alleviate this problem. future to help 1. Nature and Causes of the Problem The roots of the undocumented a lien problem in all source countries are principally economic i n nature. Income levels and general li ving conditions for ma ny of the people in these countries, par ticularly those in rur al areas, are much lower than those in the United States. Th eir prospects for improvement are relat ively limited in most cases. These conditions are the factor s which "push" individ uals to leave their home areas. Many o f them migrate to urban centers in their own countries, but others migrate across national borders to the C-433 - 2 United States. Why some migrants go to Mexico City, for example, and others go to the United States, is not fully understood. However, the attraction of living in an urban or industrial environment with its social amenities, services, and infrastructure combined with the perception of greater opportunities for employment, a higher standard of living, and upward mobility seems to "pull" many of these individuals to the United States. Our comments will focus primarily on the major source country, Mexico, since it is estimated that perhaps 60-65 percent of the undocumented aliens in the United States today originate from Mexico. However, other important source countries include the Dominican Republic, Haiti, Jamaica, Guatemala, Peru and Ecuador. Many of the problems which generate migration from those countries are similar to those of Mexico and therefore much of our discussion on Mexico will also be applicable to those countries. The entry of undocumented aliens into the United States from Mexico became a noticeable pattern toward the end of the last century. In many cases it has become an ongoing social process involving several generations of Mexican workers. The U.S. Government made several attempts to ameliorate the problem in previous years but none of the measures taken have had a lasting effect. In fact, the problem has become more acute, particularly since 1970. It is now estimated that somewhere between 300,000 and 600,000 Mexicans cross the border illegally each year. The long border makes illegal entry relatively easy and only a small fraction are apprehended by the U.S. Immigration and Naturalization Service. Many of these individuals are apprehended only after they have illegally entered the U.S. a number of times. 2. Where They Come From Most of the Mexicans who enter the United States illegally come from the rural areas in the North Central states of Jalisco, Chihuahua, Michoacan, Zacatecas, Guanajuato, Coahuila, and Durango. Only two of those states are located along the border. In contrast to those rural migrants who go to the urban areas in Mexico with a view toward living and working there permanently, many of those who came to the United States do so - 3 with the idea of earning substantially more money than they can in Mexico and then returning to the areas from where they came to buy farms or set up small businesses. People in the latter category frequently have to come to the U.S. several times over the course of many years before their goals are realized. 3. Population and Jobs One of the basic causes of the undocumented aliens problem is the very substantial gap which exists between unemployed workers and available jobs in Mexico. The Mexican economy has not been able to generate sufficient employment opportunities to close that gap. It is estimated that each year there are 600,000 - 800,000 new entrants into the labor force, a labor force which now consists of 17 million people. Unemployment in Mexico is estimated at 15-18 percent with perhaps an additional 25 percent underemployed. Even at annual growth rates of 5-8 percent—which Mexico achieved in early 1970's—it is estimated that only 300,000 new jobs openings are created annually. With the growth rate reduced to 2 percent, as it has been in 1976 and 1977, new job opportunities drop to about 200,000 annually. Thus, new job opportunities have not been sufficient to absorb the number of new entrants into the labor force, the level of unemployment has increased, and pressures for outward migration have continued to mount. A fundamental factor in the persistance of the problem is the growth rate and composition of the Mexican population. The rate of population growth in Mexico is estimated at between 3.2 and 3.6 percent per year, one of the highest in the world. A high concentration of the population is under 15 years of age. Even under the most optimistic assumptions, new entrants into the labor force will continue to grow at a rapid rate for many years to come. 4. The Role of Development Assistance While our understanding of the causes and nature of the undocumented aliens problem is far from perfect, and much work needs to be done in this area to improve our understanding of the problem, it is clear that this is a long term problem, the solution of which will depend largely on the success of domestic Mexican measures to reduce population growth and to generate increased investment in the agricultural and industrial sectors thereby creating more job opportunities. The Mexican Government is making serious efforts to address these problems. The GOM has increased public sector spending - 4 substantially to strengthen the country's capital base and improve living conditions in the rural areas. These outlays have helped but public sector revenues have not expanded apace. For example, the public sector deficit quadrupled between 1972 and 1976. This fueled inflation and also resulted in larger current account deficits which were among the principal factors precipitating the economic crisis which came to a head last year. As a result, the GOM has had to cut back on the budget deficit and imports as part of its stabilization program. External development assistance particularly through the International Development Lending Institutions, can be helpful to the Mexican Government in its efforts to strengthen the economy, create new jobs, and improve living conditions, and expand its family planning efforts. Development assistance can contribute to the general growth of the ecomony, both by directly providing additional resources for investment, but perhaps more importantly by acting as a catalyst for increased investment from the private and public sectors. The Mexican Government and the international development banks are giving increased attention to the development of rural areas in Mexico. This includes not only basic agricultural projects but also small and medium size industry, infrastructure, and social services in rural areas. Programs to create jobs and improve living conditions in those areas probably will have the most direct effect on the undocumented aliens problem. The average cost per permanent job estimated at $5,000 to $10,000, which is considerably lower than the $15,000 to $20,000 cost per permanent job estimated in the industrial sector. Rural projects, moreover, could produce significant multiplier effects, since the expanded income of lower income groups would result in increased demand, which in turn would stimulate other productive activities having secondary employment and investment implications. Development assistance can also provide additional support for the Mexican Government's efforts to slow population growth. The government has recently initiated a major effort to expand family planning programs. This, of course, is a sensitive area involving changes in cultural and social attitudes, and change cannot be accomplished overnight. Leadership must come from the Mexican Government; the development banks can provide additional resources and expertise, however. Of course, the development and expansion of the Mexican economy is linked to continued access for its exports to external markets in developed countries. Given our geographic proximity - 5 and the size of our economy, Mexico will continue to depend heavily on the U.S. as an outlet for their products. In concluding my remarks, I would note that the World Bank and the Inter-American Development Bank have provided some $4.2 billion in economic assistance to Mexico since the early 1950s. At the present time, they are lending about $500 million annually to Mexico. This support for Mexico's economic development undoubtedly has helped ameliorate the pressure for outward migration. The increased attention which the Banks are giving to the development of the rural sector should increase the direct impact of their programs on the problem. But, as noted before, this is a longterm problem and it would be unrealistic to expect quick solutions. I will leave it to my colleagues Mr. Fried and Mr. Dungan to discuss more specifically programs of the international development banks and what those programs have done or may be able to do to help ameliorate the problem of undocumented aliens. FOR IMMEDIATE .RELEASE September 14, 1977 TREASURY ANNOUNCES FINAL DETERMINATION OF SALES AT LESS THAN FAIR VALUE ON SACCHARIN FROM JAPAN AND KOREA The Treasury Department announced today that saccharin from Japan (except that produced by Aisan Chemical Co., Ltd.) and saccharin from the Republic of Korea, is being sold at less than fair value within the meaning of the Antidumping Act. These cases have been referred to the U.S. International Trade Commission which must determine within three months whether a U.S. industry is being, or is likely to be, injured by the imports. Dumping occurs only when both sales at less than fair value and injury have been determined. Sales at less than fair value generally occur when the price of the merchandise sold for export to the United States is less than the price of comparable merchandise sold in the home market. Interested persons were offered the opportunity to present oral and written views. Treasury's tentative decision was that Japanese saccharin imports are not being sold at less than fair value. However, further investigation revealed that margins did exist. Accordingly, a combined "Withholding of Appraisement Notice and Determination of Sales at Less Than Fair Value" will be issued. If the International Trade Commission finds injury, a "Finding of Dumping" will be issued and dumping duties will be assessed on an entry-by-entry basis. Imports of saccharin from Japan were valued at approximately $5.1 million during calendar year 1976, and imports of saccharin from Korea were valued at approximately $1.2 million for the same period. Notice of the above actions will be published in the Federal Register of September 14, 1977. * * * B-434 FOR IMMEDIATE RELEASE September 14, 1977 RESULTS OF TREASURY'S 52-WEEK BILL AUCTION Tenders for $2,918 million of 52-week Treasury bills to be dated September 20, 1977, and to mature September 19, 1978, were accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $350,000) Investment Rate Price Discount Rate (Equivalent Coupon-Issue Yield) High - 93.804 6.128% 6.52% Low 93.769 6.163% Average 93.776 6.156% 6.56% 6.55% Tenders at the low price were allotted 61%. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Received Accepted $ 30,975,000 4,135,575,000 2,600,000 110,080,000 49,085,000 13,015,000 434,130,000 27,775,000 24,425,000 12,725,000 14,595,000 273,665,000 $ 24,475,000 2,554,125,000 2,600,000 12,080,000 32,085,000 5,625,000 155,740,000 3,275,000 19,425,000 10,725,000 4,595,000 92,765,000 Treasury 85,000 85,000 TOTAL $5,128,730,000 $2,917,600,000 The $2,918 million of accepted tenders includes $ 83 million of noncompetitive tenders from the public and $959 million of tenders from Federal Reserve Banks for themselves and as agents of foreign and international monetary authorities accepted at the average price. An additional $130 million of the bills will be issued to Federal Reserve Banks as agents of foreign and international monetary authorities for new cash. B-435 52-WEEK EILL_RATES DATE: HIGHEST HIGHEST SINCE bhy. LAST MONTH LOWEST SINCE TODAY 9-14-77 L>. i*f<&_jo FOR RELEASE ON DELIVERY EXPECTED AT 1:30 P.M. SEPTEMBER 15, 1977 STATEMENT BY THE HONORABLE W. MICHAEL BLUMENTHAL SECRETARY OF THE TREASURY BEFORE THE INTERNATIONAL ECONOMIC POLICY AND TRADE SUBCOMMITTEE OF THE HOUSE COMMITTEE ON INTERNATIONAL RELATIONS Mr. Chairman and respected Members, I welcome this opportunity to discuss with your Subcommittee this Administration's methods of coordinating economic policy and, in particular, international economic policy. Of necessity, this is an interim account. The Administration is just eight months old, and we are still in the testing stage organizationally. For instance, the President's Reorganization Project only recently began a study of economic policy agencies outside the Executive Office. We expect the study to yield new ideas for organizing the making of international economic policy. As this Committee knows, the coordinating problems raised by economic policy have proven resistant to clear and simple solution for many years. I will not pretend that the new team has discovered the secret that has eluded all our predecessors. We have, however, made considerable progress in building mechanisms well suited to the pace, style, and objectives of this Administration. Much remains to be done, however, and I greatly value this opportunity to learn from your long experience in, and careful study of, this subject. I will begin by outlining the premises, structure, and procedures of the Economic Policy Group (EPG), which I chair, and will then address the several issues raised by the impending expiration of legislative authority for the Council on International Economic Policy (CIEP). B-436 - 2 The Economic Policy Group A. Organizational Premises President Carter's transition team and the incoming Cabinet members thoroughly studied past efforts at coordinating economic policy generally and international economic policy in particular. Many of us brought to this study considerable personal experience with these coordinating problems in past Administrations. Over the spring and summer, the study process continued as part of the work of the President's Reorganization Project on the Executive Office of the President. From all these sources, we reached several broad conclusions: 1. International and domestic economic policies should not be separated organizationally; Almost every major economic issue has major domestic and international dimensions that need to be considered simultaneously. Creating separate coordinating structures at the highest level for domestic and international economics invites friction, delay, and confusion across the whole range of economic policy and thus disserves the very idea of coordination, 2. Economic coordination must engage virtually the entire Cabinet: Economic issues, particularly international economic issues, cut across departmental boundaries. On most issues, it is relatively easy to identify the proper "lead" agency, but that agency must usually consult extensively with many others. It would be artificial, divisive, and wasteful of other agencies' resources to give to a single agency or small group of agencies the final and exclusive authority to "make" all economic policy. 3. Nevertheless, a manageably small, permanent group of Cabinet level officers should meet very frequently to monitor and oversee the Cabinet-wide development of economic policy. The Cabinet as a whole is much too big, and its members' time too valuable, for the processes of economic policy development to be managed effectively through frequent plenary meetings of an all-agency group. On the other hand, this management entirely to Congress tofunction and a coordinating not is responsible too important "staff" fornot implementing toaccountable be left - 3 the policies chosen. The best solution is to create a reasonably small "economic sub-committee" of the Cabinet to monitor and oversee the many Cabinet-wide interagency processes necessary to the development of economic policy. 4. The Treasury Secretary should chair the coordinating mechanism but, within it, other Cabinet members should have lead responsibility for particular issues, and the President's chief domestic policy and national security policy assistants should be directly involved in the coordinating process: These arrangements are essential to give the coordinating process a correct balance between centralization and dispersed authority. The Treasury Secretary has chaired nearly every broad-based coordinating mechanism devised in the economic area since the second World War. This is natural and proper. The Treasury Secretary is typically the Administration's main spokesman on • economic policy; in the international economic sphere especially; Finance Ministers play this role in nearly every government; Treasury is the only agency having a broad overview of, and wideranging operational duties in, both the domestic and international economic arenas; and it is relatively free of narrow constituency pressures. On the other hand, Treasury cannot and should not be the lead agency in developing policies for which other departments have legislative authority and specialized expertise. For instance: Within an Administration-wide mechanism devised to coordinate economic policy, the inter-agency development of agriculture policy should be led by U.S.D.A., trade policy by the Special Trade Representative, public employment policy by the Department of Labor, commercial support policy by the Department of Commerce, and the like. More broadly, CEA and OMB should both have major input into many aspects of economic policy formulation. Finally, the President's chief domestic and national security policy assistants should play central roles in economic coordination. Such an arrangement provides White House guidance and discipline for the process and helps assure that economic considerations receive proper attention at every point in the President's policy making agenda. 5 « The economic coordinating mechanism should have only a small staff of its own: The mechanism's - 4 goal is to marshall the professional resources of all interested agencies into a cooperative effort to serve the President and the broad national interest. For each category of policy, basic coordination can be assigned to a lead agency, with a very small staff to monitor the process. If the coordinating mechanism itself develops a large, independent staff, the departments will inevitably grow jealous of that staff's influence over matters of substance. The result will be chronic end-running and increased inter-agency bickering and confusion. By adding staff coordinators, one nearly always obtains less genuine coordination. 6. Successful coordination cannot be mandated by statute or executive order: Precisely which structures and procedures work best will depend crucially on the working styles of, and working relations between, the President, his White House staff, and his department heads. These matters of style and relationship tend to fluctuate even within a single Administration. Since the early 1950's, a bewildering parade of formal coordinating boards, councils, and groups for economic policy have been created by executive order, legislation, or reorganization plan. These bodies have rarely worked, even for a few weeks, in the manner intended by their designers, and most of them became hollow bureaucratic shells within a few months. By contrast, one of the most durable economic coordinating mechanisms of the post-war era — the three stage Troika system of the early and mid-1960's, involving Treasury, OMB, and CEA — was founded on nothing more than a casual oral directive by President Kennedy. The lesson is that coordinating machinery should conform as closely as possible to the actual operations of an Administration and should not Le encased in a legalistic strait jacket. B. Structures and Procedures The Economic Policy Group has been structured to reflect these general conclusions. The EPG began meeting even before the Inauguration, to formulate the Stimulus Program, and it has played a central policy within the Administration EPG resembles trationsrole in the that old it Troika exists ofbythe informal Kennedyever Presidential andsince. Johnson The directive. Adminis- - 5rather than by executive order, statute, or legislative reorganization plan. However, unlike the Troika, the EPG coordinates international, as well as domestic, economic policy and seeks to reflect the Cabinet-wide sweep of economic issues. Every Cabinet level officer is a meniber of the Group, but the operational bodies are of necessity smaller. In this regard, the EPG has two standing committees at the level of principals: a Steering Committea and an Executive Committee, both chaired by the Secretary of the Treasury. The Steering Committee consists of Secretary of the Treasury, the Secretary of State, the OMB Director, the CEA Chairman, and — on an ex officio basis — the Vice President and the President's Assistants for Domestic Policy and for National Security Affairs. The Executive Committee is the Steering Committee plus the Secretaries of Commerce, Labor, and Housing and Urban Development. The Steering Committee, which was established in July, meets at least once a week for the purpose of monitoring and guiding the many Cabinet-wide, inter-agency processes by which domestic and international economic policy are made. It is the Steering Committee's task to assure that economic problems, issues, and crises are receiving proper and timely inter-departmental and presidential attention. The Executive Committee's role has changed in recent weeks. In the Administration's early months, this Committee met weekly or twice weekly — often with non-member agencies also participating — to debate the many major economic policy decisions that emerge in a rush from the departments and the budget process to greet a new President. Now, after eight months, the flood of issues has abated somewhat and has been guided into regularized channels for inter-agency scrutiny. This has obviated the need for weekly meetings of the full Executive Committee, which are vary expensive on secretarial and staff time. Accordingly, the Executive Commitee will henceforth meet less frequently and will concentrate on broad and continuing macroeconomic issues: employment, inflation, investment, and growth. To facilitate this development, the quarterly forecasting exercises, formerly conducted by the Troika agencies — Treasury, OMB, and CEA — have been opened to participation as well by the Labor and Commerce Departments. Other, more specialized economic questions — e.g., trade, agriculture, housing, international monetary matters, taxes, Social Security financing, North-South economic - 6 relations, and the like — are discussed, and developed for Presidential decision, through inter-agency meetings and consultations led by the department having chief line responsibility for the issue. To assure their fairness and efficiency, these interagency processes are closely monitored by the EPG Steering Committee and, according to the issue, by the President's Assistant for Domestic Policy or for National Security Affairs, both of whom sit on the Steering Committee. The EPG has minimal staff of its own. The Executive Director of the EPG is employed in and supported by the Office of the Secretary of the Treasury. He secures staff and professional support for the EPG's committees and functions by working directly with the Cabinet officers involved, their chief staff assistants, and the President's major policy assistants. The EPG's purpose is not to create a new layer of staff bureaucracy but to provide a genuinely cooperative forum for the many agency officers and professionals already working full time on economic matters within the Executive Branch. The EPG has created, or assumed responsibility for, several sub-cabinet level task forces charged with examining broad areas of international economic policy. (Appendix) In addition, the Committee monitors the work of other task forces, temporary and permanent, that are created under other auspices and that deal with issues where economic considerations are present but not predominant. The Administration aims to limit the uncontrolled proliferation of "permanent" task forces that has marked the Executive Branch in recent years. In this regard, we are striving to avoid the parallel creation of EPG, NSC, OMB, White House, and department-led task forces on the same or related subjects. The EPG does not aim to supplant, but merely to monitor and facilitate, the work of the several economic coordinating bodies that have been created by statute. For instance, the Trade Policy Committee, which has statutory responsibility for formulating our multilateral trade policy, meets regularly to fulfill its statutory duties. It also occasionally meets jointly with the EPG Executive Committee, where broader coordinating issues can be raised. Similarly, the East-West Foreign Trade Board, which I chair, will fulfill its statutory mandate but also remain in close contact with the EPG and with the Policy Review Committee of the National Security Council. - 7 C. The Administration's Intentions for the EPG We earnestly hope to maintain the EPG as an informal entity and not to encase its present form and procedures in a statute or a reorganization plan, or for that matter, in an executive order. It may be that experience will change our views on this. But for the present we see nothing to be gained by legal formalization. As noted earlier, formalized coordinating mechanisms have rarely worked well. Presidents and Cabinet members have used or ignored them on the basis of the inherent logic, convenience, and utility of the mechanism. The existence of a formalizing instrument has rarely been a factor in that decision. I realize that the Congress often favors legislated mechanisms of coordination. In the case of specialized bodies, such as the Trade Policy Committee, this preference has proved sound. In the case of bodies to coordinate economic policy generally, however, the record is otherwise. Too often, the formal mechanism is not in fact used or is remote from the heart of the Administration's policymaking. This Administration believes in the propriety and necessity of congressional oversight of our actual economic coordinating structures and procedures. The EPG is a coordinating mechanism of Cabinet-level officers fully accountable to the Congress. We have bent every effort to avoid a staffdirected coordinating system that would operate outside the orbit of congressional scrutiny. The Expiration of CIEP The authorizing authority for the Council on international Economic Policy expires on September 30, 1977. The Administration strongly opposes renewing this authority. If CIEP were to continue at the level of activity originally planned for 1978, it would require 21 staff positions and more than $1.45 million annually. There are several reasons for discontinuing CIEP. First: The CIEP,1though created with the best of intentions and after expert study, has not proved a useful addition to the Executive Branch. Since its creation in 1971, the CIEP has been at best a peripheral, and often a complicating, factor in the coordination of international economic policy. The history is well analyzed in the June 8, 1977 "Report on the Coordination of United States International Economic Policy," which your full Committee commissioned from the Congressional Research Service of the Library of Congress: - 8 "The CIEP never achieved its lofty objectives: it has not been effective as the Presidential advisory group, nor has it become the fulcrum of the executive branch's international economic policy coordinating efforts." * * * * "Shortly after the CIEP received a statutory base in August 1972, President Nixon permanently removed himself as Chairman of the Council. In his place, he designated Secretary of the Treasury George Shultz as chairman. From that point on, the CIEP has not had an independent life. Rather, it has been subordinated to the various senior White House economic policy coordinating groups which have been created. Although their names change, they all have absorbed the CIEP's functions and professionaLl staff to serve as part of the larger effort to coordinate all domestic and foreign economic policies." (Page 16.) Second: The CIEP was founded on the unworkable premise that international economic policy should be coordinated separately from domestic economic policy. This premise requires top level policymakers to undertake the arbitrary exercise of assigning economic issues to either the "international" or the "domestic" category. For many issues, this is impossible. For instance, agricultural policy, exchange rate policy, trade restriction policy, energy pricing, and the like have both domestic and international dimensions of major importance. To allocate these issues between separate "domestic" and "international" tracks would ensure that the President received inadequate or redundant staffing. Third: The CIEP from its inception has been a heavily staff-centered operation. As such, it is inconsistent with President Carter's emphasis on Cabinet government and on a lean Executive Office. The CIEP staff added a new layer of bureaucracy, and new potential for empire building and bureaucratic infighting, to the Executive Office and to the entire economic domain of the Executive Branch. By adding low-level staff coordinators to the Executive Office, the CIEP actually complicated the rapid and frequent communication between policy officials in the agencies, and between them and the President, that is the essence of sound economic coordination. Fourth: Theexecute coordinating functions which the CIEP aspiredexist There to today, have underbeen the effectively EPG umbrella, assumed efficient by the processes EPG. - 9 and networks of consultation, of varying degrees of formality, between the many agencies concerned with international economic issues. Reviving the CIEP would disrupt these patterns and cause great bureaucratic confusion. The expiration of the CIEP's legislative mandate would also teminate the annual international economic report which CIEP now submits to the Congress. The Administration is not persuaded that these reports have served a useful purpose. International economic policy is already the subject of annual reports to Congress by CEA, the Treasury Department, the National Advisory Council, and other bodies. In addition, through regular testimony, the relevant committees of the Congress are kept fully abreast, on a week-by-week basis if necessary, of the Administration's plans and actions in the international economic sphere. We remain ready, of course, to discuss any other arrangements for regular communication that the Congress might find useful. In sum: Three different Administrations, both Republican and Democratic, have either ignored the CIEP or used it for minor secretariat duties ancillary to other economic coordinating bodies. We hope the Congress will share our conclusion that this history amply justifies eliminating the CIEP. Conclusion The effective coordination of economic policy is perhaps the most difficult and important organizational challenge facing not only the U.S. government but also the governments of every industrial democracy. The Carter Administration has devoted extraordinary time and attention to this problem. The process of study and experimentation continues — and should, indeed, be a permanent feature of any conscientious and self-critical Administration. Our tentative conclusions, which find reflection in the structure and procedures of the EPG, are that the economic coordinating mechanism - should encompass both international and domestic economic policies, - should engage virtually the entire Cabinet, - should be overseen directly by a small group of Cabinet-level officers, responsive to Congress, rather than by a large, independent coordinating staff, - 10 - should be chaired by the Treasury Secretary, but should also reflect leadership by other agency heads and should fully engage the President's chief policy assistants, - and should not be encased in a legalistic structure. Finding the CIEP to be unnecessary, and fundamentally inconsistent with these principles, we favor allowing its founding legislation to expire. I thank the Sub-Committee for its attention and invite your observations, criticisms and questions. 0O0 APPENDIX Name Lead Agency Established Commodities Task Force State June, 1977 Deputies Group on International Energy Policy State/DOE May, 1977 International Investment State/Treasury March, 1977 Steel STR February, 1977 International Monetary Group Treasury mid-1965 U.S. Trade Balance Treasury July, 1977 North/South Strategy Treasury/State January, 1977 Trade Adjustment Commerce March, 1977 lepartmentofthtTREASURY WASHINGTON, D.C. 20220 TELEPHONE 566-2041 FOR RELEASE ON DELIVERY EXPECTED AT 10:00 A . M . SEPTEMBER 15, 1977 STATEMENT BY T H E H O N O R A B L E R O G E R C . ALTMAN ASSISTANT SECRETARY OF THE T R E A S U R Y (DOMESTIC FINANCE) BEFORE THE SUBCOMMITTEE ON E C O N O M I C STABILIZATION OF THE HOUSE BANKING, FINANCE AND URBAN A F F A I R S COMMITTEE Mr. Chairman and Members of the C o m m i t t e e : I welcome this opportunity to assist you in your further efforts to control the financing and growth of Federal guarantee p r o g r a m s . I r e c a l l favorably y o u r March hearings o n this subject and commend y o u for continuing y o u r attention to it. You asked for our thoughts and recommendations concerning the means by w h i c h C o n g r e s s i o n a l c o n t r o l o v e r guarantee programs m i g h t b e improved, i n c l u d i n g the approach taken in H.R* 7918. You also asked f o r o u r suggestions for implementation of H.R. 7918, if enacted. The b i l l w o u l d p l a c e the F e d e r a l Financing Bank (FFB) w i t h i n t h e b u d g e t and w o u l d , in effect, require that certain loan g u a r a n t e e p r o g r a m s b e financed through the FFB. This w o u l d m e a n that loan guarantee programs w h i c h are financed through the FFB w o u l d b e included in the budget. Guaranteed loans w h i c h are n o t financed through the FFB would continue to b e excluded from the budget. We support the basic objectives of this bill from the standpoint of Treasury' s debt m a n a g e m e n t i n t e r e s t s . I ~" have a number of technical suggestions r e l a t i n g to the bill", which I w i l l discuss later in m y s t a t e m e n t . H.R. 7918 also raises a number of complex issues from the standpoint of overall budget policies and p r o c e d u r e s , h o w e v e r , w h i c h are of concern to the A d m i n i s t r a t i o n . Mr. Chairman, I would like to turn first to the broad question you raise regarding c o n t r o l over g u a r a n t e e p r o g r a m s . Following that, I w i l l discuss the specific provisions of H.R. 7918. B-437 - 2 Control over guarantee programs In testimony before this subcommitte on March 30 of this year, I discussed the rapid growth of loan guarantees, their large costs and impacts on credit markets, and the need for more effective controls. I sugcasted two approaches to improve control: (1) establishing tighter standards covering the ways in which guarantees should be used and not used and (2) setting ceilings on total guarantees. Much attention has been given to the second approach of setting ceilings either by including guarantees in the budget or by other means. Yet, all of us need to focus more on the need for better standards under which guarantee authority is provided by Congress in the first place. It seems to me that program agencies must be given much more specific guidelines on the circumstances under which guarantees are to be provided and the related terms and conditions of them. Giving these agencies broad guarantee authority and then expecting them to resist the inevitable demands for guarantees unavoidably leads to serious problems of control over guarantee totals and general misallocation of our limited credit resources. Let me discuss the basic circumstances in which guarantees are issued and make some suggestions for tightened loan guarantee standards and how they would help deal with the broader problem of controlling loan guarantee programs. Credit need test. Most loan guarantee programs are intended to facilitate the flow of credit to borrowers who are unable to obtain credit in the private market. The needs of more creditworthy borrowers are expected to be met in the private market without Federal credit aid. To achieve this purpose more effectively, and to provide a built-in control over program growth, enabling legislation should be more specific on requiring evidence that borrowers cannot obtain credit from conventional lenders. Specifically, we think that legislation should require the guarantor agency to certify that, without the guarantee, borrowers would be unable to obtain credit on reasonable terms and conditions. Coinsurance. In addition, guarantee programs are often intended to induce private lenders to extend loans on more favorable terms to marginal borrowers. The borrowers involved generally can obtain loans on their own, but only on costly and otherwise disadvantageous terms. In these cases, 100 percent guarantees don't make sense because they would lower the interest rate below that paid on unguaranteed loans to creditworthy borrowers for the - 3 same purposes. Doing so would stimulate a demand for guaranteed loans by creditworthy borrowers who do not need Federal credit aid. To avoid such excessive demand for guarantees, we favor a much greater use of partial, rather than 100 percent guarantees. In the future, legislation generally should limit the guarantees to assume, say, 90 percent of the loan. Private lenders then would charge a higher rate of interest commensurate with project risk and with the rates charged on unguaranteed loans. Such risk-sharing, or coinsurance, by private lenders would contribute to the development of more normal borrower-lender relationships, would prompt lenders to exercise greater surveillance over the loans, and would stimulate increased conventional lending for the economic activities involved. Interest rate ceilings. All of us also should be more attentive, Mr. Chairman, to the effects of statutory interest rate ceilings on the problem of controlling guarantee programs. We oppose fixed interest rates because they usually are either too high or too low at any particular moment. On the one hand, if a guaranteed lender is permitted to charge high rates relative to his risk, then he will seek guarantees in cases where he might otherwise make loans without them. On the other hand, if the interest rate ceiling is below reasonable market rates, and the Government pays the difference between the ceiling rate and the higher rate required by the lender, then demands by both borrowers and lenders for guaranteed loans will be excessive. For example, loan guarantee legislation often stipulates that the interest rate paid by the borrower not exceed a fixed rate of, say, 5 percent. This has the effect of stimulating demand for guaranteed loans (and Federal interest rate subsidy payments) as interest rates rise. In cases like this, the amount of the subsidy fluctuates with interest rate movements, and not with the needs of the borrowers. Such interest rate provisions frustrate efforts to control overall program levels and can also result in an inequitable allocation of credit resources. To avoid these problems, we think that interest rate ceilings should float in relation to interest rate movements. Equity participation. Many guarantee programs involve circumstances where borrowers could take equity positions in the projects being financed, and these guarantee programs should encourage them to do so. Requiring borrowers to have such a stake would help avoid excessive demands for guarantees, help assure more efficient projects, and help protect the interests of the Federal Government as guarantor. This - 4 could be accomplished by a legislative requirement that the amount of guaranteed and unguaranteed loans not exceed, say, 90 percent of the value of the project being financed. Other loan terms and conditions. Demands for guarantees w i H also be excessive if the legislation does not contain specific restrictions on such terms and conditions as maximum maturities, guarantee fees, reasonable assurance of repayment, default procedures, and other conditions which are common to commercial loan practice but are often overlooked or neglected in Federal credit programs. This is not to say that Federal credit assistance programs should not contain subsidies — indeed, that is their purpose — but the legislation should be carefully drafted so that the subsidies provided are by design, not chance, and are directed at specific needs. In short, I believe that more effective Congressional control over loan guarantee programs can be accomplished by adopting standards which build that control into the structure of each guarantee program. I recognize that this is not an easy task, particularly since there are more than 100 different loan guarantee programs which fall under the jurisdiction of many different subcommittees of the Congress. In the Executive Branch, the Office of Management and Budget and the Treasury Department strive to assure a uniform application of standards in the process of reviewing proposed guarantee legislation. Within Congress, however, it may be unrealistic for each interested subcommittee to develop the intense focus on guarantee standards which is essential to this improved control. Accordingly, it may be worthwhile for such a responsibility to be lodged in one committee of the Congress. Alternatively, the Congress could take the approach taken in the Federal Financing Bank Act or the Government Corporation Control Act and enact omnibus legislation to establish credit program standards. In addition to the adoption of more effective standards for all credit programs, including loan guarantee programs, Congressional control over loan guarantees could be improved by requiring that appropriations acts include ceilings on the total amount of guarantee commitments which can be issued under the related program, regardless of whether the program is included or excluded from the budget totals. - 5 H.R. 7918 I would like to turn now to the provisions of H.R. 7918. This bill would amend the Federal Financing Bank Act of 1973 to (1) include the receipts and disbursements of the Federal Financing Bank in the Federal budget totals, (2) limit the Bank's purchases of obligations in any fiscal year to such amounts as may be provided in appropriation Acts, and (3) require guaranteed obligations which would otherwise be financed in the securities markets to be financed by the FFB. Thus, the principal effects of the bill would be (1) to expand the FFB to include the financing of certain guaranteed securities which are now financed directly in the securities markets; and (2) to broaden the budget-appropriations process by including in the budget totals, and subjecting to the appropriations process, those guarantee programs which are financed through the FFB. Budget treatment. Section 11(c) of the FFB Act currently provides: (c) Nothing herein shall affect the budget status of the Federal agencies selling obligations to the Bank under section 6(a) of the Act, or the method of budget accounting for their transactions. The receipts and disbursements of the Bank in the discharge of its functions shall not be included in the totals of the budget of the United States Government and shall be exempt from any general limitation imposed by statue on expenditures and net lending (budget outlays) of the United States. The first section of H.R. 7918 would amend the second sentence of section 11(c) of the FFB Act to read: "The receipts and disbursements of the Bank in the discharge of its functions shall be included in the totals of the budget of the United States Government." To our knowledge, this would be the first time that statutory language has been used to expressly require the transactions of a particular Federal agency to be included in the budget totals. For example, the Export-Import Bank was returned to the budget by simply repealing language in the Bank's charter act which had excluded its transactions from the budget, not by enacting a requirement that its transactions be included in the budget. The intent of this requirement is not clear. We presume that the intent is to follow normal budget accounting whereby transactions between Federal agencies are - 6 not reflected in the budget totals. Thus, when the Treasury lends to a Federal agency, the transaction is not reflected in the budget until the borrowing agency disburses the funds to the public. If the explicit requirement that FFB transactions be included in the budget is intended to override this normal accounting arrangement, then this would cause double-counting in the budget totals. Specifically, FFB loans to on-budget Federal agencies such as the ExportImport Bank and TVA would be counted twice in the budget — thus inducing these agencies to resume their previous arrangement of borrowing directly in the market — and FFB purchases of (1) obligations of off-budget agencies such as the Postal Service and USRA, (2) assets sold by Federal agencies, and (3) guarantees by Federal agencies would be counted once. On the other hand, if the intent of the amendment to section 11(c) is not to override normal budget accounting rules, then FFB loans to on-budget and off-budget Federal agencies and FFB purchases of agency assets would be treated as intragovernmental transfers and not reflected in the budget. Only FFB purchases of obligations guaranteed by Federal agencies would be included in the budget totals. These totals also would increase by the amount of asset sales to the FFB, however, since such sales no longer would be treated as negative outlays. This same effect could be achieved simply by repealing section 11(c) of the FFB Act. Appropriations process. H.R. 7918 would limit FFB purchases of obligations in any fiscal year "to such extent as may be provided in appropriations Acts." Yet, situations may well arise in which the total demand for Bank financing would exceed the limitation specified in an appropriation act. There would be a need, therefore, to allocate FFB credit among competing Federal programs. Furthermore, the bill would require the Bank to purchase guaranteed obligations, but would give it discretion concerning purchases of Federal agency debt. On this basis, when demands for Bank financing exceeded the appropriations act limit in the bill — which applies to both agency debt and quaranteed obligations — there would be pressures for agencies borrowing from the Bank to shift to borrowing in the market. The role of credit allocator would not be a proper role for the FFB. Within the Executive Branch, that function should be performed by OMB. The original FFB bill sent to the Congress in 1971 contained provisions which would have authorized the Secretary of the Treasury, in effect, to bill require also guarantees would have toauthorized be financedthe through President the Bank. to limit That the - 7 total amount of guarantees issued in any year, regardless of whether the guarantees were financed by the Bank or in the market. The Congress rejected these provisions. If. H.R. 7918 is enacted, we would expect that each agency's entitlement to use the FFB would be determined by the President and by the Congress annually in the normal budget-appropriations process. Thus, the FFB would continue to function as an instrument of Treasury debt management, but neither the FFB nor the Treasury would assume the function of allocating budget or credit resources. FFB expansion. H.R. 7918 would effectively require guaranteed obligations which would otherwise be financed in the securities markets to be financed by the FFB. This would be acomplished by adding a new subsection (d) to section 6 of the Act as follows: (d)(1) Except as provided in paragraph (2), any guarantee by a Federal agency of an obligation shall be subject to the condition that if such obligation is held by any person or governmental entity, other than such agency or the Bank, such guarantee shall thereafter cease to be effective. (2) Paragraph (1) shall not apply in the case of any obligation — (A) which the Secretary of the Treasury determines is of a type which is not ordinarily bought and sold in the same markets as investment securities, as defined in the seventh paragraph of section 5136 of the Revised Statutes, as amended (12 U.S.C. 24), or (B) which is issued or sold by the Bank. Before making any determination under subparagraph (A), the Secretary of the Treasury shall consult with the Director of the Office of Management and Budget, the Comptroller of the Currency, and the Chairman of the Board of Governors of the Federal Reserve System. We strongly support the intent of these provisions. That is, if the FFB is included in the budget, it is essential to require that certain guaranteed obligations be financed through the FFB. Otherwise, there would be a budget incentive to return to the inefficient practice of financing guaranteed obligations directly in the securities market. This would undermine the purpose of the FFB Act and would add needlessly to the program financing costs and to the direct costs to the Government. - 8 Yet, we are concerned with one or two adverse, and perhaps unintended, effects of these provisions. Specifically, the FFB apparently would be explicitly required to purchase partially-guaranteed obligations, since H.R. 7918 does not distinguish between partially- and fully-guaranteed obligations. This contrasts to the present FFB legislation which authorizes but does not require purchases of such securities. As you know, we do not think that the FFB should purchase partially guaranteed obligations, and the Bank has not done so since its inception. Section 3 of the Federal Financing Bank Act defines "guarantee" as "any guarantee, insurance or other pledge ... of all or part of the principal or interest." In the past, the FFB has interpreted this to include, and has thus purchased, a wide variety of obligations guaranteed or insured by Federal agencies, including obligations secured by Federal agency lease payments and obligations acquired directly by Federal agencies. These have been sold to the FFB subject to an agreement that the selling agency will assure repayment to the FFB in the event of default by the non-Federal borrower. We also have interpreted this definition of guaranteed obligations to include those supported by Federal agency commitments to make debt service grants, e.g., to support public housing authority bonds, or other commitments such as price support agreements or commitments by Federal agencies to make direct "take-out" loans in the event of default on a private obligation. Yet, Mr. Chairman, the FFB purchases obligations guaranteed under these various arrangements only if there is a full guarantee of both principal and interest. The Bank has not purchased partially guaranteed obligations, even though they would technically be eligible for purchase under the "guarantee" definition, for the following reasons. By purchasing the non-guaranteed portions of partially guaranteed obligations, the FFB would be required to make judgments as to the creditworthiness of borrowers guaranteed by other Federal agencies and thus duplicate the functions of the guarantor agencies. Such purchases would also place the Government at risk more than was contemplated by Congress in enacting provisions which limit guarantees to less than total principal and interest. A second problem with partially guaranteed obligations concerns the methods of financing them which have developed in the private market. The loan guarantee programs of SBA and Farmers Home Administration provide good examples. - 9 In these programs, where the guarantee is limited to 90 percent of the loan, practices have developed where the lending bank will sell the 90 percent guaranteed portion in the securities market, treating it as 100 percent guaranteed paper, and retain the 10 percent unguaranteed portion in its own portfolio, while servicing the entire loan. FFB financing may be appropriate for the fully-guaranteed securities market portion of the financing, but FFB financing would not be appropriate for the unguaranteed portion held by the originating bank lender. In other cases, fully-guaranteed obligations such as small FHA and VA mortgages, are originated and serviced by mortgage lenders or acquired by Federal agencies and resold into the mortgage market. Here, FFB financing could have adverse effects on the mortgage market by having the Federal Government perform functions which today are well handled by mortgage lenders. On the other hand, certain of these mortgage-backed obligations are sold directly into the securities markets, not in the mortgage market, and FFB financing might well be appropriate there. The appropriateness of FFB financing of particular obligations should thus be determined on the basis of both the nature of the guarantee and the method of financing the obligation. We believe that such determinations should be made by the Secretary of the Treasury in keeping with his overall responsibilities for both debt management and the markets for government-backed securities. We are also concerned with possibly unforeseen and adverse effects on the financing of a number of programs under which Federal agencies enter into contracts, rentals, leasing, billing, and other arrangements which are, in effect, pledged to secure the repayment of loans made by private lenders to companies or other private institutions. These arrangements would generally fall within the definition of "guarantee" in the FFB Act, but the Bank does not currently purchase many of the private loans secured by such commitments. Yet, under H.R. 7918, such new "guarantees" would not be operative unless the FFB purchased them or the Secretary of the Treasury determined that these loans were of a type "not ordinarily bought and sold in the same market as investment securities." This requirement for a prior determination by the Secretary could cause serious administrative problems and could create a cloud of uncertainty over the legal status of a wide variety of Government contractual arrangements. Finally, the provision of proposed subsection 6(d)(2)(B) of H.R. 7918 may encourage the FFB to resell guaranteed - 10 obligations it holds, into the securities markets. This subsection would exempt such reselling from the provisions of subsection 6(d)(1) which, in effect, removes the guarantee from other obligations sold into the market. Since these sales would continue to be treated as negative budget outlays, pressures to make such sales could become irresistible under H.R. 7918 and the budget purposes of the Bill could be defeated. In summary, Mr. Chairman, we support the basic purpose of greater Congressional control over loan guarantee programs. We think that this purpose may be achieved, to a large extent, by improved standards in credit program legislation. We also believe that loan guarantee commitments should be subject to careful review in the regular appropriations process. If the Federal Financing Bank is included in the budget, and guaranteed obligations continue to be excluded, we agree that it is essential to require that certain guaranteed securities be financed through the Bank. As I have tried to point out, the specific provisions of H.R. 7918 raise a number of serious issues, and we hope to work closely with the committee to clarify these issues. I would be happy to answer any questions. Thank you. oOo CONTACT: Alvin M. Hattal (202) 566-8381 September 16, 1977 FOR IMMEDIATE RELEASE TREASURY DEPARTMENT ANNOUNCES INITIATION OF ANTIDUMPING INVESTIGATION ON METHYL ALCOHOL FROM BRAZIL The Treasury Department announced today that it would begin an antidumping investigation on imports of methyl alcohol from Brazil. Notice of the above appeared in the Federal Register of September 16, 1977. The Treasury's announcement followed a summary investigation conducted by the U.S. Customs Service after receipt of a petition filed on behalf of a U.S. industry, alleging that imports of methyl alcohol from Brazil will be dumped in the United States. The information received tends to indicate that the prices of the subject merchandise sold for export to the U.S. are less than the prices of the goods sold for home consumption. The summary investigation in this case revealed substantial doubt as to whether a U.S. industry is likely to be injured by the anticipated imports. In instances where substantial doubt exists as to the injury, or possible injury, to a domestic industry, the case is referred to the U.S. International Trade Commission (ITC) for a preliminary determination on that aspect of the investigation. Should the ITC find (within 30 days) that there is no reasonable indication of injury or likelihood of injury, the investigation will be terminated; otherwise Treasury will continue its investigation into the question of sales at less than fair value. There were no imports of methyl alcohol from Brazil in 1975 or 1976. * * * B-438 FOR RELEASE ON DELIVERY EXPECTED AT 10:00 A.M. SEPTEMBER 16, 1977 TESTIMONY OF ROBERT CARSWELL DEPUTY SECRETARY OF THE TREASURY BEFORE THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS Mr. Chairman and Members of this distinguished Committee: I appreciate this opportunity to comment on behalf of the Administration on S.684 and S.711, the two bills before your Committee today. S.684 S.684, the Federal Bank Commission Act of 1977, addresses, as have many previous proposals, the hardy perennial question of whether Federal bank regulatory agencies should be reorganized and consolidated. S.684 would reorganize and consolidate the bank supervisory and regulatory functions of the three Federal bank regulatory agencies under a new Federal Bank Commission and make various other changes complementary to that purpose. It would constitute a major overhaul of our present system of regulation. In its study "The Debate on the Structure of Federal Regulation of Banks," dated April 14, 1977, the General Accounting Office identified 22 comprehensive proposals (not including this one) that have addressed this question since 1919. None has been adopted by the Congress. I think it might be helpful to consider S.684 in the context of the arguments presented in these previous efforts and their application to the situation today. Relationship to the Dual Banking System The dual system of commercial bank regulation has been rooted in our system of federalism at least since 1963. In B-439 - 2 its present stage of evolution it involves a complex interlock of regulatory authority of three agencies at the Federal level: the Office of the Comptroller of the Currency, the Federal Reserve System and the Federal Deposit Insurance Corporation. At the state level, every state has its own bank regulatory system which permits it to adopt policies that differ from Federal law in such important areas as branching, chartering and banking powers. States have traditionally guarded their prerogatives in this area jealously. Some coordination has been possible between the Federal and State agencies, but many areas of overlap continue. Creation of a single Federal bank regulatory supervisor has frequently been viewed as the precursor to the eventual demise of the dual banking system because by its very monolithic quality it will dominate the scene. S.684 goes some distance toward meeting this concern by providing (i) for the automatic grant of Federal insurance to State banks regulated by State regulatory agencies that meet Federal standards, and (ii) for Federal funding of bank examinations by approved State regulatory agencies in some circumstances. But there will no doubt be those who will feel that he who holds the power to approve the State agencies, as well as the purse strings, will also have the power to control. The Necessity for Reorganization The present regulatory system is cumbersome in design. It is, of course, a product of historical development, not rational design. Each of the three Federal regulators was established to meet a particular, pressing need demanded by the times in which it was launched. Irrational as the present regulatory structure may be, however, it works — albeit imperfectly at times. The ultimate test of the structure is the strength and adaptability of our Nation's banks, and most commentators have concluded that the American banking system is among the strongest and most adaptable in the world. The Nation's banks have enjoyed the uniterrupted confidence of the American people for more than 40 years. During the recent economic downturn, the failure of four banks of substantial size and a number of smaller ones raised questions as to the adequacy of the regulatory structure, but I think it is fair to say today that, in an overall sense, bank failures have been kept to an acceptable level. I am sure this Committee realizes that the objective - 3 of preventing bank failures itself involves tradeoffs. Tighter regulation would no doubt have reduced the rate of failure but at the price of preventing innovation and risktaking essential to a growing economy. Despite being one of our most closely regulated industries, banking has kept abreast of the Nation's changing economic needs and has successfully incorporated technological change to meet those needs. It has been persuasively argued that this record has in part been achieved because the de facto checks and balances in the system of regulation have permitted evolution rather than the stagnation evident in some other requlated industries. As you know, very early in this Administration, the President announced his Reorganization Project. That Project is focusing on those areas of the Federal Government that are perceived as most in need of reorganization. The question of whether reorganization of the bank regulatory agencies should be included in the Project has been considered by the staff of the Project and has not been included on its agenda as an area requiring priority attention. Overlap, Duplication and Coordination Over the years, many commentators have correctly pointed to multiple instances of overlap, duplication and failures of coordination as justifying reorganization. I think it is fair to say that in recent years Federal regulators have acted to minimize overlap of supervision in a number of areas. In 1965, the Treasury strongly supported the formation of the Coordinating Committee, consisting of the three federal bank regulators, as a means of assuring coordination at senior levels on a more regular basis in an effort to develop consistent treatment of common problems. We have continued to support and participate in its activities. The Committee originally was a response to a need to resolve conflicts in the treatment of bank mergers which had developed among the regulators, but it has gradually expanded the scope of its activities through the years. The Committee now includes the three regulators, the Treasury, and the Federal Home Loan Bank Board. The National Credit Union Administration has recently been invited to join. Acting through the Coordinating Committee or less formally, the regulators have reduced their differences in recent years. Although the agencies still have distinct regulatory philosophies resulting from their statutory obligations, we do not believe that these differences are sufficiently pronounced to support the view that banks - 4 engage in Federal regulatory forum shopping. If there once was a competition in laxity among the agencies, there is persuasive evidence that it has given way to a spirit of increased cooperation and coordination, a spirit which should be encouraged. There is one exception to this record of progress that I should note. The system of bank holding company regulation continues to be plagued by overlapping jurisdiction. Bank holding companies and their subsidiaries are treated as distinct entities for supervisory purposes and, except in the limited case of a holding company whose banking subsidiaries are State member banks, examined by more than one Federal agency. Bank holding companies and their bank and non-bank subsidiaries should be viewed as a single entity at least for purposes of examination. This issue should be addressed but it is far from clear that a consolidated agency (as opposed to an approach along the lines of S.711) is necessary to address it. Savings and Cost of Consolidation Another area that has historically been central to consideration of the appropriateness of bank regulatory reorganization has been the possibility of achieving substantial savings. Inefficiencies exist in the Federal bank regulatory system in the duplication of services within each of the agencies. Each agency has created a staff which looks at most of the same fundamental questions of banking practice as are reviewed by the staffs of the other two regulators. Despite this duplication, replacing three large agencies with a super agency will not necessarily result in substantial efficiencies. One management system would replace three, but that one system would require substantial additional administrative coordination and the costs associated with it. There is no established track record for efficient, effective and responsive super agencies. Most of the current costs incurred in running the three agencies, excluding the costs incurred by the Federal Reserve in fulfilling its obligations as central banker, are incurred in the bank examination process. The Comptroller General in his report to your Committee of December 5, 1975, "Information on Consolidation of Bank Regulatory Agencies," identifed cost savings which might result in this area from consolidation of the agencies. These savings would arise principally from consolidation and relocation of field offices, development of a single computer system and unified recruiting and training of bank examiners. - 5Consolidation would, however, also impose substantial short-run costs for the regulators, the banks and the public. Regulatory efficiency would suffer, and the development of innovative banking techniques to meet the everchanging financing needs of the American economy would be inhibited. Ability to implement new legislation would also be prejudiced. The energies of the regulator would be distracted from the reexamination of current practices by the demand of consolidating the administration of existing law. On balance, while there is no question that reorganization would facilitate public understanding of bank regulation and probably result in some efficiencies, the historical debate has made it clear that it also involves both unknown costs and risks. Accordingly we have concluded that prudence dictates a step by step approach. S.711 S.711 would establish a Federal Bank Examination Council to prescribe uniform standards and procedures for the Federal examination of banks and to make recommendations to promote uniformity in bank supervision. The Administration supports this approach as a constructive first step in addressing the issues raised by the consolidation debate. The Council could accomplish many of the goals of consolidation. Coordination would clearly be enhanced. Troublesome areas such as the overlap of bank holding company responsibilities and the treatment of problem or failing banks could be addressed. Many of the potential cost savings identified by the Comptroller General could be achieved. These accomplishments could be realized without the disruptive impact of consolidation. We also support S.711 because it would establish a liaison committee of State supervisors to encourage uniformity between Federal and State bank supervisory agencies, thereby strengthening the dual banking system. It would also permit closer review of an area of significant potential cost savings for Federal regulators through increased reliance on the States. We think S.711 could be improved by certain modifications. It names the Chairman of the Board of Governors of the Federal Reserve System as the permanent chairman of the Council. Of the three bank agencies, the Federal Reserve examines the smallest number of banks, and there is no particular reason to single it out as the lead agency at this point in the development of a new system. The Administration believes that the Council would be better served initially - 6by a rotating chairmanship (as has been successfully followed in the Coordinating Committee). We also support the other changes to S.711 suggested by the Comptroller of the Currency. In summary the Administration believes S.711 takes a sensible first step toward improvement of the Federal bank regulatory structure. This step would have our full support and would permit us to reassess other aspects of the consolidation question at a later stage based upon practical experience. 0O0 kpartmentoftheTREASURY lASHINGTON, OX. 20220 TELEPHONE 566*2041 September 15, 1977 FOR IMMEDIATE RELEASE AMENDED RESULTS OF TREASURY'S 26-WEEK BILL AUCTION The announcement of September 12 of the results of the 26-week Treasury bill auction for the bills to be issued September 15 is corrected below to reflect a decrease in the total tenders received and accepted. This adjustment was due to an error in recording competitive bids during the auction process. This error did not affect the average price as reported in the September 12 announcement. Location Received Accepted Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Treasury TOTALS $ 28,175,000 4,863,000,000 5,105,000 46,155,000 14,955,000 32,430,000 639,530,000 35,635,000 36,650,000 23,865,000 14,245,000 273,690,000 350,000 $6,013,785,000 $ 23,175,000 2,859,800,000 5,105,000 46,155,000 11,955,000 32,430,000 217,930,000 23,635,000 36,650,000 23,865,000 14,245,000 80,690,000 350,000 $3,375,985,000 All other particulars in the announcement remain the same. B-440 FOR RELEASE UPON DELIVERY (APPROXIMATELY 11:15 A1.to.) SEPTEMBER 20, 1977 STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS ON LEGISLATION TO AUTHORIZE U.S. PARTICIPATION IN THE IMF SUPPLEMENTARY FINANCING FACILITY BEFORE THE SUBCOMMITTEE ON INTERNATIONAL TRADE, INVESTMENT, AND MONETARY POLICY OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES Mr. Chairman and Members of the Subcommittee: I welcome these hearings, and this opportunity to testify for the Administration in support of legislation to authorize United States participation in the Supplementary Financing Facility of the International Monetary Fund. This new facility is needed, and needed urgently, to strengthen the International Monetary Fund, and to enable us through the Fund to deal with certain potentially serious problems in the international monetary system today. The establishment of the facility will help to make sure that our international monetary system continues to function smoothly, and will foster our objectives of an open and liberal system of international trade and payments. United States participation is a pre-requisite to the facility's establishment. I urge, on behalf of the Administration, that the Congress act promptly to authorize that participation. I cannot exaggerate the importance, for international financial stability, of this facility, and this legislation. The need for the Supplementary Financing Facility arises from the drastic changes that have occurred in the pattern of international payments since 1973. As this Subcommittee knows, the quintupling of oil prices, the most severe world recession since the 19130' s, and world inflation unprecedented in pervasiveness and obstinacy, have all combined to bring radical changes to many aspects of the international payments B-441 - 2 - situation. Thus, in recent years, the pattern of international payments has dramatically changed, with certain oil exporting countries accumulating immense current account surpluses, while the rest of the world accustomed itself to very large deficits; the attitude toward imbalances has changed, with recognition that the aggregate oil deficit cannot be eliminated in the short run; and the magnitude of world-wide financing requirements has thus increased by a quantum step to multiples of the levels of earlier years. The increase in balance of payments financing has indeed been striking. In the three years 1971 through 1973, the aggregate deficit of all nations running current account deficits averaged about $15 billion per year. In the three years 1974 through 1976 the aggregate deficit averaged about $75 billion per year, or five times as mucho Understandably, an increase of this magnitude in financing requirements has caused strains in the international monetary system. This large amount of balance of payments financing -about $225 billion over the last three years -- was largely matched by an increase in debto The rapid growth in financing and debt came as no surprise. boon after the shock of the increase in oil prices, it was recognized that with such price levels and the absorptive capacity constraints of oil producers, the resulting OPliC payments surpluses -- and counterpart deficits of the oil importing countries -could not be eliminated in the short run. The oil importing nations acknowledged that they could all harm each other if each tried to shift its oil deficit to other countries by external restrictions and excessive domestic retrenchment„ The IMF membership agreed formally in January 1974 in the Rome Communique to avoid such self-defeating actions. 'In the circumstances, it was appropriate that nations were urged to "accept" the oil deficit, at least temporarily, and finance it. Efforts were concentrated on assuring that recycling of OPEC surpluses occurred smoothly and that adequate financing would be available to all countries to meet the higher costs of oil imports0 As part of this stress on "financing" rather than "adjustment," the IMF established a temporary "Oil Facility," which channeled $8 billion to member nations, allocated largely in relation to the increase in oil import costs, and with much less than the usual emphasis - 3 - on the IMF's usual requirement that its financing be linked to carefully negotiated adjustment programs or corrective measures on the part of the borrowers. Nations thus borrowed very heavily in the years 1974 through 1976 to finance their large balance of payments deficits. The borrowing took many forms. While official financing through the IMF during this period was far above historic levels, it was the private markets that handled the bulk of the financing, accounting for about three-quarters of the total[ rSuch data as are available -- admittedly incomplete -show a pattern of world payments in the period 1974 through 1976 roughly as follows: -- The cumulative current account deficits financed equaled about $225 billion or so (after the receipt of grant aid), representing the counterpart of the lendable surpluses of OPEC plus those of certain industrial countries registering surpluses during the periodo --About $15 billion of these deficits, or 7 percent of the total, was .financed through the IMF, the bulk of it through the temporary "Oil Facility" and tne "Compensatory Financing Facility," both of which provided financing largelv on the basis of "need" with relatively little emphasis on "conditionally" or the adoption of corrective adjustment measures by the borrower. r-- About $4,0 billion of the deficits, or 18 percent of the total, was financed through a variety of other official sources -- development lending by industrial countries and OPEC, by the IBRD and regional development banks, and other sources. -- The remaining current account deficits, some $170 billion, plus about $40 billion of debt repayments, were financed largely through marketoriented borrowing. Most of these funds were obtained through banks and securities markets. Some came from governments seeking investment outlets for their surpluses or as export financing_ - 4Given the private market orientation of the world economy, it was natural that the bulk of this financing be handled by private rather than official channels. The private institutions were in a position to expand the level of their activity. Huge surpluses, by OPEC and other countries, of course, brought large deposits and placements to the banks and other financial intermediaries, and greatly expanded the loanable funds of those institutionso In addition, the period was one of rapid institutional expansion in the international banking system. Many institutions were competing eagerly for new customers, as they sought to establish themselves in new activities and new geographic areas, and endeavored to broaden their scope of operations so as to spread risks and diversify portfolios at a time when domestic loan demand was less buoyant than in immediately preceding years. The question has been raised as to whether this rapid and unprecedented enlargement of lending activity and debt has reached a danger point for the monetary system -- either in the sense that large numbers of countries have borrowed beyond their capacity to service debt, or in the sense that our banks and other institutions are overextended_ It is our considered judgment that the system as a whole is not in any such position of imminent danger, either as a result of excessive borrowing by large numbers of debtor nations or as a result of our financial institutions being over-stretched. But the fact that the system as a whole has performed well thus far is no cause for comfort or complacency_ Success in the past is no guarantee that we are adequately armed for the future. Much remains to be done0 Structural changes, domestic and external, must take place in many countries, often involving major alterations of traditional patterns of production and consumption_ Such changes will not come easily and must take place over a number of years if satisfactory levels of growth and employment -- and an open system of trade and payments -- are to be maintained. Substantial financing will continue to be needed by countries in deficit. And, in some countries, adjustment measures need to be introduced0 The Supplementary Financing Facility will help to assure that the financing is available and that the adjustment measures are adoptedo - 5 Clearly there are countries -- certainly not a large number but a significant number -- that have already reached or are approaching the limits of their ability to borrow or their prudence in doing so. These are countries that are beset by internal economic imbalances, that still face large payments deficits, where the need for corrective measures and internal and external adjustment is compelling. Such countries, and others which may in future face similar difficulties, must be encouraged, and permitted, to adjust their economies in ways that are compatible with our liberal trade and payments objectives, in ways that avoid discrimination against others and disruption of the world economy. Our monetary system must foster sound adjustment, internationally responsible adjustment, with programs that develop underlying economic and financial stability in the countries undertaking adjustment measures, while avoiding recourse to trade and payments restrictions that are destructive of international prosperity. This economic and financial stability is a pre-requisite to sustainable expansion and high employment0 A major function of the IMF is to induce such adjustment. Our international monetary system is at present strong and functioning effectively. But we must eliminate its vulnerabilities and put in place the machinery needed to insure fthat it will continue to operate effectively in the future_ Looking ahead, we can make two fairly safe predictions: -- First, that large payments imbalances will continue for the next several yearsl The OPEC surplus, the largest part of the imbalance, will diminish only gradually, as OPEC spending grows and as effective energy conservation and production programs are implemented in the United States and elsewhere. -- Second, that there will be a need for greater emphasis on "adjustment" of imbalances, rather than simply "financing" the imbalances, especially by those countries facing relatively large payments deficits. With the passage of time, the need for countries to adapt to nigher energy costs and other economic developments has become stronger and is increasingly recognized. Indeed, at the Manila IMF meeting last^ fall, a basic strategy of adjustment was agreed, which, among other things, called upon deficit countries to shift resources to the external sector and bring current account positions into line with sustainable capital inflows. - 6 - Givsn these expectations, it is essential that the resources of the IMF be adequate both to enable it to foster responsible " adjustment policies by members facing severe payments difficulties and also to provide confidence to the world community that it can cope with any potential problems that may arise. That, fundamentally, is why the Supplementary Financing Facility is' needed. Without the additional funds of the new facility, the IMF's resources may not be adequate to meet demands placed on it over the next several years. With relatively large use in the past three years, the IMF's usable resources are at present extremely low at about $5 billion. These usable resources will be increased by about $6 or $7 billion with the coming into effect of the sixth quota review approved in 1976 and now being ratified, and about $3 billion remains available under certain conditions through the General Arrangements to Borrow. Even with those additions, and the repayments which may be expected, the IMF's resources look sparse in a world in which total imports are running at an annual level of nearly a trillion dollars, and in which'OPEC surpluses are likely to decline only gradually from the current $40 billion annual level. Against this background, the decision was taken to seek to establish the Supplementary Financing Facility, with financing of about $10 billion to be provided initially by seven industrial nations and seven OPEC countries. The industrial countries would provide $5.2 billion, of which the U.S. share -subject to Congressional authorization -- would be SDR 1.45 billion (about $1.7 billion) approximately 17 percent of the total. The OPEC members would provide about $4„8 billion, or nearly half the total, with Saudi Arabia the largest single participant of either group at $2.5 billion. The terms relating to the provision of this financine to the IMF by the participants are presented in detail in the National Advisory Council Special Report on the Supplementary Financing Facility presented to the Congress with the legislation. Under the agreed terms, participation in the facility is advantageous to the United States and others providing the financing0 In addition to furthering our interest in assuring a strong and smoothly functioning international monetarv system, U0S„ participation in the facility provides us with a strong, liquid and interest-earning monetary asset. Under the facility, the United States and other participants agree to provide currency to the IMF in These exchange claims for on a liquid the IMF, claim which on can the be IMFdrawn of equivalent down any value. time - 7- there is a balance of payments need to do so, form part of our international reserve assets. The United States also can sell or transfer these assets to others by mutual agreement. Since, in exchange for any dollars we provide, we receive a fully liquid claim which can be drawn down any time we have a need to do so, there is no U.S. budget expenditure involved, but rather an exchange of one asset for another. This treatment is in keeping with the budget and accounting practices followed with respect to all U.S. transactions with the IMF. The interest rate we receive from the IMF is linked to U0S. Treasury issues of comparable maturity, so that there is no net cost to the Treasury from our participation in the facility. As the drawings are repaid by the borrower, the IMF returns the dollars to the U.S., U.S. drawing rights on the IMF correspondingly are reduced, and the transaction is reversed. This $10 billion facility would be available to the IMF for a temporary period. Countries could apply within the next 2 to 3 years, and could draw down funds over a period of 2 to 3 years, though the total period of disbursements could not exceed 5 years. it would be available for use by IMF members only under clearly defined criteria. Specifically, a member drawing under the facility: -- Must have a balance of payments financing need that is large in relation to its IMF quota and exceeds the amount available to it under the IMF's regular policies. -- Requires a period of adjustment that is longer than that provided for under regular IMF policies. -- Must enter into a stand-by agreement with the IMF in which it undertakes to adopt corrective economic policy measures adequate to deal with its balance of payments problem. The facility, in short, is designed to encourage those countries with particularly severe payments problems to adopt internationally responsible adjustment programs -- and to avoid the unwelcome alternatives of resort to the controls, trade restrictions, and beggar-thy-neighbor policies which can be so harmful to world prosperity and so disruptive to our liberal - 8 - trade and payments order. It will, in addition, by fostering a smoother, more effective process of international balance of payments adjustment, reinforce confidence in the international monetary system, and thus facilitate the flow of financing throughout the system. It is not a device for augmenting development assistance -- the IMF provides only snort to medium term balance of payments support. The member drawing on the facility receives more financing than is otherwise available from the IMF; a longer period of adjustment (a 2- to 3-year program as compared with the 1 year normally applicable in the IMF); and a longer period of repayment (3- to 7-year maturity, as compared with the IMF's normal li- to 5-year maturity). Since interest on the financing provided to the Fund is marketrelated, the borrowing country would also pay a somewhat higher change than for normal IMF drawings. The facility is a cooperative venture, with the surplus countries of OPEC and the stronger industrial countries joining together to assure that the needed financing will be available. The agreement requires that before the facility can begin operations participants must formally commit $9 billion of the full $10 billion, and the six largest participants must all formally commit themselves to participate. Thus action by the United States, and the Congress, is necessary before the facility can become a reality. Let me assure you that the Supplementary Financing Facility is not proposed or represented as a solution to all the world international financial problems. For one thing, it will not meet the problems of nations whose real need is for permanent transfers of resources or long-term development aid. Most importantly, it cannot eliminate the large imbalance between the OPEC surplus countries and the oil importing world. We must work toward the elimination of that imbalance. But that will come about only through, on the one hand, effective programs by the United States and others to conserve energy and develop alternative energy supplies, and, on the other, continued growth in the capacity of oil exporting nations to absorb goods and services produced in the oil importing world. What the Supplementary Financing Facility will do is help redistribute, as well as reduce, the collective current account deficits so that the necessary borrowing is undertaken by those countries whose creditworthiness and economic strength are adequate to sustain the additional debt. By encouraging responsible adjustment measures in those countries experiencing severe domestic economic distortion, large payments deficits and shifted serious to afinancing more sustainable problems, world-wide such deficits pattern. are reduced and - 9- With the establishment of the Supplementary Financing Facility there will continue to be a large amount of borrowing -private as well as publico Concern has been expressed that continued borrowing in such large amounts, irrespective of who is borrowing or how •''the credit is used, constitutes a serious danger for the monetary system. I do not share that view. If the borrowed funds are properly used to support productive investment, and strengthen the borrower's current account position, the debt need not constitute a serious future burden, as shown by the experience of the United States in the last century and other countries at present. Excess savings in surplus OPEC countries can, in effect, finance investment in the oil importing countries by supplementing domestic savings. tfut the borrowed funds should be productively invested, in order* to avoid servicing problems in the future. This, -then, is the broad strategy within which the Supplementary Financing Facility fits -- we aim for a sustainable pattern of payments in which the borrowing is undertaken by countries commensurate with their creditworthiness; we seek to assure that the borrowed funds are used to support sound arid effective programs of stabilization and adjustment; and meanwhile we work toward elimination of the pil imbalance through ettergy programs and OPEC development. Let me address three1 questions which have been asked with respect to this new facility. First, how can we' be sure that the $lu billion contemplated for the facility is adequate to do the job but not more than is needed? Obviously it is a matter of judgment and no one can beabsolutely sure. ; We cannot predict-with certainty just which countries will hav<e the particularly large needs for credit that make them eligible for'this facility, along with the willingness to adopt the kind of adjustment programs associated with it-' It is our judgment that this facility plus the amounts available to the IMF from other sources will enable it to provide financing over the next 2 or 3 years up to, say, a total of $25 billion. This is above the levels of IMF financing of recent years which wer6 already relatively high. To assure confidence in the monetary system, it is vital that the IMF always be known to have adequate resources in reserve to meet whatever urgent problems may arise, even if it turns out that less than the full amount is actually drawn. Since no cash transaction occurs until a member country actually draws from the IMF, there is no interest or other cost whatever -to the IMF, or to the United States and other participants -drawings. for any portion of the facility not actually utilized for - 10 A second question is will the facility serve to "bail out" private banks which have lent unwisely or excessively? The answer is "no." The facility is not so designed and will not be so used. It will not bail out either countries or banks. It will encourage countries to initiate needed adjustment measures before their debts become too large to handle or credit is no longer available, and it will provide transitional financing while the measures take effect. it will help redistribute deficits to a more sustainable pattern, and improve nations' creditworthiness and confidence in the monetary system. It is not a substitute for bank credit and will not take over the banks' regular lending activities. While IMF financing may in the period ahead account for a >share of total balance of payments financing larger than the 7 percent if provided in 1974-76, it will remain small in comparison with the share channeled through private markets. in fact, the. facility is expected to encourage banks to continue tx> expand: their foreign lending rather than cut back, by promoting sound economic policies on the part of borrowers -- and experience indicates that in fact the banks normallv lend more to a country after it has entered into a stand-by agreement with the IMFo . The banks will benefit from the new facility, but only indirectly -- through the improved international environment, stronger monetary system and high levels of trade that will benefit all elements of the American economy.... A third question is why was the ^Supplementary Financing Facility established rather than the alternative of a permanent change in IMF quotas. . The answer is that this method was chosen for reasons of timing and practicality. A review of IMF quotas is under way, but with the complications of negotiation and ratification, it may not lead to actual quota increase for, ,say, two years or more. Hopefully the new facility can be put into operation at an early date, and cover the particular needs until a quota revision occurs. The facility is also more flexible than a quota increase, since it is not subject to the same quota constraints and can be used more selectively to meet the problems of countries with particularly large needs. - 11 - Mr. Chairman, the IMF is a valuable institution, in which all members contribute, financially and otherwise, to an effective international monetary system. It has a good record. The proposal for a Supplementary Financing Facility is a sensible and realistic way to strengthen it to meet present problems. The facility is equitable to all parties. It is needed, and needed soon. The Administration urges that the Committee report the proposed legislation favorably, and that the Congress enact it promptly. I thank you. oo 00 oo Contact: Alvin M. Hattal (202) 566-8381 September 16, 1977 FOR IMMEDIATE RELEASE SPECIAL CERTIFICATES FOR IMPORTS OF FERROCHROMIUM AND CHROMIUM-BEARING STEEL MILL PRODUCTS FROM THE FEDERAL REPUBLIC OF GERMANY The Department of the Treasury announced today that special certificates issued under the certification agreement between the United States and the Commission of the European Communities are now available for imports of ferrochromium and chromium-bearing steel mill products from the Federal Republic of Germany under the Rhodesian Sanctions Regulations. A Notice to this effect was published in the Federal Register of September 16, 1977. Materials from the Federal Republic of Germany shipped after that date may be imported only if a special certificate is presented to Customs at the time of entry. Imports of certifiable materials from the Federal Republic of Germany shipped before the Federal Register Notice appeared may continue to be made under the interim certificates. However, the entry will not be liquidated until the importer presents a special certificate. Such certificate must be obtained from the producer and filed by the importer on or before Septem ber 18, 1977, to complete liquidation. Failure to present the required special certificate of origin by September 18, 1977, will result in a demand for redelivery of the goods. * * * B-442 FOR RELEASE 10:00 A.M. ESDT, MONDAY, SEPTEMBER 19, 1977 STATEMENT BY HELEN B. JUNZ DEPUTY ASSISTANT SECRETARY OF THE TREASURY FOR COMMODITIES AND NATURAL RESOURCES BEFORE THE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, AND THE COMMITTEE ON ENERGY AND NATURAL RESOURCES SUBCOMMITTEE ON ENERGY AND NATURAL RESOURCES MONDAY, SEPTEMBER 19, 1977 10:00 A.M. I am very pleased to appear before you today to discuss the Treasury Department's views on deep seabed mining legislation. We feel, however, that the timing of our discussions is somewhat unfortunate. As you know, since the end of the last session of the LOS Conference, the Executive Branch has undertaken a full review of our posture towards the Law of the Sea Conference, including also the question of legislation. The LOS review will carefully balance advantages against disadvantages over the full range of our interests in this area in order to arrive at decisions that protect them adequately. While this review will still take several weeks to complete, we expect to have a decision on legislation in a matter of days and certainly before this bill goes to mark up. Therefore, we may have to defer comments on certain features of this legislation until that time. You know, from previous testimonies on these matters, that the Administration feels that the wealth of resources at the bottom of the sea must not be left to lie idle. Indeed, we feel that if our aspirations for increased standards of living worldwide are to be realized, we will need to employ productively the world's resources wherever they are to be found. C-443 - 2 Therefore, it is vitally important that we provide an international and national climate that will ensure that deep sea resources are developed productively, efficiently and to the benefit of the world community. The interest of the Treasury Department in the current Law of the Sea negotiations is related to the overall economic goals of the United States, as is the bill you are asking me to comment on. A Legal Regime to Preserve U.S. Economic Interests In the negotiations, Treasury's attention has been focused largely on the principles that would govern access to and exploitation of the deep seabed resources. We share the Committee's concern that a stable, legal framework for deep ocean mining is needed. Without such a^framework,^ mining consortia would be unable to make rational decisions with regard to committing risk capital in seabed mining. A pre-requisite for any stable, legal framework is the principle of assured access for seabed mining firms. Uncertainty with regard to the terms of access can — and indeed, should — discourage state and private entities from assuming the substantial economic risks of exploring the seabed and of developing the new technology needed to eventually exploit these new resources for the world market. The Treasury Department believes that assured access to the seabeds for states and their nationals will lead to the most efficient allocation of resources as well as the most rapid development of the seabed resources to the ultimate benefits of both the United States and the world economy. The Administration has hoped that an appropriate framework for the productive exploitation of deep seabed resources would be provided by a Law of the Sea Treaty. As you know, we have not yet been able to achieve acceptable treaty provisions on this point. In a press conference following the last Law of the Sea session, Ambassador Richardson pointed out the major defects in the text dealing with the economic management of the seabed resources — the so-called "Engo Text" — and the process used to draft it. In the view of the Administration, the Engo Text, produced in private and never discussed - 3 with a representative group of participating nations, was fundamentally unacceptable because it not only failed to provide for assured access, but would make deep seabed mining basically uneconomic. But even the Evensen Texts, negotiated during the Conference and set-aside by the Chairman in favor of the Engo Text, would have required a considerable amount of further negotiation to assure that national and private enterprises could commit their resources and energies with the prudence dictated by their responsibilities to their taxpayers and stockholders. While today's technology points only to the existence of nodules, there is no telling what lies ahead in the future. But even with only today's promise, we simply cannot agree to a regime that would unnecessarily inhibit, and perhaps even prevent, deep seabed development. To do so would make a mockery of the principle of the Common Heritage of Mankind and shut off altogether, or reduce to a pitiful trickle, the benefits that could otherwise accrue to mankind as a whole, but in particular to the developing countries. Mr. Chairman, for some number of months now, we have been engaged in a dialogue with the developing countries on their proposals for a New International Economic Order by which they would achieve participation in world economic affairs on an equal footing with developed countries. And the shaping of an economic regime for the deep seabed forms part of this dialogue. It is clear that any new international institution, if it is to work, must reflect the realities of the evolving international system. But one of the realities of our system is that we cannot force the commitment of private capital resources or the transfer of the fruits of private research and patent rights. Governmental actions can facilitate such flows, but finally they must be induced by the economic realities. Therefore, any international institutions we create for the deep seabed must represent a true accommodation of the interests of both developing and developed countries, if, indeed, it is to help tap the resources of the deep seabed to the benefit of mankind. What happened at the Sixth Session is therefore particularly disappointing. We were prepared to agree to a compromise which would produce maximum benefits to be shared with the poorer countries while at the same time opening up the opportunity for the developing world itself to participate in the effort. Such a compromise would have seen a major achievement ~ not only for the benefits to be - 4 attained from resource exploitation as such, but also as a precedent for future world institutions and the evolution of our international economic relations. Because of both the great importance and the complexity of the whole range of issues pertaining to the establishment of a viable ocean mining regime and a productive seabed mining industry, we believe it is vitally important that the Congress and the Executive Branch work together as closely as possible on these issues. U.S. Legislation With respect to the substance of deep seabed mining legislation, Ambassador Richardson and officials of several agencies have on various occasions informed members of Congress of the Administration's views. It is clear from the bills now before the Congress that considerable understanding has been shown for the Administration's concerns, and I would like to express my appreciation for this. I am confident it augurs well for continuing cooperative efforts on these matters in the future. May I briefly review the main elements of Administration policy before I turn to a discussion of the bill before us. In our view, legislation: should be interim in nature, and eventually superceded by a treaty; should contain provisions for harmonizing U.S. regulations with those of reciprocating states; should provide for environmental protection and sound resource management; should provide that seabed mining by U.S. companies produces financial benefits for the international community; should not be site-specific with regard to licensing; - 5 should not require that processing plants be located in the United States; should not offer U.S. mining companies financial protection against adverse effects of a treaty concluded subsequent to the passage of legislation and the commitment of expenditures by those companies; and should assure that all provisions of the legislation leave undisturbed the concept of freedom of the high seas. As I indicated a moment ago, some of these views coincide with provisions contained in S.2053. First, this bill clearly is designed to be interim legislation pending the entry into force of an international agreement. Second, it contains provisions designed to prevent conflict with designated reciprocating states engaged in deep seabed mining. Third, it provides for environmental safeguards and the means to assure timely action to avoid and avert damage to the ocean atmosphere, although, in our view, strengthening of enforcement provisions is needed. Finally, there is provision made for sharing the proceeds of deep seabed mining with the international community. On the other hand, some provisions of S.2053 are of concern to the Administration. Among these, the provisions on tax treatment and investment guarantees are of special concern to Treasury and I would like to comment on these in some detail. Tax Policy As a general proposition, the Administration agrees with the concept that there should be no tax discrimination between U.S. deep seabed mining and U.S. domestic mining. However, while this concept can be stated simply, deep seabed mining does raise a number of complex tax issues, and we believe that the tax provisions in S.2053 are in need of further refinement in order to take explicit account of these questions. - 6 Among these questions is the treatment of deep seabed mining activities under present tax law, with respect to depletion allowances, accelerated depreciation range (ADR), the investment tax credit, mining exploration expenses and payments to special funds for possible transfer to the international community. At this point, I would like to summarize briefly how present tax laws operate with respect to these particular areas. Under the principle of domestic treatment, deep seabed mining conducted by a U.S. individual or corporation, would be subject to U.S. tax. However, this mining activity, under present law, would not be accorded a class life of 20 percent shorter than the normal guideline life; nor would the investment tax credit be available, because these incentives generally are limited to fixed assets physically located in the United States. Exploration expenses, which currently may be deducted if incurred with respect to mineral deposits located in the U.S., must be capitalized and recovered through depletion when the deposits are located outside the United States. Finally, percentage depletion, if available at all, would be at the rates prescribed for foreign mineral deposits (14 percent for manganese, nickel, copper and cobalt), rather than the higher rates for domestic deposits (22 percent for manganese, nickel and cobalt and 15 percent for copper). In this connection, it should be noted that under present law, depletion is allowed only if the taxpayer has an "economic interest" in the minerals in place. Although the concept of an "economic interest" is not well delineated in the law, it is something akin to an ownership right in the minerals prior to extraction. Because there are no clear ownership rights to deposits in the deep seabed, it is not likely that under present laws deep seabed mining would have the requisite economic interest to qualify for depletion allowances. With this background, it is apparent that non-discriminatory domestic tax treatment for deep seabed mining cannot be achieved without additional tax legislation. Further, the definition of U.S. citizenship in this bill can lead, under varying circumstances, to inequities in tax treatment. For example, as we read Section 6(15), a "U.S. citizen" is defined to include a foreign corporation or other foreign entity if "controlled" by a single U.S. individual or other U.S. legal entity. Putting aside the troublesome - 7 omission of a standard for determining control, this provision can lead to double taxation or tax avoidance. For example, if control were to be defined as a 51 percent interest, a joint venture incorporated in France "controlled" by a U.S. corporation, could be a "U.S. citizen" subject to full U.S. tax under this bill. As a French corporation, the joint venture would also be legitimately subject to French taxation — hence double taxation could result. Conversely, if the U.S. corporation did not "control" the joint venture, since it owned say only 49 percent, then the United States would have no tax jurisdiction. If a "U.S. citizen" incorporates such a joint venture in a tax haven area, for example in the Bahamas, it would escape all tax. Under the provisions of the bill, which requires control by a single U.S. entity, two U.S. corporations each owning one-third interest in a Bahamian corporation also would escape all U.S. tax liability. Thus, the provisions in S.2053 could produce double taxation in some instances and tax avoidance in others. The Administration believes that a policy based on the following principles would avoid both double taxation and tax avoidance: U.S. entities that engage directly or indirectly in deep seabed mining ventures, on their own or jointly with non-U.S. entities, should be treated for U.S. tax purposes as if they were engaged in land-based ventures in the United States. Non-U.S. entities, that either mine on their own or participate with U.S. entities in deep seabed mining, should not be subject to U.S. taxation. The tax treatment for payments to an international seabed authority or to an escrow fund held by the U.S. Government should be the same as that accorded domestic land-based mining ventures for payments of - 8 royalties. Thus, such payments would either be: (1) deductible; or (2) capitalized and recovered through depletion. Treasury has already furnished the House Merchant Marine and Fisheries Committee with a short paper on "Tax Policy Considerations Affecting Ocean Mining." I have attached a copy of this paper as an Appendix to my testimony. Remaining issues on which Treasury is continuing to work center on the mechanics for implementing non-discriminatory domestic tax treatment for deep seabed miners according to the principles set out above. In the coming months,^ Treasury will be conferring with the Committees responsible for ocean mining legislation as well as with the House Ways and Means Committee and the Senate Finance Committee in order to work out the necessary legislation to implement the Administration's ocean mining tax policy. Investment Guarantees Although the Administration believes strongly in the desirability of developing the mineral resources of the seabed, an investment guarantee program for such activities is both undesirable and unnecessary in our view. Investment guarantees are undesirable because they imply an obligation on the part of the Government to indemnify firms for possible adverse consequences of Government policies. But it is a fact of life that Government decisions often affect an industry's profitability dramatically. The claim made for seabed mining in favor of Government guarantees is that it is in a unique situation because the conclusion of a Treaty may alter its profit calculations profoundly. However, the Administration has concluded that the situation of deep seabed raining consortia is not sufficiently unique to justify institution of a new guarantee program. Investment guarantee programs currently in place cover certain domestic and foreign land-based mineral operations of U.S. corporations. For example, the Overseas Private Investment Corporation (OPIC) has programs to insure foreign investments in the minerals industries in developing countries. - 9 These programs are now being reviewed, and as Assistant Secretary Bergsten stated earlier this year, we are now proposing that OPIC should develop new "risk reducing coverage for projects in energy and other raw materials." It would be possible to consider whether there is a role for OPIC in seabed mining, but to the extent that we are recommending domestic tax treatment for such operations, it is not clear that OPIC activities indeed could be extended to include seabed mining activities without raising questions about the equity of treatment of domestic versus foreign investment under Federal laws. Certain domestic programs reflect national interests either with respect to the specific industry, for example energy, or to a class of investors, such as small business. In our view, seabed mining consortia do not qualify under these counts. There is no overall national strategic interest sufficient to justify governmental action to reduce risks that are similar in type to those encountered by both domestic and foreign investors. Governmental and non-governmental groups have conducted several studies of the market for the minerals to be obtained from the seabed and our strategic need for them. These studies have shown that the adequacy of supply is reasonably assured. In the absence of a compelling national interest, the industry ought to compete on equitable terms with land-based producers. I want to point out that the investment guarantee portion of the proposed legislation is based on two presumptions: (1) that the United States Government will negotiate and the Senate will ratify a Treaty under which the terms of operation for firms could be arbitrarily and adversely affected; and (2) that if an equitable Treaty were accepted, the United States will be unable to prevent later adverse actions through its representation in the seabed authority's governing body. We think these premises are incorrect. As you know, this Administration has consistently opposed treaty texts which would subject miners' operations to capricious or onerous regulation. In fact, the President's Special Representative, Ambassador Richardson, has denounced the current draft text as "fundamentally unacceptable" to the United States. Also, we expect the Congress to look askance at any Treaty that significantly diminishes the value of investments of U.S. firms in the deep seabed. Moreover, the United States will continue to oppose provisions of governance which fail to give the United States and - 10 other ocean-mining countries a major voice in the decisionmaking councils of an International Seabed Authority. The second point we want to make with regard to the investment guarantees proposed in this bill, is that we consider them to be unnecessary. The lending climate for major investments has changed in recent years. Partly in response to the tumultuous conditions of the early seventies, banks are no longer willing to make loans solely on the merits of specific projects. They now require that specific investments be fully backed by the corporations undertaking them. Hence, the testimony you may be hearing argues correctly that banks will not fund projects without corporate guarantees, but this increasingly applies across the board and not solely to seabed mining. Consultations with major U.S. banks and with other financial agencies in Washington, lead the Treasury to conclude that funds are available for deep seabed mining operations without Government guarantees if firms are willing to assume the risk. The decision whether the reportedly rich returns from seabed mining justify investment in this new area — under license by the U.S. Government with assurances that the Government will do all it can to protect mining interests — is a decision which we firmly believe is best left to the companies themselves. If the anticipated returns justify the risk, the investments will take place. If not, the capital will be put to more productive uses elsewhere. In conclusion, it is clear that the U.S. economy will ultimately benefit from the existence of a viable and productive seabed mining industry. But we find arguments in favor of preferential treatment of seabed development neither convincing nor equitable. Therefore, we could not support diversion of official financial resources into Other Policy Considerations seabed Economic production and away from competing claims for Federal funds. Treasury is in complete agreement with legislative provisions that would provide benefits for the international community through the establishment of an escrow account. (S.2053, Section 204 and H.R.3350, Section 203). Permitting the Administration time to submit a specific revenue sharing - 11 proposal after the date of enactment is a particularly helpful provision in these bills. This will give the United States time to work out the necessary details and to consult with other prospective ocean mining countries and reciprocating states. Thus, the Administration will be able to develop a revenue sharing system that will assure that U.S. firms are not put at a competitive disadvantage with the miners of other countries. With regard to provisions in these bills that require license holders to locate processing plants in the United States (S.2053, Section 102 and H.R.3350, Section 103), the Administration believes that such a provision should not be a requirement for receiving a U.S. license. By allowing processing plants to be located at the most economical sites, the viability of the ocean mining industry will be increased, and the benefits of ocean mining will be more widespread as will be support for such activities. For example, countries where processing plants are located would be giving implicit recognition to the fact that U.S. miners are engaged in a legitimate use of the high seas. Thank you for this opportunity to discuss our views on U.S. ocean mining policy with you. My staff and I will be pleased to make available to you what help we can during the coming months. o 0 o ATTACHMENT TAX POLICY CONSIDERATIONS AFFECTING DEEP SEABED MINING BACKGROUND Five multinational consortia (four of which are led by U.S. companies) are currently investigating the economic and technological feasibility of mining deep seabed manganese nodules containing approximately 1.5% nickel, 1.3% copper, .25% cobalt and 24.2% manganese. There is thus a need to determine the nature of U.S. tax treatment of deep seabed mining. Deep seabed mining is juridically unlike most other economic activities. Extraction of nodules will take place in an area which is not subject to the jurisdiction of any nation. On the other hand, all but one of the U.S.-led consortia plan to transport the nodules in chartered vessels to shore for processing. One consortium plans to process at sea beyond national jurisdiction. While many countries, in particular developing countries, claim the deep seabed is "common property" and cannot be exploited until an international regime for this purpose is agreed, the U.S. and other developed countries maintain it belongs to no one and can be exploited under customary international law providing for freedom to use the high seas. The U.S. is, nevertheless, prepared to agree to the establishment of an international regime and organization (International Seabed Authority) for the administration of deep seabed mining. We are not, however, prepared to agree to Authority ownership of or sovereignty over deep seabed minerals. The nature of the international regime and organization for the deep seabed is currently under discussion in the third UN Conference on Law of the Sea (LOS). It is probable that any agreed regime will provide, inter alia, for (i) contracts between the Authority and private entities sponsored by States to mine specific deep seabed areas, and (ii) certain payments by these entities to the Authority (financial arrangements) in recognition of the economic interest of all countries in deep seabed development. The current draft treaty texts before the Conference provide potentially for four types of payments from private entities to the Authority: 2 1. Payments in kind, upon obtaining from the Authority a contract to mine the seabed, i.e., banking by the contractor of mining sites for the Authority's operating arm, the Enterprise. 2. Fee payable on the award of a contract to mine the deep seabed. 3. Royalty based on percentage of value of minerals extracted by the seabed miner. 4. Taxes on the revenues of contractors derived from their activities in the deep seabed. The U.S. proposal on this subject dated June 3, 1977, provides for (i) banking, (ii) a small fee (not to exceed $500,000), and (iii) profit sharing (15-20% of net proceeds depending on return on investment) or royalties (10% of the imputed value of the minerals at the mine site; the mine value is calculated as 20% of the fair market value of the processed metals). In addition to the LOS Conference discussions, three House Committees (Merchant Marine and Fisheries, Interior and Insular Affairs and International Relations) are considering three bills (HR 3350/4582 [Murphy-Breaux], HR 6784 ([McCloskey] and HR 3652 [Fraser] which would authorize seabed mining by private entities pending agreement on an international regime. Only HR 6784 (McCloskey) provides for international payments and deals as such with U.S. tax treatment. It authorizes a Deep Seabed Resource Development Revenue Sharing Fund to which payments would be made in escrow for the international community pending agreement on a treaty, and states such payments shall be considered as payments to a foreign government and credited against U.S. income taxes. For its part, the Administration has indicated that any U.S. legislation should provide for some payments into escrow for the benefit of the international community. ISSUES (1) What is the appropriate U.S. tax treatment of deep seabed mining ventures undertaken by a U.S. entity? " (2) What should be the U.S. tax treatment of payments by U.S. entities to an International Seabed Authority and/or to a USG escrow fund for such an Authority pending its establishment? 3 CONCLUSION U.S. entities that engage in deep seabed mining ventures should be treated for U.S. tax purposes as if they were engaged in land-based minincj ventures in the United States. Non-U.S. entities, who mine either on their own or in partnership with U.S. entities should not be subjectHbo U.S. taxation on this activity to the extent it is undertaken at sea. Payments zo an International^eabed Authority or to a USG escrow fund will toe either (1) deductible from U«S. gross income; or (2) capitalized and recovered through depletion. The tax treatment will be~he same as that accorded domestic land-based mining ventures on payments of a similar nature. DISCUSSION The policy objective is to assure economic equality of U.S. tax treatment of U.S. entities as between deep seabed and land-based mining of the minerals concerned. Meeting this objective in turn involves consideration of whether the economic equality should be with (i) mining by U.S. entities in the U.S., or (ii) mining by U.S. entities in a foreign country. The entire venture might be considered a purely "domestic" investment since none of the investment is located within the jurisdiction of another sovereign nation; or the venture might be considered a "foreign" investment to the extent located outside the geographic area of the United States. (See attachment A for a quantified comparison of these two treatments.) The tax treatment of an ocean mining venture will vary somewhat depending on its treatment as domestic or foreign. The principal differences currently are the rate of percentage depletion allowed, the availability of ADR (Asset Depreciation Range) depreciation and the investment tax credit, and the deductibility of mine exploration expenditures. The rate of percentage depletion allowed for foreign mineral deposits of manganese, nickel, copper and cobalt is 14 percent. The percentage depletion rates in the case of U.S. deposits are 22 percent for manganese, nickel and cobalt and 15 percent for copper. ADR depreciation at a class life 20 percent shorter than the guideline life and the investment tax credit are generally limited to fixed assets located in the United States. Finally, mine exploration expenditures may be deducted currently if incurred with respect to deposits located in the United 4 States, but generally must be capitalized and recovered through depletion when incurred with respect to mineral deposits located outside the United States. In all other principal respects the tax treatment of domestic and foreign hard mineral mining operations is the same. As a matter of tax policy, the choice between "domestic" or "foreign" treatment is relatively simple: any investment by a United States resident should be treated as "domestic" so long as it is not located within the taxing jurisdiction of a foreign government. This classification of investment by a U.S. resident is consistent with national income accounting concepts. Moreover, inasmuch as world-wide income of U.S. residents is subject to U.S. income tax, treating deep seabed mining operations as "foreign" needlessly creates income "source" issues when no other sovereign taxing jurisdiction is involved. Although treatment of ocean mining ventures undertaken by a U.S. company as purely domestic will require certain amendments to the Code, such treatment is consistent with the tax treatment accorded analogous situations. The investment tax credit is available for communications satellite and transoceanic cable equipment (Code sections 48(a)(2)(B)(viii) and (ix)), and for certain property used in ocean mining ventures located in the international waters of the northern portion of the Western Hemisphere (Code section 48(a)(2)(B)(x)). Income from transoceanic cable or telegraph transmission operations is deemed from U.S. sources to the extent such transmissions originate in the United States, and income from communication satellites would presumably be treated in a similar manner. Finally, tax reform proposals related to international shipping are not inconsistent with domestic tax treatment of ocean mining ventures. Proposals to treat international shipping income as U.S. source to the mid-point of each voyage is roughly the same as treating all outbound traffic as domestic and all inbound as foreign. On the other hand, from the international point of view, such U.S. tax treatment must make clear that it in no way implies an assertion of U.S. jurisdiction over the deep seabed. Amendments to the Internal Revenue Code providing for such treatment should apply only to U.S. persons and not to non-U.S. persons. In particular, no attempt should be made to tax the deep seabed mining income of non-U.S. persons who are members of U.S.-led consortia engaged in deep seabed mining. Such non-U.S. persons, of course, would continue to be subject to U.S. tax on income arising from 5 their activities in the United States, e.g., income from processing in the U.S. Details of this policy, such as the taxation of U.S. controlled foreign corporations or the leasing of equipment to non-U.S. persons, would need to be worked out in a specific legislative proposal. The only disadvantage of domestic treatment from the U.S. companies' point of view is the unavailability of potential tax credits against U.S. tax for certain of the payments made to the Authority either directly or in escrow. The fourth category of payments to the Authority (listed above on page 2) could be structured so as to be economically similar to income taxes payable to a foreign State with respect to revenues derived from activities within its jurisdiction. Some would argue that such payments should qualify for a foreign tax credit as if these payments were income taxes paid to a foreign government. The issue of domestic or foreign tax treatment aside, granting a foreign tax credit for payments to the Authority is undesirable. On the one hand, there has been increasing concern about granting credit for payments which are not truly income taxes, (especially in the case of payment by oil companies to governments which not only impose the tax but also own the oil.) This has been reflected in recent rules and legislation, and the tests for a creditable tax are being more stringently applied than ever. And, on the other hand, to be creditable the income tax must be paid to a foreign government. Payments to the International Seabed Authority would not be creditable because it is not a foreign country endowed with sovereign taxing powers. To endow it with sovereignty would be contrary to both our national security and economic interests. To endow such an international body with sovereign taxing power would be an extraordinary precedent and would encourage the Authority to exercise the monopoly power thus bestowed on it. While treating deep seabed mining ventures as "foreign" might result in a "revenue gain" from limiting percentage depletion and denying the investment tax credit and the shorter depreciation life, foreign treatment would constitute an unwarranted bias against certain forms of investment of U.S. capital (assuming that access to seabed minerals is assured) and may buttress the arguments of those desiring to invest the International Seabed Authority with "tax sovereignty." Accordingly, deep seabed mining ventures undertaken by U.S. companies should be treated for tax purposes in a manner identical to domestic land-based mining ventures. 6 Imports of seabed materials If the seabed mining is defined as a domestic activity, then consistent trade policy would dictate that the products from that activity should be treated as domestic production and exempt from any duties or other import restrictions. Currently the duties applied to imports are relatively low and vary according to the material imported, e.g. specific ore, metal, or mixed ores. To assure that these seabed materials are defined as domestic, the tariff schedule would have to be amended to specifically define materials from the seabed as exempt from duties. This exemption would be similar to the treatment now extended to fish landed by American fishermen. Under present law it is not mandatory that materials be transported in U.S. vessels. Attachment A Quantification of Differences in Tax Treatment of Ocean Mining Ventures From the point of view of a U.S. venturer, we may compute the value of "domestic" tax treatment as an amount the venturer would be willing to pay for that treatment rather than "foreign." It is also an amount available to him to pay for a "license" to mine, either as a "bonus" or "royalty" per ton of material removed. To make such calculations, some specification of expenditures related to the mining, transportation, and processing is required. For this purpose, we rely on a publication of the Ocean Mining Administration of the Department of the Interior which summarizes the fragmentary information on this as yet speculative activity.]./ Based on the published "medium" cost estimates for a venture which would supply 3 million tons of nodules pey year to be processed into nickel, copper, and cobalt,2/ and adding the cost of an alternative site to be provided gratis to the DSA as is presently contemplated, we computed the present value of the minimum gross income from the sale of the aforementioned metals which would be required to yield the venturer a 15 percent rate of return after taxes under two regimes: (1) the entire project is regarded as "domestic"; (2) the sea-based mining activity is "foreign". Then, based on these two calculations, we may compute the maximum "additional take" of DSA if that agency is accorded sovereign taxing status.3/ 1/ Rebecca L. Wright, Ocean Mining: An Economic Evaluation; May, 1976. 2/ According to Wright, technology for the extraction of manganese in useful form is still not well-enough defined to permit cost specifications of the on-shore processing. Moreover, she considers that manganese processing may usefully be considered as processing "tailings" of the nickelcopper-cobalt process. Ibid, Appendix A. 3/ The published data were organized simply to permit computation of an internal rate of return. For our purposes, and to facilitate reasonably accurate representation of the critical tax terms, it was necessary to reorganize the basic information. Miss Barbara Lloyd, who had performed the original computations kindly provided us with disaggregation of investment and operating costs, by site. Fortunately, the cost specifications treat transportation as independently provided, not as an integrated operation of the venturer. This is fitting, for ownership and operation of the transport vessels are of no consequence to the economics of the project nor its alternative tax treatments. If the entire project is treated as domestic, the present value of the "required" total sales over the estimated 20-year productive life of the project would be just over $830 million. Of this total value of product, 35 percent would be added by mining, 9 percent by transportation, and 56 percent by on-shore processing.4/ If sales values of the minerals finally sold, as projected by the aforementioned publication, are used as a reference point, the venturer would be willing to pay the DSA up to $16 million (in addition to the aforementioned alternative site) for the license to mine. Alternatively, the venturer would be willing to pay $3.85 per ton of nodules removed, when removed.5/ In contrast, if the sea-mining operation is treated as "foreign", the loss of the investment credit with respect to that investment, along with somewhat slower depreciation and a percentage depletion rate of only 14 percent rather than the weighted average 19 percent for "domestic" mining of the same minerals, increases the "required" total sales to $855 million, which is $25 million more than under "domestic" tax treatment. Given the same projected mineral prices, the venturer could only pay up to $3 million for the license, or a royalty of only about 75C per ton of nodules, when removed. While the overall difference between "domestic" and "foreign" treatment is not large—a mere 3 percent increase in "required" gross sales income—it is an 80 percent reduction in the venturer's maximum biddable bonus or royalty, under the assumed conditions of this example. This must always be true, because the rental value of the sea-bed will always be a tiny fraction of the total value of mineral product.6/ (footnote on page 4) 4/ Addition of manganese processing would greatly increase the on-shore value added share. Neither the mining nor transport activities depend on the extent of on-shore processing of nodules. 5/ The computation of maximum "bonus" takes into account that the payment will become a part of the venturer's "depletion" basis whereas the payments of royalties will simply be reductions of gross income for U.S. tax purposes as production occurs. The reader is cautioned not to take the numerical values in the text seriously. Given the insubstantial character of the cost estimates, along with the implicit assumptions about ultimate mineral recovery, the 15 percent discount rate is clearly too low to be applied to an estimated income stream stretching 26 years into the future (6-years' start-up, 20-years production). Had the "high" cost estimates been used the projected income stream would have been insufficient to justify making the commitment, without any lease bonus or royalty, to yield results a is 15 percent to provide return. an indication The soleof purpose the relative of the magnitudes. numerical Finally, if "foreign" tax treatment by the United States is to be accompanied by DSA "taxing power," the U.S. foreign tax wedge may be "taken" by the DSA without discouraging the venturer. This foreign tax wedge is equal to at least $75 million, in present value terms. If this amount is expressed as additional royalty per ton of nodules, it adds $9.20 to the $0.75 royalty per ton otherwise payable to DSA under "foreign" tax treatment only. Alternatively, it affords the venturer the possibility of paying an additional $39 million bonus. These calculations may be summariz-ed as follows: Maximum DSA "take"* expressed as: -IT Bonus" Completely "domestic" "Foreign" (at sea) 3 0.75 with "creditable" DSA "tax" $16 million 42 \ "Royalty" $3.85 per ton 9.95 •Assumes the Wright projections of nickel, copper, and cobalt prices and projects costs, allow a 15 percent after-tax rate of return to the venturer. 6/ At best, estimates of the mineral content of the nodules are not expected to be much over 3 percent for copper, nickel, and cobalt, all of which are found ashore in ores which are less expensively processed. Clearly, the price of minerals will trace the marginal cost of production, and this will inevitably basically consist in the cost of extraction, transportation, and processing. Only the slight differences in metal-content of nodules and ores will give rise to rents for the higher-content mineral sources, and these rents will be small relative to total value added. OF WrtmentoftheJREASURY I B fc . 53fc TELEPHONE 566-2041 WASHINGTON, D.C. 20220 "V r -fc, /789 FOR IMMEDIATE RELEASE September 19, 1977 RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS Tenders for $2,503 million of 13-week Treasury bills and for $3,501 million of 26-week Treasury bills, both series to be issued on September 22, 1977, were accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: High Low Average 13-week bills maturing December 22, 1977 26-week bills maturing March 23. 1978 Discount Investment Price Rate Rate 1/ Discount Investment Price Rate Rate 1/ 98.525 98.519 98.521 5.835% 5.859% 5.851% 6.00% 6.03% 6.02% 96.997 96.971 96.979 5.940% 5.991% 5.976% 6.21% 6.26% 6.25% Tenders at the low price for the 13-week bills were allotted 31%. Tenders at the low price for the 26-week bills were allotted 30%. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Received Boston $ 21,765,000 New York 4,589,175,000 Philadelphia 32,570,000 Cleveland 53,255,000 Richmond 25,750,000 Atlanta 32,625,000 Chicago 621,925,000 St. Louis 56,810,000 11,660,000 Minneapolis Kansas City 32,520,000 Dallas 14,425,000 San Francisco 181,940,000 Treasury TOTALS 40,000 $5,674,460,000 Accepted Received $ $ 16,765,000 2,208,460,000 17,570,000 31,665,000 15,730,000 23,515,000 46,235,000 21,740,000 5,660,000 26,380,000 14,425,000 75,180,000 40,000 41,465,000 4,656,335,000 28,035,000 62,790,000 30,985,000 61,740,000 491,550,000 40,170,000 12,630,000 23,610,000 31,870,000 202,500,000 $ 34,465,000 2,880,335,000 28,035,000 62,790,000 26,985,000 61,740,000 136,550,000 18,770,000 12,630,000 23,610,000 31,870,000 183,300,000 80,000 80,000 $2,503,365,000a/ $5,683,760,000 ../Includes $309,590,000 noncompetitive tenders from the public. .•/Includes $159,840,000 noncompetitive tenders from the public. ./Equivalent coupon-issue yield. B-444 Accepted $3,501,160,000b/ FOR RELEASE ON DELIVERY EXPECTED AT 8:30 A.M. SEPTEMBER 20, 1977 STATEMENT BY THE HONORABLE ROGER C. ALTMAN ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE) BEFORE THE SUBCOMMITTEE ON OVERSIGHT OF THE HOUSE WAYS AND MEANS COMMITTEE Mr. Chairman and Members of the Committee: I welcome this opportunity to present the views of the Treasury Department on H.R. 7416. The bill would place the Federal Financing Bank (FFB) within the - budget and would, in effect, require that certain loan guarantee programs be financed through the FFB. This would mean that loan guarantee programs which are financed through the FFB would be included in the budget. Guaranteed loans which are not financed through the FFB would continue to be excluded from the budget. We support the basic objectives of this bill from the standpoint of Treasury's debt management interests. I have a number of technical suggestions relating to the bill, which I will discuss later in my statement. H.R. 7416 also raises a number of complex issues from the standpoint of overall budget policies and procedures, however, which are of concern to the Administration. Mr. Chairman, I would like to turn first to the broader question of control over guarantee programs. Following that, I will discuss the specific provisions of H.R. 7416- B-445 - 2 Control over guarantee programs In testimony before the House Banking Committee on March 30 of this year, I discussed the rapid growth of loan guarantees, their large costs and impacts on credit markets, and the need for more effective controls. I suggested two approaches to improve control: (1) establishing tighter standards covering the ways in which guarantees should be used and not used and (2) setting ceilings on total guarantees. Much attention has been given to the second approach of setting ceilings either by including guarantees in the budget or by other means. Yet, all of us need to focus more on the need for better standards under which guarantee authority is provided by Congress in the first place. It seems to me that program agencies must be given much more specific guidelines on the circumstances under which guarantees are to be provided and the related terms and conditions of them. Giving these agencies broad guarantee authority and then expecting them to resist the inevitable demands for guarantees unavoidably leads to serious problems of control over guarantee totals and general misallocation of our limited credit resources. Let me discuss the basic circumstances in which guarantees are issued and make some suggestions for tightened loan guarantee standards and how they would help deal with the broader problem of controlling loan guarantee programs. Credit need test. Most loan guarantee programs are intended to facilitate the flow of credit to borrowers who are unable to obtain credit in the private market. The needs of more creditworthy borrowers are expected to be met in the private market without Federal credit aid. To achieve this purpose more effectively, and to provide a built-in control over program growth, enabling legislation should be more specific on requiring evidence that borrowers cannot obtain credit from conventional lenders. Specifically, we think that legislation should require the guarantor agency to certify that, without the guarantee, borrowers would be unable to obtain credit on reasonable terms and conditions. Coinsurance. In addition, guarantee programs are often intended to induce private lenders to extend loans on more favorable terms to marginal borrowers. The borrowers involved generally can obtain loans on their own, but only on costly and otherwise disadvantageous terms. In these cases, 100 percent guarantees don f t make sense because they would lower the interest rate below that paid on unguaranteed loans to creditworthy borrowers for the - 3 same purposes. Doing so would stimulate a demand for guaranteed loans by creditworthy borrowers who do not need Federal credit aid. To avoid such excessive demand for guarantees, we favor a much greater use of partial, rather than 100 percent guarantees. In the future, legislation generally should limit the guarantees to assume, say, 90 percent of the loan. Private lenders then would charge a higher rate of interest commensurate with project risk and with the rates charged on unguaranteed loans. Such risk-sharing, or coinsurance, by private lenders would contribute to the development of more normal borrower-lender relationships, would prompt lenders to exercise greater surveillance over the loans, and would stimulate increased conventional lending for the economic activities involved. Interest rate ceilings. All of us also should be more attentive, Mr. Chairman, to the effects of statutory interest rate ceilings on the problem of controlling guarantee programs. We oppose fixed interest rates because they usually are either too high or too low at any particular moment. On the one hand, if a guaranteed lender is permitted to charge high rates relative to his risk, then he will seek guarantees in cases where he might otherwise make loans without them. On the other hand, if the interest rate ceiling is below reasonable market rates, and the Government pays the difference between the ceiling rate and the higher rate required by the lender, then demands by both borrowers and lenders for guaranteed loans will be excessive. For example, loan guarantee legislation often stipulates that the interest rate paid by the borrower not exceed a fixed rate of, say, 5 percent. This has the effect of stimulating demand for guaranteed loans (and Federal interest rate subsidy payments) as interest rates rise. In cases like this, the amount of the subsidy fluctuates with interest rate mdvements, and not with the needs of the borrowers. Such interest rate provisions frustrate efforts to control overall program levels and can also result in an inequitable allocation of credit resources. To avoid these problems, we think that interest rate ceilings should float in relation to interest rate movements. Equity participation. Many guarantee programs involve circumstances where borrowers could take equity positions in the projects being financed, and these guarantee programs should encourage them to do so. Requiring borrowers to have such a stake would help avoid excessive demands for guarantees, help assure more efficient projects, and help protect the interests of the Federal Government as guarantor. This - 4could be accomplished by a legislative requirement that the amount of guaranteed and unguaranteed loans not exceed, say, 90 percent of the value of the project being financed. Other loan terms and conditions. Demands for guarantees will also be excessive if the legislation does not contain specific restrictions on such terms and conditions as maximum maturities, guarantee fees, reasonable assurance of repayment, default procedures, and other conditions which are common to commercial loan practice but are often overlooked or neglected in Federal credit programs. This is not to say that Federal credit assistance programs should not contain subsidies — indeed, that is their purpose — but the legislation should be carefully drafted so that the subsidies provided are by design, not chance, and are directed at specific needs. In short, I believe that more effective Congressional control over loan guarantee programs can be accomplished by adopting standards which build that control into the structure of each guarantee program. I recognize that this is not an easy task, particularly since there are more than 100 different loan guarantee programs which fall under the jurisdiction of many different subcommittees of the Congress. In the Executive Branch, the Office of Management and Budget and the Treasury Department strive to assure a uniform application of standards in the process of reviewing proposed guarantee legislation. Within Congress, however, it may be unrealistic for each interested subcommittee to develop the intense focus on guarantee standards which is essential to this improved control. Accordingly, it may be worthwhile for such a responsibility to be lodged in one committee of the Congress. Alternatively, the Congress could take the approach taken in the Federal Financing Bank Act or the Government Corporation Control Act and enact omnibus legislation to establish credit program standards. In addition to the adoption of more effective standards for all credit programs, including loan guarantee programs, Congressional control over loan guarantees could be improved by requiring that appropriations acts include ceilings on the total amount of guarantee commitments which can be issued under the related program, regardless of whether the program is included or excluded from the budget totals. - 5 H.R. 7416 I would like to turn now to the provisions of H.R. 7416. This bill would amend the Federal Financing Bank Act of 1973 to (1) include the receipts and disbursements of the Federal Financing Bank in the Federal budget totals, (2) limit the Bank's purchases of obligations in any fiscal year to such amounts as may be provided in appropriation Acts, and (3) require guaranteed obligations which would otherwise be financed in the securities markets to be financed by the FFB. Thus, the principal effects of the bill would be (1) to expand the FFB to include the financing of certain guaranteed securities which are now financed directly in the securities markets; and (2) to broaden the budget-appropriations process by including in the budget totals, and subjecting to the appropriations process, those guarantee programs which are financed through the FFB. Budget treatment. Section 11(c) of the FFB Act currently provides: (c) Nothing herein shall affect the budget status of the Federal agencies selling obligations to the Bank under section 6(a) of the Act, or the method of budget accounting for their transactions. The receipts and disbursements of the Bank in the discharge of its functions shall not be included in the totals of the budget of the United States Government and shall be exempt from any general limitation imposed by statue on expenditures and net lending (budget outlays) of the United States. The first section of H.R. 7416 would amend the second sentence of section 11(c) of the FFB Act to read: "The receipts and disbursements of the Bank in the discharge of its functions shall be included in the totals of the budget of the United States Government." To our knowledge, this would be the first time that statutory language has been used to expressly require the transactions of a particular Federal agency to be included in the budget totals. For example, the Export-Import Bank was returned to the budget by simply repealing language in the Bank's charter act which had excluded its transactions from the budget, not by enacting a requirement that its transactions be included in the budget. The intent of this requirement is not clear. We presume that the intent is to follow normal budget accounting whereby transactions between Federal agencies are - 6 not reflected in the budget totals. Thus, when the Treasury lends to a Federal agency, the transaction is not reflected in the budget until the borrowing agency disburses the funds to the public. If the explicit requirement that FFB transactions be included in the budget is intended to override this normal accounting arrangement, then this would cause double-counting in the budget totals. Specifically, FFB loans to on-budget Federal agencies such as the ExportImport Bank and TVA would be counted twice in the budget — thus inducing these agencies to resume their previous arrangement of borrowing directly in the market — and FFB purchases of (1) obligations of off-budget agencies such as the Postal Service and USRA, (2) assets sold by Federal agencies, and (3) guarantees by Federal agencies would be counted once. On the other hand, if the intent of the amendment to section 11(c) is not to override normal budget accounting rules, then FFB loans to on-budget and off-budget Federal agencies and FFB purchases of agency assets would be treated as intragovernmental transfers and not reflected in the budget. Only FFB purchases of obligations guaranteed by Federal agencies would be included in the budget totals. These totals also would increase by the amount of asset sales to the FFB, however, since such sales no longer would be treated as negative outlays. This same effect could be achieved simply by repealing section 11(c) of the FFB Act. Appropriations process. H.R. 7416 would limit FFB purchases of obligations in any fiscal year "to such extent as may be provided in appropriations Acts." Yet, situations may well arise in which the total demand for Bank financing would exceed the limitation specified in an appropriation act. There would be a need, therefore, to allocate FFB credit among competing Federal programs. Furthermore, the bill would require the Bank to purchase guaranteed obligations, but would give it discretion concerning purchases of Federal agency debt. On this basis, when'demands for Bank financing exceeded the appropriations act limit in the bill — which applies to both agency debt and guaranteed obligations — there would be pressures for agencies borrowing from the Bank to shift to borrowing in the market. The role of credit allocator would not be a proper role for the FFB. Within the Executive Branch, that function should be performed by OMB. The original FFB bill sent to the Congress in 1971 contained provisions which would have authorized the Secretary of the Treasury, in effect, to require guarantees to be financed through the Bank. That bill also would have authorized the President to limit the - 7 total amount of guarantees issued in any year, regardless of whether the guarantees were financed by the Bank or in the market. The Congress rejected these provisions. If H.R. 7416 is enacted, we would expect that each agency's entitlement to use the FFB would be determined by the President and by the Congress annually in the normal budget-appropriations process. Thus, the FFB would continue to function as an instrument of Treasury debt management, but neither the FFB nor the Treasury would assume the function of allocating budget or credit resources. FFB expansion. H.R. 7416 would effectively require guaranteed obligations which would otherwise, be financed in the securities markets to be financed by the FFB. This would be acomplished by adding a new subsection (d) to section 6 of the Act as follows: (d)(1) Except as provided in paragraph (2), any guarantee by a Federal agency of an obligation shall be subject to the condition that if such obligation is held by any person or governmental entity, other than such agency or the Bank, such guarantee shall thereafter cease to be effective. (2) Paragraph (1) shall not apply in the case of any obligation -(A) which the Secretary of the Treasury determines is of a type which is not ordinarily bought and sold in the same markets as investment securities, as defined in the seventh paragraph of section 5136 of the Revised Statutes, as amended (12 U.S.C. 24), or (B) which is issued or sold by the Bank. Before making any determination under subparagraph (A), the Secretary of the Treasury shall consult with the Director of the Office of Management and Budget, the Comptroller of the Currency, and the Chairman of the Board of Governors of the Federal Reserve System. We strongly support the intent of these provisions. That is, if the FFB is included in the budget, it is essential to require that certain guaranteed obligations be financed through the FFB. Otherwise, there would be a budget incentive to return to the inefficient practice of financing guaranteed obligations directly in the securities market. This would undermine the purpose of the FFB Act and would add needlessly to the program financing costs and to the direct costs to the Government. - 8 Yet, we are concerned with one or two adverse, and perhaps unintended, effects of these provisions. Specifically, the FFB apparently would be explicitly required to purchase partially-guaranteed obligations, since H.R. 7416 does not distinguish between partially- and fully-guaranteed obligations. This contrasts to the present FFB legislation which authorizes but does not require purchases of such securities. As you know, we do not think that the FFB should purchase partially guaranteed obligations, and the Bank has not done so since its inception. Section 3 of the Federal Financing Bank Act defines "guarantee" as "any guarantee, insurance or other pledge ... of all or part of the principal or interest." In the past, the FFB has interpreted this to include, and has thus purchased, a wide variety of obligations guaranteed or insured by Federal agencies, including obligations secured by Federal agency lease payments and obligations acquired directly by Federal agencies. These have been sold to the FFB subject to an agreement that the selling agency will assure repayment to the FFB in the event of default by the non-Federal borrower. We also have interpreted this definition of guaranteed obligations to include those supported by Federal agency commitments to make debt service grants, e.g., to support public housing authority bonds, or other commitments such as price support agreements or commitments by Federal agencies to make direct "take-out" loans in the event of default on a private obligation. Yet, Mr. Chairman, the FFB purchases obligations guaranteed under these various arrangements only if there is a full guarantee of both principal and interest. The Bank has not purchased partially guaranteed obligations, even though they would technically be eligible for purchase under the "guarantee" definition, for the following reasons. By purchasing the non-guaranteed portions of partially guaranteed obligations, the FFB would be required to make judgments as to the creditworthiness of borrowers guaranteed by other Federal agencies and thus duplicate the functions of the guarantor agencies. Such purchases would also place the Government at risk more than was contemplated by Congress in enacting provisions which limit guarantees to less than total principal and interest. A second problem with partially guaranteed obligations concerns the methods of financing them which have developed in the private market. The loan guarantee programs of SBA and Farmers Home Administration provide good examples. - 9 In these programs, where the guarantee is limited to 90 percent of the loan, practices have developed where the lending bank will sell the 90 percent guaranteed portion in the securities market, treating it as 100 percent guaranteed paper, and retain the 10 percent unguaranteed portion in its own portfolio, while servicing the entire loan. FFB financing may be appropriate for the fully-guaranteed securities market portion of the financing, but FFB financing would not be appropriate for the unguaranteed portion held by the originating bank lender. In other cases, fully-guaranteed obligations such as small FHA and VA mortgages, are originated and serviced by mortgage lenders or acquired by Federal agencies and resold into the mortgage market. Here, FFB financing could have adverse effects on the mortgage market by having the Federal Government perform functions which today are well handled by mortgage lenders. On the other hand, certain of these mortgage-backed obligations are sold directly into the securities markets, not in the mortgage market, and FFB financing might well be appropriate there. The appropriateness of FFB financing of particular obligations should thus be determined on the basis of both the nature of the guarantee and the method of financing the obligation. We believe that such determinations should be made by the Secretary of the Treasury in keeping with his overall responsibilities for both debt management and the markets for government-backed securities. We are also concerned with possibly unforeseen and adverse effects on the financing of a number of programs under which Federal agencies enter into contracts, rentals, leasing, billing, and other arrangements which are, in effect, pledged to secure the repayment of loans made by private lenders to companies or other private institutions. These arrangements would generally fall within the definition of "guarantee" in the FFB Act, but the Bank does not currently purchase many of the private loans secured by such commitments. Yet, under H.R. 7416, such new "guarantees" would not be operative unless the FFB purchased them or the Secretary of the Treasury determined that these loans were of a type "not ordinarily bought and sold in the same market as investment securities." This requirement for a prior determination by the Secretary could cause serious administrative problems and could create a cloud of uncertainty over the legal status of a wide variety of Government contractual arrangements. Finally, the provision of proposed subsection 6(d)(2)(B) of H.R. 7416 may encourage the FFB to resell guaranteed - 10 obligations it holds, into the securities markets. This subsection would exempt such reselling from the provisions of subsection 6(d)(1) which, in effect, removes the guarantee from other obligations sold into the market. Since these sales would continue to be treated as negative budget outlays, pressures to make such sales could become irresistible under H.R. 7416 and the budget purposes of the Bill could be defeated. In summary, Mr. Chairman, we support the basic purpose of greater Congressional control over loan guarantee programs. We think that this purpose may be achieved, to a large extent, by improved standards in credit program legislation. We also believe that loan guarantee commitments should be subject to careful review in the regular appropriations process. If the Federal Financing Bank is included in the budget, and guaranteed obligations continue to be excluded, we agree that it is essential to require that certain guaranteed securities be financed through the Bank. As I have tried to point out, the specific provisions of H.R. 7416 raise a number of serious issues, and we hope to work closely with the committee to clarify these issues. I would be happy to answer any questions. Thank you. oOo FOR RELEASE ON DELIVERY EXPECTED AT 9:15 A.M. SEPTEMBER 20, 1977 STATEMENT OF THE HONORABLE ROBERT H. MUNDHEIM GENERAL COUNSEL OF THE TREASURY DEPARTMENT BEFORE THE SUBCOMMITTEE ON TRADE OF THE HOUSE COMMITTEE ON WAYS AND MEANS WASHINGTON, D. C. Mr. Chairman and Distinguished Members of this Subcommittee: I am Robert H. Mundheim, General Counsel of the Treasury. I am pleased to participate in this panel. The Treasury Department has the responsibility for administering two important laws designed to prevent unfair practices in international trade: the Antidumping Act and the Countervailing Duty Law. We are convinced that healthy world trading cannot exist while artificial trade distortions created by such unfair trade procedures persist. Therefore, we take very seriously our responsibility to administer the antidumping and countervailing duty laws firmly and fairly. Let me talk first about the Antidumping Act of 1921. At present we have two pending antidumping investigations involving steel products. In both of these cases the statute requires Treasury to make a tentative determination by September 30, 1977, and you can therefore expect a decision in those cases shortly. As you know, the Antidumping Act is aimed at a foreign producer's practice of discriminating in his prices by selling in our market at prices lower than those charged at home or in third countries, and thereby injuring a domestic industry. It is a form of unfair competition against which we have also adopted purely domestic legislative prohibitions. The prohibition is soundly premised on the maxim that "There is no free lunch." The alleged unfair bargains foreign producers may offer today, supported by high prices in home or third markets protected from the competition of others, including our own manufacturers, may be temporary. It would be foolish to ask our domestic proB-446 ducers to compete against such unfair foreign bargains. The -2decline of domestic capacity flowing from such unfair competiti will be translated into harm to our domestic economy when the unfair bargains are withdrawn and high prices take their place. Our antidumping law cannot be effective if it cannot be used to provide prompt relief. Concern has been voiced about the ability to use the law sufficiently rapidly to stop dumping before it can create substantial harm to our domestic industry. Treasury action in an antidumping matter is triggered by the filing of a petition by an affected party. It does take time to put such a petition together in an appropriate form. The requirement of a properly drawn petition guards against frivolous complaints against fair competition. Nevertheless, the timing of the petition is entirely within the control of the affected party. Once the petition is filed Treasury is bound to act within the sharply circumscribed time periods set forth in the Trade Act of 1974. Within 30 days of the filing of the petition we must decide whether to initiate a proceeding. If we decide to initiate a proceeding we must make a tentative determination of dumping within six months of the date of the initiation of the proceeding. In unusual cases that period can be extended for an additional three months. We have used that extension power sparingly. Three months after rendering the tentative decision we must make our final determination. Although nine months or a year may seem a long time to arrive at a final determination, it is the bare minimum needed to collect, verify and evaluate the vast amount of date which we must have in order to decide whether sales at less than fair value have been made. That is particularly true in cases such as steel where a petition may require us to look not only at prices but also at each foreign company's cost of producing the particular item against which a petition has been filed. Once a tentative determination of dumping has been made, all goods entering the United States after that date are subject to the possible assessment of dumping duties. Although particular concerns have been voiced about the slowness of the process of assessing duties after a dumping finding has been made, the speed of the process does not affect the liability for dumping duties. We are taking steps to speed up the assessment process but I do not believe that steel -3exporters or importers are encouraged to engage in or to continue dumping from any slowness in the assessment process. Let me now turn to the Countervailing Duty Law. While most of the attention in the steel sector is presently focused on the question of dumping, Treasury has countervailed on steel products on eight occasions in the past. At present, we have two pending countervailing duty cases involving steel. As you know, the law requires Treasury to countervail against any "bounty" or "grant" made with respect to an exported item if dutiable and, in the case of duty free merchandise, when injury is determined. The vice against which the law is aimed is old and generally well-understood. But in our modern era it has many new wrinkles. For it is one thing to say — quite properly — that foreign governments cannot favor their exporters with subsidies which operate to distort international trade; it is quite another to say that any benefit a government bestows on a producer, even though it has no special impact on exports, requires the imposition of a responsive countervailing duty. Some subsidies are obvious to all of us: For example, access to government export financing at preferential rates. But there are difficult questions posed by programs that are often significant to the countries involved. Perhaps the most important of these involves the remission of indirect taxes on exports, which the Treasury consistently has ruled to be not a bounty. That administrative practice, of 80 years' standing, has recently been upheld in the Zenith case by the Court of Customs and Patent Appeals. Supreme Court review may be sought. In the meantime, to the extent a comparable issue has been raised with respect to steel exports from the European Economic Community in a case presently before the Customs Court, we will adhere to that view. Another case presently before us involves a steel company, wholly-owned by an entity that is in turn controlled by financial institutions which themselves are controlled by a government. One of the questions we must determine is whether equity capital made available to such a company is first, provided by the government and, second, if so, is a bounty or grant. And if it is a bounty or grant, how should it be quantified? -4The questions in this case are suggestive of problems which would be raised if a petition were filed with respect to a steel facility directly owned by a government. Assume such a case involves a facility which produces a variety of products, only some of which are exported to the United States. How do we apportion to exported products the value of benefits the company might have obtained through its favored access to working capital? Or access to raw materials? Or to energy? Or to ships or shipping space or to workers trained at a government facility or relaxations of pollution abatement controls applicable to other entities within the country? Or to any of the other myriad ways in which a company can be favored by a benign government? I suspect that we may be wrestling with these problems in the months to come. The Countervailing Duty Law and the Antidumping Act are extremely important aspects of our international trade structure. We have the responsibility to administer these laws vigorously and sensibly. We will do that. * * * * FOR RELEASE UPON DELIVERY EXPECTED AT 2:00 P.M. SEPTEMBER 20, 1977 STATEMENT OF THE HONORABLE LAURENCE N. WOODWORTH, ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY ON THE EARNED INCOME TAX CREDIT PROVISIONS OF THE ADMINISTRATION'S WELFARE PROPOSALS BEFORE THE WELFARE REFORM SUBCOMMITTEE OF THE COMMITTEES ON AGRICULTURE, EDUCATION AND LABOR, AND WAYS AND MEANS Mr. Chairman and members of this distinguished subcommittee: It is an honor to make this appearance before you to testify on the Administration's welfare proposals. My testimony is directed to those specific provisions which provide subsidies to wage earners with dependents through the earned income tax credit. Description of Current Law Under current law, there is allowed to eligible individuals an earned income credit of 10 percent of adjusted gross income up to $4,000. The amount of the credit is then reduced by 10 percent of adjusted gross income (or, earned income, if higher) in excess of $4,000. There are several conditions which must be met in order for an individual to be eligible for the credit. The most important of these conditions are that the individual maintain a household in the United States and that the household contain a child or disabled person for whom a deduction for personal exemptions can be claimed. A married couple eligible for the credit must file a joint return. In 1977 under present law, we estimate that approximately 6.6 million returns will claim the earned income tax credit at a revenue cost of about $1.3 billion. B-447 -2- Table 1 PARTICIPATION AND REVENUE COST OF THE EARNED INCOME CREDIT UNDER PRESENT LAW (1977 levels) 2 Parent Families 1 Parent Families Total Participation (in thousands) 3,630 2,950 6,580 Revenue Cost (in $millions) 710 570 1,280 Description of the Proposal As a part of the Administration's welfare programs, the maximum amount of the earned income credit would be expanded considerably beyond its present level, and, most importantly, the phase-out of the available credit would not begin until a household unit is in a higher income level* Specifically, the credit for an eligible individual would equal 10 percent of earned income up to $4,000, plus 5 percent of additional earned income up to a specified maximum income amount. This maximum income amount would vary with the number of personal exemptions. For 2 exemptions, the maximum income amount would be $6,500 and the maximum credit would be $525. For each additional exemption — up to a total of 7 — the maximum income amount would increase by $1,300 and the maximum credit by $65. For 7 or more exemptions, the maximum income amount would be $13,000 and the maximum credit $850. The credits are at 1978 income levels. -3- Table 2 MAXIMUM CREDITS AND MAXIMUM INCOME AMOUNTS ACCORDING TO NUMBER OF EXEMPTIONS (1978) Number of Deductions for Personal Exemptions Maximum C redit 2 $ 3 4 5 .6 7 or more $ $ $ $ $ 525 590 655 720 785 850 Maximum Income Amount $ $ $ $ $ $ 6,,500 7,,800 9,,100 10,,400 11.,700 13,,000 To determine the credits for 1981, the first year in which the program would become effective, the maximum income amounts would be adjusted upward by changes in the consumer price index since 1978. Projecting to 1981, the maximum income amounts would rise by about 5 percent a year, or a little over 16 percent for the three years, using current inflation forecasts. For a family of four, the maximum credit for 1981 would be about $730. As under current law, the credit would be phased out by 10 percent of adjusted gross income (or earned income, if greater) in excess of the maximum income amount. In effect, once the maximum income amount is reached, there is an implicit additional marginal tax rate of 10 percent on income until such point as no earned income credit is received. Since income taxes and social security taxes will apply in income ranges where the credit is being phased out, we do not believe that the rate of phase-out should rise above 10 percent. Reasons for Change The Administration's welfare reform plan has been designed to provide adequate income to low-income citizens — both those who work and those who are unable to work — while at the same time maintaining strong incentives to work. Our current programs are deficient -4in both these respects. A major inadequacy of the current hodge-podge of welfare programs is that an insufficient and inequitable amount of total assistance is directed to the working poor, especially two-parent families with dependents. Outside of food stamps and the existing earned income tax credit, there are no other major assistance programs available to families with low wages unless they contain aged or disabled members or are single-parent families. Under the welfare reform plan, the relationships established between wages and welfare payments ensure that families in which someone works will always be better off financially than families of the same size and structure in which no one works. This is accomplished primarily by including the working poor under the unified cash assistance component of the welfare plan but also by expansion of the earned income tax credit. In addition, as an incentive for workers to take regular unsubsidized public or private employment, rather than subsidized public service employment, the earned income tax credit would apply only to earnings from unsubsidized jobs. Thus someone with a full-time private job would be better off than if he took a full-time subsidized public service job and better off still than if he took no job at all. Perhaps the most important reason for expanding the earned income tax credit is to avoid the combined high marginal tax rates that can result when the phase out of various welfare benefits are added to the tax rates of the income tax system. Most welfare programs phase out benefits when income rises above a specified level. The rate at which a welfare program phases out is usually quite high in order to keep the cost of the program within reason and to concentrate benefits on those recipients most in need. Yet these rates of phase out are equivalent to rates of tax on additional dollars of earnings. When a household faces a combination of these rates from more than one assistance program, or from positive taxes such as the income tax and the social security tax, the household is given a powerful disincentive to increase earnings from work. This combination of tax rates is one of the most difficult problems in designing a welfare system. For example, the tax rate implicit in the food stamp schedule, when combined with phase out of benefits in -5Aid to Families with Dependent Children, produces about a 77 percent marginal tax rate on earnings. The Administration's cash assistance component of the welfare reform plan would solve some of the problem of high combined marginal tax rates by consolidating many existing cash assistance programs into one program. The marginal rate of tax, or rate of phase out of those benefits, would be 50 percent. Nonetheless, if there is state supplementation of the benefits provided under the minimum Federal level of benefit, the phase out rate could increase by. as much as 20 percentage points to 70 percent. If the social security tax is also taken into account, the total implicit tax rate on earnings can rise to about 76 percent. If the earned income credit were to be phased out in the"same income range as cash assistance is phased out, the rate of tax on earnings would rise by 10 percent, and, in certain income ranges, some worEers could face a combined marginal tax rate of 86 percent on earnings? Under current law, the earned income credit phases out at between $4,000 and $8,000 of adjusted gross income (or earned income, if higher). That range overlaps with the range in which cash assistance for most eligible households also phases out. A marginal tax rate of 86 percent means that, out of an additional dollar of earnings, only 14 cents is returned for family use. The expanded earned income credit in the Administration's welfare proposals has been designed to avoid that 10 percent increase in marginal tax rates on earnings. Beyond that, it would actually reduce the combined implicit tax rate for those households in income ranges where cash assistance would be phased out. This is accomplished in two ways. First, the phase out for the earned income credit is started only after the phase out for the cash assistance program has been completed. Secondly, a further credit of 5 percent is allowed for earned income between $4,000 and the point of complete phase out for cash assistance. The "maximum income amount" which I mentioned earlier would be set at a level a few percent above the Federal break-even point for cash assistance, i.e., the level at which cash assistance has already been completely phased out. The few percent difference is to allow for state supplementation• -6The result of this change is that the combined marginal tax rates would be reduced by 15 percentage points — in the example given earlier, from 86 percent to 71 percent. That is, instead of adding 10 percentage points to the 76 percent combined tax rate from the basic welfare program, state supplementation, and social security, the earned income credit would reduce the combined tax rate by 5 percentage points. Administrative Aspects of the Earned Income Tax Credit Permit me to turn now to some administrative aspects of the proposal. We wish to work closely with this subcommittee to insure that all eligible individuals receive the earned income credit, to make that credit available to eligible individuals throughout the year, and to minimize its complexity. A number of efforts are currently made to inform individuals of their possible eligibility for the credit. For instance, many potential recipients are contacted through outreach programs of welfare offices around the country. In addition, the Internal Revenue Service prominently provides information on the credit in the tax forms and in the instructions accompanying the tax forms. The Internal Revenue Service also separately notifies many households which fail to claim the credit that they may be eligible. In 1975, 1.8 million taxpayers claimed earned income credits of $375 million after being notified by the Internal Revenue Service of their possible eligibility. Another means of informing potentially eligible recipients is contained in the draft of the Administration's proposal. Because the credit would be reflected in withholding, employers could become sources of information whereby employees learn of their possible eligibility for the credit. It is our belief that this combination of information sources—information on tax forms, IRS notification of potential recipients who have not filed for a credit, outreach through welfare departments, and communication between employer and employee—would together insure that practically all eligible individuals would receive the credit. Because the credit would be reflected in withholding, households would receive the credit thoughout year rather than a lumpreflected sum whenin tax returns arethe filed. To have the in credit -7withholding, the employee would furnish to the employer a withholding exemption certificate stating that he or she is eligible.for the credit and that the employee or the spouse of the employee does not have a similar withholding certificate on file with another employer. The employer would then withhold tax as set forth in a withholding table furnished by the Secretary of the Treasury. In some cases the amount of credit would exceed the amount of income tax otherwise to be withheld. In those cases, the employer would reduce the amount of withholding for old age, survivors, and disability insurance to cover the excess of any credit that was due over income tax otherwise withheld. The Treasury Department in turn would reimburse the trust funds for Old Age and Survivors, Disability Insurance, and Hospital Insurance according to the amount by which their tax collections had been decreased. Conclusion Let me summarize the proposed changes in the earned income tax credit. Eligibility for the earned income credit would be restricted so that a person accepting a private job would be better off than if he accepted a subsidized public job of equal pay. Furthermore, to increase incentives for work and to reduce high marginal rates of tax on earnings, the maximum amount of the credit would be increased. The credit would not phase out for most households until any cash assistance had already been phased out. In addition, a 5 percent credit would be given for earnings from $4,000 to a maximum income level set approximately at the break-even point proposed for the cash assistance component of the welfare program. This additional 5 percent credit would provide a further work incentive and would be a partial offset to the implicit tax rate inherent in the phase out of cash assistance. The net result would be to reduce the combined marginal tax rate by 15 percentage points — from levels as high as 86 percent — in income ranges where cash assistance phases out. Finally, the administration of the earned income credit would be improved so that the amount of credit would be reflected throughout the year in the paychecks -8of workers. This would not only level out the payment of the credit over the course of a year, but would also lead to additional information being provided to employees about their eligibility for the credit. FOR RELEASE UPON DELIVERY (APPROXIMATELY 10:00 A.M.) SEPTEMBER 21, 1977 STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS ON LEGISLATION TO AUTHORIZE U.S. PARTICIPATION IN THE IMF SUPPLEMENTARY FINANCING FACILITY BEFORE THE SUBCOMMITTEE ON FOREIGN ECONOMIC POLICY OF THE COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE Mr. Chairman and Members of the Subcommittee: The legislation before you would authorize United States participation in the Supplementary Financing Facility of the International Monetary Fund. I am pleased to give you the Administration's views on why we strongly support this vitally important legislation, and ask that you report it favorably. The international monetary system at present faces certain potentially serious problems. The Supplementary Financing Facility is needed, and urgently needed, to strengthen the International Monetary Fund, and to enable us to deal with these problems. The establishment of this facility will help to make sure that our international monetary system continues to function smoothly, and it will further in an important way our objectives of an open and liberal system of interntional trade and payments. United States participation is a prerequisite to the facility's entry into force, and I urge, on behalf of the Administration, that the Congress authorize that participation. Much of the relative prosperity which the world has enjoyed over the past thirty years --in contrast to earlier decades -derives from the strength and effectiveness of our international monetary system, with the IMF as its principal instrument. That B-443 - 2 system has provided the framework for a growth in world trade and financial flows unthinkable at the time the IMF was established. No nation has benefited more than the United States. Our foreign trade amounted to $235 billion last year, nearly 15 percent of our gross national product. Our exports provide one out of every six manufacturing jobs. Essential imports are integrated into all phases of our economic life. Our currency is widely used internationally and widely held, and our capital markets channel vast sums to investment throughout the world. Our efforts to promote growth, reduce unemployment and curb inflation depend on an effective international monetary system0 Other nations receive similar benefits. The monetary sphere is one area in which international cooperation has operated with a high degree of success. We have on a number of occasions modified and adapted the system to meet new problems and new circumstances, most recently and most fundamentally in last year's Jamaica agreements. Similarly, we have progressively strengthened the IMF in its ability to fulfill its central role as referee, or keeper of the monetary "rules of the game," and as principal source of official balanceof-payments financing. The Supplementary Financing Facility is a further such step, an important step to meet a serious present need arising out of drastic changes in the pattern of international payments in recent years„ Since 1973, there have been international payments imbalances of unprecedented size resulting from the massive oil price increases, deep world recession and rapid inflation. This has placed serious strains on the system. With the recognition that these imbalances could not be eliminated in the short run, emphasis was placed on "financing" the deficits. Both official and private financing expanded sharply. The increase was spectacular. In the three years 1971 through 1973, the aggregate deficit of all nations in current account deficit averaged $15 billion a year. In the three years 1974 through 1976, it was $75 billion a year, a total of $225 billion for the three years. Nations borrowed very heavily in the years 1974 through 1976 to finance their large balance of payments deficits. The borrowing took many forms. While official financing through the IMF during this period was far above historic levels, it was the private markets that handled the bulk of the financing, accounting for about three-quarters of the total. - 3 - Such data as are available -- admittedly incomplete -show a pattern of world payments in the period 1974 through 1976 roughly as follows: -- The cumulative current account deficits financed equaled about $225 billion or so (after the receipt of grant aid), representing the counterpart of the lendable surpluses of OPEC plus those of certain industrial countries registering surpluses during the period. -- About $15 billion of these deficits, or 7 percent of the total, was financed through the IMF, the bulk of it through the temporary "Oil Facility" and the "Compensatory Financing Facility," both of which provided financing largely on the basis of "need" with relatively little emphasis on "conditionality" or the adoption of corrective adjustment measures by the borrower. -- About $40 billion of the deficits, or 18 percent of the total, was financed through a variety of other official sources -- development lending by industrial countries and OPEC, by the IBRD and regional development banks, and other sources. -- The remaining current account deficits, some $170 billion, plus about $40 billion of debt repayments, were financed largely through marketoriented borrowing. Most of these funds were obtained through banks and securities markets. Some came from governments seeking investment outlets for their surpluses or as export financing. Given the private market orientation of the world economy, it was natural that the bulk of this financing be handled by private rather than official channels. The private institutions were in a position to expand the level of their activity. Huge surpluses, by OPEC and other countries, of course, brought large deposits and placements to the banks and other financial intermediaries, and greatly expanded the loanable funds of those institutions. In addition, the period was one of rapid institutional expansion in the international banking system. Many institutions were competing eagerly for new customers, as they sought to establish themselves in new activities and new geographic areas, and endeavored to broaden their scope of operations so as to spread risks and diversify portfolios at a time when domestic loan demand was less buoyant than in immediately preceding years. - 4 The question has been raised as to whether this rapid and unprecedented enlargement of lending activity and debt has reached a danger point for the monetary system -- either in the sense that large numbers of countries have borrowed beyond their capacity to service debt, or in the sense that our banks and other institutions are overextended. It is our considered judgment that the system as a whole is not in any such position of imminent danger, either as a result of excessive borrowing by large numbers of debtor nations or as a result of our financial institutions being overstretched. There is a misconception that the increased borrowing is being undertaken largely by the non-oil exporting developing nations, and that if there is a danger point in the system, it is the ability of these nations to service their debts. At present, these developing nations -- as a group -- are not running the large deficits and are not the heavy borrowers. The aggregate current account deficit of the developing nations was large in the recession period 1974-75, but it has subsequently declined very considerably, and currently is no larger, adjusted for inflation, than their deficits prior to the oil price increase. After counting receipts of grant aid, the non-oil LDC's aggregate deficit is estimated for 1977 at about $13 billion, or half the level of 1975. This group increased its reserves last year by $11 billion, and registered a slightly higher economic growth rate than the industrial world. Of course, some developing nations are in difficulty -- looking at the group as a whole can conceal important differences in individual countries. But it is largely the OECD countries -both the more developed and the non-industrial -- that have accounted for the bulk of the deficits and the heavy borrowing. But the fact that the system has --in the financing sense -worked well thus far is no cause for comfort or complacency. Success in the past is no guarantee that we are adequately armed for the period ahead. Let me comment on our expectations for the future and how the Supplementary Financing Facility fits into the picture. Nations have approved the broad outlines of a balance-ofpayments adjustment strategy. At the Manila IMF meeting last fall, it was agreed that: --adjustment should be symmetrical, reducing both surpluses and deficits; - 5 - --countries in balance of payments difficulty should shift resources to the external sector and bring current account positions into line with sustainable capital inflows; —countries in strong payments positions should maintain adequate demand, consistent with anti-inflationary policies; --exchange rates should play their proper role in adjustment. Looking ahead, it is nonetheless a safe prediction that large imbalances will continue for the next several years. On the surplus side, the present imbalances consist of two parts: the current account surpluses of several industrial countries -- in particular Germany, J£pan, Switzerland and the Netherlands; and more importantly, the surpluses of certain OPEC countries -- mainly in the Persian Gulf area. We expect a reduction in the surpluses of the major industrial countries, as these nations expand their economies in line with domestic needs and the agreed adjustment strategy. But we expect only a gradual decline in the OPEC surplus -which is the largest part of the imbalance -- from the present level of about $40 billion. As is clearly pointed out in the Subcommittee's recent staff report, the OPEC surplus does not lend itself to abrupt correction. It is structural in nature. The energy needs of the oil importing nations cannot be suddenly and sharply cut back, if economic activity is to be maintained at acceptable levels -- and adequate supplies from alternative sources do not at present exist. The reduction and elimination of OPEC surpluses through curtailment of oil imports will take a period of years. it is important -- critically important -that the United States and other oil importing nations apply stringent measures to conserve energy use and expand energy production. President Carter's program will make a major contribution to an improved energy balance. But our program, and those of others, cannot yield major reductions in oil imports overnight. - 6 Similarly, it is not realistic to expect, in the relatively small number of OPEC nations in which the surpluses are concentrated, too rapid an increase in purchases of foreign goods and services. A number of OPEC nations have, in fact, expanded rapidly their imports of development and consumption goods to the extent that their surpluses have virtually disappeared. But the remaining OPEC surpluses are concentrated in nations whose absorptive capacity for imports is quite limited. Accordingly, it must be expected that large imbalances will continue at least for the next few years, while we work toward their elimination. In the meantime, our efforts must be directed toward assuring that the collective current account deficits are distributed, and to the extent possible reduced, so that the necessary borrowing is undertaken by those countries whose creditworthiness and economic strength are adequate to sustain the additional debt. By encouraging responsible adjustment measures in those countries experiencing severe domestic economic distortion, large payments deficits and serious financing problems, such deficits are reduced and shifted to a more sustainable worldwide pattern. The Supplementary Financing Facility is a major element of our strategy for fostering this needed adjustment, and helping to assure such a sustainable pattern of payments. With the establishment of the Supplementary Financing Facility there will continue to be a large amount of borrowing -private as well as public. Concern has been expressed that continued borrowing in very large amounts, irrespective of who is borrowing or how the credit is used, constitutes a serious danger for the monetary system. I do not share that view. If the borrowed funds are properly used to support productive investment and to strengthen the borrower's current account position, the debt need not constitute a serious future burden, as shown by the experience of the United States in the last century and other countries at present. Excess savings in surplus OPEC countries can, in effect, finance investment in the oil importing countries by supplementing domestic savings. But the borrowed funds should be productively invested, in order to avoid servicing problems in the future. This, then is the broad strategy within which the Supplementary Financing Facility fits -- we aim for a sustainable pattern of payments in which the borrowing is undertaken by countries commensurate with their creditworthiness; we seek to assure that the borrowed funds are used to support sound and effective programs of stabilization and adjustment; and meanwhile we work toward elimination of the oil imbalance through energy programs and further development of the OPEC nations' capacity to import. The Supplementary Financing Facility will thus help to assure that adopted. needed financing is available andtake that adjustment change are a rlranpfifir Much and adjustment external, remains must to beplace done.in Structural manymeasures - 7 countries, often involving major alterations of traditional patterns of production and consumption. Such changes will not come easily and must take place over a number of years if satisfactory levels of growth and employment -- ana an open system of trade and payments -- are to be maintained. Substantial financing will continue to be needed by countries in deficit. And, in some countries, adjustment measures need to be introduced . Clearly there are countries -- certainly not a large number but a significant number -- that have already reached or are approaching the limits of their ability to borrow or their prudence in doing so. These are countries that are beset by internal economic imbalances, that still face large payments deficits, where the need for corrective measures and internal and external adjustment is compelling. Such countries, and others which may in future face similar difficulties, must be encouraged, and permitted, to adjust their economies in ways that are compatible with our liberal trade and payments objectives, in ways that avoid discrimination against others and disruption of the world economy. Our monetary system must foster sound adjustment, internationally responsible adjustment, with programs that develop underlying economic and financial stability in the countries undertaking adjustment measures, while avoiding recourse to trade and payments restrictions that are destructive of international prosperity. This economic and financial stability is a pre-requisite to sustainable expansion and high employment. A major function of the IMF is to induce such adjustment. Given our expectations, it is essential that the resources of the IMF be adequate both to enable it to foster responsible adjustment policies by members facing severe payments difficulties , and also to provide confidence to the world community that it can cope with any potential problems that may arise. Without the addiditonal funds of the new facility, the IMF's resources may not be adequate to meet demands placed on it over the next several years. With relatively large use in the past three years, the IMF's usable resources are at present extremely low at about $5 billion. These usable resources will be increased by about $6 to $7 billion with the coming into effect of the sixth quota review approved in 1976 and now being ratified, and about $3 billion remains available under certain conditions through the General Arrangements to Borrow. Even with those additions, and the repayments which may be expected, the IMF's resources look sparse in a world in which total imports are running at an annual level of nearly a trillion dollars, and in which OPEC surpluses are likely to decline only gradually from the current $40 billion annual level. -8Against this background, the decision was taken to seek to establish the Supplementary Financing Facility, with financing of about $10 billion to be provided initially by seven industrial nations and seven OPEC countries. The industrial countries would provide $5.2 billion, of which the U.S. share -subject to Congressional authorization -- would be SDR 1.45 billion (about $1.7 billion) approximately 17 percent of the total. The OPEC members would provide about $4.8 billion, or nearly half the total, with Saudi Arabia the largest single participant of either group at $2.5 billion. The terms relating to the provision of this financing to the IMF by the participants are presented in detail in the National Advisory Council Special Report on the Supplementary Financing Facility presented to the Congress-with the legislation. Under the agreed terms, participation in the facility is advantageous to the United States and others providing the financing. In addition to furthering our interest in assuring a strong and smoothly functioning international monetary system, U.S. participation in the facility provides us with a strong, liquid and interest-earning monetary asset. Under the facility, the United States and other participants agree to provide currency to the IMF in exchange for a liquid claim on the IMF of equivalent value. These claims on the IMF, which can be drawn down any time there is a balance of payments need to do so, form part of our international reserve assets. The United States can also sell or transfer these assets to others by mutual agreement. Since, in exchange for any dollars we provide, we receive a fully liquid claim which can be drawn down any time we have a need to do so, there is no U.S. budget expenditure involved, but rather an exchange of one asset for another. This treatment is in keeping with the budget and accounting practices followed with respect to all U.S. transactions with the IMF. The interest rate we receive from the IMF is linked to U.S. Treasury issues of comparable maturity, so that there is no net cost to the Treasury from our participation in the facility. As the drawings are repaid by the borrower, the IMF returns the dollars to the U.S., U.S. drawing rights on the IMF correspondingly are reduced, and the transaction is reversed. This $10 billion facility would be available to the IMF for a temporary peirod. Countries could apply within the next 2 to 3 years, and could draw down funds over a period of 2 to 3 years, though the total period of disbursements could not exceed 5 years. It would be available for use by IMF members only under clearly defined criteria. Specifically, a member drawing under the facility: -- Must have a balance of payments financing need that is large in relation to its IMF quota and exceeds the amount available to it under the IMF's regular policies. -9- Requires a period of adjustment that is longer than that provided for under regular IMF policies. -- Must enter into a stand-by agreement with the IMF in which it undertakes to adopt corrective economic policy measures adequate to deal with its balance of payments problem. The facility, in short, is designed to encourage those countries with particularly severe payments problems to adopt internationally responsible adjustment programs -- and to avoid the unwelcome alternatives of resort to the controls, trade restirctions, and beggar-thy-neighbor policies which can be so harmful to world prosperity and so disruptive to our liberal trade and payments order. It will, in addition, by fostering a smoother, more effective process of international balance of payments adjustment, reinforce confidence in the "international monetary system, and thus facilitate the flow of financing throughout the system. It is not a device for augmenting development assistance -- the IMF provides only short to medium term balance of payments support. The member drawing on the facility receives more financing than is otherwise available from the IMF; a longer period of adjustment (a 2- to 3-year program as compared with the 1 year normally applicable in the IMF) ; and a longer period of repayment (3- to 7-year maturity, as compared with the IMF's normal 3- to 5-year maturity). Since interest on the financing provided to the Fund is market-related, the borrowing country would also pay a somewhat higher charge than for normal IMF drawings. The facility is a cooperative venture, with the surplus countries of OPEC and the stronger industrial countries joining together to assure that the needed financing will be available. The agreement requires that before the facility can begin operations^ participants must formally commit $9 billion of the full $10 billion, and the six largest participants must all formally commit themselves to participate. Thus action by the United States, and the Congress, is necessary before the facility can become a reality. Let me address three questions which have been asked with respect to this new facility. First, how can we be sure that the $10 billion contemplated for the facility is adequate to do the job but not more than is needed? Obviously it is a matter of judgment and no one can be absolutely sure. We cannot predict with certainty just which countries will have the particularly large needs for credit that make them eligible for this facility, along with the willingness to adopt the kind of adjustment programs associated with it. It is our judgment that this facility plus the amounts available to the IMF from other sources will enable it to - 10 provide financing over the next 2 or 3 years up to, say, a total of $25 billion. This is above the levels of IMF financing of recent years; which were already relatively high. To assure confidence in the monetary system, it is vital that the IMF always be known to have adequate resources in reserve to meet whatever urgent problems may arise, even it it turns out that less than the full amount is actually drawn. Since no cash transaction occurs until a member country actually draws from the IMF, there is no interest or other cost whatever -- to the IMF, or to the United States and other participants -- for any portion of the facility not actually utilized for drawings. A second question is will the facility serve to "bail out" private banks which have lent unwisely or excessively? The answer is "no." The facility is not so designed and willnot be so used. It will not bail out either countries or banks. It will encourage countries to initiate needed adjustment measures before their debts become too large to handle or credit is no longer available, and it will provide transitional financing while the measures take effect. It will help redistribute deficits to a more sustainable pattern, and improve nations' creditworthiness and confidence in the monetary system. It is not a substitute for bank credit and will not take over the bank's regular lending activities. While IMF financing may in the period ahead account for a share of total balance of payments financing larger than the 7 percent it provided in 1974-76, it will remain small in comparison with the share channeled through private markets. In fact, the facility is expected to encourage banks to continue to expand their foreign lending rather than cut back, by promoting sound economic policies on the part of borrowers -- and experience indicates that in fact the banks normally lend more to a country after it has entered into a stand-by agreement with the IMF. The banks will benefit from the new facility, but only indirectly -- through the improved international environment, stronger monetary system and high levels of trade that will benefit all elements of the American economy. A third question is why was the Supplementary Financing Facility established rather than the alternative of a permanent change in IMF quotas. The answer is that this method was chosen for reasons of timing and practicality. A review of IMF quotas is under way, but with the complications of negotiation and ratification, it may not lead to actual quota increase for, say, two years or more. Hopefully the new facility can be put into operation at an early date, and cover the particular needs until a quota revision occurs. facility is to also flexible than a quota increase, particularly used sincemore it The is selectively not large subject needs. to meet themore the same problems quota constraints of countries and with can be - 11 - Mr. Chariman, the IMF is a valuable institution, in which all members contribute, financially and otherwise, to an effective international monetary system. It has a good record. The proposal for a Supplementary Financing Facility is a sensible and realistic way to strengthen it to meet present problems. The facility is equitable to all parties. It is needed, and needed soon. The Administration urges that the Committee report the proposed legislation favorably, and that the Congress enact it promptly. I thank you. oo 00 00 FOR RELEASE AT 4:00 P.M. September 20, 1977 TREASURY'S WEEKLY BILL OFFERING The Department of the Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $5,500 million, to be issued September 29, 1977. This offering will not provide new cash for the Treasury as the maturing bills are outstanding in the amount of $5,508 million. The two series offered are as follows: 91-day bills (to maturity date) for approximately $2,200 million, representing an additional amount of bills dated June 30, 1977, and to mature December 29, 1977 (CUSIP No. 912793 L9 5), originally issued in the amount of $3,201 million, the additional and original bills to be freely interchangeable. 182-day bills for approximately $3,300 million to be dated September 29, 1977, and to mature March 30, 1978 (CUSIP No. 912793 P5 9). Both series of bills will be issued for cash and in exchange for Treasury bills maturing September 29, 1977. Federal Reserve Banks, for themselves and as agents of foreign and international monetary authorities, presently hold $2,383 million of the maturing bills. These accounts may exchange bills they hold for the bills now being offered at the weighted average prices of accepted competitive tenders. The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest. Except for definitive bills in the $100,000 denomination, which will be available only to investors who are able to show that they are required by law or regulation to hold securities in physical form, both series of bills will be issued entirely in book-entry form in a minimum amount of $10,000 and in any higher $5,000 multiple, on the records either of the Federal Reserve Banks and Branches, or of the Department of the Treasury. Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time, Monday, September 26, 1977. Form PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series) should be used to submit tenders for bills to be maintained on the book-entry records of the Department of the Treasury. -449 -2Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,000. In the case of competitive tenders the price offered must be expressed on the basis of 100, with not more than three decimals, e.g., 99.925. Fractions may not be used. Banking institutions and dealers who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names of the customers and. the amount for each customer are furnished. Others are only permitted to submit tenders for their own account. Payment for the full par amount of the bills applied for must accompany all tenders submitted for bills to be maintained on the book-entry records of the Department of the Treasury. A cash adjustment will be made on all accepted tenders for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, or for bills issued in bearer form, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their tenders. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and the Secretary's action shall be final. Subject to these reservations, noncompetitive tenders for each issue for $500,000 or less without stated price from any one bidder will be accepted in full at the weighted average price (in three decimals) of accepted competitive bids for the respective issues. Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and bills issued in bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt on September 29, 1977, in cash or other immediately available funds or in Treasury bills maturing September 29, 1977. Cash adjustments will be made for differences between the par value of the maturing bills accepted in exchange and the issue price of the new bills. -3Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, No. 418 (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. CONTACT: George G. Ross 202-566-2356 FOR IMMEDIATE RELEASE September 19, 1977 Treasury Announces Public Hearing on Boycott Guidelines Revises Effective Dates of Certain Boycott Guidelines Secretary of the Treasury, W. Michael Blumenthal, today announced that a public hearing will be held on October 25, 1977 to receive oral comments on the boycott guidelines published in the Federal Register on August 17, 1977. Those guidelines relate to the provisions of the Tax Reform Act of 1976 which deny certain tax benefits for participation in or cooperation with international boycotts. The hearing will be held at 10 a.m., in the Cash Room of the Main Treasury Building, 15th and Pennsylvania Avenue, N.W., Washington, D.C. Persons wishing to present oral comments at the hearing must give written notice to the Assistant.Secretary for Tax Policy by October 19, 1977. The notice must (1) state the name, address, and telephone number of the person who will make the oral presentation; (2) outline thee points to be covered in the oral presentation; and (3) make any suggestions or raise any questions about the procedures to be followed at the hearing. All such written notices will be made available for public inspection and copying. Although it is hoped that each speaker can be permitted 10 minutes, exclusive of time consumed by questions from a Treasury panel, it may be necessary to limit further the length of oral presentations. Persons expecting to present similar views are encouraged to consulidate their presentations. B-450 -2An agenda will be prepared setting forth the order of presentation of oral comments and the time allotted to each speaker. Copies of the agenda will be available the day before the hearing and at the hearing itself. Persons desiring further information should contact H. David Rosenbloom at 202-566-5992, or at U.S. Treasury Department, Office of International Tax Counsel, Washington, D. C. 20220. In addition, the Secretary of the Treasury also announced today that answers H-8 and H-29 of the boycott guidelines published in the Federal Register on-,August 17, 1977 will be effective only for operations, requests, and agreements after November 15, 1977. Answers H-8 and H-29 relate to letters of credit. In the case of operations carried out in .accordance with the terms of a binding contract entered into before November 16, 1977. Answers H-8 and H-29 will not be effective until after June 30, 1978. The effective dates for other boycott guidelines remain unchanged. This announcement will appear in the Federal. Register of September 21, 1977. oOo EMBARGOED FOR RELEASE UNTIL 2:00 P.M. E.D.T. OR UPON DELIVERY Remarks Of W. Michael Blumenthal Secretary Of The Treasury To The American Institute Of Certified Public Accountants Cincinnati, Ohio September 20, 1977 I'm glad to have this chance to talk with you about tax reform. As you know, President Carter during his campaign made a firm commitment to comprehensive reform of our income tax system. So from the very beginning of this Administration, we made sure that we worked hard to honor that commitment. Throughout the spring and summer, we held meetings with concerned groups of business executives, accountants and tax attorneys, economists and public interest groups. Also, I visited various parts of the country for regional meetings and speech occasions like this. We held frequent meetings with the President on these proposals -- going over virtually every detail — with very open give and take. And we1re now beginning to make the final decisions, so that % President Carter can present the reform legislation to Congress in early October. As I said, the final decisions have not been made. So it is still too early to describe in detail what may or may not be in the tax package. But I would like to explain what we believe are the problems — and our broad objectives for tax reform. We began with the proposition that the tax code is a basic part of our social fabric. It is a part of a compact among ourselves and with our government. ^ V-f / -2Because that compact has been strong, we enjoy the world's most successful voluntary-compliance tax system. But despite this compact, the tax code needs repair, even though there have been several attempts at major tax revision. Let me outline what this Administration considers the three most serious shortcomings. First, the system is far too complex. I know that this may be the wrong place to talk about reducing the need for accountants. But as a matter of public policy, tax simplification is a critical need. Adam Smith in his Wealth of Nations emphasized that a tax must be both simple and certain. Every citizen should know what he owed and why. Any departure from that, he said, would be inherently arbitrary and unjust. The income tax code today, to the average American, is a mystery. About half of all individual returns are prepared by a professional. The IRS estimates that Americans spend about $1 billion annually on tax preparation services. The Commission of Federal Paperwork estimates that the total cost to all individuals for filling out forms and keeping records amounts to $4.6 billion a year. For virtually every business, tax planning and preparation is a major expense. For small businesses, tax paperwork costs over $11 billion, according to the Paperwork Commission. Obviously, we didn't intend to create this result. Mostly, we had good intentions — because we wanted to improve tax equity or to promote various social goals. Now at a time when citizens feel increasingly alienated from their government, the mystery of the tax code adds to that alienation. And we can no longer accept this complexity as a necessary price we pay for achieving important social goals. We can — will — reduce tax complexity because it has become a major source of inequity — and because tax simplicity is itself a social good. and -3The second major problem we recognize is the unfairness of our tax system. We have strayed much too far from the basic premise that people should pay taxes according to their ability to pay. Compared to most other countries, of course, we have a fairly progressive income tax system. Yet as a person moves up the income ladder, the more chances he has to avoid taxes. And very often, the source of income — not the amount — determines how much taxes he pays. So while we have a rough form of vertical equity — overall, the code is progressive — we have a serious problem of horizontal equity among people who earn the same, but from different sources. Also, we must recognize the serious inequity in tax rates because of an individual's marital status — what we now call the marriage penalty. Under the present law, working spouses earning $50,000 combined could pay up to $1,910 more in taxes than they would if they were single and earning the same. At a combined income of $30,000, the extra tax could be up to $565, and even at a combined income of $15,000, the extra tax could be $204. This is clearly an unfair penalty. The third major problem is those parts of the system that discourage private investment, both for the short term and long term. The fact that the United States relies on an income tax, rather than a consumption tax, for its basic source of revenue inhibits investment to some extent. But the income tax was a basic choice we made decades ago, to which we will adhere for a long time to come, I am sure. Within that constraint, there is much we can do. One of our most important problems is the treatment of corporations, which we now tax as if they are the final recipients of income. The fact is that corporations may write the checks, but the money comes from elsewhere — consumers, stockholders or employees. We're not really sure of the exact incidence of the corporate income tax. -4But we know that it can discourage investment, especially when corporate income is taxed doubly — once as corporate profits, then as personal income to the stockholder. We are also concerned about a tax code that encourages investments in some areas, to the neglect of others. Too often tax implications, not inherent profitability, determine private investment decisions. We have strayed far from Adam Smith's warning that taxes should not interfere with decisions of the marketplace. Instead, we have wandered into an exotic world of tax shelters for real estate construction, timber, oil drilling, equipment leasing and other ventures — a world in which companies buy other companies that are losing money, just for the tax benefits. The result distorts our investment pattern and diverts needed funds into uneconomic uses. These are three very tough problems — complexity, inequity and investment disincentives — and our tax package will address all three. Without teasing you with details about a tax package not yet in final form, I would like to describe how we hope to encourage investments — and how these tax incentives fit in with our overall economic recovery strategy. As you may know, we started out this Administration with the goals of reduced unemployment, moderating inflation, and a balanced budget. These are ambitious goals, and we realize that the key rests with the business community. Only the private sector can create lasting, meaningful jobs for American workers. Those jobs will not come without more incentives for investment. Our latest survey suggests that real growth of capital outlays will be 7 or 8 percent in the second half of this year. But to reach our economic goals by 1981, we need to achieve 9 to 10 percent growth annually. Moreover, this cautious investments pattern is part of a long-term trend. The rate of capacity growth in manufacturing has been dropping — from 4.6 percent between 1948 and 1968, to 4 percent from 1968 to 1973, and to 3 percent from 1973 to 1976. -5To reverse that trend, this Administration has underway some major initiatives. Let me describe some of them here: First, our tax reform package will contain strong incentives for business to invest, to retain profits and to increase productivity. When the tax package goes to Congress next month, you'll see a significant net reduction of business taxes. As you've probably read, our package will probably propose a major change in capital gains treatment, in order to meet our goals of improved equity and simplification. But I can assure you that any reduction in capital gains preferences for individuals and corporations will be more than offset by other measures. Among those measures getting the most attention are lower tax rates to reduce the tax bias against savings and investment — both by individuals and corporations. We could include relief from double taxation of corporate profits, to reduce taxes on dividend income. We may also consider expanding the investment tax credit for example, to improve the rate of investment in new production facilities. Of course, the final tax decisions have not been made, so it would not be fair to try to detail what the package will or will not be. But you should feel confident that the package will include a substantial stimulus for productivity and investment — and that, while there will be tradeoffs, the net effect will be favorable toward business. To accomplish tax reform, we will need support from the business community, and we hope that after you have a chance to examine the package, you can give us that support. Our second major initiative will be to get our energy program through Congress. The emphasis on energy conservation provides many opportunities for greater productivity — while we develop new domestic supplies of energy. Instead of a crash energy development program — which could disrupt capital markets and yield only an uncertain payoff — a serious conservation effort can stretch out our supplies of domestic energy. -6Moreover, we can increase energy prices to world market levels predictably and gradually, so that business can plan on its future costs, and we can eliminate the oil entitlements program. But most important, our energy program can buy the time we need to expand our use of coal, to bring more oil and gas out of the ground, to resolve nuclear energy problems, to expand research and development for alternative sources — time, in other words, for an orderly transition into a new energy era. In my view, the energy program is a vital first step. In the longer run, obviously, conservation alone is no final answer. No matter how successful our conservation efforts, we must still increase future domestic supplies of energy. We must still invest huge amounts of capital into these efforts. But at least now we will have the time to do this rationally and efficiently. Our third major initiative is to step up efforts to encourage exports and reduce our trade imbalance. We are already planning to expand the resources of the Export-Import Bank, to provide American companies additional support. We are continuing to practice responsive economic diplomacy to encourage other governments to restrain demands for new import restrictions — while we restrict our own impulses for trade protectionism. Most important, we will continue to encourage other industrial nations to stimulate growth of their domestic economies. We're just now beginning to see those efforts take place. Our fourth major initiative will be to continue holding down government spending and future deficits. This Administration remains committed to a balanced budget, as we move toward full utilization of our resources. Therefore, we will resist the temptation to begin ambitious efforts, either for speeded-up economic recovery or new domestic programs, that cannot be sustained by available budget resources. As we consider spending proposals, we will look not only at the next year's impact, but the impact in five years and later. Defense projects, welfare reform, government reorganization, tax reform and energy development incentives — all these will affect the budgets of the 1980's — and every proposal must fit in with our most urgent priorities, which must include a balanced budget. -7We cannot afford the trap of spending for recovery or for new programs at levels higher than absolutely necessary. If our growth falls below targets, we can then add spending to stimulate growth. But as we all know, it's much easier to increase spending or reduce taxes than it is to restrain spending in programs that are already underway. Our insistence on budget restraint will give us maximum flexibility as we face future economic developments. 0ur fifth major initiative, something that I strongly believe in, is to reduce unnecessary government interference in the private sector — to give business the room it needs to do its job. Having come from business so recently, I did not need any new lessons in this area. I intend to pursue this problem vigorously. This Administration has already taken steps to loosen regulation of airline fares, to promote competition. The President's government reorganization will seek not simply to move the boxes around — but to consolidate wasteful programs and rationalize our agency structure. Along with that will be a serious effort to reduce paperwork that Federal agencies expect business to maintain — and to reduce the aggravations of nitpicking, unnecessary and uneconomic regulations. We've even managed to bring some common sense to OSHA, where the new administrator has redirected the agency away from Mickey Mouse safety rules, concentrating instead on serious health hazards in high-risk industries. Moreover, I personally have opposed the current effort underway to expand job discrimination laws into the area of mandatory retirement. Despite its desirable goal, I know that there must be a better way than this new intrusion into business affairs. I reject the idea that we need a new government program or a new set of restrictive rules and regulations for every social problem that concerns us. Weil, I could discuss this subject for several more hours. But I think that I am making my point: That is, the Carter Administration is committed to reducing unnecessary government interference in our personal lives and our business affairs. And I am convinced that we can do this at no sacrifice to our social and environmental goals. I just don't think that we tried hard enough in the past. -8In short, this Administration is relying on a healthy, growing, productive private sector to move our economy to higher ground. And as we seek this major tax reform, it will be in that context. We are seeking not only to promote greater equity and simplicity in our tax system — improvements clearly needed if we are to strengthen our compact with each other. We are also seeking to overcome the business uncertainty that so far has inhibited new investment — and to assure the business community that the causes of that uncertainty are in the past, not the present. And once these assurances begin to sink in, I believe that we can foster the investment needed to increase production and job opportunities — and to return to the economic prosperity that has eluded us so far in this decade. EMBARGOED FOR RELEASE UNTIL 7:30 P.M. E.D.T. OR UPON DELIVERY Remarks of W. Michael Blumenthal Secretary Of The Treasury To The Association of Primary Dealers in U.S. Government Securities World Trade Center New York, New York September 21, 1977 Tonight I would like to review the Administration's economic program and the progress we have made in the past eight months. Any such analysis of goals set and progress made, of successes and of failures, has to be seen against the background of the economic events of earlier years -- the economic history of the early and mid-70s. Not that any of you are likely to have forgotten this period with all its problems, ups and downs, its policy shifts and surprises, both domestic and international. We had the Arab oil embargo -- followed by a quadrupling of oil prices — and the realization that the era of cheap and abundant energy is over. We had unexpected shortages of basic raw materials, capacity bottlenecks, a monumental real estate boom and bust cycle. We had sudden wage and price controls, then an easing, then the disappearance of controls — all within two years. We had a sudden devaluation of the dollar, accompanied by an imports surcharge. We had a surge in the money supply, followed by a severe contraction, pushing the prime rate into the 12-percent range. B-452 -2We saw the stock market reach an all-time peak, then plunge precipitously, recover briefly, then linger at its present level. We had wild swings in food prices -- responding to such unlikely events as coffee crop failures, the disappearance of the anchovy, and overseas wheat shortages. To put it milaly, the 1970's have been a very interesting period in which to run a business. I should know. I was in the middle of it too. Many of our headaches were clearly unavoidable, but some of them came from unsound economic management by government -- when economic policy shifted unexpectedly from month to month, often for political expediency -- or when the wrong policy tools were used to cope with new problems. The Carter Administration, coming into office on January 20 of this year, was keenly conscious of the implications of all of these events. Indeed all of us and all of you even today still have to live- with that legacy -- with the uncertainties of that period still clearly imprinted in our mines. In developing our economic program -- to achieve a faster growth rate in the U.S. economy, to bring inflation under better control, and to reduce the levels of unemployment -- I believethat we must be guided by five fundamental principles. First, it is vital to follow policies that are clear-cut and consistent — policies which avoid surprises wherever possible. Second, our policies must rely primarily on private industry. We should avoid injecting more government involvement into the nation's affairs, and restrain -- if not decrease -- the percentage of the GNP devoted to government spending. Third, we must follow policies that are modest and gradual. The economy cannot stand more risks and more shocks, and a more cautious approach toward the achievement of our goals is preferable. Fourth, we must emphasize responsible management, careful government budgeting, moving toward a balanced budget within a reasonable period of time. -3And fifth, we must implement these goals without new restrictions or controls. The emphasis must be on removing undue regulations which hamper the ability of private industry to grow and to create the jobs needed to put all Americans to work. Looking back on what has been accomplished we have made considerable progress, but there are clearly some areas in which we have not yet done as well as we should. Let us look at the positive side of the ledger first. First, we have made significant progress in the fight against inflation this year, after an annual rate of increase of 8.b percent in consumer prices in the first half of this year. Wholesale prices increased only slightly in August. Farm and food price declines have wiped out the bad record of earlier this year. Nonagricultural raw materials prices are well below their peaks, without any major shortages in sight. The fight to bring inflation down is as important as anything we can do. Our efforts must continue, and we cannot be satisfied with what has been accomplished. Nevertheless, the results so far achieved arc encouraging. Second, we have reduced the unemployment rate by nearly one percent this year. This, too, is not enough. But with some two million more jobs added to our economy this year, the percentage of our civilian population with jobs is higher than it has been since 1969, when it was only slightly higher than now. Third, consumer spending has held up well, probably in response to moderating prices. Auto sales were very strong in August, and total retail sales reversed the third-quarter decline. Fourth, real GNP growth in the first quarter was at the 7.5 percent rate, despite the severe winter. In the second quarter, it continued strongly, at 6.2 percent. And with projected third and fourth quarter growth, the year's average figure will be close to what we expected. Fifth, we developed a modest stimulus package of tax cuts and job-producing programs to add strength to the private sector recovery underway. This stimulus package in the fourth quarter alone will add an estimated 300,000 new jobs, as a result of public works construction and public service jobs programs. -4Sixth, we reduced the Federal budget deficit, partly by design and partly by good luck. In the fiscal year ending September 30, we expect a deficit of about $48.1 billion, down from $66.5 billion the year before. And finally, the dollar has held its value on international markets, despite larger than expected oil import costs. Also on the positive side, we can count some of the things that didn't happen -- because we prevented them from happening. We held down excessive minimum wage demands, to prevent wage cost increases from adding to inflationary pressure. Despite great pressure, we restrained trade protectionism in key areas, also to keep down inflationary pressures. And we rejected proposals for wage and price controls, guidelines or any form of constraints on markets.% As you know, some problems remain. Our GNP growth in this quarter has slowed down, somewhat more than anticipated, causing some nervousness. The trend, however, is something we expected to happen, and we expect a significant improvement in the fourth quarter. Inflation continues to be a serious problem. Our six percent underlying rate is far too high, despite recent improvement. But we intend to avoid policies that could either reaccelerate this rate of inflation or that repeat the past mistake of attempting to restrain wages and prices through government controls. Instead, we must do better in developing new approaches that rely on the private sector to correct inflation with better productivity, avoidance of supply and capacity bottlenecks, and the reliance on market forces. Unemployment continues to be a problem, despite our recent success. It is clearly unacceptable to all of us to have seven million unemployed workers in this country. And especially troubling are the very high unemployment rates for blacks and youths. We must do better here — not through indiscriminate spending programs that could reignite inflation — but through jobs programs that target on the most stubborn aspects of hard core unemployment — and through reliance on cyclical improvement to provide a broad base for new jobs. -5Moreover, our adverse trade balance continues to be a problem, largely because of oil import costs and the slow pace of domestic economic industrial recovery in other nations. If you look beyond these negative signs, however, our fundamental strength is still there. In fact, the speed of the recovery is just about typical if measured from the bottom of the recession in March, 1975. So we expect to continue solid growth through the second half of this year and into the next. To help ensure this growth, we will carry out several major economic initiatives over the coming months. Let me describe some of them here. First, we will send to Congress next month a major tax reform package that will cut business taxes and stimulate investment. While in some areas, taxes for business and high-income individuals will increase, reduction in other areas will more than offset them. Among our many options for business tax reductions, getting the most attention are lower tax rates for individuals and corporations, relief from double taxation of corporate profits, and expansion of the investment tax credit. But To accomplish tax reform, we will need support from the business community, and we hope that after you have a chance to examine the package, you can give us that support. Our second major initiative will be to get our energy program through Congress. The emphasis on energy conservation allows us to stretch out existing supplies of energy -- to avoid the high costs and uncertainties of a crash development program — to reduce imports — while we seek the more certain and economic solutions. Moreover, we can increase energy prices to world market levels predictably and gradually, so that business can plan its future costs, and eliminate the oil entitlements program. But most important, our energy program can buy the time we need to expand our use of coal, to bring more oil and gas out of the ground, to resolve nuclear energy problems, to expand research and development for alternative sources -- time, in other words, for an orderly transition into a new energy era. In my view, the energy program is a vital first step -- but in the longer run, obviously conservation alone is no final answer. No matter how successful our conservation efforts, still increase future domestic supplies of energy. invest huge amounts of capital into these efforts. now we will have the time to do this rationally and we must We must still But at least efficiently. Our third major initiative is to step up efforts to encourage exports and reduce our trade imbalance. We are already planning to expand the resources of the Export-Import Bank, to provide American companies additional support. We are continuing to practice responsive economic diplomacy to encourage other governments to restrain demands for new import restrictions -- while we restrict our own impulses for trade protectionism. Most important, we will continue to encourage other industrial nations to stimulate growth of their domestic economies. We're just now beginning to see those efforts take effect. ^ur fourth major initiative will be to continue holding down government spending and future deficits. This Administration remains committed to a goal of a balanced budget, as we move toward full utilization of our resources. To reach that goal, we will resist the temptation to begin ambitious efforts, either for an overheated economic recovery or new domestic programs that exceed our current budget resources. We cannot afford the trap of spending more than absolutely necessary — not just this year, but in succeeding years as well. If our growth rate falls below targets, then we can add spending to stimulate growth. But as we all know, it's much easier to increase spending or reduce taxes than it is to restrain spending in programs that are already underway. Our insistence on budget restraint will give us maximum flexibility as we face future economic developments. -7Our fifth major initiative, something that I strongly believe in, is to reduce unnecessary government interference in the private sector — to give people the room they need to do their jobs. Having come from business so recently, I did not need any new lessons in this area. I intend to pursue this problem vigorously. This Administration has already taken steps to loosen regulation of airline fares, to promote competition. The President's government reorganization will seek to consolidate wasteful programs and rationalize our agency structure. We will make a serious effort to reduce paperwork and the aggravations of nitpicking, unnecessary and uneconomic regulations. We've even managed to bring some common sense to OSHA, where the new administrator has redirected the agency away from Mickey Mouse safety rules, concentrating instead on serious health hazards in high-risk industries. From these lessons, I hope that we will learn to exercise more caution about new proposals for government interventionOne very current example is the proposal in Congress to apply Federal job discrimination laws to mandatory retirement ages, in effect, banning mandatory retirement. Rather than proceeding headlong into this new intervention into business affairs -- a major social change, really — I hope that we can study both the problem and the possible solutions more thoroughly. Ihe goal is a desirable one -- job protection for older workers -- but we could easily add new costs and new complexities that far exceed the benefits. This is only one example of the strong tendency I have seen in Washington for people to look first to the Federal government for solutions — no matter how deep-seated, complex or intractable the problem. The fact is that government, just like an individual, must make intelligent choices about where it can best devote its efforts. -8Government is a powerful instrument of the people of this country. Government can do many useful, constructive, necessary things, and this Administration is on record with a commitment to deal with our most serious national problems. Yet government also has its limitations. It cannot be all things to all people, and it cannot solve all of the problems that affect our citizens. By taking on more than it can handle -- or by getting involved where government solutions are bound to fail — we diminish the ability of government to solve problems that only it can solve. And wnile I cannot lay down a rigid rule about the limits of government, I car state that we should get involved very cautiously -- only after we have determined that no better alternative exists. Certainly we should examine more deeply the opportunities that lie in voluntary cooperation and market solutions. The free market has time and again demonstrated its abilities for efficient allocation in our society, and to solve difficult problems. I also know that we could expand the use of lebor-management groups to work out voluntary solutions to economic problems. As we face the challenges of productivity and growth, we certainly must look for voluntary solutions. I am not offering tonight any specific suggestions along these lines. I wanted instead for you to understand my thinking and the direction in which I would like us to take during this Administration. In short, I want to make this point: That is, I am committed to reducing unnecessary government interference in our personal lives and our business affairs. I am convinced that we can do this at no sacrifice to our social and environmental goals. Moreover, this Administration is relying on a healthy, growing, productive private sector to move our economy to higher ground. We are seeking to overcome the business uncertainty that so far has inhibited new investment — and to assure you that the causes of that uncertainty are in the past, not the present. -9We realize that this depends on government policies that understand the needs of business, that have continuity and stability, that are developed openly with broad consultation, and that make full use of the voluntary opportunities that lie ahead. And once these assurances begin to sink in, I believe that we can foster the investment needed to increase production and job opportunities — and to achieve the economic prosperity that has eluded us so far in this troubled decade. FOR RELEASE UPON DELIVERY EXPECTED AT 10:00 A.M. September 22, 1977 STATEMENT OF THE HONORABLE W. MICHAEL BLUMENTHAL SECRETARY OF THE TREASURY BEFORE THE SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT OF THE SENATE COMMITTEE ON FINANCE » Mr. Chairman and Members of the Committee: I am pleased to be here today to assist you in your consideration of the public debt limit. As you know, on September 30, 1977, the present temporary debt limit of $700 billion (enacted on June 30, 1976) will expire and the debt limit will revert to the permanent ceiling of $400 billion. Legislative action by September 30 will be necessary, therefore, to permit the Treasury to borrow to refund securities maturing after September 30 and to raise new cash to finance the anticipated deficit in the fiscal year 1978. In addition, we are requesting an increase in the $17 billion limit (also enacted June 30, 1976) on the amount of bonds which we may issue without regard to the 4-1/4 percent interest rate ceiling on Treasury bond issues. B-453 - 2 - Finally, we are requesting authority to permit the Secretary of the Treasury, with the approval of the President, to change the interest rate on U.S. Savings Bonds if that should become necessary to assure a fair rate of return to savings bond investors. Debt Limit Turning first to the debt limit, our estimates of the amounts of the debt subject to limit outstanding at the end of each month through the fiscal year 1978 are shown in the attached table. The table indicates a peak debt subject to limit of $780 billion on September 30, 1978, assuming a $12 billion cash balance on that date. The usual $3 billion margin for contingencies would raise this amount to $783 billion, thus requiring an increase of $83 billion from the present temporary limit of $700 billion. This $83 billion increase reflects the Administration's current estimates of a fiscal 1978 unified budget deficit of $61.5 billion, a trust fund surplus of $13.1 billion, and a net financing requirement for off-budget entities of $8.5 billion. The trust fund surplus must be reflected in the debt requirement because the surplus is invested in Treasury securities which are subject to the debt limit. - 3- The debt of off-budget entities which affect the debt limit consists largely of obligations which are issued, sold or guaranteed by Federal agencies and financed through the Federal Financing Bank. Since the Federal Financing Bank borrows from the Treasury, the Treasury is required to increase its borrowing in the market by a corresponding » amount. This, of course, adds to the debt subject to limit. As indicated in the table, it is assumed that the Treasury's operating cash balance will be at $12 billion at the end of each month from September 30, 1977, through September 30, 1978. On this basis, no net increase in the debt will be required to finance the cash balance in the fiscal year 1978. We believe that our $12 billion constant balance assumption is reasonable in light of current needs and the actual balances maintained by the Treasury in recent years. Over the past decade, the Treasury's cash balances at the end of each fiscal year have been as follows: 1968 $ 5.3 billion 1969 1970 1971 1972 1973 1974 1975 1976 T.Q. 5.9 8.0 8.8 10.1 12.6 9.2 7.6 14.8 17.4 - 4 - The need to carry larger cash balances in recent years reflects the overall growth in Government receipts and expenditures. Also, there is a heavy drain in cash from Government expenditures in the first half of each month, and there is a sharp increase in cash from tax receipts in the second half of the tax payment months. Thus, large month-end cash balances, which otherwise might be used to pay off debt, are essential to the efficient management of the Government's finances. Our $83 billion estimate of the required increase in the debt subject to limit through September 30, 1978 is $8 billion higher than the $75 billion increase recommended by the House Ways and Means Committee in its report of August 4, 1977. Also, a $75 billion increase was approved in the second concurrent resolution on the Federal budget for fiscal year 1978, which was adopted by the Congress on September 15, 1977. As indicated in the table attached to my statement, the $775 billion limit recommended by the House Committee and approved in the concurrent resolution is expected to be reached by August 31, 1978. Thus, if our estimates prove to be correct, the Treasury may have to maintain lower than - 5- desirable cash balances in September 1978 to stay within the $775 billion limit or come back to the Congress to request that a further increase in the debt limit be enacted perhaps a few weeks earlier than the proposed September 30, 19 78 expiration date. However, in view of the fact that Congressional action on the debt limit must be completed by the end of next week, I urge your Committee to agree to the $775 billion limit recommended by the House Committee. Bond Authority I would like to turn now to our request for an increase in the Treasury's authority to issue long-term securities in the market without regard to the 4-1/4 percent statutory ceiling on the rate of interest which may be paid on such issues. We are requesting that the Treasury's authority to issue bonds (securities with maturities over 10 years) be increased by $10 billion from the current ceiling of $17 billion to $27 billion. As you know, the 4-1/4 percent ceiling predates World War II but did not become a serious obstacle to Treasury issues of new bonds until the mid-1960's. At that time, market rates of interest rose above 4-1/4 percent, and - 6 the Treasury was precluded from issuing new bonds. The Congress first granted relief from the 4-1/4 percent ceiling in 196 7 when it redefined, from 5 to 7 years, the maximum maturity of Treasury notes. Since Treasury note issues are not subject to the 4-1/4 percent ceiling on bonds, this permitted the Treasury to issue securities in the 5 to 7 year maturity area without regard to the interest rate ceiling. Then, in the debt limit act of March 15, 19 76, the maximum maturity on Treasury notes was increased from 7 to 10 years. Today, therefore, the 4-1/4 percent ceiling applies only to Treasury issues with maturities in excess of 10 years, and certain amounts have been exempted from this ceiling. In 19 71, Congress authorized the Treasury to issue up to $10 billion of bonds without regard to the 4-1/4 percent ceiling. This limit was increased to the current level of $17 billion in the debt limit act of June 30, 1976. As a result of these actions by the Congress, the Treasury has been able to achieve a better balance in the maturity structure of the debt and has re-established the market for long-term Treasury securities. - 7Today, however, Treasury has nearly exhausted the $17 billion authority. The amount of unused authority to issue bonds is $1 billion. Since the last increase in this limit on June 30, 1976, the Treasury has offered $6-2 billion of new bonds in the market. This includes $2.5 billion issued in the current quarter. While the timing and amounts of future bond issues will depend on then current market conditions, a $10 billion increase in the bond authority (which was recommended by the House Committee) would permit the Treasury to continue its recent pattern of bond issues throughout fiscal year 1978. We believe that such flexibility is essential to efficient management of the public debt. Savings Bonds In recent years, Treasury recommended on several r occasions that Congress repeal the 6 percent statutory ceiling on the rate of interest that the Treasury may pay on U.S. Savings Bonds. The 6 percent ceiling rate has been in effect since June 1, 1970. Prior to 1970 the ceiling had been increased many times. As market rates of interest rose, it became clear that an increase in the savings bond interest rate was necessary in order - 8to provide investors in savings bonds with a fair rate of return. While we do not feel that an increase in the interest rate on savings bonds is necessary at this time, we are concerned that the present requirement for legislation for each increase in the rate does not provide sufficient flexibility to adjust the rate in response to changing market conditions. The delays encountered in the legislative process could result in inequities to savings bond purchasers and holders as market interest rates rise on competing forms of savings. Also, the Treasury has come to rely on the savings bond program as an important and relatively stable source of long-term funds, and we are concerned that participants in the payroll savings plans and other savings bond purchasers might drop out of the program if the interest rate were not maintained at a level resonably competitive with comparable forms of savings. Any increase in the savings bond interest rate by the Treasury would continue to be subject to the provision in existing law which requires approval of the President. Also, the Treasury would, of course, give very careful consideration to the effect of any increase in the savings bond interest rate on the flow of savings to banks and thrift institutions. - 9 - The House Ways and Means Committee deferred to a later date consideration of our August 1 request to that Committee that the 6 percent interest rate ceiling on savings bonds be repealed. In view of the need for the Congress to complete action on the debt limit next week, I am not requesting that the House bill be amended to repeal the interest ceiling on savings bonds. However, I urge the Congress to consider our request on savings bonds at an early date. To sum up, Mr. Chairman, I recommend that the Senate agree to the House bill, which would increase the debt limit to $775 billion through September 30, 1978 and would increase to $27 billion the authority to issue bonds without regard to the 4-1/4 percent ceiling. I understand that the full House will take up the bill this week and probably recommend a slightly lower debt limit than $775 billion. In light of our timing problem, I urge you to support an increase in the debt limit of this approximate magnitude. I will be happy to try to answer any questions regarding these requests. OoO PUBLIC DEBT SUBJECT TO LIMITATION FISCAL YEAR 1977 Based on: Budget Receipts of $358 Billion, Budget Outlays of $404 Billion, Unified Budget Deficit of $46 Billion, Off-Budget Outlays of $10 Billion ( $ Billions) Operating Cash Balance Public Debt Subject to Limit With $3 Billion Margin for Contingencies -A<stual- 1976 0 $17.4 $635.8 October 29 12.0 638.7 November 30 8.7 645.8 December 31 11.7 654.7 January 31 12.7 655.0 February 28 14.6 664.5 March 31 9.0 670.3 April 29 17.8 672.2 7.0 673.2 June 30 16.3 675.6 July 31 10.2 675.0 August 31 7.1 686.3 September 30 1977 May 31 -EstimatedSeptember 30 12 696 699 PUBLIC DEBT SUBJECT TO LIMITATION FISCAL YEAR 1978 Based on: Budget Receipts of $401 Billion, Budget Outlays of $463 Billion, Unified Budget Deficit of $62 Billion, Off-Budget Outlays of $9 Billion ($ Operating Cash Balance 1977 September 30 Billions) Public Debt Subject to Limit With $3 Billion Ma]rgin for - Conl :ingencies -Es1:imated$12 $696 $699 October 31 12 708 711 November 30 12 716 719 December 30 12 721 724 January 31 12 720 723 February 28 12 733 736 March 31 12 749 752 April 17 12 757 760 April 28 12 745 748 May 31 12 763 766 June 15 12 770 773 June 30 12 758 761 July 31 12 764 767 August 31 12 775 778 September 29 12 780 783 1978 FOR IMMEDIATE RELEASE September 21, 1977 RESULTS OF AUCTION OF 2-YEAR NOTES The Department of the Treasury has accepted $3,140 million of $5,485 million of tenders received from the public for the 2-year notes, Series U-1979, auctioned today. The range of accepted competitive bids was as follows: Lowest yield 6.71% 1/ Highest yield Average yield 6.75% 6.74% The interest rate on the notes will be 6-5/8%. At the 6-5/8% rate, the above yields result in the following prices: Low-yield price 99.843 High-yield price Average-yield price 99.770 99.788 The $3,140 million of accepted tenders includes $466 million of noncompetitive tenders and $2,532 million of competitive tenders (including 36% of the amount of notes bid for at the high yield) from private investors. It also includes $142 million of tenders at the average price from Federal Reserve Banks as agents for foreign and international monetary authorities in exchange for maturing securities. In addition, $705 million of tenders were accepted at the average price from Government accounts and Federal Reserve Banks for their own account in exchange for securities maturing September 30, 1977, ($90 million) and from Federal Reserve Banks as agents for foreign and international monetary authorities for new cash ($615 million) . 1/ Excepting 2 tenders totaling $10,000 B-454 FOR IMMEDIATE RELEASE September 28, 1977 UNITED STATES AND JAMAICA TO DISCUSS INCOME TAX TREATY The Treasury Department announced today that representatives of the United States and Jamaica have recently concluded exploratory talks in Washington with a view to determining whether a basis exists for resuming negotiations on a new income tax treaty between the two countries. On the basis of these talks, it is expected that negotiations will resume in Jamaica early in 1978. The income tax treaty between the United States and the United Kingdom was extended to Jamaica in 1958, and remains in force today. The proposed new treaty would replace this extended U.K. treaty. The proposed treaty is intended to prevent double taxation and to facilitate trade and investment between the two countries. It will be concerned with the tax treatment of income of individuals and companies from business, investment, and personal services, and with procedures for administering the provisions of the treaty. The 1977 "model" income tax treaty developed by the Organization for Economic Cooperation and Development will be taken into account along with recent U.S. treaties with other countries, such as the treaties with Korea and The Philippines, which are currently pending before the Senate Foreign Relations Committee. Attention is also called to the current United States "model" income tax treaty, the text of which was released by the Treasury Department on May 17, 1977. The Treasury invites persons wishing to submit comments concerning the proposed treaty to send them to Dr. Laurence N. Woodworth, Assistant Secretary of the Treasury, U.S. Treasury Department, Washington, D.C. 20220, by January 20, 1978. This announcement appeared in the Federal Register of Tuesday, September 28, 1977. B-455 oOo kpartmentoftheTREASURjr TELEPHONE 566-2041 (ASHtNGTON, D.C. 20220 September 26, 1977 FOR IMMEDIATE RELEASE RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS Tenders for $2,200 million of 13-week Treasury bills and for $3,300 million of 26-week Treasury bills, both series to be issued on September 29, 1977, were accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: High Low Average 26-week bills maturing March 30, 1978 13-week bills maturing December 29, 1977 Price Discount Rate 98.496 98.486 98.488 5.950% 5.989% 5.982% Investment Rate 1/ Price 6.12% 6.17% 6.16% 96.890 96.868 96.873 Discount Rate 6.152% 6.195% 6.185% Investment Rate 1/ 6.44% 6.48% 6.47% Tenders at the low price for the 13-week bills were allotted 26%. Tenders at the low price for the 26-week bills were allotted 70%. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTSAND TREASURY: Location Received Accepted Received Accept-.v $ 23,515,000 4,712,725,000 9,665,000 24,745,000 15,075,000 66,060,000 590,705,000 40,560,000 5,295,000 20,100,000 3,330,000 310,775,000 $ 16,515,000 2,898,725,000 9,665,000 9,745,000 *9,575,000 44,060,000 158,705,000 18,415,000 5,295,000 20,100,000 3,330,000 105,775,000 ?nn,nnn Boston $ 18,495,000 New York 3,674,025,000 Philadelphia 18,140,000 Cleveland 31,810,000 Richmond 16,660,000 Atlanta 44,830,000 Chicago 494,665,000 St. Louis 61,245,000 Minneapolis 7,325,000 Kansas City 35,450,000 Dallas 12,125,000 San Francisco 230,520,000 $ 16,495,000 1,906,040,000 17,490,000 30,515,000 16,660,000 28,125,000 54,425,000 36,555,000 7,325,000 26,510,000 12,125,000 48,080,000 Treasury 30,000 30,000 $4,645,320,000 $2,200,375,000 ah $5,822,750,000 TOTALS 2QQ.QQQ ~" ^Includes $330,495,000 noncompetitive tenders from the public. Includes $162,000,000 noncompetitive tenders from the public. Equivalent coupon-issue yield. 458 $3,300,105,000 b/ J ' NATIONAL ADVISORY COUNCIL ON INTERNATIONAL MONETARY AND FINANCIAL POLICIES SPECIAL REPORT TO THE PRESIDENT AND TO THE CONGRESS ON U.S. PARTICIPATION IN THE SUPPLEMENTARY FINANCING FACILITY OF THE INTERNATIONAL MONETARY FUND SEPTEMBER 1977 NATIONAL ADVISORY COUNCIL ON INTERNATIONAL MONETARY AND FINANCIAL POLICIES SPECIAL REPORT TO THE PRESIDENT AND TO THE CONGRESS ON U.S. PARTICIPATION IN THE SUPPLEMENTARY FINANCING FACILITY OF THE INTERNATIONAL MONETARY FUND SEPTEMBER 1977 TABLE OF CONTENTS PAGE Summary 1 The World Balance of Payments Situation 5 and Financing Patterns, 1973-1976 The Need for the Supplementary Financing 10 Facility Main Provisions of the Supplementary 18 Financing Facility Proposed Legislation 22 Recommendation 23 Annexes A. IMF Decision Establishing a Supplementary Financing Facility B. IMF Decision on Replenishment in Connection with Supplementary Financing Facility C. Relationship Between Supplementary Financing and Regular IMF Resources I. Summary Since 1973, the pattern of world payments has undergone profound transformation as a result of massive increases in oil prices, unprecedented and persistent inflation, deep recession, and hesitant economic recovery and growth. Dramatic alterations in the pattern of payments have produced major strains on the international financial system. The OPEC 1/ group of countries, after years of approximate balance on current account, registered cumulative current account surpluses of about $150 billion during the three years 1974 through 1976. The industrial country group, which historically had run current account surpluses and exported capital to the rest of the world, has experienced cumulative current account deficits of unprecedented magnitude — about $66 billion during the three year period, or about forty percent of the deficits run by oil importers. The non-oil exporting developing countries and the non-market economies of Eastern Europe have sustained deficits and financing reguirements much larger than they had previously experienced -about $106 billion for the three year period. Broadly similar patterns are likely in 1977 and beyond. In the period immediately following the oil price increases of 1973-74, major emphasis was placed on financing the deficits, given their magnitude and the long-term structural nature of adjustment reguired to reduce oil imports. The only other course of action would have been for oil importing countries individually to attempt to reduce their own deficits guickly, by sharply reducing economic growth rates, applying trade and payments restrictions or manipulating exchange rates — policies that would have been disruptive of the world economy and harmful to our objectives of an open, liberal trading system. Thus initial concerns were directed to ensuring that financing was available to countries and to avoidance of uncooperative and ultimately self-defeating actions to improve their own positions at the expense of others. Even with the emphasis on financing, the world economy experienced a severe recession centered in the major industrial countries, while smaller 1/ The Organization of Petroleum Exporting Countries. nations borrowed heavily in an effort to avoid harsh curtailment The followingThe countries areincreases members: aggravated Algeria, the Ecuador, of growth. oil price already Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. - 2 serious problems of worldwide inflation, caused major changes in the relative costs of factor inputs in production processes, and led to a major shift in terms of trade against the oil importing nations. The greatly increased global need for balance of payments financing has been matched, by and large, by a general expansion of financing available for that purpose. The OPEC surpluses, as a matter of necessity, have been invested predominantly in the oil importing countries. But the geographic placement of OPEC surplus funds has not corresponded to the pattern of current account deficits. Thus, financial intermediation on an unparalleled scale has been required to redistribute, or recycle, these huge surpluses. Private capital markets and the international banking system have been relied upon to meet the bulk of the financial intermediation requirements of the last few years, and have done so efficiently and successfully. While private market financing expanded rapidly during the past three years, providing roughly three-quarters of total balance of payments financing during that period, official financing has also increased substantially. The International Monetary Fund (IMF), the primary source of official balance of payments financing, has channeled financing to its members at record levels since 1973, primarily through the temporary Oil Facility and the Compensatory Financing Facility. Nevertheless, IMF financing remained relatively small by comparison with private financing during this period, meeting approximately seven percent of total balance of payments financing needs. The priority that was initially placed on ensuring that financing was available, generally on a relatively "unconditional" basis, provided a valuable breathing space. The oil importing countries were afforded an opportunity to reassess their domestic and external economic policies more carefully in light of the profound changes that had taken place in the world energy balance and in world trade and payments. Subsequently, many countries did act to alter their economic policies in order to stabilize their economies and to bring their external accounts into better balance -- to bring their current account deficits to positions more compatible with their ability to attract foreign capital. But while such "adjustment" policies have been initiated in a number of countries, the process is far from complete. Structural changes must yet take place in many economies, often involving significant alteration of tradi- - 3 tional attitudes and patterns of production and consumption. For many countries, such changes will not come easily and must take place over a number of years if satisfactory levels of growth and employment -- and an open system of trade and payments — are to be maintained. Over the next several years it must be expected that large payments imbalances will continue as these adjustments take place in oil importing countries, and — equally importantly -- as OPEC's capacity to absorb imports continues to increase. In order to help ensure that adjustment occurs at an appropriate pace — and with appropriate policies — substantial financing will continue to be needed by countries in deficit. Private markets can and should continue to provide the bulk of this financing. But they cannot be expected to handle all the situations which may arise. The massive borrowing of the last few years has quite naturally led to the accumulation of large amounts of external debt. For many countries, large external debt does not currently constitute a problem since these countries have maintained — in some cases restored — their creditworthiness in the private market, generally through the implementation of sound economic policies and productive utilization of investment. In a relatively few cases, however, where the need for adjustment is evident but the willingness or ability to pursue the needed policies has been lacking, commercial bankers have become more cautious. Understandably, the banks have become less willing to continue to provide additional balance of payments financing in cases where debts are substantial but needed adjustment is not taking place. In order to help ensure that needed adjustment is pursued — i n a cooperative and internationally appropriate manner -- by countries facing balance of payments difficulties, it is important that adequate official financing be available on the basis of appropriate terms and conditions. The IMF is the primary official source of "conditional" financing — that is, financing keyed to the adoption by the borrower of sound adjustment policies designed to eliminate the need for such financing and to provide a basis for repayment. The IMF's record is good and its reputation is strong, with both borrowers and creditors. But its current supply of usable currencies is extremely low, both by historical standards and in relation to potential needs for official financing during the next few years. In the circumstances, the Interim Committee of the IMF concluded in April 1977, that there was "an urgent need for a supplementary arrangement of a temporary nature that would enable the Fund to expand its financial assistance to those - 4 of its members that in the next several years will face payments imbalances that are large in relation to their economies." After further consideration of this issue by the IMF's Executive Board, IMF Managing Director Johannes Witteveen approached a number of industrial and oil exporting countries about the possibility of providing additional resources to the IMF on a temporary basis. After extensive negotiations, a meeting was held in Paris on August 6 of potential "participants" — that is, those nations that would participate in assuring the financing of the new facility — and agreement was reached on the basic terms and conditions of the financing to be provided, and on amounts of financing commitments to the Supplementary Financing Facility. Agreement was subsequently reached in the IMF Executive Board on the final operating details of the new facility. The two IMF decisions providing for the establishment of this facility, including the general terms of the agreement that each participant would sign with the IMF in committing financing to the facility, are presented as Annexes A and B to this report. The Supplementary Financing Facility will be a temporary facility, enabling the IMF to draw upon the financing commitments of participants over the next several years in order to provide additional financing — on a strictly "conditional" basis -- to members with especially large balance of payments financing needs and difficult adjustment problems. Borrowing members will have access to resources under the facility in amounts larger than would normally be available from the IMF, and will be able to draw under an arrangement with the IMF over a period longer than the one year normally applicable to IMF stand-by arrangements. The period of repayment will also be longer than the usual IMF standard of three to five years. In exchange for the financing provided to the IMF, participants will receive a liquid financial claim on the Fund which will pay interest at market-related rates. Initial participants in the facility include industrial countries and oil-producing countries, with initial commitments equal to approximately SDR 8.6 billion, about $10 billion. The proposed U.S. share is SDR 1,450 million (about $1,700 million), or approximately 17 percent of the total.2/ The facility will make a major contribution toward the strengthening of the international monetary system, 2/^^V^f^blVTr^Pa^ge 18. As of September 9, 1977, discussions were underway that were expected to bring the initial total to at least SDR $8.6 billion. - 5 and will help ensure that the IMF can cope with potential problems that might arise. By enabling the IMF to provide additional financing to members, it will encourage countries to initiate needed adjustment measures in a timely fashion through sound and internationally responsible policies. In doing so, it will improve the creditworthiness of members, thus helping ensure continued adequate flows of private market financing, which must continue to meet the bulk of the world's balance of payments financing needs. Moreover, the facility will strengthen confidence in the international monetary system as a whole, promoting adjustment of payments positions toward a more sustainable pattern, and demonstrating that the official community has the capacity to respond quickly when serious payments problems arise. It is the unanimous judgment of the National Advisory Council that the Supplementary Financing Facility is essential to the continued effective functioning of the international financial system and the maintenance of an open, liberal world trade and payments system. The Council considers that it is in the vital interest of the United States to participate in the facility. By the terms of the decisions establishing the facility, it will not enter into force until the United States and other major participants have completed official agreements with the IMF to participate and to make financing available in the amounts proposed. Authorization by the Congress is required for the United States to participate in the facility. The Council believes that prompt enactment of authorizing legislation will both demonstrate the importance placed by the United States on a strong and cooperative international monetary system and serve as a major step to ensure the maintenance of such a system. Accordingly, the Council recommends prompt and favorable action by the Congress on legislation to authorize U.S. participation in the facility. II. The World Balance of Payments Situation and Financing Patterns, 1973-1976 Major economic disturbances in the years 1973 to 1976 brought about large and abrupt changes in the world economy. The oil price increases of 1973 and 1974 aggravated the inflation that already existed and were a contributing factor in the worst world recession since the 1930's. These developments combined to cause major changes in the pattern of world account surplus on the order of $6 billion in 1973, registered - 6 a surplus of $68 billion in 1974. Their cumulative surplus for the three years 1974 through 1976 totaled about $150 billion. The industrial nations of the Organization for Economic Cooperation and Development (OECD) suddenly witnessed an aggregate current account shift from moderate surplus to large deficit. Instead of being major suppliers of net capital to the rest of the world, the OECD group became net capital importers. The historic and widely accepted view that "mature" economies should be creditors was dramatically rendered obsolete, as the OPEC surplus countries moved to the position of generating large amounts of net savings which were used by the OECD countries and (often after intermediation through OECD capital markets) by the non-oil exporting developing countries. In the period 1974 through 1976, the combined OECD current account position showed a deficit of $22 billion per year, compared with an average current account surplus position in excess of $5 billion in 1971 through 1973. (See Table 1 below.) Within OECD, a few countries registered surpluses in the 1974-76 period, averaging $15 billion per year, while those OECD members in deficit saw their combined position deteriorate from a deficit of $7 billion per year in 1971-73 to a deficit of $37 billion per year in 1974-76. The position of the non-oil exporting developing nations also changed sharply. During the 1960's and early 1970's these countries had generally maintained carefully controlled current account deficits. Between 1971 and 1973, the average annual aggregate deficit of the non-oil exporting LDC's was roughly $4 billion. In the immediate wake of the oil price increases, their aggregate annual deficits rose nearly six-fold, to an average of $23 billion per year during 1974-1976. There has in addition been a dramatic change in the external balance of the "rest of the world," which includes Israel, South Africa and the non-market economies of Eastern Europe, the USSR, and the People's Republic of China. These countries ran near-balanced current account positions in 1971-73, carefully tailoring import purchases to export proceeds. The oil crisis and worldwide recession, coupled with increased demand for consumer goods at home, resulted in a sharp jump in the current account deficit of these countries to $12 billion a year in the 1974-1976 period. The following table demonstrates the shifts in payments patterns for these groups of countries. - 7 Table 1 World Payments Patterns Balances on goods, services, and private and governmental transfers ($ billions) Average Average 1971-73 1974-76 Surplus Countries ; OPEC 2.8 49.0 OECD 12.3 15.3 Total Surpluses + 15.1 + 64.3 Deficit Countries OPEC - 1.4 - 2.0 OECD - 6.7 - 37.3 LDC -4.1 V Other - 2.7 Total Deficits - 14.9 - 74.6 2/ Residual - 0.2 + 10.3 1/ Israel, South Africa, and non-market economies of Eastern Europe, the USSR, and the People's Republic of China. 2/ Over the past several years the "residual" item has grown significantly. Recorded exports exceed imports by a sizable sum for any calendar year due to goods in transit and inflation. The OECD staff has estimated that $12-14 billion is involved in these factors. These factors would by themselves make the residual negative rather than positive. Both the IMF and OECD attribute the positive residual to asymmetries in the reporting of service transac tions; that is, an over-reporting of service imports, or under-reporting of service exports. Source: OECD and U.S. Treasury Department staff estimates. - 8 In the circumstances, nations borrowed very heavily in the years 1974-76 to finance their large current account deficits. The borrowing took many forms. While official financing through the IMF during this period was far above historical levels, and official development lending increased, private markets provided the bulk of the financing — about three-quarters of total balance of payments financing during the three year period. In addition to expanded demands for credit, conditions on the supply side of the market were also conducive to a rapid growth in private financing during the period. The huge OPEC surpluses, of course, brought large deposits and placements to recipient banks and other financial intermediaries, and greatly expanded the assets of those institutions. In addition, the period was one of rapid secular expansion of the international banking system. Particularly with domestic loan demand less buoyant than in immediately preceding years, many institutions were competing eagerly for new customers abroad, as banks sought to establish themselves in new activities and new geographic areas and endeavored to broaden their scope of operations so as to spread risks and diversify portfolios. Using such data as are available -- and acknowledging that the picture is incomplete — we can sketch out a pattern of the financing of world payments in the period 1974 through 1976 with roughly the following dimensions: — Cumulative current account deficits equaled about $225 billion (after the receipt of grant aid), representing the counterpart of the investable surpluses of OPEC countries plus those of certain industrial countries registering surpluses during the period. — About $15 billion of these deficits, or seven percent of the total, was financed by the IMF, the bulk of it through the temporary Oil Facility and the Compensatory Financing Facility, both of which provided financing largely on the basis of "need" with relatively little emphasis on "conditionality" or the adoption of corrective adjustment measures by the borrower. — About $40 billion of the deficits, or eighteen percent of the total, was financed by a variety of other official sources — devel- - 9 opment lending by other industrial and OPEC countries, and by the IBRD and regional development banks, and other official financing. — The remaining current account deficits, some $170 billion, plus about $40 billion of debt repayments, were financed largely through market-oriented borrowing. Most of these funds were obtained through banks and securities markets. The financing pattern of the past few years reflects the initial emphasis placed by nations on financing the imbalances rather than adjusting their economies so as to reduce or eliminate the large imbalances resulting from the combined impact of oil price increases and worldwide recession and unprecedented inflation. At the time of the initial shifts in payments patterns resulting from the oil price increases, there were serious concerns that the oil importing nations, trying individually to protect their own payments positions, would harm each other by external restrictions and excessive domestic retrenchment, as they tried to eliminate deficits which -- as the counterpart of the OPEC surplus -- were collectively irreducible. Recognizing these dangers, the IMF membership agreed in January 1974 in the Rome Communique to forswear such self-defeating actions. Accordingly, in the early aftermath of the oil price increases, emphasis was appropriately placed on assuring the adequacy of resources for financing the balance of payments costs of higher oil prices. Nations were encouraged, at least temporarily, to "accept" the oil deficit and finance it, rather than to try individually to eliminate their respective deficits at the expense of other oil importing countries. Much of the financing made available — both by private and official sources — was essentially without conditions or requirements that particlar adjustment policies be implemented. With the large amount of international financing that has occured during this period, accumulations of debt, especially debt owed to private institutions, has been large, by historical standards very large. Complete and accurate records on the aggregate amount of debt outstanding do not exist, but the following statistics give some indication of the present situation: — The external public or publicly guaranteed indebtedness of 75 non-oil exporting developing countries has been estimated by the World Bank at about $171 bililion as of the end of 1976. - 10 — The OECD estimates that the aggregate foreign borrowing undertaken by the OECD deficit countries in the years 1974-1976 amounted to roughly $98 billion. — The foreign claims of commercial banks on countries other than the G-10 major industrial countries, Switzerland and the offshore banking centers totaled $194 billion at the end of 1976, of which U.S. banks accounted for roughly $82 billion.3/ — The foreign claims of commercial banks on the G-10 major industrial countries, Switzerland and offshore centers (which includes inter-bank lending and thus involves a large amount of double-counting) were about $354 billion at the end of 1976, of which U.S. banks accounted for roughly $126 billion.3/ These data are difficult to assess. It might be noted that, as a rough rule of thumb, the bank claims, both on G-10 countries and others, approximately doubled during the three years 1974-76. External public debts of the 75 non-oil developing nations more than doubled during the same three years. Of course, doubling the absolute size of debt does not mean doubling the "real burden," since price increases have reduced the burden in real terms of previously incurred debt, and since economic growth has strengthened the debtors' capacity to service debt. III. The Need for the Supplementary Financing Facility , , i_- - n i i u •_- r i- ir i r • nr - r — ~ — ~~^ " ^ — — — — — — — ~ ~ ^ — i~ ~~ — ~r — — ~ir ~r - ~ * ~r — — — — ~ ^ " ~ ~* The availability of financing during the 1974-76 period provided countries with the time and opportunity to reassess and redirect their overall economic policies in light of fundamentally altered economic circumstances -- without having to move hastily to reverse the weakening of their current account positions because of a lack of financing. There was growing recognition on the part of many countries that some very basic adjustments in their economies would ultimately be required -- factors of production shifted, product mixes altered, alternative energy sources exploited, new energy-efficient capital equipment designed and installed, long-standing patterns of consumption modified, and resources transferred toward export sectors. 3/ Sources: Bank for International Settlements and Federal Reserve Board of Governors. - 11 The process of international adjustment has been considerably facilitated by the more flexible exchange rate arrangements which most countries adopted in 1973, just prior to the sharp increases in oil prices. This increased flexibility has enabled the system to absorb shocks of unprecedented severity without the massive capital flight and traumatic exchange market crises of earlier periods. Flexible rates cannot, of course, eliminate the imbalances between OPEC and the oil importing world — no tolerable set of exchange rates could effect an adjustment of such magnitude. But flexible exchange rates — where, indeed, flexibility has been permitted by the authorities -- have helped to distribute the imbalances toward a more sustainable geographic pattern, and have allowed the system to accomodate to the widely diverging inflation rates that different countries have experienced during this period. The oil price increases created dual problems for oil importing countries: sharp shifts in historic patterns of trade and current account balances; and sudden alterations of relative factor input costs in production processes. While some progress has been made in re-establishing a generally sustainable pattern of current account balances, much domestic restructuring remains to be accomplished. The sharp shifts in relative prices, both internally and externally, and the terms of trade shifts against oil importers, have been difficult to adjust to, and resistance in many countries to the needed adjustment measures has exacerbated the problems of inflation and economic management. The responses of individual countries to the change in circumstances since 1973 have been varied. In some countries, policies have been altered effectively to stabilize the economy and bring the current account balance into a position that is reasonable and sustainable in light of the country's ability to attract capital. In others, stabilization programs have only recently been put into place, or progress on programs implemented earlier has been slow and difficult to achieve. For these countries, perserverance — as well as time — will be needed to restore long-lasting stability and growth. And there are a significant though not large number of countries which are only now beginning to consider stabilization measures, having reached or approached the limits of their ability to borrow. These countries are still beset by economic distortions and still face large - 12 payments deficits — financing has been used largely to maintain consumption levels rather than support new investment needed to accomplish economic restructuring. The need for corrective measures and adjustment in these cases is compelling. Large imbalances will continue in 1977, although the distribution of balances among oil importers will be somewhat altered in 1977. The OPEC surplus is expected to remain at about $40 billion. Non-oil exporting developing nations, benefiting from higher commodity prices and important adjustment efforts by a few major countries, will probably show some reduction in their current account deficits as a group. OECD countries will bear a larger share of the deficits, although in some of the larger countries adjustment policies now in place will produce impressive improvements in the external positions. The Eastern European countries may see some small reduction in their aggregate deficits. We have no reason to expect substantial changes in the current payments pattern among the four major country groupings in the next few years. OPEC surpluses are likely to diminish, but the pace of decline is expected to be slow. The aggregate deficit of the non-oil exporting developing nations will probably remain roughly constant, or perhaps increase slightly as flows of official development lending increase and thus enable some countries to run larger deficits. The financing problems that may arise over the next few years are not expected to be of an aggregate nature, directly involving all members of the international monetary system. But there are individual countries which either already face financing problems or may be expected to face them in the next two to three years. Some countries need to undertake major efforts to reduce fundamental imbalances within their economies and restore their external accounts to sustainable positions. Their external financing needs in some cases will certainly exceed private market willingness to provide funds. A combination of appropriate adjustment measures and adequate financing is clearly required during the next several years if the system is to operate effectively. Adjustment will become unavoidable for some countries because of their inability to obtain financing from the markets in needed amounts and on acceptable terms. If financing is not available, they may feel compelled to take recourse to unduly restrictive domestic economic measures, harsh trade and capital restrictions, or aggressive exchange rate practices in order to reduce their financing needs. - 13 Such measures could have serious worldwide repercussions as well as consequences for the economy of the country introducing them. In today's interdependent world, the economic actions and policies of any one country are closely related to those of other countries and directly affect their economic prosperity. Trade barriers imposed by one country, for instance, can abruptly and seriously impair other countries' trade and payments positions, and lead them to impose barriers in order to protect their own external position or in retaliation. The potential for serious disruption of the world economy as a consequence of such moves is widely understood. The U.S. economy, for example, is heavily dependent on world trade and financial flows. Imported products, from raw materials to high technology products, are heavily integrated into all phases of U.S. economic activity -- production, distribution and consumption. Export markets constitute a major part of the demand for U.S. goods and services. U.S. financial markets are a keystone of international financial transactions. It is of critical importance to the prosperity of the U.S. economy specifically and the world economy generally that the structure of the international financial system remain sound and that the liberal system of world trade and payments be maintained. Sound adjustment can bring positive advantages to the world economy, as well as to the countries involved. By improving underlying stability, adjustment can lead to a stable economic environment which will encourage productive investment and foster real growth. While the imposition of adjustment measures can lead temporarily to a reduction of output in an overheated economy, it can provide the required longer-run foundation for sound and sustainable growth, and strengthen the world economy. It is expected that private markets will continue to meet the bulk of balance of payments financing needs during the period ahead. But there are clear indications that some individual countries will lose their access to private financing unless they institute effective adjustment measures -- steps which show promise of restoration of a sound and stable payments position. Over the past several months commercial banks have become more selective in the provision of capital to certain deficit countries, where the debts are already substantial and the absence or inadequacy of adjustment policies has raised questions about the borrowers' creditworthiness. There is a critical need for the system to have - 14 available adequate official financing to support carefully-developed, orderly and internationally appropriate programs of adjustment — as an alternative to countries facing serious situations and as an incentive for them to act before their situations become critical. While our international monetary system is at present strong and functioning effectively, we do not have in place everything needed to insure against future risks. It is for this reason that it is proposed that the United States join with other strong industrial nations and major oil exporting nations to establish within the IMF a new facility — the Supplementary Financing Facility — to fill that need. The rationale for the Supplementary Financing Facility rests on three main premises: — First, that large payments imbalances will continue for the next several years. — Second, that there is a need for emphasis on "adjustment" of imbalances, rather than simply "finaneing" imbalances, especially by those countries facing relatively large payments deficits and difficult financing needs. — Third, that the resources of the IMF must be adequate not only to enable it to foster responsible adjustment policies by individual members facing severe payments difficulties, but also to provide confidence more generally that it is in a position to deal with problems that may arise. The IMF is the principal source of official balance of payments financing for its member countries. IMF financing has increased greatly during the last few years as a consequence of the balance of payments developments described above, and IMF holdings of usable resources are now extremely low, both by historical standards and in relation to potential balance of payments financing needs during the next few years. Current IMF holdings of "usable" currencies 4/ amount to the equivalent of about SDR 4-5 billion (roughly $4 1/2-5 1/2 billion). It is expected that usable IMF resources will increase by about SDR 5-6 billion ($6-7 billion) when the 4/ That is, IMF holdings of the currencies of countries that are considered to be in a strong enough external position for these currencies to be used by the Fund in extension of credit to other members. - 15 quota increase agreed pursuant to the Sixth General Review of Quotas takes effect (expected to occur by early 1978), and there remains SDR 2.6 billion ($3 billion) in uncommitted resources under the General Arrangements to Borrow. 5/ The IMF can also expect to receive modest amounts of additional usable resources through its program of monthly gold sales and through repayments of earlier drawings. Taking into account all of these sources of funds, IMF resources nonetheless are quite low in relation to potential demands over the next few years. A further (Seventh) review of IMF quotas is now in progress, but it is not anticipated that any increase in quotas that may be agreed in this review could take effect before late 1979. In the interim, there is clearly a need for additional IMF resources. The Supplementary Financing Facility is designed to meet this need. It will be a temporary facility, open for application by members for two years, with a possibility of extension up to one additional year. Thus the facility would serve as a "bridge" to a permanent increase in IMF resources which is expected to be agreed under the Seventh quota review now in progress. All financing under this facility will be provided in support of economic and financial programs adopted by borrowing members to place their balance of payments positions on a more sustainable basis and reduce their needs for external financing. Such programs will take the form of normal IMF financing arrangements, with specific policy conditions tailored to the particular problems and circumstances of each borrowing member. The payments difficulties faced by some countries are very large in relation to their economies and their regular access to IMF resources. In some cases, the relatively small amounts of financing available through the IMF's regular facilities have provided insufficient incentive for countries to borrow from the IMF and to adopt the adjustment programs required in conjunction with IMF financing. The Supplementary Financing Facility is thus designed to help correct this situation by making financing available to members in amounts larger than are currently available, with the total amount available to any one member determined by judgment based upon, 5/ This figure represents the remaining uncommitted resources of among other factors, the size and nature of its payments problems all GAB participants except U.K. and Italy (also includes the Swiss association). Actual availability of GAB resources depends both on drawings by GAB participants and actual participation in loans by GAB members. - 16 Adjustment programs adopted by borrowers, and actual drawdowns of financing, will be phased over periods longer than the one year generally applied under IMF stand-by arrangements, and could in some instances extend up to three years. (In no case, however, could drawings be made after five years from the date of establishment of the facility). Repayment of borrowing from the facility would take place over three to seven years, somewhat longer than the three-to-five year period that applies to regular IMF resources. Together, these provisions would afford members which use the facility somewhat longer periods of adjustment, consistent with the severity of their problems and the need for sustained and appropriately paced efforts to correct those problems. The Supplementary Financing Facility represents a major cooperative effort on the part of oil exporting and industrial countries to address current world payments problems. Participation is shared equitably between the two groups on a near fifty-fifty basis (see Table 2), reflecting both groups1 interest in and responsibility for a strong and smoothly operating international monetary system. The facility also represents a global cooperative approach in that all members of the IMF that meet the criteria for eligibility (i.e., severity of payments difficulties and willingness to implement corrective measures) would have access to the facility. This approach is consistent with and supportive of the principle of uniformity in the IMF's treatment of its members -- a principle that is fundamental to the IMF's successful performance as the world's central monetary institution. The Supplementary Financing Facility is not proposed or represented as a solution to all the world's international financial problems. Most importantly, it cannot eliminate the imbalance between the OPEC surplus countries and the oil importing world. The elimination of that imbalance can come about only through effective programs by the United States and others to conserve energy and develop alternative energy supplies, and through continued growth in the capacity of oil exporting nations to absorb goods and services produced in the oil importing world. What the Supplementary Financing Facility is designed to do is to help redistribute, as well as reduce, the collective current account deficit so that the necessary borrowing is undertaken by those nations whose creditworthiness and economic strength are adequate to sustain the additional debt. This means encouraging in those countries and iencing serious domestic problems economic inadjustment financing distortions, those large deficits. payments Itexperdeficits, means in - 17 addition encouraging a form of adjustment that is compatible with maintenance of a liberal system of international trade and payments. With the establishment of the Supplementary Financing Facility, there will continue to be a large amount of international borrowing — private as well as public. In fact, an important feature of the facility is that it will facilitate continued large-scale borrowing from banks and other private market sources — by improving the creditworthiness of countries adopting adjustment measures, and by shifting a portion of the borrowing to nations more capable of servicing additional debt. Foreign debt is not necessarily bad — it can be an important positive factor in an economy. As shown by the experience of the United States in the nineteenth century, and by Canada and others at present, borrowed money, if productively invested, can be a major source of economic growth. Thus the OPEC savings can be transferred to oil importing countries and used to finance productive investment in those countries. The Supplementary Financing Facility is not designed — nor will it be used — to replace commercial bank lending, or to "bail out" commercial banks that may have lent excessively or unsoundly. The aim is to provide access to official balance of payments financing in support of sound and internationally responsible programs of adjustment by borrowers, and to encourage them to initiate needed corrective measures before their debts become too large for them to handle or credit is no longer available. Use of the facility will improve the general level of creditworthiness among countries and confidence in the international monetary system. It is designed to help countries that are in need, not financial institutions. Nor will it be used to take over the private banks' regular lending activities. The amounts involved are far below levels of private lending — although the IMF may in the period ahead account for a share of total balance of payments financing somewhat larger than the share it provided in 1974-76, the IMF's share will remain small in comparison with the share channeled through the private market. In addition, experience indicates that after the IMF enters into a stand-by agreement with a borrowing country, private lending tends to expand rather than contract. IMF lending is a complement to private lending, not a substitute for it. The banks will benefit from the facility, but only indirectly — through an improved international environment, stronger monetary system and an expanding world economy that will benefit all segments of the American economy — industry, workers, farmers, and consumers. - 18 IV. Main Provisions of the Supplementary Financing Facility A. Participation and Entry into Force Initial participants in the facility and the amounts to be provided are listed in the table below, on the basis of information available in early September 1977. (Discussions are still underway with a few other countries, and it is anticipated that initial participation in the facility will total SDR 8.6 billion ($10 billion) or more). Other countries would be eligible to participate at a later date, provided that they had sufficiently strong external positions, and initial participants would be able to increase the amount of resources they make available should they choose to do so. Shares in the facility have been determined largely on the basis of relative external economic positions, as indicated primarily by balance of payments and reserve positions and ability to provide financing. The U.S. share would be SDR 1,450 million (approximately $1.7 billion), about 17 percent of the overall initial total. Table 2 Supplementary Financing Facility 1/ As Percent Participants and(million) Commitments Industrial Countries SDR $ (million) of Total Belgium Canada Germany Japan Netherlands Switzerland United States Subtotal 1.8 150 200 050 900 100 650 450 4,500 174 232 1,220 1,046 116 755 1,685 5,228 Iran Qatar Saudi Arabia Venezuela United Arab Emirates Kuwait Subtotal 685 100 2,150 450 150 400 3,935 796 116 2,500 523 174 465 4,574 8.1 1.2 25.5 5.3 1.8 4.7 46.6 TOTAL 8,435 2/ 9,802 100.0 2.4 12.4 10.7 1.2 7.7 17.2 53.4 Oil Exporting Countries Based on the SDR/$ rate prevailing September 1, 1977, 1 SDR = $1.16210. Expected to increase to at least SDR 8.6 billion ($10 billion). See text above and footnote, page 4. - 19 The facility will enter into force when a total of SDR 7.75 billion (approximately $9 billion) has been effectively made available to the IMF and at least six participants have each made available SDR 500 million (approximately $580 million) or more. B. Terms Relating to Provision of Resources to the IMF. Period of Financing. Commitments by participants to provide financing to the IMF will remain effective for five years from the date of the facility's entry into force. Financing actually provided to the facility will be repaid in eight semi-annual installments beginning 3 1/2 years and ending 7 years after the date the financing is provided, equivalent to an average maturity of 5 1/4 years. The IMF will have the right to make early repayment in certain circumstances. Calls for Financing. Calls will be made in broad proportion to the unutilized commitments of participants. Upon call, funds will be transferred to the IMF for immediate use in providing financing from the facility. A participant may represent that its balance of payments and reserve position does not justify a call or any further calls. If the IMF concurs with the participant's representation, the participant will not be expected to contribute to any further calls until its balance of payments and reserve position improves sufficiently. Interest Rates. Participants will receive interest equal to the yield on U.S. Treasury securities of comparable maturity, rounded up to the nearest one-eighth of one percent. The interest rate that will apply until June 30, 1978, is seven percent, based on the interest rates on U.S. Treasury securities prevailing at the time the facility was agreed. For each subsequent six month period, the interest rate that will apply will be the average of the daily yield during that period on actively traded U.S. Government securities of a constant maturity of five years, rounded up to the nearest one-eighth of one percent. Such yields are calculated daily by the U.S. Treasury Department and published weekly by the Federal Reserve Board. Liquidity of Claims. In exchange for financing provided to the IMF, a participant will receive a liquid reserve claim on the IMF, which can be encashed at any time upon a representation by the participant of balance of payments need. Claims may also be transferred (sold) to other participants, other IMF members or other transferees which may be approved by the IMF. - 20 Denomination. All commitments to provide financing, and all financing actually provided to the facility, will be denominated in Special Drawing Rights. In the event of a change in the method of valuation of the SDR 6/, a participant would have the right to immediate repayment of its claims on the IMF and to terminate any remaining commitments. C. Terms and Conditions of Drawings by Members. Eligibility. An IMF member will be eligible to use the facility if the IMF is satisfied: — that the member's balance of payments financing need is greater than the amount remaining available to it under the credit tranches (i.e., under the regular IMF resources); — that the member's balance of payments problem requires a relatively long period of adjustment and a period of repayment longer than the period of three ^to five years that applies to the credit tranches; and — on the basis of a detailed statement of the economic and financial policies the member will follow and the measures it will apply under a stand-by or extended arrangement, that the member's program will be adequate for the solution of its balance of payments problem and is compatible with the IMF's policies on the use of its resources in the upper credit tranches or under the Extended Fund Facility 7/ (i.e., the IMF's more conditional policies). Access and Relation to Regular Credit Tranches. Members will be able to apply for use of the facility at any time within two years after the date the facility enters into force. This period will be reviewed in conjunction 6/ The SDR is valued on the basis of market exchange rates of a weighted "basket" of sixteen currencies. The dollar weight is roughly one-third of the total. 2/ Under this facility, established in September 1974, the I makes longer-term balance of payments financing available to countries prepared to undertake and adhere to a comprehensive program of structural reform approved by the IMF and covering a period of several years. - 21 with an overall review of the facility 8/, and may be extended for up to one additional year. Actual drawings by a member will be phased over a period of two to three years from the date the member enters into agreement with the IMF, and will be dependent on satisfactory compliance by the member with the economic program agreed with the IMF.9/ The amount of IMF financing available to a member under the facility would be based on a judgment by the IMF, taking into account the size and nature of the member's payments problem, its access to alternative sources of financing, and the availability of resources in the IMF. Supplementary financing will be made available in parallel with a member's purchases of regular IMF resources under the credit tranches t or the Extended Fund Facility. Initially, supplementary financing roughly equivalent to a member's quota will be available in conjunction with credit tranche drawings, and up to 140 percent of quota will be available in conjunction with Extended Fund Facility drawings. Drawings on the facility will be apportioned to parallel drawings on the regular credit tranches or the Extended Fund Facility as described in Annex C. The amounts available from the facility in conjunction with drawings on the upper credit tranches or the Extended Fund Facility would be subject to review from time to time by the IMF, and could be modified in light of the availability of supplementary financing and regular resources. In special circumstances, the IMF could permit purchases of supplementary financing in amounts above that available in conjunction with parallel drawings on the regular resources. Repayment. Repayment of drawings ("repurchases") under the Supplementary Financing Facility will take place over a period somewhat longer than the three to five years that applies to the regular resources. Repayment will be required in equal semi-annual installments beginning not later than three and one-half years and completed not later seven years the not datelater of purchase. A mem8/ Thisthan review will takefrom place than two years after ber will be expected to make repayment, the facility enters into early force or when an however, increase as in quotas pursuant to the Seventh General Review of Quotas becomes effective. 9/ Drawings will not be permitted beyond five years after the facility enters into force, consistent with the maximum period of commitment by participants in the financing arrangements with the IMF. The effect of this .limitation is that if the period for applications is lengthened beyond two years, the maximum period of drawdown must be shortened from three years to fit with the five year maximum availability of financing. - 22 its balance of payments and reserve position improves, and a member can be required to make early repayment if the IMF determines that an improvement in the member's position so justifies. Early repayment of a drawing from the facility must be accompanied by early repayment of any parallel drawing from the IMF's regular resources. Charges. Charges to borrowers on drawings from the facility will be equal to the cost of financing provided to the facility, plus a small margin of slightly less than one-quarter of one percent per annum to cover IMF administrative costs. V. Proposed Legislation Prior Congressional approval for United States participation in the Supplementary Financing Facility is required by Section 5 of the Bretton Woods Agreements Act, as amended. The Council believes that legislation should be promptly enacted to authorize the Secretary of the Treasury to take the steps necessary for U.S. participation in the facility. The bill proposed for this purpose would authorize the Secretary of the Treasury to make resources available for U.S. participation in an amount not to exceed the dollar equivalent of 1,450 million Special Drawing Rights. The terms of United States participation in the facility will be governed by the decisions of the IMF Executive Directors establishing the facility and authorizing replenishment of IMF resources for the purposes of the facility (attached as Annexes A and B ) . These resources would be made available by the United States entering into an agreement with the IMF for replenishment of the IMF's resources in accordance with Executive Board Decision numbered 5509-(77/127) (Annex B ) . In addition, the United States could transfer (sell) to others its reserve claims on the IMF arising from participation in the facility and could purchase such claims on the IMF held by others, under the IMF Executive Board Decision. In no event would the total amount of currency made available by the Secretary of the Treasury, net of any amounts received by the U.S. with respect to its participation in the facility, exceed the equivalent of 1,450 million Special Drawing Rights. Transactions arising from U.S. participation in the facility, like other U.S. transactions with the IMF, are exchanges of monetary assets, akin to deposits in a bank. - 23 This accounting and budgetary treatment of U.S. transactions with the IMF was adopted as a result of the recommendations in 1967 of the President's Commission on Budget Concepts. The Congress has concurred since 1975 in the application in full of the exchange of asset concept to U.S. transactions with the IMF. The Congress has considered appropriations unnecessary both for increases in the United States quota in the IMF (Congress authorized consent to the last increase in the United States quota in P.L. 94-564, without an appropriation), and for payment by the U.S. of maintenance of value obligations to the IMF. Similarly, no appropriation is necessary for U.S. participation in the IMF Supplementary Financing Facility and none is authorized by the proposed bill. When the United States provides dollars under the terms of the facility, the U.S. in exchange will receive a monetary asset in the form of a liquid reserve claim, of equivalent SDR value, on the IMF. These claims will increase the automatic drawing rights of the United States on the IMF and will be transferable. Consequently, these claims will form part of the U.S. "reserve position" in the IMF and so will constitute part of U.S. international reserves. Since the assets and accounts of the Treasury are denominated in dollars, while those of the IMF (including U.S. claims on the IMF acquired through participation in the facility) are denominated in SDR's, there may, as a consequence of exchange rate changes, be a net change in the dollar value of U.S. monetary assets arising from our participation in the facility. The proposed bill therefore provides for the Exchange Stabilization Fund, established by Section 10 of the Gold Reserve Act of 1934, as amended, to account for any such adjustment in the dollar value of U.S. monetary assets. VI. Recommendation The National Advisory Council strongly recommends to the President and to the Congress that the United States participate in the Supplementary Financing Facility of the International Monetary Fund. The proposed terms and conditions of U.S. participation are set forth in the documents annexed to this Report. While the international monetary system has been functioning well, there is a real and - 24 present need for an increase in the resources of the IMF, as provided by the proposed Supplementary Financing Facility. The facility will provide a major strengthening to the international monetary system during this period of strain, greatly reducing any risk that the system may not be able to meet the demands placed upon it. The Council believes that establishment of this facility is of critical importance to the United States, and that participation by the United States is manifestly in our national interests. It is therefore strongly recommended that legislation be promptly enacted authorizing U.S. participation in the Supplementary Financing Facility Agreement. ANNEX A (Page 1 of 5) DOCUMENT OF THE INTERNATIONAL MONETARY FUND August 30. 1977 DECISION ESTABLISHING A SUPPLEMENTARY FINANCING FACILITY 1. (a) The Fund will be prepared to provide, in accordance with this Decision, supplementary financing in conjunction with use of the other resources of the Fund (hereinafter referred to as "ordinary resources") to members facing serious payments imbalances that are large in relation to their quotas. Supplementary financing for the purpose of this Decision means financing that the Fund will provide under a stand-by or extended arrangement with resources the Fund obtains by replenishment under Article VII, Section 2 and Decision No. 5509-(77/127), adopted August 29, 1977. (b) Resources available to members under other policies of the Fund will remain available in accordance with the terms of those policies. 2. A member contemplating use of the Fund's resources in the three credit tranches beyond the first credit tranche (hereinafter referred to as the "upper credit tranches") that would include supplementary financing shall consult the Managing Director before making a request under this Decision. A request by a member will be met under this Decision only if the Fund is satisfied: (i) that the member needs financing from the Fund that exceeds the amount available to it in the four credit tranches and its problem requires a relatively long period of adjustment and a maximum period for repurchase longer than the three to five years under the credit tranche policies; and (ii), on the basis of a detailed statement of the economic and financial policies the member will follow and the measures it will apply during the period of the stand-by or extended arrangement, that the member's program will be adequate for the solution of its problem and is compatible with the Fund's policies on the use of its resources in the upper credit tranches or under the Extended Fund Facility. 3. The Fund may approve a stand-by or extended arrangement that provides for supplementary financing at any time within two years from the effective date of this Decision. The Fund will review this period when conducting a review under 12 below. Any extension of the period shall not exceed one year. 4* (a) Supplementary financing will be available only if the program referred to in 2(ii) above is one in support of which the Fund approves a stand-by arrangement in the upper credit tranches or beyond or an extended arrangement. The stand-by or extended arrangement will be in accordance with the Fund's policies, including inter alia its ANNEX A (Page 2 of 5) policies on conditionally, phasing, and performance criteria, provided however that any right of augmentation exercised by a member in connection with a repurchase in respect of a purchase made with supplementary financing shall be subject to the same period of repurchase that applied to the purchase in respect of which the repurchase was made. (b) The period of a stand-by arrangement approved under this Decision will normally exceed one year, and may extend up to three years in appropriate cases. The period of an extended arrangement will be in accordance with Decision No. 4377-(74/114), adopted September 13, 1974. (c) A request for a purchase in accordance with extended arrangement approved under this Decision ordinary resources and supplementary financing in mined under 5 and 6 below when the arrangement is a stand-by or will be met from the proportions deterapproved. 5. The amounts available to a member under a stand-by arrangement approved under this Decision will be apportioned between ordinary resources and supplementary financing as follows: (a) While each credit tranche is 36.25 per cent of quota under the Fund's policies, supplementary financing will be equivalent to 34 per cent of quota in respect of each of the upper credit tranches. (b) After each credit tranche becomes 25 per cent of quota under the Fund's policies, supplementary financing will be equivalent to 12.5 per cent of quota in respect of the first credit tranche and 30 per cent of quota in respect of the upper credit tranches. (c) If a member has used all or part of its credit tranches before a stand-by arrangement is approved under this Decision, the arrangement approved under this Decision will provide that the amount of supplementary financing that would have been used under (a) and (b) above if all earlier purchases in the credit tranches had been made in conjunction with supplementary financing will be used, subject to 4(a) above, before purchases are made under (a) or (b) above. (d) If a purchase in a credit tranche is less than the amount of a full credit tranche, the supplementary financing to be used in conjunction with the purchase will be in the same proportion of the amount of supplementary financing referred to in (a) and (b) above as the purchase in the credit tranche bears to the amount available in that tranche when the arrangement was approved. (e) From time to time, the Fund will review the proportions of supplementary financing to be used in conjunction with the upper credit tranches, and may substitute modified proportions for those in effect pursuant to this Decision. The modified proportions shall apply ANNEX A (Page 3 of 5) only to stand-by arrangements approved after the date of the decision to modify the proportions, provided that a member that has an existing stand-by arrangement may request that, subject to 4(a) and 5(c) above, any increased proportions be made available to it under a new or revised arrangement. (f) In special circumstances, a stand-by arrangement may be approved under this Decision that provides for purchases beyond the credit tranches and supplementary financing available under (a), (b), and (c) above. The arrangement will provide that all purchases under it will be made with supplementary financing. The Fund, taking into account the criteria in 2 above, will prescribe in each arrangement the amount of supplementary financing that will be available. 6. (a) Supplementary financing will be available, in combination with ordinary resources, for purchases under an extended arrangement approved under this Decision in an amount not exceeding the equivalent of 140 per cent of quota. Purchases under an extended arrangement will be made with ordinary resources and with supplementary financing in the ratio of one to one. (b) Supplementary financing available to a member in accordance with the ratio in (a) above will be increased by an amount determined by the ratio of one to one in respect of that part of the upper credit tranches that is no longer available to the member as the result of earlier uses of the Fund's resources. Purchases will be made with supplementary financing, subject to 4(a) above, to the extent of the amount of this increase before purchases are made in accordance with (a) above. (c) The principles of 5 (e) and (f) shall apply to extended arrangements approved under this Decision. 7. (a) Repurchases in respect of outstanding purchases under this Decision will be made in accordance with the terms of the stand-by or extended arrangement under which the purchases were made. (b) The terms will include a provision that the member will be expected to repurchase in respect of purchases, whether made with ordinary resources or with supplementary financing, as its balance of payments and reserve position improves, and will make such repurchases if, after consultation with the member, the Fund represents that repurchase should be made because of an improvement. (c) The terms will also provide that with respect to purchases financed with ordinary resources repurchase will be made in accordance with the Fund's policies on the credit tranches or under the Extended Fund Facility; and that with respect to purchases made with supplementary ANNEX A (Page 4 of 5) financing repurchase will be made in equal semi-annual installments that begin not later than three and one half years and are completed not later than seven years after the purchase. (d) A repurchase attributed to a purchase made with supplementary financing in advance of this schedule of equal semi-annual installments must be accompanied by a repurchase in respect of the purchase financed with ordinary resources made at the same time if any part of the latter purchase is still outstanding. The amounts of the two repurchases will be in the same proportions in which ordinary resources and supplementary financing were used in the purchases, provided, however, that the repurchase in respect of the purchase financed with ordinary resources will not exceed the amount of the purchase still outstanding. (e) Repurchases will be made in the media prescribed by the Articles of Agreement and specified by the Fund at the time of the repurchase after consultation with members. The Fund will be guided by a policy of specifying for repurchase the media in which it will make repayments as a result of the repurchases, and will take this policy into account in preparing its currency budgets. 8. In order to carry out the purposes of this Decision, the Fund will be prepared to grant a waiver of the conditions of Article V, Section 3(a)(iii) (or Article V, Section 3(b)(iii) after the second amendment of the Articles) that is necessary to permit purchases under this Decision or to permit purchases under other policies that would raise the Fund's holdings of a member's currency above the limits referred to in that provision because of purchases outstanding under this Decision. 9- The Fund will apply its credit tranche policies as if the Fund's holdings of a member's currency did not include holdings resulting from purchases outstanding under this Decision that have been made with supplementary financing. After the effective date of the second amendment of the Articles of Agreement purchases under this Decision and holdings resulting from purchases outstanding under this Decision will be excluded under Article XXX(c). 10. The Fund will state which purchases by a member are made under this Decision and the amounts of ordinary resources and supplementary financing used in each purchase. 11. The Fund will levy charges in accordance with the decision of the Executive board on holdings of a member's currency resulting from purchases outstanding under this Decision to the extent that they are made with supplementary financing. ANNEX A (Page 5 of 5) 12. The Fund will review this Decision not later than two years after its effective date or when the Seventh General Review of Quotas becomes effective, if that occurs within the two years. One year after the effective date of this Decision the Fund will report on the use of the supplementary financing facility. The report will deal also with other important aspects of the facility. 13. The effective date of this Decision will be the date on which agreements are completed under Decision No. 5509-(77/127), adopted August 29, 1977, for a total amount not less than SDSL 7.75 billion, including at least six agreements each of which provides for an amount not less than SDR 500 million. Decision No. 5508-(77/127), adopted August 29, 1977 ANNEX B (Page 1 of 2) DOCUMENT OF THE INTERNATIONAL MONETARY FUND August 30, 1977 DECISION ON REPLENISHMENT IN CONNECTION WITH SUPPLEMENTARY FINANCING FACILITY 1. The International Monetary Fund deems it appropriate in accordance with Article VII of the Articles of Agreement to replenish its holdings of currencies to the extent that purchases are to be made with supplementary financing under Executive Board Decision No. 5508-(77/127), adopted August 29, 1977. 2. A number of members and institutions have expressed their intention to make resources available to the Fund for the purpose stated in paragraph 1 above. In order to enable the Fund to replenish its resources in accordance with these intentions, the draft letter set out in the Annex to this Decision is adopted as the basis for terms and conditions to be incorporated in the agreement with each contracting party under Article VII of the Articles of Agreement. The terms and conditions will be uniform to the maximum extent possible. Each letter setting forth the terms and conditions to be proposed will be submitted to the Executive Directors for their approval. 3. At any time within the period in which the Fund can replenish its resources in order to provide supplementary financing, it may enter into agreements for this purpose with the contracting parties referred to in paragraph 2 above and with any other member or with its national official financial institutions, provided that the member is in a sufficiently strong balance of payments and reserve position, or with any institution that performs functions of a central bank for more than one member. The Fund will consider a member to be in the position referred to above if it is in a net creditor position in the Fund and if its currency could be used in net sales in the Fund's currency budgets for the foreseeable future, but the Fund may take other circumstances into account in deciding whether to enter into an agreement with a member or with its national official financial institutions. 4. The amounts to be called by the Fund will be in broad proportion to the unutilized balance under each agreement to the total of unutilized balances under ail agreements, subject to such operational flexibility as the Fund may find necessary. 5. The Fund will use its best efforts to ensure that the currencies it receives in accordance with this Decision will be transferred on the same day to purchasers under Executive Board Decision No. 5508(77/127), adopted August 29, 1977, and that amounts corresponding to repurchases attributed in accordance with Paragraph 5(b)(i) of the ANNEX B (Page 2 of 2) draft letter set out in the Annex to this Decision will be repaid to contracting parties on the same day as the repurchase is completed, provided, however, that the Fund will not make such repayment, unless it decides otherwise, if the repurchase entitles the purchaser to augmented rights under its stand-by or extended arrangement. If such repayment has not been made, the Fund will repay promptly on the expiration of the arrangement an amount equivalent to the amount of the augmented rights that have not been exercised. Decision No. 5509-(77/127), adopted August 29, 1977 ANNEX to ANNEX B (Page 1 of 5) A N N E X [Your Excellency] [Dear Sir]: In accordance with Article VII of the Articles of Agreement of the International Monetary Fund, hereinafter referred to as "the Articles," and pursuant to Executive Board Decision No. 5509-(77/127), adopted August 29, 1977, and Executive Board Decision No. [authorizing agreement with individual contracting party, X] adopted , I have been authorized to propose on behalf of the International Monetary Fund, hereinafter referred to as "the Fund," that [X] agree to make available to the Fund at call during the period of five years from the effective date of Executive Board Decision No. 5508-(77/127), adopted August 29, 1977, [currency of X] [specified currency or currencies deemed by the Fund to be freely usable] in amounts that in total do not exceed the equivalent of million special drawing rights (SDR ) in exchange for readily repayable claims on the following terms and conditions: 1. All amounts under this agreement shall be expressed in terms of the special drawing right. For all purposes of this agreement, the value of a currency in terms of the special drawing right shall be calculated at the rate for the currency as determined by the Fund in accorance with the Fund's Rules and Regulations in effect when the calculation is made, subject to Paragraph 7(a). 2. (a) Calls under this agreement shall be made only (i) in respect of purchases to be made with supplementary financing under the facility established by Executive Board Decision No. 5508-(77/127), adopted August 29, 1977, which is hereinafter referred to as "the facility," or (ii) by agreement with [X], in order to enable the Fund to repay a claim under another agreement connected with the facility when repayment is made under that agreement because of a balance of payments need. (b) The Fund shall give [X] as much advance notice as possible of the Fund's intention to make calls. (c) [X] may represent that its balance of payments and reserve position does not justify calls or further calls under this agreement. The Fund, in considering the representation, shall give [X] the overwhelming benefit of any doubt. After consultation with [X], in which the Fund shall give [X] the overwhelming benefit of any doubt, the Fund may make calls or further calls at a later date when in the opinion of the Fund the balance of payments and reserve position of [X] improves sufficiently to justify calls or further calls. ANNEX to ANNEX B (Page 2 of 5) (d) When a call is made, [X] shall deposit to the Fund's account with [X] [the Fund's depository for the currency of [X]] [the Fund's depository for the currency of ] within three business days after the call an amount of [its currency] [the currency or currencies specified in the preamble] equivalent to the amount of the call at the rate for the currency as determined by the Fund in accordance with the Fund's Rules and Regulations. On request, [X] shall exchange its currency [if not deemed by the Fund to be freely usable] when sold by the Fund for a freely usable currency at the rates for the two currencies as determined by the Fund in accordance with its Rules and Regulations. 3. The Fund shall issue to [X] on its request an instrument evidencing the amount, expressed in special drawing rights, that the Fund is committed to repay under this agreement. Upon repayment of the amount of any instrument and all accrued interest, the instrument shall be cancelled. If less than the amount of any such instrument is repaid, the instrument shall be cancelled and a new instrument for the remainder of the amount shall be substituted with the same maturity dates as in the old instrument. If all or part of the amount of a claim is transferred under 8 below, a new instrument or instruments shall be substituted on request for tne old instrument with the same maturity dates as in that instrument. 4. (a) The Fund shall pay interest on the amount that the Fund is committed to repay under this agreement in accordance with the following provisions: (i) The initial rate of interest on all outstanding claims shall be seven per cent per annum. This rate shall apply until June 30, 1978. (ii) Six months after June 30, 1978, and at intervals of six months thereafter, the Fund shall calculate, in the manner set forth in (iii) below, the rate of interest to be paid on outstanding claims for the period of six months prior to the calculation. (iii) The interest rate on outstanding claims for a period of six months shall be the average of the daily yields during that period on actively traded U.S. government securities, determined on the basis of a constant maturity of five years, as published each week by the Federal Reserve Board, Washington, D.C, in statistical release H-15 or any substitute publication, or if such publication shall cease as certified by the U.S. Treasury, provided that this average shall be rounded up to the nearest one-eighth of one per cent. ANNEX to ANNEX B (Page 3 of 5) (iv) Interest shall be paid promptly after June 30 and December 31 of each year on the average daily balances outstanding during the preceding six months of the amounts the Fund is committed to repay under this agreement. (b) No other fee, charge, or commission shall be imposed by [X] with respect to a deposit or an exchange pursuant to a call under under Paragraph 2(d) or with respect to any other aspect of a call. 5. (a) Subject to the other provisions of this Paragraph 5, the Fund shall repay [X] an amount equivalent to any deposit pursuant to a call under Paragraph 2 in [eight] equal serai-annual installments to commence three and one half years, and to be completed not later than [seven] years, after the date of the deposit. (b) The Fund may repay [X] in advance of the repayments required by Paragraph 5(a) to the extent that: (i) a repurchase is attributed, in accordance with the Fund's practice, to a purchase under the facility for which the Fund has received resources from [X] under this agreement, or (ii) [X] agrees to receive repayment. (c) If at any time [X] represents that there is a balance of payments need for repayment of part or all of the amount the Fund is committed to repay under this agreement and requests such repayment, the Fund, in considering the representation and deciding wnether to make repayment, shall give [X] the overwhelming benefit of any doubt. (d) Repayments under Paragraph 5(b) and (c) shall discharge the installments prescribed by Paragraph 5(a) in the order in which they become due. 6. The Fund shall consult [X] in order to agree with it on the means in which payments of interest and repayment shall be made, but, if agreement is not reached, the Fund shall [have the option to] make payment or repayment in [the currency of [X], or] the currency received by the Fund from [X], [or] [special drawing rights] [or any currency deemed by the Fund to be freely usable or any currency that can be exchanged at the time of the payment or repayment for a freely usable currency at a rate of exchange that would yield value equal in terms of the special drawing right to payment or repayment in a freely usable currency,][or any combination of these means of payment or repayment] . 7. (a) If the Fund decides to make a change in the method of valuation of the special drawing right, [X] shall nave the option to require immediate repayment of all outstanding claims on the basis of the. method of valuation in effect before the change. ANNEX to ANNEX B (Page 4 of 5) ANNEX (b) If [X] exercises its option under Paragraph 7(a), it shall have the further option to cancel this agreement. 8. (a) For value agreed between transferor and transferee, transfers may be made at any time of all or part of a claim to repayment under this agreement in accordance with the following provisions: (i) Transfers may be made to any contracting party, any member, a member's national official financial institutions (hereinafter referred to as a member's "institution"), or any institution that performs functions of a central bank for more than one member. (ii) Transfers may be made to transferees other than those referred to in (i) above with the prior consent of the Fund and on such terms and conditions as it may prescribe. (b) The transferor of a claim shall inform the Fund promptly of the claim that is being transferred, the transferee, the amount of the transfer, the agreed value for the transfer, and the value date. The transfer will be registered by the Fund if it is in accordance with this agreement. The transfer shall be effective for the purposes of this agreement as of the value date agreed between the transferor and transferee. (c) If all or part of a claim is transferred during a period of six months as described in Paragraph 4, the Fund shall pay interest on the amount of the claim transferred for the whole of that period to the transferee. (d) Subject to (c) and to any terms and conditions prescribed under (a)(ii), the claim of a transferee shall be the same in all respects as the claim of the transferor, except that Paragraph 5(c) shall apply only if, at the time of the transfer, the transferee is a member, or the institution of a member, that is in a net creditor position in the Fund and in the opinion of the Fund the member's currency could be used in net sales in the Fund's currency budgets for the foreseeable future. (e) If requested, the Fund shall assist in arranging transfers. 9. [If [X] withdraws from the Fund, this agreement shall terminate and the amount that the Fund is committed to repay under this agreement shall be repaid in accordance with the terms of this agreement, provided that repayment shall be made, at the option of the Fund, in the currency of [X] [or in a currency deemed by the Fund to be freely usable], or in such other currency as may be agreed with [X].] [If the ANNEX to ANNEX (Page 5 of 5) member country of which [X] is an institution withdraws from the Fund, [X's] agreement shall terminate, and the amount that the Fund is committed to repay under this agreement shall be repaid in accordance with the terms of this agreement, provided that repayment shall be made, at the option of the Fund, in the currency of that member [or in a currency deemed by the Fund to be freely usable], or in such other currency as may be agreed with [X].] 10. In the event of liquidation of the Fund the amounts the Fund is committed to repay to [X] shall be immediately due and payable as liabilities of the Fund under the provisions of the Articles on liquidation of the Fund. For the purposes of these provisions the currency in which the liability is payable shall be, at the option of the Fund, [the currency received by the Fund under this agreement] [the currency of [X] if it differs from that currency], [a currency deemed by the Fund to be freely usable,] or any other currency agreed with [X]. 11. Any question of interpretation that arises under this agreement that does not fall within the purview of the provisions of the Articles on interpretation shall be settled to the mutual satisfaction of [X] and the Fund. If the foregoing proposal is acceptable to [X], this communication and your duly authenticated reply shall constitute an agreement between [X] and the Fund, which shall enter into force on the date on which the Fund receives your reply. Very truly yours, H. Johannes Witteveen Managing Director ANNEX C (Page 1 of 3) Relationship Between Supplementary Financing and Regular IMF Resources Tin - - - - - - - - - - - Drawings on the Supplementary Financing Facility will be available in conjunction with drawings of regular IMF resources under the credit tranches and the Extended Fund Facility. Amounts initially available would be as described below. Drawings Under the Credit Tranches. As part of the Jamaica agreement on monetary reform in January 1976, countries' potential access to the credit tranches was temporarily expanded by 45 percent, so that each credit tranche is temporarily equal to 36.25 percent of quota. This expansion will lapse when the amendments to the IMF Articles of Agreement now in process of ratification take effect, and each credit tranche will then revert to 25 percent of quota. As long as this temporary expansion is in effect, drawings of supplementary financing will be available only in connection with drawings on the upper (i.e., more conditional) credit tranches, and in an amount equivalent to 34 percent of quota in conjunction with drawings on each of the second, third, and fourth credit tranches. After the temporary expansion in credit tranches lapses, drawings of supplementary financing will be permitted in conjunction with drawings on the first credit tranche, in an amount not to exceed 12 1/2 percent of quota, and drawings of the equivalent of 30 percent of quota will be permitted in conjunction with drawings of each of the three upper credit tranches. No drawings of supplementary financing will be permitted unless a country has agreed with the IMF on a program extending into the upper credit tranches. If a member has already used part or all of its credit tranches before a stand-by arrangement is approved under the Supplementary Financing Facility, in addition to the amount of supplementary financing made available in conjunction with drawings on the remaining credit tranches the member would be entitled to draw the amount of supplementary financing available in conjunction with the earlier credit tranche drawings. These initial relationships between drawings of supplementary financing and credit tranche drawings are summarized in the table below. The amounts available in conjunction with drawings on the upper credit tranches will be subject to review by the Fund from time to time, ANNEX C (Page 2 of 3) and may be modified in light of the relative availability of supplementary financing and regular IMF resources. In special circumstances, the Fund may decide to permit drawings of supplementary financing in amounts beyond the limits implicit in the ratios mentioned above. Drawings on Parallel Drawings Available From Credit Tranches Supplementary Financing Facility Before Amendment of IMF Articles After Amendment of IMF Articles Percent of Quota Percent of Quota First Credit Tranche - - 12.5 Second Credit Tranche 34.0 30.0 Third Credit Tranche 34.0 30.0 Fourth Credit Tranche 34.0 30.0 Total 102.0 102.5 Drawings Under the Extended Fund Facility. Drawings under the Extended Fund Facility can total the equivalent of 140 percent of quota, subject to a limit of 176.25 percent of quota on combined drawings from the Extended Fund Facility and the credit tranches (this combined limit will be reduced to 165 percent of quota when the temporary expansion of credit tranches lapses). Drawings of supplementary financing will be permitted in conjunction with drawings on the Extended Fund Facility on a one-to-one basis. If a member has already used part of its access to resources under the Extended Fund Facility, in addition to the supplementary financing made available on a oneto-one basis the member will be entitled to draw the amount of supplementary financing available in conjunction with the earlier drawings under the Extended Fund Facility. ANNEX C (Page 3 of 3) As with drawings under the credit tranches, the Fund m a v decide in special circumstances to permit drawings of S p l e m e n L r y financing in amounts beyond the limits implicit in the ratios mentioned above. Department of theTREASURY WASHINGTON, D.C. 202: LEPHONE 566-2041 ^ /789 CONTACT: Alvin Hattal 566-8381 September 21, 1977 FOR IMMEDIATE RELEASE SPECIAL CERTIFICATES FOR IMPORTS FROM FRANCE, THE NETHERLANDS, BELGIUM AND LUXEMBOURG OF FERROCHROMIUM AND CHROMIUM-BEARING STEEL MILL PRODUCTS The U.S. Department of the Treasury announced today that special certificates issued under the Certification Agreement between the United States and the Commission of the European Communities are available as of September 10, 1977, for imports of ferrochromium and chromium-bearing steel mill products from the following Member States: France, the Netherlands, Belgium and Luxembourg. Materials from these countries shipped after the publication date of this notice may be imported only if a special certificate is presented to Customs at the time of entry. Imports of certifiable materials from France, the Netherlands, Belgium and Luxembourg shipped before the publication date of this notice may continue to be made under the interim certificates. However, the entry will not be liquidated until the importer presents a special certificate. Such certificate must be obtained from the producer and filed by the importer on or before October 10, 1977, to complete liquidation. Importers are reminded that failure to present the required special certificate by October 10, 1977, will result in a demand for redelivery of the goods. * B-456 * * FOR RELEASE ON DELIVERY EXPECTED AT 3:00 P.M. SEPTEMBER 22, 1977 STATEMENT OF THE HONORABLE ROGER C. ALTMAN ASSISTANT SECRETARY OF TREASURY (DOMESTIC FINANCE) BEFORE THE SUBCOMMITTEE ON INDIAN AFFAIRS AND PUBLIC LANDS AND THE SUBCOMMITTEE ON ENERGY AND POWER Mr. Chairmen and Members of the Committees: I am pleased to have this opportunity to assist you in your consideration of the President's Decision on an Alaska Natural Gas Transportation System, and, in particular, the financing aspects of the Decision. The Treasury Department has participated in the Alaskan gas decision process from its initial stages. Among other activities, the Department led an interagency task force, which on July 1, 1977, delivered a public Report to the President on financing a transportation system. The President has designated the Alcan system to transport Alaskan gas across Canada for delivery to consumers in the lower forty-eight states. The President's Report discussing the reasons for that decision was forwarded to Congress. It included a detailed discussion of the financing issues. Let me begin, Mr. Chairmen, by summarizing the discussion of financing contained in that Report. The President observes that "the Alcan project will be one of the largest — if not the largest — privately financed international business ventures of all time." Obviously, the amount of financing required for such an undertaking is enormous and raising it is a complex task. Indeed, certain financing issues still remain unresolved. B-457 - 2My central conclusion, however, is that the Alcan project can be privately financed, assuming equitable participation of those parties who will benefit directly from its construction. Federal Regulation The Treasury Department has consistently argued that an Alaska Natural Gas Transportation System could be privately financed given a proper Federal regulatory climate. The President's Decision, with the accompanying Terms and Conditions, would eliminate much of the potential uncertainty of Federal regulation and ensure that such regulation will be conducive to both an efficient project and a private financing. To be specific, the President has recommended a modified form of incremental pricing for Alaskan Gas to assure marketability to consumers. He has recommended the creation of an Alaska Natural Gas Office directed by an appointed Federal Inspector to coordinate the government's involvement in construction of the project and to ensure the project proceeds efficiently. He has prepared an Agreement with the government of Canada which largely eliminates binational regulatory problems. The President has recommended establishing a rate of return on equity which discourages cost overruns. He has discouraged the use of new and controversial tariff arrangements that would be subject to time-consuming litigation with uncertain results. Finally, the President has recommended that the field price to the producers of Alaskan gas be established in accordance with his National Energy Plan, thus eliminating a lengthy price proceeding before the Federal Energy Regulatory Commission and subsequent litigation. By adopting these recommendations, the Carter Administration expects to resolve much of the uncertainty which earlier characterized the Federal regulatory environment for this project. This should eliminate what had been perceived to be a major risk of the project. In effect, the President's recommendations go far to encourage an economically viable Alaskan gas project, which is the key to a private financing. One of the issues mentioned above, the form of the tariff paid by gas consumers, is particularly central to financing the project privately. The project applicants originally requested a novel form of tariff referred to as the "all events, full cost of service" tariff. This tariff would have reimbursed the project company for its costs, including the return on and of equity, under any and all possible circumstances, It was private argued such lending a tariff for this was including project. necessary non-completion. to induce sufficient - 3Alcan's financial advisors have recently concluded that such a tariff will not be necessary. Alcan is prepared, instead, to finance its project with a more conventional tariff commencing only after the project has been completed. Such a tariff would assure that the project's debt would be serviced upon completion and should satiLfy lenders that principal and interest payments on the project's debt will be met. Essentially, our anticipation of an economically viable project coupled with this assurance of debt service leads me to believe that the Alcan project can be financed in the private sector. Alcan Financing Plan Alcan's financing plan, which is included in the President's Report, estimates the total capital requirements of the project at $9.7 billion in escalated dollars, most of which is to be raised over a three year period beginning in 19 80. Of this total, 22 percent will represent equity investments and 78 percent will be in the form of debt capital. Alcan expects approximately 82 percent of this $9.7 billion total ($7.9 billion) to be raised in the U.S., and the remaining 18 percent ($1.8 billion) to be raised in Canada. The U.S. and Canada private capital markets combined represent the largest and most resilient capital markets in the world and have the inherent capacity to supply these amounts. As an example, Alcan plans to raise approximately $5.5 billion during three years in the U.S. corporate longterm debt market. Overall long-term borrowing by nonfinancial corporations in that market is projected to reach $300 billion this year. In 19 82, the final year of Alcan's borrowing, it is projected to increase to $466 billion. Alcan's borrowings would represent only 1.2 percent of this total. The Alcan financing plan should be viewed as tentative because several important issues must be resolved before funds will be committed to it. These currently unresolved issues include: 1. the final determination of the field price of Alaskan gas; 2. the completion of sales contracts for the gas; 3. the final determination of the rate of return that will be allowed on the equity investment in the project. - 4 A small group of the largest U.S. insurance companies will provide the bulk of the U.S. debt capital required. Accordingly, their perceptions of the risks will be critical. At this initial stage, we cannot be sure how these key lenders will assess the risks or even which risks they will perceive as dominate, e.g., the risks of marketability and non-completion. It will take more than a year before we will know with certainty whether the financing can be arranged. Participants in a Private Financing One important aspect of our conclusion on the private financing is that the parties who benefit from the project can and should participate in its financing. The major and direct beneficiaries of this project are natural gas transmission corporations, the producers of North Slope natural gas, and the State of Alaska. Their participation will increase the overall private financeability by reducing the amounts which must be raised on the strength of the project's credit alone. I will discuss each of these parties briefly. Natural Gas Transmission and Distribution Corporations Natural gas transmission and distribution corporations comprise the Alcan consortium and they must provide the necessary equity for the project as well as the equity portion of any cost overrun financing. The strength of this sponsoring consortium, therefore, is a key element of the financing. Our analysis shows that the firms currently involved in the Alcan project have the capacity to provide these required equity investments. Furthermore, we expect that the consortium will continue to expand and eventually will include a large portion of the entire natural gas transportation industry. In addition, the Alcan project has the advantage of the substantial equity investment of Canadian transmission corporations, which will total at least $800 million. Producers of Alaskan Natural Gas The owners and producers of Alaskan natural gas are major U.S. energy companies. This group is primarily composed of Exxon, Atlantic Richfield, and the Standard Oil Company of Ohio. These companies will benefit substantially from the sale of their natural gas reserves, and obviously require a transportation system to sell them. These three companies had total assets of $51 billion in 1976 and net income in excess of $3 billion. They - 5 clearly have the capacity to participate in the financing of a transportation system, especially as full returns from their North Slope oil and related pipeline investments are realized. These companies have demonstrated varying degrees of interest and have not yet agreed to participate in the project. It seems in their interest, however, and they should be encouraged to do so. We think that financial participation by the producing companies can be structured so as to avoid anticompetitive practices, a continuing concern of the Department of Justice. This issue is specifically addressed in the Report which has been forwarded to you with President Carter's Decision. The State of Alaska The State of Alaska will realize substantial revenue in the form of royalty payments and taxes from the sale of North Slope gas. The State will also benefit from use of the pipeline for natural gas distribution and resulting commercial development within the State. The State of Alaska can use a portion of its revenues from the sale of Alaskan oil to assist in the financing of this project. Originally, the State offered to assist in the financing of the El Paso project by guaranteeing $900 million of project debt. Similar State of Alaska support for the Alcan project is considered advantageous and is encouraged. Federal Government Financial Assistance Possible Federal government support to the project, viz., loan guarantees or insurance, has been evaluated intensively by the Treasury Department because certain parties earlier claimed that it was necessary. These parties asserted that Federal financing support was necessary to finance the project in the uncertain regulatory environment which then existed. They argued that only such assistance would assure lenders of repayment in the event the project was not economically viable and only this would assure their participation. In particular, the Arctic Gas consortium, which withdrew earlier, claimed that financing assistance by both the Canadian and U.S. governments was required for the financing of their project. In addition, the El Paso proposal incorporated approximately $1.5 billion in loan guarantees under the existing Maritime Administration Shipbuilding program. On the other hand, no Federal financial assistance has been requested for the Alcan project. Alcan's investment banking advisors do not believe that Federal financing assistance is necessary for the Alcan project. The Administration shares this conclusion. In - 6addition, the Administration believes that Federal assistance to this project would be undesirable for several important reasons. 1) Federal financial support substitutes the government for private lenders in the critical risk assessment function normally performed by the private lenders. 2) Financial assistance also reduces incentive for efficient management of the project. 3) Serious questions of equity would result from the transfer of project risks to taxpayers, many of whom are not gas consumers or will not receive additional gas supplies as a result of the Alaskan project. 4) A subsidy in the form of lower interest rates yields an artificially low price for the gas. 5) Other large energy projects might not be undertaken without similar Federal assistance. The Government of Canada also opposes Canadian governmental financial assistance to a binational project. Transfer of Financial Risks to Consumers The issue of a new mechanism by which gas consumers bear some or all of the financial risks of this project also has received careful study by the Executive Branch. The most frequently discussed mechanism for consumer support would entail a consumer financial guarantee by means of an all events tariff with non-completion arrangements. The non-completion features would provide for a consumer guarantee of at least debt service in the event of non-completion. The Alcan sponsors and financial advisors have stated that the Alcan project can be financed without such a consumer guarantee prior to completion and without Federal financial assistance. The Administration has concluded that the bearing of financial risks by consumers prior to completion is unnecessary for this project. Furthermore, the Administration believes that consumer guarantees are undesirable for many of the same reasons that Federal financing assistance is undesirable. Conclusion The Alcan project is the largest construction project ever contemplated by private enterprise. The requisite financing is uniquely large, complex and most difficult. - 5clearly have the capacity to participate in the financing of a transportation system, especially as full returns from their North Slope oil and related pipeline investments are realized. These companies have demonstrated varying degrees of interest and have not yet agreed to participate in the project. It seems in their interest, however, and they should be encouraged to do so. We think that financial participation by the producing companies can be structured so as to avoid anticompetitive practices, a continuing concern of the Department of Justice. This issue is specifically addressed in the Report which has been forwarded to you with President Carter's Decision. The State of Alaska The State of Alaska will realize substantial revenue in the form of royalty payments and taxes from the sale of North Slope gas. The State will also benefit from use of the pipeline for natural gas distribution and resulting commercial development within the State. The State of Alaska can use a portion of its revenues from the sale of Alaskan oil to assist in the financing of this project. Originally, the State offered to assist in the financing of the El Paso project by guaranteeing $900 million of project debt. Similar State of Alaska support for the Alcan project is considered advantageous and is encouraged. Federal Government Financial Assistance Possible Federal government support to the project, viz., loan guarantees or insurance, has been evaluated intensively by the Treasury Department because certain parties earlier claimed that it was necessary. These parties asserted that Federal financing support was necessary to finance the project in the uncertain regulatory environment which then existed. They argued that only such assistance would assure lenders of repayment in the event the project was not economically viable and only this would assure their participation. In particular, the Arctic Gas consortium, which withdrew earlier, claimed that financing assistance by both the Canadian and U.S. governments was required for the financing of their project. In addition, the El Paso proposal incorporated approximately $1.5 billion in loan guarantees under the existing Maritime Administration Shipbuilding program. On the other hand, no Federal financial assistance has been requested for the Alcan project. Alcan's investment banking advisors do not believe that Federal financing assistance is necessary for the Alcan project. The Administration shares this conclusion. In - 6 addition, the Administration believes that Federal assistance to this project would be undesirable for several important reasons. 1) Federal financial support substitutes the government for private lenders in the critical risk assessment function normally performed by the private lenders. 2) Financial assistance also reduces incentive for efficient management of the project. 3) Serious questions of equity would result from the transfer of project risks to taxpayers, many of whom are not gas consumers or will not receive additional gas supplies as a result of the Alaskan project. 4) A subsidy in the form of lower interest rates yields an artificially low price for the gas. 5) Other large energy projects might not be undertaken without similar Federal assistance. The Government of Canada also opposes Canadian governmental financial assistance to a binational project. Transfer of Financial Risks to Consumers The issue of a new mechanism by which gas consumers bear some or all of the financial risks of this project also has received careful study by the Executive Branch. The most frequently discussed mechanism for consumer support would entail a consumer financial guarantee by means of an all events tariff with non-completion arrangements. The non-completion features would provide for a consumer guarantee of at least debt service in the event of non-completion. The Alcan sponsors and financial advisors have stated that the Alcan project can be financed without such a consumer guarantee prior to completion and without Federal financial assistance. The Administration has concluded that the bearing of financial risks by consumers prior to completion is unnecessary for this project. Furthermore, the Administration believes that consumer guarantees are undesirable for many of the same reasons that Federal financing assistance is undesirable. Conclusion The Alcan project is the largest construction project ever contemplated by private enterprise. The requisite financing is uniquely large, complex and most difficult. JkpartmentoftheTREASURT |{ TELEPHONE 566-2041 WASHINGTON, OX. 20220 FOR IMMEDIATE RELEASE September 26t 1977 RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS Tenders for $2,200 million of 13-week Treasury bills and for $3,300 million of 26-week Treasury bills, both series to be issued on September 29, 1977, were accepted at the Federal Reserve Banks and Treasury today. The details are as follows: RANGE OF ACCEPTED COMPETITIVE BIDS: 13-week bills maturing December 29, 1977 Price High Low Average Discount Rate 98.496 98.486 98.488 5.950% 5.989% 5.982% 26-week bills maturing March 30, 1978 Investment Rate 1/ Price 6.12% 6.17% 6.16% 96.890 6.152% 6.195% 96.868 96.873 6.185% Discount Rate Investment Rate 1/ 6.44% 6.48% 6.47% Tenders at the low price for the 13-week bills were allotted 26%. Tenders at the low price for the 26-week bills were allotted 70%. TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS AND TREASURY: Location Received Accepted Received Accepted $ 23,515,000 4,712,725,000 9,665,000 24,745,000 15,075,000 66,060,000 590,705,000 40,560,000 5,295,000 20,100,000 3,330,000 310,775,000 $ 16,515,000 2,898,725,000 9,665,000 9,745,000 '9,575,000 44,060,000 158,705,000 18,415,000 5,295,000 20,100,000 3,330,000 105,775,000 200,000 700.000 Boston $ 18,495,000 New York 3,674,025,000 Philadelphia 18,140,000 Cleveland 31,810,000 Richmond 16,660,000 Atlanta 44,830,000 Chicago 494,665,000 St. Louis 61,245,000 Minneapolis 7,325,000 Kansas City 35,450,000 Dallas 12,125,000 San Francisco 230,520,000 $ 16,495,000 1,906,040,000 17,490,000 30,515,000 16,660,000 28,125,000 54,425,000 36,555,000 7,325,000 26,510,000 12,125,000 48,080,000 Treasury 30,000 30,000 $4,645,320,000 $2,200,375,000 a}. $5,822,750,000 TOTALS a/Includes $330,495,000 noncompetitive tenders from the public. b/Includes $162,000,000 noncompetitive tenders from the public. UEquivalent coupon-issue yield. i-458 $3,300,105,000 b/ Department of thefREASURY WASHINGTON, D.C. 20220 TELEPHONE 566-2041 EMBARGOED FOR RELEASE UNTIL 11 A.M. E.D.T. OR UPON DELIVERY Remarks of W. Michael Blumenthal Secretary of the Treasury of the United States to the Annual Meeting of the International Monetary Fund and World Bank Sheraton-Park Hotel Washington, D.C. September 27, 1977 We meet at a time future. The legacy of deep recession of 1974 system of international of doubt about the world's economic the oil shocks of 1974, inflation, and the and 1975 poses questions of whether our economic cooperation can endure. The main points I want to make are these: — t h e world economy has begun to recover from staggerinq blows^ --we have in place a strategy for sustained recovery, and that strategy is workings —and we will succeed—though success takes time—if we continue to act together and do not lose our nerve. The effective functioning of the institutions that bring us together t o d a y — t h e Bank and the F u n d — i s a critical part of that cooperative effort. The U.S. Economy , * wil1 fi*st report to you on the condition of the United states economy. Q. I am pleased that we are continuing to make solid progress. we nave recorded economic growth of 7.5 percent for the first quarter and 6.2 percent for the second. over ?ei/oPeCt t0 meet °ur tar9et f°r real growth during 1977 of s-i/z percent and we expect continued strong growth in 1978. B-459 -2We have reduced our unemployment rate by about one percentage point and so far this year have created more than 2 million new jobs. Inflationary pressures are diminishing, despite the adverse effects of an unusually harsh winter. Consumer prices rose at the rate of more than 8 percent in the first half of the year. We expect the rate to decline to less than 5 percent in the second half. We also have problems—serious ones. Unemployment is much too high. Creating new jobs to bring it down is a top priority. Despite our progress, inflation also remains too high. We know well how difficult it is to break the inflationary cycle. Business investment, though increasing, is weaker than it should be. Energy consumption and oil imports are excessive. Our current account deficit is likely to be in the range of $16 to $20 billion. In part, the shift in our current account position since 1975 has been caused by our heavy consumption of oil. But it is also a consequence of the comparatively high rate of economic growth in the United States and more restrained expansion in many other countries. We are determined to correct our problems. The expansionary effects of new programs for public works and public service jobs will show up strongly in coming months. We have undertaken a series of measures to keep inflation under control and to bring it down. President Carter will soon present tax proposals that will include important new incentives to stimulate business and encourage higher productivity. We are urging Congress to complete action on legislation which will encourage energy conservation and increase domestic energy production. That program will be an important first step. But more will have to be done to limit demand and, especially, to develop new domestic energy supplies. -3We look to countries with payments surpluses to expand their economies to the maximum extent consistent with the need to combat inflation. Such moves are essential to a smoothly functioning international economic system. We are encouraged by expansionary measures decided on or implemented in recent weeks. The Strategy of Cooperation The international economic system is under stress because of the need to adjust to wide variations in national economic performance, high energy costs, and large imbalances in international payments positions. A broad strategy to facilitate these adjustments has been agreed in international discussions. The guiding principle of that strategy is cooperation. It calls for symmetrical action by both surplus and deficit countries to eliminate payments imbalances. It calls on countries in strong payments positions to achieve adequate demand consistent with the control of inflation. It calls on countries in payments difficulties to deploy resources more effectively so as to bring current accounts into line with sustainable financing. One point is clear. If this strategy is to succeed, the oil-exporting countries will have to show restraint in their pricing. This is an essential element of international cooperation and is in the interest of the oil-exporting and oil-importing nations alike. We also need to resist protectionist pressures. Most importantly, we must work for the successful completion of the Tokyo round of the GATT negotiations. The IMF, with its key role at the center of the international economic system, must be in a position to help countries carry out the agreed strategy. This requires first of all that the Fund have adequate resources. The United States has formally consented to the increase in its quota agreed to in the Sixth Quota Review. We urge others to act promptly so that the increased quotas can be put into effect without further delay. -4We welcome the new Supplementary Financing Facility to provide an additional $10 billion for nations whose financing needs are especially large. We intend to press for prompt legislative authorization of U.S. participation. A permanent expansion of IMF resources for the longer term is also needed. We will work for agreement on an adequate increase in Fund quotas during the Seventh Quota Review. The second requirement is that the fund use these resources to foster necessary adjustment. As the Supplementary Financing Facility recognizes, serious imbalances cannot be financed indefinitely. Current account positions must be brought into line with sustainable capital flows. The facility retains the central principle that IMF financing should support programs that will correct the payments problems of borrowers, not postpone their resolution. In today's circumstances, that process will in some cases require a longer period of time. Consequently, the United States supports the provisions in the new Facility that introduce flexibility in determining the pace of adjustment. In large measure, this comes down to a question of balance and judgment in the Fund's operations. The Fund cannot avoid its responsibilities to press for needed changes*; nor, on the other hand, can it be rigid and inflexible in requiring adjustments. The course it must steer is often narrow and difficult. I believe that, on the whole, the Fund has carried out this responsibility with skill and sensitivity. I am confident it will continue to condition the use of its resources in a reasonable and equitable manner, taking into account the needs and circumstances of individual countries as well as the particular conditions in the world economy today. It is not a matter of whether the Fund attaches conditions, but what kind. In individual cases, there will be a need to adjust the emphasis between deflationary measures and policies for the redirection of resources to productive investment and improvement of external accounts. Third, we must bear in mind the influence of the actions of the Fund on the flow of private capital. It is inevitable and right that the private capital market will continue to play the dominant role in financing imbalances. -5At the same time, banks, in their lending policies, are increasingly looking to the existence of stand-by arrangements with the Fund. These arrangements, with their stipulations about domestic economic and external adjustment policies, can considerably strengthen nations' creditworthiness. A greater availabilty of information may also prove useful and feasible. The Executive Board is currently examining the question of how the system might be strengthened by greater private access to factual information produced by the Fund, on a basis that respects the confidential relationships between the Fund and its members. I believe that in general it is important to explore possible methods to make sure that private and public flows of capital are compatible with each other. This, too, is a way of strengthening the international financial system. The responsibility of the Fund goes beyond its operations in support of countries in payments difficulty. The amended Articles give the Fund an important, explicit, role in overseeing the operations of the system as a whole and in exercising surveillance over the exchange rate policies of its member governments. The principles to guide the Fund in carrying out these responsibilities reflect widely held views, and a consensus has also been reached on the procedures to be used. It is underlying economic and financial factors that should determine exchange rates. That is recognized. I believe we all acknowledge that in carrying out these new provisions the Fund will have to approach its task cautiously. These are uncharted waters. History is by no means an adequate guide to the future. Only by experience will it be possible to test the principles we have established and to modify them where it is proven necessary. It is evident that the Fund's effectiveness in this area will depend on the genuine support of its members for the principles it develops. I believe the Fund is in an excellent position to undertake this new role. It is now time for the member countries of the IMF to act by approving the amended Articles and bringing these provisions into effect. -6Problems of Development Establishing conditions for sustained growth and strengthening the financial adjustment processes are the most pressing intermediate-term issues facing the world economy. The critical long-term problem, however, is to assure economic growth with equity in the developing world. President Carter spoke yesterday of the strong commitment of the United States to help in the effort to meet the basic human needs of the world's poor. President McNamara gave us a picture of the magnitude of the task. Action is required by both industrial and developing countries. The most important contribution the industrial countries can make is to achieve adequate, sustained economic growth in the context of an open international economic system. In the past year the oil-importing developing countries have improved their trade position by $8 billion as a result of the export opportunities arising from the growth in the U.S. economy. An acceleration in the economic expansion of other industrial countries would provide comparable benefits. For such benefits to be realized in the future markets must be open and protectionism resisted. Healthy economic conditions in the industrial world will also facilitate the flow of capital to meet productive needs in the developing countries. In this connection we must review our efforts to assure adequate access to private capital markets. In addition, specific actions must be taken to facilitate the growth of developing countries. A substantial increase in the transfer of official capital to developing countries is necessary. The United States will do its share. The Congress has authorized over $5 billion in contributions to the international development banks and has supported a sizeable increase in bilateral assistance. We are prepared to begin formal negotiations in the Board of Directors of the World Bank leading to a general increase in its capital. We must work together to strengthen arrangements for stabilizing earnings from raw material exports. -7We must also approach the management of international indebtedness, not as a crisis, but as a short- and medium- term balance of payments problem. We can draw encouragement from the fact that the aggregate current account deficit of the oil-importing developing countries declined in 1976 as the world economy began to recover. Where individual countries face severe balance of payments problems, the new Supplementary Financing Facility will help to facilitate adjustment. Actions by the industrial countries are only part of the story. The real payoff lies in the policies adopted by the developing countries. This is not surprising. Four-fifths of the investment capital of developing countries is mobilized from domestic savings. Domestic policies will determine not only how much savings can be mobilized in the future but also how efficiently resources are used and how effectively the developing countries can take advantage of an expanding international economic environment. The development partnership requires not only healthy global economic conditions that will enable the developing economies to grow, but also efforts by the developing countries to assure that the benefits of growth are enjoyed by their poorest citizens. In this connection, my government strongly supports the new directions charted by the World Bank in financing social and economic development. The Bank has pioneered in designing new approaches to alleviate urban poverty and stimulate rural development. I believe the continued expansion of the activities of the World Bank Group, more than any other single action, will contribute to constructive relations between industrial and developing countries. In supporting this expansion, the United States will urge: —more emphasis on food production, expanding employment opportunities, and other measures to improve the lot of the world's poorest people. increased lending to expand energy resources in developing countries. using the Bank's resources to facilitate the adoption of sound economic policies in the developing countries. I am convinced that foreign assistance will not have the support of the American people unless they perceive that it is making a real contribution to improving the lives of the poor. -8My government also believes that the goals and purposes of development encompass human rights as well as freedom from economic privation and want. The United States Congress has instructed the Administration to seek international agreement on standards for human rights. We will pursue this mandate. Looking ahead, the Bank and the Fund have a vital and expanding role to play in the international economic system. Their record entitles them to strong support and they shall have it from the United States. I must point to a problem, however, that concerns both the Bank and the Fund. My government's continuted ability to support these two institutions will depend on their efficient administration. Most importantly, we must resolve the issue of proper compensation policies for their staffs and Executive Directors. On salaries there is need for restraint. More generally, it is essential to overhaul the entire compensation system of these institutions — as well as the systems of other internaitonal organizations — to meet today's realities. We hope that the Joint Committee set up to review the situation will enable us to move to such a new system. We must not permit this issue to threaten these great institutions. As I conclude my comments, it is a matter of deep regret to the United States and to me personally that as the Fund crosses a threshold into a new era of operations, it will lose the valued services of its Managing Director, our trusted friend, Johannes Witteveen. He has guided the Fund with firmness, fairness, imagination, and good sense. He deserves a large portion of the credit for the great progress the Fund has recorded in recent years, and he leaves the institution strong and fully capable of meeting its new and challenging responsibilities. I join other Governors in expressing our thanks. We have a formidable agenda before us and one that we should approach with a sense of hope and resolve. The necessary actions are difficult but the potential gains are immense. Pursuit of sound economic policies domestically and adherence to open and cooperative policies internationally will see us into a new period of economic progress and equity, worldwide. FOR RELEASE AT 4:00 P.M. September 27, 1977 TREASURY'S WEEKLY BILL OFFERING The Department of the Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $5,800 million, to be issued October 6, 1977. This offering will not provide new cash for the Treasury as the maturing bills are outstanding in the amount of $5,806 million. The two series offered are as follows: 91-day bills (to maturity date) for approximately $2,300 million, representing an additional amount of bills dated July 7, 1977, and to mature January 5, 1978 (CUSIP No. 912793 M9 4 ) , originally issued in the amount of $3,305 million, the additional and original bills to be freely interchangeable. 182-day bills for approximately $3,500 million to be dated October 6, 1977, and to mature April 6, 1978 (CUSIP No. 912793 P6 7 ) . Both series of bills will be issued for cash and in exchange for Treasury bills maturing October 6, 1977. Federal Reserve Banks, for themselves and as agents of foreign and international monetary authorities, presently hold $2,871 million of the maturing bills. These accounts may exchange bills they hold for the bills now being offered at the weighted average prices of accepted competitive tenders. The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest. Except for definitive bills in the $100,000 denomination, which will be available only to investors who are able to show that they are required by law or regulation to hold securities in physical form, both series of bills will be issued entirely in book-entry form in a minimum amount of $10,000 and in any higher $5,000 multiple, on the records either of the Federal Reserve Banks and Branches, or of the Department of the Treasury. Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of the Public Debt, Washington, 0. C 20226, up to 1:30 p.m., Eastern Daylight Saving time, Monday, October 3, 1977. Form PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series) should be used to submit tenders for bills to be maintained on the book-entry records of the Department of the Treasury. B-460 -2Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,000. In the case of competitive tenders the price offered must be expressed on the basis of 100, with not more than three decimals, e.g., 99.925. Fractions may not be used. Banking institutions and dealers who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names of the customers and the amount for each customer are furnished. Others are only permitted to submit tenders for their own account. Payment for the full par amount of the bills applied for must accompany all tenders submitted for bills to be maintained on the book-entry records of the Department of the Treasthry. A cash adjustment will be made on all accepted tenders fotHhe difference between the par payment submitted and the actl&l lS issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, or for bills issued in bearer form, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their tenders. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and the Secretary's action shall be final. Subject to these reservations, noncompetitive tenders for each issue for $500,000 or less without stated price from any one bidder will be accepted in full at the weighted average price (in three decimals) of accepted competitive bids for the respective issues. Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and bills issued in bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt on October 6, 1977, in cash or other immediately available funds or in Treasury bills maturing October 6, 1977. Cash adjustments will be made for differences between the par value of the maturing bills accepted in exchange and the issue price of the new bills. -3Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, No. 418 (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. 3> r-r .'h sD .E so ederaiWASHINGTON, nnancing DariK D.C. 20220 FOR IMMEDIATE RELEASE £ o September 27, 1977 SUMMARY OF FEDERAL FINANCING BANK HOLDINGS August 1-August 31, 1977 Federal Financing Bank activity for the month of August, 1977, was announced as follows by Roland H. Cook, Secretary:' The National Rail Passenger Service (Amtrak) drew down the following amounts under notes guaranteed by the Department of Transportation: Interest Date Note Amount Maturity Rate 11 8/1 $10,000,000 9/12/77 5 621 13 8/1 42,000,000 10/31/77 5 621 8/3 11 5,000,000 9/12/77 5 624% 8/9 13 10,000,000 10/31/77 5 7901 8/15 13 8,000,000 10/31/77 8/17 5 7661 13 8/22 4,000,000 13 10/31/77 5 916% 8,500,000 10/31/77 5 745% On August 30, Amtrak repurchased $23,322,500.00 in principal of Note #11. The amount, which was originally to mature on September 12, 1977, was repurchased at the price of $23,320,222.72 which reflects the market discount to Amtrak. The U.S. Railway Association drew down the following amounts under notes guaranteed by the Department of Transportation: Interest Date Note Amount Maturity Rate 8/2 8 $11,264,580 4/30/79 6 606% 8/5 8 231,650 4/30/79 6 637% 8/8 8 515,000 4/30/79 6 645% 8/11 11 500,000 12/26/90 7 520% 8/15 8 3,982,890 8/29 4/30/79 6 794% 8 735 % 8,736,025 4/30/79 6 On August 3, the Bank advanced $790,318 to the Missouri, Kansas, Texas Railroad (KATY) at an interest rate of 7.670% on a quarterly basis. The note under which the advance was made will mature on November 15, 1997, and is guaranteed by the Department of Transportation. B-461 - 2The FFB purchased Rural Electrification Administrationguaranteed notes in the following amounts from utility companies: Interest Date Borrower Amount Maturity Rate 8/1 United Power Assn. $12,000,000 8/01/79 6.62% 8/1 Cooperative Power Assn. 17,000,000 12/31/11 7.801% 8/1 Oglethorpe Electric Membership Corp. 8/4 Allied Telephone Co. of Arkansas 10,582,000 12/31/11 7.801% 200,000 12/31/11 7.779% 8/8 Cooperative Power Assn. 3,000,000 12/31/11 7.781% 8/11 Tri-State Generation $ Transmission Assn. 3,115,000 12/31/11 7.809% 8/11 Colorado-Ute Elect. Assn. 1,961,000 12/31/11 7.809% 8/12 Gulf Telephone Co. 110,000 12/31/11 7.808% 8/13 Big River Elect. Corp. 1,768,000 12/31/11 7.792% 8/22 Sierra Telephone Co. 232,826 9/01/79 6.797% 8/29 Brookville Tele. Co. 1,636,000 8/29/79 6.738% 8/29 Central Iowa Pwr. Coop. 2,553,000 12/31/11 7.731% 8/29 East Ascension Tele. Co. 310,960 12/31/11 7.731% 8/30 Arizona Elect. Pwr. Coop. 16,000,000 12/31/11 7.651% 8/31 East Kentucky Pwr. Coop. 5,984,000 12/31/11 7.659% 8/31 Southern Illinois Pwr. Coop. 2,225,000 8/31/79 6.689% Interest on the above notes is paid quarterly. On August 3, the FFB purchased Series F Notes from the Department of Health, Education and Welfare in the amount of $4,205,000. The notes mature July 1, 2001, and bear interest at a rate of 7.75%. The notes, which are guaranteed by HEW, were previously acquired by HEW from various public agencies under the Medical Facilities Loan Program. - 3The FFB made advances to foreign governments under loans guaranteed by the Department of Defens e. InterestMaturity Date Amount Borrower Rate Argentina China 8/9 8/15 8/24 8/26 8/11 $ 380,065.98 72,836.01 70,922.05 258,262.34 15,000.00 6/30/83 6/30/83 6/30/83 6/30/83 12/31/82 7.032% 7.134% 7.057% 7.024% 7.047% Ecuador 8/2 8/17 251,882.84 60,000.00 6/30/83 6/30/83 7.026% 7.163% Indonesia 8/22 1,962,399.32 6/30/83 7.088% Israel 8/9 50,000,000.00 5/12/07 7.804% Jordan 8/3 8/26 8/30 39,370,841.55 2,744,458.20 558,600.00 11/26/85 6/30/85 6/30/85 7.251% 7.154% 7.079% Malaysia 8/4 8/4 8/26 8/26 8/4 2,350,594.54 703,768.77 1,028,100.00 59,101.73 182,254.40 6/30/84 12/31/83 12/31/83 6/30/84 12/31/82 7.120%' 7.078% 7.058% 7.092% 7.012% Morrocco 8/15 3,020,800.00 6/30/84 7.215% Paraguay 8/11 34,581.71 6/30/81 6.886% Peru 8/23 2,305,792.00 4/01/84 7.158% Philippines 8/16 733,222.21 6/30/82 7.072% Tunisia 8/16 8/18 472,664.00 169,095.00 6/30/82 6/30/82 7.073% 7.044% Uruguay 8/11 137,936.48 6/30/83 7.094% Ofc Korea On August 9, the Bank advanced $713,700 to the Chicago, Rock Island and Pacific Railroad at a rate of 7.685%. The note, under which the advance was made, is guaranteed by the Department of Transportation and will mature on June 21, 1991. On August 22, the Western Union Space Communications drew down $6,450,000 at a rate of 7.605% on an annual basis. The drawdown is guaranteed hy the National Aeronautics and Space Administration and will mature on October 1, 1989. - 4 The Student Loan Marketing Association issued notes to the FFB in the following principal amounts: Interest Date Amount Maturity Rate $ 5,000,000 5,000,000 5,000,000 5,000,000 10,000,000 30,000,000 20,000,000 10,000,000 5,000,000 20,000,000 20,000,000 30,000,000 25,000,000 8/2 8/2 8/2 8/2 8/2 8/2 8/2 8/2 8/2 8/9 8/16 8/23 8/30 9/13/77 9/20/77 9/27/77 10/04/77 10/11/77 11/01/77 11/08/77 11/15/77 12/13/77 11/18/77 11/15/77 11/22/77 11/29/77 5.701% 5.701% 5.701% 5.701% 5.701% 5.701% 5.701% 5.701% 5.701% 5.626% 5.956% 5.836% 5.857% Sallie Mae borrowings are guaranteed by the Department of Health, Education and Welfare. The Federal Financing Bank purchased the following notes from the Secretary of the Treasury pursuant to the New York City Seasonal Financing Act of 1975: Yield Face Face Purchase To Date Note # Amount Rate Maturity Price FFB (millions) 8/16 8/16 21 22 $ 50 $100 7.36% 7.38% 4/20/78 5/05/78 6.485% $ 50,283,615.25 $100,600,063.18 . 6.505% On August 24, the FFB purchased a debenture in the amount of $720,000 from a small business investment company guaranteed by the Small Business Administration. The debenture matures on August 1, 1987, and bears interest at a rate of 7.565%. On August 24, the Bank purchased the following Certificates of Beneficial Ownership from the Farmers Home Administration: Amount Maturity Interest Rate $100,000,000 675,000,000 40,000,000 8/24/82 8/24/92 8/24/97 7.32% 7.78% 7.94% Interest payments on the Certificates are made on an annual basis. - 5On August 26, the Bank advanced $1,055,760.21 to the Guam Power Authority, the repayment of which is guaranteed by the Department of the Interior. The amount matures on December 31, 1978 and bears interest at a rate of 7.54%. On August 31, the Bank purchased from the Tennessee Valley Authority a $170 million note maturing on November 30, 1977 with an interest rate of 5.884%. Federal Financing Bank holdings on August 31, 1977 totalled $33.8 billion. # 0# FOR RELEASE AT 4:00 P.M. September 27 1977 TREASURY TO AUCTION $2,500 MILLION OF 5-YEAR 1-MONTH NOTES The Department of the Treasury will auction $2,500 million of 5-year 1-month notes to raise new cash. Additional amounts of the notes may be issued to Federal Reserve Banks as agents of foreign and international monetary authorities at the average price of accepted tenders. Details about the new security are given in the attached highlights of the offering and in the official offering circular. Attachment B-46LZ HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF 5-YEAR 1-MONTH NOTES TO BE ISSUED OCTOBER 17, 1977 September 27, 1977 Amount Offered: To the public $2,500 million Description of Security: Term and type of security Series and CUSIP designation 5-year 1-month notes Series F-1982 (CUSIP No. 912827 HB 1) Maturity date November 15, 1982 Call date No provision Interest coupon rate To be determined based on tne average of accepted bids Investment yield To be determined at auction Premium or discount To oe determined after auctioi Interest payment dates May 15 and November 15 (first payment on May 15/ 1971 Minimum denomination available $1,000 Terms of Sale: Method of sale • Yield Auction Accrued interest payable by investor • None Preferred allotment Noncompetitive bid for $1,000,000 or less Deposit requirement 5% of face amount Deposit guarantee by designated institutions • Acceptable Key Dates: Deadline for receipt of tenders Settlement date (final payment due) a) casn or Federal funds b) check drawn on bank within FRB district where submitted c) checK drawn on bank outside FRB district where submitted Delivery date for coupon securities. Wednesday, October 5, 1977, by 1:30 p.m., EDST Monday, October 17, 1977 Tnursday, October 13, 1977 Wednesday, October 12, 1*77 Tuesday, October 18, 1977 DEPARTMENT OF THE TREASURY <BREAKFAST - PRESS CONFERENCE WITH W. MICHAEL BLUMENTHAL SECRETARY OF THE TREASURY OF THE UNITED STATES ^ ON Remarks to the Annual Meeting of The International Monetary Fund and World Bank September 27, 1977 / Shoreham-Americana Hotel Washington, D.C. WITH: Under Secretary for Monetary Affairs Anthony M. Solomon and Assistant Secretary for International Affairs C. Fred Bergsten and Assistant Secretary for Public Affairs Joseph Laitin 8:15 a.m. -2- SECRFTARY LAITIN: with your breakfast? Ladies and Gentlemen: All finished Whatever the Secretary savs here, of course, is embargoed until 11.6fclock when the Secretary will address the International Monetary Fund Meeting. Please restrict vour auestions to matters involvinq the meeting here — the International Monetary Fund Meeting. The Secretary will be holding a general Dress conference at the Treasury at 10:00 a.m., Thursday morning; the dav after tomorrow. It will be in the Cash Room of the Treasury. Fnter the building through the front entrance and the Cash Room is at the entrance.— 10:00 a.m. Thursday — a general Dress conference of Secretary Blumenthal. Fe reauest you to restrict vour ouestions todav to the International Monetary Fund. Incidentally, copies of the SDeech will be available to you as you leave here — the text of the 11 o'clock SDeech. Secretary Blumenthal. SECRETARY BLUMENTHAL: I would like to use this ODDortunitv to give you a brief preview — general preview -- of the content of our remarks which I will be making this morning at anoroximatelv 11 o'clock to the International Monetary Fund meeting. The Durpose of it is to provide a view of the United States with regard to the world economic situation and with regard to the matters under the responsibility of the Fund. The general emphasis of my remarks will be on the fact that the world is coming out of a situation in which it reallv received some staggering economic blows in the Deriod 1974-1975, relating to the substantial quintupling of the Drice of oil — conseauent heavy inflation in many countries; deeD recession in many of these same countries; high levels of unemDloyment, and great difficulty in adjusting to all of these Droblems. Looking at what has haDDened since 1974 and 1975, there is no cause for undue gloom — that, in fact, considerable orogress had been made with regard to the adjustment process, but that at the same time, there are serious Droblems along with the progress that has been made. It is the business of the Fund and the Bank, and of the principal countries who are members of the Fund and Bank, to be addressing ourselves to these problems. -3- Then, in turning to the I refer to the fact that there year in the United States with in fact, than occurred in most condition of the United States, has been solid progress in this regard to growth in our GNP; more, other developed nations. We have been doing relatively better than most, and similarly, there has been encouraging progress with regard to unemployment and inflation. However, clearly, the Carter Administration — the present American Administration — is not satisfied with the levels reached with regard to unemDlovment and inflation, and, a lot more work needs to be done: we find that the rate of business investment is too low; the general business confidence is not high enough; we are consuming and importing too much energy and that is an unsatisfactory situation from our point of view. And, we are experiencing larqe current account and trade deficits. That is a matter that challenges us for the future. I refer to the fact that we had very rapid growth in the first part of this year in GNP. Some satisfying growth is occurring in the second part of this vear. We will be meeting or exceeding the targets originallv set for ourselves, and we are continuing to work toward a tarqet of about a five percent growth in real terms for next year. Among the corrective measures that we are undertaking in order to deal with some of the problems which I have referred to are, of course, our energy program, which is presentlv being debated in the Senate of the United States; a modest stimulus program which was approved by Congress and enacted earlier this year — and the full effects of which are now being felt; the tax reform program, which will be presented to the Congress before its adjournment at the end of next month, and an anti-inflation strategy which we have been pursuing for some time. Turning to the international situation, I refer to successes and problems with international strategy that has been adopted bv the major countries on the situation that has emerged out of the period '74-'75 I note that that strategy is still the correct one, and it is working — althoug, obviously, there is not total success bv any means. -4- Some Droblems remain and we have to redouble our efforts in order to deal with them. That strategy, of course, is one that involves programs by strong countries to ensure that their economies are growing at good rates, while allowing time for the less strong countries to follow adjustment proorams in order to stabilize their situation. Clearly, that strategy of cooperation, which takes time, can work only in a framework in which there is also restraint bv oilexporting countries in the price of oil — that further significant increases in the price of oil would make the adjustment process all that much more difficult. Turning then to the IMF, I review the considerable contribution which the IMF has made to these activities. We feel strongly that there should be adequate resources available in IMF to provide the official resources needed to support stabilization programs in countries temporarily experiencing difficulty in pursuing such programs. We feel that the countries which have not vet ratified the Sixth Quota increase should do go at the earliest possible opportunity. We are further encouraged bv the agreement on the Supplemental Financing Facility — so-called Witteveen facility which will provide almost $10 billion in additional official financing resources to the IMF. V7e are in agreement that further expansion of permanent resources will be needed by the IMF and that the Seventh Quota Review, which should lead eventually to another quota increase should be pursued in the coming months. We feel strongly that the use of these resources bv IMF should be directed towards fostering the necessary adjustments. In other words, in the borrowing taking place bv countries to enable them to overcome their problems, a fair degree of flexibility is required in striking the right balance between the need for adjustment and an understanding of the internally different economic and political problems that have to be taken into account. That is a difficult course — but one in which we feel the Fund has done well. We fefer, also, to — of course — vate capital flow has to continue is a very important aspect of the resources can only do so much and cant. the need that one priat a high level. That reallv total world situation. Official private capital is very signifi- -5- We look towards an increasingly closer relationship between the two and an increasing availability of information which will help a great deal leading to the provision of private resources in conjunction with the stabilization programs taking place. On the question of development, turning to the Bank — the major, critical problem, as we see it, is to ensure that the needed growth with equity in the many developing countries of the world continues. Obviously, that is very necessarv in order to seek to lessen the gap between the rich and the poor countries. It is obviously a problem made more difficult because of the substantial increases in the price of energy. Therefore, in the first instance, the best contribution which the developed countries — the industrial nations — can make towards the cause of the development of the LDCS is to ensure that their own growth is adeauate and occurs in an open international system, a system devoid of protectionism and in which the developing countries can benefit from the strong economic situations of developed countries. So, that is our first responsibility — not onlv to ourselves, but also to the developing countries. In addition, there are a number of other measures that can and should be taken, which we in the United States want to cooperate in as fully as possible. The first involves the effort to negotiate arrangements to stabilize raw material prices. We are fullv in support of these measures. The agreement early-on is that we would be willing to negotiate some kind of Common Fund arrangement. That is an example of our flexibility in that area. Secondly, to improve the management of indebtedness, with some flexibility, taking into account the particular needs of individual countries, and third, of course", is the fact that the Congress of the United States has, in response to a reauest bv this Administration, authorized a very high level of aid funds. This is a point to which President Carter referred to yesterday, that appropriations for IDA V have been approved and that the debate on the other appropriations requests is now going forward, and that the Administration is exerting every effort to see that the outstanding issues are satisfactorily resolved. In addition to that, we recognize that the World Bank probably should have a "capital increase" and we are prepared to begin negotiations for a Bank capital increase. -6- It is of course true, and that point requires underlining, that developing countries on their own reallv have to do a great deal about furthering their development. In the end, it depends on their own efforts in mobilization of their own resources and helping their own poor to bring about needed change. The second emphasis that we welcome, which the Bank is engaged in and that we would like to support, deals with urban poverty and rural development to emphasize projects of resource development, projects of energy, raw material development, food production, job opportunities, domestic energy in the context of establishing traditions of sound economic policy. Not only do we fully support the World Bank in these efforts, but we have our own proqram of insurance, the Overseas Private Investment Corporation, emphasizing these kinds of projects. In our aid programs and in our work within the World Bank and the other regional banks, we are concerned, as we have previously stated, about human rights — which we consider to be just as important as freedom from economic need. We feel therefore, we will continue to pursue policies in which we will take into account the human rights issues. Obviously, we will do so flexibly and with undestanding —? and without wishing to impose our standards on others — but do feel it is a consideration that we must and will take into account. Equally important, we feel that it is essential to maintain the support of all countries, and that the activities of the Bank as well as the Fund are conducted not only towards the right ends, but are conducted efficiently and on the basis of efficient administration and in a constant manner. Of course, that does relate in particular to the concerns that we have expressed for some time that some of the administrative methods, in particular', the compensation arrangements that tend at times to be excessive and cause a great deal of criticism in our boundaries. It, therefore, gives us great difficulty in gettino approval for substantive programs that we so much want to get. So, it is a matter that really needs stressing. Of course, I would be remiss if I did not note with great regret the decision by Managing Director of the Fund, Mr. Witteveen, not to put his name up for re-election, but to end his activities next year at the termination of his present term. -7- So, in summary then, this review of the agenda for the Bank and the Fund lists not only the successes which we think have been achieved, but also the problems, and states as clearly as we can the U.S. position with regard to each of these matters. QUESTIONS AND ANSWERS QUESTION: Sir, have you retreated from the U.S. position with regard to power plotting? SECRETARY BLUMENTHAL: We have not. There has been no change in our position. QUESTION: Mr. Secretary, the last time vou talked about the large U.S. trade deficits, thev went into a tail-spin. How are you going to prevent that from happening todav? SECRETARY BLUMENTHAL: Well, I think that it is well understood around the world that the U.S. economy is strong, growing — as strong or stronger than virtually any in the world. We are in a solid position. There is a gread deal of capital flowing into this country because that is recognized. The basic situation is very sound and I therefore have everv expectation that the international stability is pretty well ensured and that the strength of the dollar will be maintained. QUESTION: What is the U.S. position about new issues of SDR? SECRETARY BLUMENTHAL: New issues of SDR? I will call on Under Secretary Solomon. UNDER SECRETARY SOLOMON: Our position is the same as it was in the Interim Committee in April, when we agreed to participate actively in a study of the role of the FDR, the future role of SDR, and the characteristics of the SDR. It should be a broad study in terms of how that would relate to the workings and the objectives of the International Monetary Fund, including — but not confined to ~ the objective of the SDR becoming the principal reserve asset in the lonq run. We, of course, are working on our own analysis. That should be ready for the next Interim Committee session. QUESTION: Do you share the view bv others that countries recently coming into surplus should now stimulate their economies? -8- SECRETARY BLUMENTHAL: Well, I think that really vou have to look at that on an individual basis, country-bv-countrv. I don't see too many candidates that fall into that category. I think that the principal emphasis still has to be on a continuation of the strategy that we have followed for some time, and, that really relates to the three strono countries that have been mentioned: Germany, Japan and the United States. I don't see too many other candidates who would be well advised to start stimulating. QUESTION: Does that include Great Britain, sir? SECRETARY BLUMENTHAL: I will allow the British to answer that. QUESTION: Mr. Secretary, has the Administration put anv pressure on private United States banks to lend more to undeveloped countries and, in return, what is the Administration doing to guarantee these loans in case of default? Is there going to be anv increased assurance, and do we expect any further defaults? SECRETARY BLUMENTHAL: The answer is we have put no pressure and do not put pressure on private banks. There are no guarantees, and the answer is no to all other aspects. QUESTION: Is the United States satisfied with the steps that the Government of Germany, Federal Republic, has taken to stimulate the economy? SECRETARY BLUMENTHAL: We noted with interest that the Federal Republic has recently announced additional measures and we will be watching with interest to see whether these will succeed in meeting the kinds of growth targets that the government has mentioned. If these targets are met, we think that would be a considerable contribution to international stability, but, obviouslv it is too early to tell. Yes? QUESTION: What is the role between private and -- do vou see any particular combination of IMF and the banks or what do you see? -9SECRETARY BLUMENTHAL: I don't think there is any particular target — a number that you can point to — as being the right combination of official and private resources. I think that depends very much on each individual situation. It is true that the very large portion of total financial resource at the disposal of individual countries will be private, but it is difficult to tell exactly what the right proportion ought to be. QUESTION: But do you see a closer cooperation or do vou have a special scheme in mind? SECRETARY BLUMENTHAL: I think a relatively close cooperation between the private banks and the IMF would be a desireable thing. I talked about that at the International Monetary Conference in Tokyo earlier this year. I briefly referred to it here in my opening comments. Just the availability of information to the banks — of course, not on confidential matters — will be helpful. It is helpful when the banks have assurances and understanding that IMF is working activly on programs with these countries. This ought-to give them added confidence and enable them to provide more private resources. QUESTION: Mr. Secretary, what response are you gettina from the Japanese in efforts to get them to reduce their current account surplus? SECRETARY BLUMENTHAL: The Japanese Government has, at various times, indicated its understanding and concern with their very large current account surplus and it is my impression that the policies that thev are following are intended to reduce that. Again, as in the case of the Federal Republic, it - 10 remains to be seen whether the policies will be successfu. Q. Mr. Secretary, if Mr. Carter's energy plan emerges from the Congress perhaps at half or a quarter -- which some people are suggesting it will -- what is the next long term alternative for fixing up the U.S. deficit? SECRETARY BLUMENTHAL: In the first place, I do believe that Congress will adopt an energy program that will, over time, have a significant effect toward reducing the cost of energy imports. But, we will have to wait the next few weeks to see what the Congress does. Secondly, I have no doubt that whatever the program is that the Congress will adopt, it will not be the last thing that needs to be done in the energy area. There will be further measures which should have an effect on energy imports. It seems to me that the next most important impact on our U.S. deficit is the rate of growth in other countries; countries that are now pursuing atabilization policies. As these policies achieve success these countries will be able to resume greater growth and that will be of considerable benefit to the United States. Third: We are actively engaged in promoting our own exports through a major expansion of the Export-Import Bank and that will have -- within the next year or two -- some significant measurable impact on our total trade balance. So, you have to take some of these measures and others into account as you look ahead. Q. Do you still estimate, Mr. Secretary, that the balance of trade will have a deficit of $25 to $27 billion this year and the balance of trade will be about $12 billion? Do you still believe it's possible that it will not be increased substantially? SECRETARY BLUMENTHAL: Well, I think that the numbers I previously mentioned have been between 25 and 30 -- less than 30, but more than 25. I don't know exactly where the number will turn out to be on trade balance, and I think that this is what is likely to happen. The current account deficit is about $10 billion or so less than that, so should we have 26 on trade we would have 16 on current account. If we had 27, we would have 17. - 11 That is about the way we think it will come out. Q. Mr. Secretary, following your reference to human rights policy, I want to know whether the American members in the World Bank are taking into account that respect for human rights in the evaluation of specific countries. SECRETARY BLUMENTHAL: I don't think I understand the question. A. Do the American members of the Board of the World Bank take into account the human rights respect in the evaluation of the specific -SECRETARY BLUMENTHAL: In deciding how to deal with each specific matter on which they have to vote, they clearly evaluate the total situation. And the question of human rights is one of those questions they bear in mind. Q. Mr. Secretary, did you come across any doubts about your view on our ability to meet growth targets and, if so, how are we able to -SECRETARY BLUMENTHAL: Not really. You see, since our record up to now has been pretty good, there isn't a great deal of skepticism around. I think, basically, my colleagues from other countries look at what we have done this year and agree with us that we have a good chance of meeting the targets we set. Q, Mr. Secretary, I would like to take you back to an earlier comment in which you aid you don't see too many other candidates that would be well advised to start this stimulus in a major way. Yesterday American Treasury officials were suggesting that perhaps France, the UK — even Italy -- possibly — perhaps also Switzerland and the Netherlands -- might be candidates for some modest reflation sometime in the future. Is there a difference here or were you encompassing that in your remarks? SECRETARY BLUMENTHAL: I don't think there is ever any difference between Treasury officials. (LAUGHTER.) - 12 SECRETARY BLUMENTHAL: Clearly, there can be circumstances in which there is a country in addition to the three I mentioned who could take additional stimulative measures. I am not suggesting that may not be advisable. I wanted to make a point that the United States is not changing its viewpoint in recommending to a significant number of countries that they should continue to follow policies of stabilization. There is no change in our policy in that regard and we are not recommending it. Q. Would you agree that there has been a change of mood this year -- that the recovery will peter out under the threat of new inflation? SECRETARY BLUMENTHAL: I would not want to make that kind of a comparison. I would say there is a mood of some concern about the future and in general in this country a feeling of a lack of confidence, a lack of confidence by our business community about the medium and longer range prospects. We find that lack of confidence or hesitation seems to be shared by similar groups in other countries. SECRETARY LAITIN: We have time for one last question. Q. Is there any chance of US growth in sales during the IMF programs? SECRETARY BLUMENTHAL: We will be following the same policies. Q. Recently the French Industrialist Association stated that: "The conclusion of the U.S. Administration is that leading growth is necessary to save the dollar. A dollar crash would be set off in a moment by alliance of certain industrial countries with OPEC to counter the U.S. decision to stop growth." What I am interested in knowing is this the kind of propegation -- is that what you have been desperately manuvering here to prevent? SECRETARY BLUMENTHAL: No. Thank you. SECRETARY LAITIN: The text of the Secretary's address will be available as you leave. (Whereupon at 8:45 a.m. the conference was concluded.) September 29, 1977 JOINT STATEMENT BY FORMER SECRETARIES OF THE TREASURY As former Secretaries of the Treasury, we reaffirm our belief that United States participation in the international financial institutions — the World Bank and the regional development banks — is vital to American economic and political interests. Continued U.S. participation in these lending institutions is now totally dependent on the Congress of the United States. The Fiscal 1978 Foreign Assistance Appropriations Act is pending before Congress. The restrictive amendments contained in the House version of this bill would effectively end U.S. participation in the Banks. The charters of these multilateral institutions simply would not permit them to accept funds so conditioned by individual members. Such a result would gravely undermine the world economy and the future well-being of the American people. Indeed, our contributions of about $2 billion are essential to mobilize contributions of $5.5 billion —almost three times as much — from other donor countries. If the institutions are cut off from these funds, lending that would benefit hundreds of millions of poor people throughout the worl would cease. u.S. relations with the poor countries would be shattered. Our relations with the other donor countries — our closest allies in Europe, Canada and Japan — would be disrupted, for they have already decided to contribute their - 2- fair share to these institutions on the assumption that we would contribute ours. As a result, the international cooperation which is so critical to the stability and growth of our world economy would be severely jeopardized. Over the past several decades successive Presidents of the United States—Truman, Eisenhower, Kennedy, Johnson, Nixon and Ford—supported with strong bipartisan backing in the Congress, have encouraged the development and expansion of the role of the World Bank and the regional development banks. As Secretaries of the Treasury during this period since World War II, we have consistently urged this feature of our foreign economic policy as an indispensable element of an effort to engage the other wealthy industrialized democracies in sharing our burden and responsibility to assist the poorer, less developed nations in providing some hope and progress for their peoples. We firmly believe that these multilateral financial institutions are essential to peace and prosperity. Continued U.S. support and participation in a leadership role is vitally necessary to a continuance of these organizations as effective instruments for international cooperation. - 3 Therefore, we hope that the Congress will modify the restrictive amendments and vote out the appropriations so that the World Bank and regional development banks can accept the U.S. subscriptions. Robert B. Anderson Joseph W. Barr John B. Connally Douglas Dillon Henry H. Fowler David M. Kennedy George P. Shultz William E. Simon John W. Snyder MEMORANDUM TO THE PRESS: September 27, 1977 Treasury Secretary Blumenthal will hold a general news conference in the Main Treasury Cash Room at 10 a.m. Thursday, September 29. The Cash Room is located on the second floor directly opposite the Pennsylvania Avenue entrance to the building. # # # B-463 FOR RELEASE ON DELIVERY EXPECTED AT 10:00 A.M. SEPTEMBER 29, 1977 TESTIMONY OF ROBERT CARSWELL DEPUTY SECRETARY OF THE TREASURY BEFORE THE HOUSE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS Mr. Chairman and Members of this distinguished Committee: I appreciate this opportunity to comment on behalf of the Administration on the Safe Banking Act of 1977. The first four titles of H.R. 9086 are substantially the same as S. 71, which has passed the Senate and on which the Acting Comptroller of the Currency testified earlier this year. The Administration continues to support prompt passage of the measures set forth in that bill, which is a product of careful and lengthy consideration. Some of the remaining titles of H.R. 9086 have also been represented by other bills; some are new. The issues with which this bill deals range from technical amendments to the Federal Deposit Insurance Act, through limitations on a bank's transactions with bank officers and other insiders, to the granting of a Federal chartering option for thrift institutions. Much of this material was added to the bill only a short time ago. Accordingly, there are some issues on which we have not had adequate time to come to a considered judgment. Nonetheless, I will attempt this morning to set forth the Administration's views on this bill to the fullest extent possible. TITLETitle I — I SUPERVISORY AUTHORITY OVER DEPOSITARY provides new civil penalties and other INSTITUTIONS enforcement powers to redress violations of certain provisions of the national banking laws; it grants the bank regulators the power to remove or suspend directors under certain circumstances; B-464 - 2 and it places limits on loans made by a bank to its officers and directors, each holder of 5 percent of any of its voting securities, and to any company controlled by such person or any related political committee. The limitations on loans to insiders extend to all members of the Federal Reserve System, and to non-member insured banks. The Administration supports the provisions of this title and the goals to which these provisions are addressed. We would like, however, to direct the Committee's attention to a potential problem relating to Section 10 4, which deals with loans to insiders. Under Title I, loans to each insider and his affiliates are limited to one-half of the amount that could otherwise be loaned to a single person under applicable law. This may sharply and perhaps unfairly limit the amount of credit that can be extended by a small bank (as distinct from the larger money center banks) to persons who have a relatively small interest in the bank. This is particularly so in view of the fact that the prohibition applies to 5 percent shareholders (a reduction from the 10 percent test contained in S. 71), thus expanding the coverage of this section. Moreover, for purposes of applying this test, Section 104 requires the aggregation of all loans made to the insider, his controlled corporations and his related political committees. Aggregation is not required under Section 5200 of the Revised Statutes (12 U.S.C. 84), which establishes the limit on loans to a single borrower by a national bank. The effect of this sharp curtailment of credit may make it more difficult for smaller banks in some local and rural communities to attract the kind of management they require. In those communities it may be particularly difficult to secure local businessmen to serve as directors, since the effect of aggregation may exclude senior officers of corporations with significant business borrowings from . the bank. S. 71 would have restricted loans to directors (who are not also officers or substantial shareholders) only by the requirement that such loans in excess of $25,000 be approved in advance by two-thirds of the entire Board of Directors, with the interested director abstaining. S. 71 would also limit loans to officers and 10 percent stockholders of insured banks, and to companies they control, to 10 percent of the bank's surplus and capital, or the applicable limits under state law in the case of state chartered banks. The bank regulators have indicated that this approach, including the persons covered, is adequate to reach abuses of the insider relationship. We, therefore, support S. 71's approach to limiting loans made to insiders. - 3 TITLE II — INTERLOCKING DIRECTORS Section 203 prohibits any "management official" of a depository institution or a depository holding company from acting as a management official of another depository institution or depository holding company within the same geographical area. It also bars interlocks between management officials of depository institutions or holding companies, regardless of location, with assets exceeding certain specified levels. The Administration supports these provisions. Section 203 also would prohibit any common management officials' between a depository institution or depository holding company and any insurance company, title company, company engaged in the business of appraising real property or company which provides services in connection with the closing of real estate transactions. The prohibition would apply regardless of whether the two companies are geographically adjacent or competitively engaged. This provision was not present in S. 71, and we believe the need for such a blanket prohibition has not been demonstrated. We agree, however, that interlocks between banks and other corporations with which they compete should be prohibited. Although we understand the Justice Department is currently appealing cases in this area, clarification of the law would be appropriate and relatively simple. Section 8 of the Clayton Act (15 U.S.C. Sec. 19) could be amended to limit clearly the exclusion for banks only to interlocks between two banks, bank holding companies, or other depository institutions. In that case a common directorship (but not a common officership) between a bank and another corporation would be. tested by the same standards as interlocking directorships in the case of nonbank corporations. TITLE III — FOREIGN BRANCHING The Administration supports Title III of the bill, which, in general, extends to non-member banks the requirement of prior Federal approval (in this case by the FDIC) of the establishment of a foreign branch or the acquisition of the equity securities of a foreign bank. We note that Section 309 of Title III gives the FDIC general rulemaking authority for the laws which it administers (except where another agency has exclusive rulemaking authority). This provision was not incorporated in S. 71. In our view this addition is salutary. The Federal Home Loan Bank Board already has such power. Under H.R. 9106 (the Comptroller of the Currency's "housekeeping amendment" bill), which we support, similar authority would be granted to the Comptroller. We recommend, - 4 however, that Section 107 of H.R. 9106 be revised to reflect the exception, included in Section 309 of H.R. 9086, for laws as to which another regulator has been granted exclusive authority to issue regulations. TITLE IV — CONFLICTS OF INTEREST Title IV prohibits former members of the Board of the FDIC, the Federal Reserve and the Federal Home Loan Bank Board from acting as officers, directors, employees, attorneys, consultants or agents of any institution formerly subject to their regulation for a period of two years after they leave office. During that period they are prohibited from acquiring any interest in any such institution (or its affiliates) or from voting any securities of which such an institution is an issuer. We believe that this prohibition sweeps too broadly. It will make it increasingly difficult for the Government to attract people to senior regulatory positions who have experience in the industry unless they.are on the verge of retirement or are otherwise prepared to abandon a career in that industry. Even academics may be deterred because consulting will be barred to them for two years. There is also a broader question as to whether public policy is served, for example, by prohibiting an ex-member of the FDIC or the Board of Governors of the Federal Reserve System from acquiring any securities in a formerly regulated bank after they leave office. Congress presently has before it S. 555, the Administration's bill that attempts to deal with the socalled "revolving door" problem more narrowly. We would suggest that action on this title be deferred until the Congress has acted on S. 555, as it would be undesirable to place the various agencies on an unequal basis in this area. TITLE V — CREDIT UNION RESTRUCTURING We have reviewed these provisions, which are new in this piece of legislation. The Administration has no objection to the substitution of a board for the Administrator of the National Credit Unions Administration. On the other hand, my comments with respect to the prohibitions in Title IV, dealing with subsequent employment by a regulated institution of a former member of the Board of Governors, would be equally applicable to subdivision (f) of Section 501f which contains a parallel prohibition. The Congress is separately considering in the context of H.R. 2176 the question of the appropriate scope of an audit by the General Accounting Office of a bank regulator. That consideration should be reflected in the final paragraph (g) of Section 501, which calls for such an audit. - 5 TITLES VI and VII — CHANGE IN BANK CONTROL These provisions of the bill require the advance approval of the FDIC to any acquisition of control of an insured bank. "Control" is defined as the power to direct the management or policies of a bank or to vote more than 25 percent of a bank's outstanding voting stock. The Comptroller of the Currency and the Federal Reserve Board are given an additional veto over the transfer of control. We support in principle the concept of strengthening bank regulatory oversight of transfers of control of a banking institution. There has long been recognized a special need for personal and financial integrity in the management of depository institutions and, to this end, both state authorities and the Comptroller of the Currency have wide discretion in approving the chartering of new banks. The same considerations that justify that discretion over chartering suggest that similar (if more limited) discretion is appropriate as regards transfers of control of a bank. Indeed, some state banking authorities already have powers over this issue. Accordingly, we support the general objectives underlying these provisions. There are, however, a number of provisions which we believe require further consideration. Most importantly, the bank regulators have expressed to us and to this Committee their concerns as to the workability of requiring prior approval. Given the importance of developing a system which gives adequate protection without unnecessarily restricting the marketability of bank securities, we would suggest that the Committee await the recommendations of those bank regulators which are studying a variety of approaches to the transfer of control issue. We do also have a few observations on some specific provisions of this title. For example, it is not clear why a veto power should be lodged in the FDIC in the case of institutions that are otherwise primarily regulated by the Comptroller of the Currency or the Federal Reserve Board. Also, under what conditions would a proposed acquisition of a bank be considered unfair to depositors or creditors? Even more important, we believe that it would be an important and unwise departure from present practice to make the bank regulators responsible for the fairness of the transaction to shareholders of a bank, as would clause (E) of subdivision 8 of proposed Section 7(j) of the Federal Deposit Insurance Act. Title VI also makes the stock of all insured banks subject to the prevailing margin requirements established - 6 pursuant to Section 7(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78q(b)). Accordingly, the margin rules would be applicable regardless of whether the stock is listed or otherwise publicly traded and regardless of whether it would otherwise be subject to the margin requirements Margin requirements were adopted and are administered with a view to their impact on the capital markets. The inclusion of this provision in Title VI would seem, to the contrary, to be designed to make it more difficult to acquire the stock of a bank through the use of leverage. We have not been able to ascertain thus far the extent to which there have been material abuses in the use of leverage for the purchase of bank stocks. Indeed, we understand that the bank regulatory agencies are currently conducting a review of that question. If serious abuses do exist, it would appear preferable to give the regulators powers to approve changes of control of banks in appropriate circumstances. We are concerned that applying the margin requirements to all bank stock would unduly restrict the marketability of those securities. TITLE VIII — EXTENSIONS OF CREDIT AND CORRESPONDENT BALANCES Under Title VIII, if one bank has a correspondent relationship with another bank, neither bank may extend credit to any officer, director, or holder of 5 percent or more of the voting securities of the other bank. By virtue of the definition of extension of credit in Section 104 of Title I of the bill, an overdraft would be considered an extension of credit. The Administration agrees that correspondent balances \Should not be used for the benefit of any individual. They are assets of the bank that maintains the balance and should be used only in the interests of that bank. Indeed, in the case where a correspondent balance is maintained directly or indirectly for the sole purpose of serving the personal interests of a corporate insider, the breach of fiduciary obligation is often clear, and present statutes may be adequate to reach these transactions. On the other hand, existing law may not be sufficient to reach a situation where the correspondent relationship is genuine, but the balance also serves the personal interests of a corporate insider. Under such circumstances, Title VIII would build a protective wall around the correspondent relationship that would insulate it from any possibility of misuse. We favor protecting the correspondent balance arrangement from abuse. The approach proposed, however, may well have collateral effects which place small bankers as a group at a disadvantage. Take the case of a banker in a smaller - 7 community who finds that existing rules, the rules proposed to be enacted by this legislation, or his own bank's policy, prohibit him from meeting his borrowing needs at his own bank. He may be understandably reluctant to make a full disclosure of his financial condition to his competitors in the same area, particularly if his financial condition is in turn dependent upon the financial condition of his own bank. That might well be the case for an officer with substantial stock ownership. The correspondent bank with which he maintains a significant business relationship is a logical and, in most cases, an entirely appropriate, place for him to turn. . We simply do not know the full extent of this problem. The bank regulatory agencies have recently initiated a survey of loans by correspondent banks and the results will be available to the Congress after the New Year. I would suggest that legislative action await the results of these studies. If, however, Congress deems it important to act now, it can avoid placing small banks at a potential disadvantage, while still correcting the abuses toward which Title VIII was directed, by employing the disclosure mechanism set forth in Title IX. Under this approach, the terms of any loan involving an officer of one bank and another bank with which a true correspondent relationship exists would be publicly disclosed by the employer bank. This disclosure, together with vigorous enforcement by the regulatory authorities, should end any material abuses that may exist. We have additional concerns about the more technical aspects of this title. It does not contain, for example, a definition of a "correspondent account." If that term were to be construed to include any account maintained by one bank at another bank, the extent of the prohibition may be much greater than was intended. In some cases, banks maintain accounts with one another in order to facilitate the settlement of transactions. TITLE IX — DISCLOSURE OF MATERIAL FACTS The Administration supports this title with two exceptions. In one case, we go further and would change subdivision (ii) to require disclosure of the specified information about the terms of each loan, by name, to each officer, director and substantial stockholder, rather than treating all such persons as a group. Moreover, this disclosure should include loans by all controlling persons of the correspondent bank as well as the correspondent bank itself. As noted above, we believe this approach should have the effect of preventing abuses of the kind to which Title VIII is directed by bringing these transactions into public scrutiny. - 8 On the other hand, we think it wholly inappropriate to disclose the aggregate amount of loans classified as "substandard, doubtful, and loss" at the last examination of the bank. Those classifications are created for internal regulatory purposes, and we believe that their disclosure could adversely affect public confidence in banks. TITLE X — FINANCIAL INSTITUTIONS EXAMINATION COUNCIL The Administration endorses the formation of a council of Federal regulators, such as the Financial Institutions Examination Council, to promote uniformity in the examination and supervision of financial institutions. It has supported in the Senate legislation similar to Title X. Title X would enhance coordination among Federal regulators, permit achievement of substantial cost savings, and encourage interaction with State regulators. It improves upon its companion legislation in the Senate, S. 71, by including the Federal Home Loan Bank Board and the National Credit Union Administration as Council members, by authorizing the President to select the Chairman annually and by identifying particularly troublesome areas of supervision which merit Council attention. Nevertheless, we are unable to support Title X in its present form. By funding the Council through Congressional appropriations and by authorizing the Council to secure the records of financial institutions, we believe that Title X could foster the development of the Council into a new layer of the Federal regulatory structure which is already cumbersom in design. At least in the beginning, the role of the Council should be limited to improving the performance of the present regulatory structure. If so limited, the Council could be adequately funded by the regulators without recourse to the taxpayer and would not need direct access to the records of financial institutions. TITLE XI — RIGHT TO FINANCIAL PRIVACY This title is one of a number of bills that seeks to require that a bank customer be notified prior to the time that the records of his bank transactions are examined by a government official, giving him an opportunity to challenge the administrative subpoena or other process under which the examination is to take place. As you know, the Internal Revenue Service and the Department of Justice have in the past opposed provisions like these on the ground that theirv adoption would materially hinder the law enforcement investigative process. Nevertheless, last year Congress added Section 7609 (of the Internal Revenue Code) which contained similar provision dealing with summonses issued by the Internal Revenue Service. - 9 We would suggest that action on this Title be deferred until we are able to report on the effect of Section 7609 through December 31, 1977. TITLE XII — CHARTERS FOR THRIFT INSTITUTIONS This title would amend the Home Owners' Loan Act of 1933 to provide a federal chartering option for existing mutual savings banks. In considering the shape and extent of its own financial institutions legislation for 1977, the Administration decided to come to Congress with a relatively small legislative package: the authorization of nationwide NOW accounts; the payment by the Federal Reserve System of interest on reserves; and a two-year extension of the present legislation relating to deposit interest rate ceilings. In doing so, we decided not to deal at. this time with the question of a federal chartering option for mutual savings banks. While we continue to be of the same view, I would like to make it clear that the Administration does not oppose such an option in principle. There are however, issues raised by Title XII which we believe require further consideration. For example, Section 5(a) of the Home Owner's Loan Act, as proposed to be amended, would permit a Federal mutual savings bank to invest a portion of its assets in non-mortgage investments determined on the basis of its actual experience during the 5-year period beginning January 1, 1972. The following section in the bill, however, appears to eliminate that "grandfathered" investment power ten years after the issuance of a Federal charter. This provision seems designed to eliminate, at the Federal level, the special characteristics of mutual savings banks. We think that the general question of the investment powers of Federal mutual savings banks should be considered in the context of the more general review of the role of thrift institutions in providing mortgage credit which will take place during the two year extension of existing legislation on deposit interest rates ceilings that the Administration has recommended. In our view, it would be premature to do otherwise at this time. TITLE XIII — BANK HOLDING COMPANIES Many sections of this title parallel similar provisions in S. 71 and the Administration supports those sections. On the other hand, some of its sections address far more fundamental questions in the bank holding company area. Section 1308, for example, would prohibit any acquisition that would result in a bank holding company owning more than - 10 20 percent of the bank assets in a state and Section 1309 would set forth new detailed criteria relating to acquisitions of non-banking activities. We commend the Committee for focusing attention on the importance of bank holding companies in our banking structure, and we agree that this is an appropriate time for a review of the role played by bank holding companies and the functioning of the structure created by the Bank Holding Company Act. The Department of the Treasury would be prepared to cooperate with the Committee in its review. The Administration is not, however, prepared to comment on the specific changes proposed at this time. We would note, however, that several of the bank regulators, especially the Federal Reserve in its role as regulator of bank holding companies, have expressed significant reservations about the procedures set forth in this title. It is important that these concerns be considered carefully. oOo ASHINGTON, D.C. 20220 TELEPHONE 566-2041 FOR RELEASE UPON DELIVERY EXPECTED AT 9:30 A.M. SEPTEMBER 30, 1977 STATEMENT BY THE HONORABLE ANTHONY M. SOLOMON UNDER SECRETARY FOR MONETARY AFFAIRS DEPARTMENT OF THE TREASURY BEFORE THE SENATE FOREIGN RELATIONS COMMITTEE I am pleased to be here to discuss the economic aspects of the Panama Canal Treaty and the economic arrangements. You have already heard testimony on the annuity and royalty payments Panama will receive according to the new treaty. My understanding is that these payments represent Panama's share of the benefits from operation of the Canal: they will be paid out of Canal revenues, and not out of U.S. tax revenues. These payments provisions will also serve U.S. interests by enlarging Panama's stake in the secure and efficient operation of the Canal. In addition to the payments provisions of the treaty, we have extended to Panama, as Under Secretary Cooper has noted, an offer of economic cooperation involving as much as $295 million in U.S. loans, guarantees, and insurance, which I will presently discuss in detail. B-465 - 2 - The benefits to Panama from the financial provisions of the treaty and the economic cooperation arrangements will be significant and timely. In the decade prior to 1974, Panama's GDP increased at an annual average rate of 7.3 percent. In 1974, however, economic growth abruptly slowed to 2.6 percent, and last year there was no growth. A major cause of Panama's economic slowdown was uncertainty over the future of the Canal, resulting in a marked decrease in private investment (which increased only slightly in 1974 and 1975 and fell by 25 percent in 1976). In addition, worldwide recession, the increase in the price of oil, and the recent decrease in sugar prices also contributed to Panama's large current account deficits. The Government of Panama attempted to maintain overall investment levels by increasing public investment to offset the decline in private investment. As a result, the central government budget deficit increased from $69 million in 1973 to $122 million in 1976. This, combined with borrowings to finance Panama's current account deficits, caused total public sector debt to rise from $0-6 billion in 1973 to $1.4 billion in 1976. - 3- There is reason, however, for some optimism about the future of Panama's economy. Panama has negotiated two stabilization agreements with the IMF (one last year and one in March 1977), and has taken steps to reduce the government deficit and limit public sector debt. World economic recovery will help to narrow Panama's current account deficit. Above all, the single most important factor in bringing returned vigor to the Panamanian economy will be settlement of the Canal issue, and the resulting restoration of a favorable investment climate in Panama. We expect that, as a consequence, foreign and domestic private investment will rise appreciably, leading to increases in employment, reduced budgetary pressure on the Panamanian government, and improvements in its external accounts. Panama's new economic program and settlement of the Canal issue are the fundamental requirements for returning Panama to its former path of economic growth. The payments provisions of the new treaty and the economic cooperation arrangements are ancillary to these developments, but we believe they will provide the extra boost to contribute to Panama's long-term economic development. -4- This is of importance to the United States, in the sense that economic stability and an improved standard of living in Panama will strengthen the ability of Panama to act as our partner in the Canal enterprise, bearing its share of the responsibilities. We have designed arrangements for economic cooperation with this goal in mind, selecting financial assistance programs which are non-concessional, befitting Panama's stage of development, and directed at meeting Panama's present economic needs for low-income housing and a revived private sector. The U.S. will benefit additionally from these economic arrangements, through participation by U.S. investors and business in the Eximbank, OPIC, and housing investment guarantee programs the arrangements entail. I would now like to turn to the two aspects of the treaty effort in which I had a direct role. Treasury did not directly participate in the treaty negotiations. My contribution was to recommend economic cooperation arrangements, and to provide advice on the financing arrangements for the new Panama Canal Commission. - 5- 1. Economic Cooperation Arrangements. The proposed economic cooperation arrangements consist of: (1) an offer by the Overseas Private Investment '.V Corporation to guarantee up to $20 million in borrowings in the U.S. capital market by the Panamanian development bank, (2) an offer by the Export-Import Bank to provide up to $200 million in loans, loan guarantees and insurance for individual U.S. export sales over a five-year period; and (3) a pledge by the Administration to consider providing up to $75 million in housing investment guarantees over a five-year period. In addition, we will provide up to $50 million in guarantees over a ten-year period under our Foreign Military Sales program. These particular arrangements were selected not only for the benefits they are expected to bring to both the U.S. and Panama, but also for the reasonable level of risk they present and their compatibility with the financial assistance programs involved. All of these offers are subject to compliance with legal and managerial requirements, and, as necessary, availability of funds. The housing guarantee aspect of the economic cooperation arrangements and the FMS offer have been addressed by Under Secretary Cooper. - 6 - As for the offer by Eximbank to provide up to $200 million in loans, guarantees and insurance, I would like to point out that the portfolio risk to Eximbank as a result of its offer will be small. With an additional $200 million to Panama over five years, exposure in Panama will amount to less than 1.37 percent of Eximbank's total existing portfolio. Project risk will be controlled in the usual manner, since each transaction will be subject to normal Eximbank financial, legal and engineering criteria — including Eximbank's statutory requirement to find a reasonable assurance of repayment. Once the Canal issue is settled and investment in Panama accelerates, Panama will become an expanding market for U.S. exports. This projected market expansion is expected to give rise to more applications for Eximbank support, and Eximbank has indicated that its business in Panama could well amount to $200 million over the next five years. A guarantee by the Overseas Private Investment Corpora- tion of $20 million in borrowing by the Panamanian development bank would raise OPIC's exposure in Panama to only 8.5 percent of its total existing portfolio, a reasonable level of portfolio risk. The risk to OPIC will be further reduced by a Government of Panama guarantee. OPIC has also stipulated - 7- that its offer to Panama depends on terms being negotiated which are acceptable to the OPIC Board. This will be the first time OPIC has participated in financing the expansion of a government-owned development bank, although OPIC is permitted to do so by long-standing OPIC Board policy guidelines. The Panamanian development bank, COFINA, is engaged in supporting the development of private enterprises in Panama through project lending. This function is both wholly compatible with OPIC's mission and in accord with our view that it should help strengthen the private sector of Panama's economy. 2. Future Financing of the Panama Canal Commission Turning now to the financial aspects of the Canal operations, an essential point in negotiating the treaty was that any new entity established to operate the Canal must be self-financing over the life of the treaty. Our negotiators made it clear to the Panamanians that any arrangements which did not conform to this principle would not be acceptable to the U.S. I assure you that we will continue to be guided by that principle. The Administration will make every possible effort to see that costs of the Canal operation are contained and that revenues are sufficient to cover liabilities. However, as a normal provision for management flexibility, I feel it is appropriat - 8- for the Panama Canal Commission to have the authority to borrow, as does its predecessor agency, the Panama Canal Company. Thus, the Administration will request a continuation of this authority in the implementing legislation. I believe the following guidelines should be followed by the Commission in its borrowings. First, any borrowing by the Panama Canal Commission should be strictly limited to an amount sufficient to support the Commission's operations. The Commission should not have the authority to borrow for any other purpose, such as the general economic development of Panama. Second, all borrowing should be at a rate of interest equal to the cost of money to the U.S. Treasury for the period of time under consideration. Third, the repayment schedule should be tailored so that all borrowings will be fully repaid before the expiration date of the treaties. Mr. Chairman, this concludes my formal statement. I will be happy to answer any questions the Committee may have. nun Contact: George G. Ross (202) 566-2356 September 27, 1977 FOR IMMEDIATE RELEASE Philip J. Wiesner Appointed Assistant Tax Legislative Counsel at Treasury Secretary of the Treasury W. Michael Blumenthal today announced the appointment of Philip J. Wiesner of Philadelphia, Pennsylvania, as Assistant Tax Legislative Counsel. Mr. Wiesner, 32, has been an attorney-advisor to the Treasury Department since July 1975. In October 1976 he received a Sustained Superior Performance Award for his efforts in connection with the Tax Reform Act of 1976. Prior to joining Treasury, he had been associated with the Philadelphia law firm of Morgan, Lewis & Bockius. As Assistant Tax Legislative Counsel, Mr. Wiesner will assist the Tax Legislative Counsel, Daniel I. Halperin, in providing assistance and advice to the Assistant Secretary of the Treasury for Tax Policy, Laurence N. Woodworth. The Office of Tax Legislative Counsel participates in the preparation of Treasury Department recommendations for Federal tax legislation and also helps develop and review tax regulations and rulings. The Office of Tax Legislative Counsel is one of four major units under the direction of the Assistant Secretary for Tax Policy. The other three are the Office of Tax Analysis, the Office of International Tax Counsel, and the Office of Industrial Economics. A native of Rochester, New York, Mr. Wiesner received a B.S. degree from Seton Hall University in 1966 and J.D. degree cum laude from the Columbia University Law School in 1969. He received an LL.M. (in Taxation) from New York University School of Law in 19 77. * * * B-466 vmntoftheTREASURY WON, D.C. 20220 TELEPHONE 566-20*1 FOR RELEASE AT 4:00 P.M. September 30, 1977 TREASURY'S WEEKLY BILL OFFERING The Department of the Treasury, by this public notice, invites tenders for two series of Treasury bills totaling approximately $5,700 million, to be issued October 13, 1977. This offering will not provide new cash for the Treasury as the naturing bills are outstanding in the amount of $5,706 million. Phe two series offered are as follows: 91-day bills (to maturity date) for approximately $2,300 nillion, representing an additional amount of bills dated July 14, 1977, and to mature January 12, 1978 (CUSIP No. J12793 N2 8), originally issued in the amount of $3,404 million, :he additional and original bills to be freely interchangeable. 182-day bills for approximately $3,400 million to be dated )ctober 13, 1977, and to mature April 13, 1978 (CUSIP No. U2793 P7 5). Both series of bills will be issued for cash and in exchange for Treasury bills maturing October 13, 1977. p ederal Reserve Banks, for themselves and as agents of foreign md international monetary authorities, presently hold $2,931 lillion of the maturing bills. These accounts may exchange bills :hey hold for the bills now being offered at the weighted average >rices of accepted competitive tenders. The bills will be issued on a discount basis under competitive md noncompetitive bidding, and at maturity their par amount will je payable without interest. Except for definitive bills in the ; 100,000 denomination, which will be available only to investors r ho are able to show that they are required by law or regulation o hold securities in physical form, both series of bills will be ssued entirely in book-entry form in a minimum amount of $10,000 nd in any higher $5,000 multiple, on the records either of the ederal Reserve Banks and Branches, or of the Department of the reasury. Tenders will be received at Federal Reserve Banks and ranches and at the Bureau of the Public Debt, Washington, •C. 20226, up to 1:30 p.m., Eastern Daylight Saving time, rid ay, October 7, 1977. Form PD 4632-2 (for 26-week eries) or Form PD 4632-3 (for 13-week series) should be used o submit tenders for bills to be maintained on the book-entry ecords of the Department of the Treasury. -467 -2Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,000. In the case of competitive tenders the price offered must be expressed on the basis of 100, with not more than three decimals, e.g., 99.925. Fractions may not be used. Banking institutions and dealers who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York their positions in and oorrowings on such securities may submit tenders for account of customers, if the names of the customers and the amount for each customer are furnished. Others are only permitted to submit tenders for their own account. Payment for the full par amount of the bills applied for must accompany all tenders submitted for bills to be maintained on the book-entry records of the Department of the Treasury. A cash adjustment will be made on all accepted tenders for the difference between the par payment submitted and the actual issue price as determined in the auction. No deposit need accompany tenders from incorporated banks and trust companies and from responsible and recognized dealers in investment securities for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, or for bills issued in bearer form, where authorized. A deposit of 2 percent of the par amount of the bills applied for must accompany tenders for such bills from others, unless an express guaranty of payment by an incorporated bank or trust company accompanies the tenders. Public announcement will be made by the Department of the Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their tenders. The Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and the Secretary's action shall be final. Subject to these reservations, noncompetitive tenders for each issue for $500,000 or less without stated price from any one bidder will be accepted in full at the weighted average price (in three decimals) of accepted competitive bids for the respective issues. Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks and Branches, and bills issued in bearer form must be made or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt on October 13, 1977, in cash or other immediately available funds or in Treasury bills maturing October 13, 1977. Cash adjustments will be made for differences between the par value of the maturing bills accepted in exchange and the issue price of the new bills. -3Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount of discount at which these bills are sold is considered to accrue when the bills are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration as capital assets. Accordingly, the owner of these bills (other than life insurance companies) must include in his or her Federal income tax return, as ordinary gain or loss, the difference between the price paid for the bills, whether on original issue or on subsequent purchase, and the amount actually received either upon sale or redemption at maturity during the taxable year for which the return is made. Department of the Treasury Circulars, No. 418 (current revision), Public Debt Series - Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury bills and govern the conditions of their issue. Copies of the circulars and tender forms may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the Public Debt. FOR IMMEDIATE RELEASE September 30, 1977 Contact:Charles Arnold 566-2041 PETER D. EHRENHAFT NAMED DEPUTY ASSISTANT SECRETARY (TARIFF AFFAIRS) Treasury Secretary W. Michael Blumenthal has announced the appointment of Peter D. Ehrenhaft as Deputy Assistant Secretary (Tariff Affairs). As such, he will be responsible, within the Office of General Counsel, for the administration of the antidumping and countervailing duty laws. In addition, Mr. Ehrenhaft has been designated by General Counsel Robert Mundheim as Special Counsel for Tariff Affairs. Prior to his appointment, Mr. Ehrenhaft was a partner in the New York and Washington law firm of Fried, Frank, Harris, Shriver and Kampelman. Previously, Mr. Ehrenhaft had served as Senior Law Clerk to the Chief Justice of the United States, Earl Warren, and as a Motions Law Clerk to the United States Court of Appeals for the District of Columbia Circuit. Since 1958, Mr. Ehrenhaft has been a Judge Advocate in the United States Air Force Reserve. From 1958 to 1961, he served on active duty whereafter he was assigned to Ready Reserve duty in the Office of the Judge Advocate General, in Washington, D. C , where he is presently the Reserve Chief of the International Law Division. Mr. Ehrenhaft was born in Vienna, Austria on August 16, 1933. He received an A.B. in Political Science with Honors in 1954 from Columbia College and received his LL.B. and M.I.A. with with Honors in 1957 from the Columbia University Schools of Law and International Affairs. Mr. Ehrenhaft was admitted to the Bar of New York in 1958 and the Bar of the District of Columbia in 1961. He is a member of the American Law Institute, American Bar Association, American Society on International Law, the American Foreign Law Society,the Licensing Executives Society, and the Association of the Bar of the District of Columbia. Mr. Ehrenhaft succeeds Peter 0. Suchman, who resigned as Deputy Assistant Secretary (Tariff Affairs) in August and has joined the New York and Washington law firm of Sharretts, Paley, Carter and Blauvelt. Mr. Ehrenhaft is married to the former Charlotte Kennedy. They have three children, Elizabeth, James and Daniel. B-468 oOo department of theTREASURY • # Q WASHINGTON, D.C 20220 TELEPHONE 86*20*1 jtf—"vw*/. FOR IMMEDIATE RELEASE EXPECTED AT 9:45 A.M. EDT OCTOBER 3, 1977 REMARKS BY THE HONORABLE C. FRED BERGSTEN ASSISTANT SECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS BEFORE THE CHARLES RIVER ASSOCIATES CONFERENCE ON FUTURE PROBLEMS IN MINERALS AND ENERGY POLICY WALDORF ASTORIA HOTEL, NEW YORK CITY U.S. Commodity Policy: A Progress Report Introduction The Carter Administration has adopted a four-fold approach to international commodity problems: — Negotiation of international agreements between producing and consuming countries to reduce price instability in world commodity markets. — Support for a common fund, to save money by pooling the financial resources of such agreements, which is now under active international negotiation. — Promotion of increased investment in the production of key raw materials through increased involvement in such activities by the World Bank family, the regional development banks, our own Overseas Private Investment Corporation in support of the activities of U.S. firms, and the investment insurance agencies of other industrialized countries. - 2 — Review of existing mechanisms to assure adequate support for the stabilization of export earnings, which is now provided globally by the Compensatory Finance Facility in the International Monetary Fund, as agreed on September 25 by the Development Committee of the IMF and World Bank. The Administration has now been implementing this policy approach for about six months. Some progress has been made, and major efforts lie just ahead. Hence it seems appropriate to take stock of the results to date and provide a basis for public comment on where we are headed. I greatly welcome the opportunity to do so before this group. Because of your focus, and because of the relative importance of developments in this particular area, I will concentrate today on our approach to international commodity agreements (ICAs). The Policy Objectives The Administration has adopted its comprehensive policy program, in part, as a way of engaging the developing countries in constructive and pragmatic efforts - which can result in gains for both them and us - rather than the senseless ideologica confrontation which has marked North-South relations in recent years. But the program has been adopted primarily to promote some of the key economic interests of the United States - price stability, smoother economic growth both at home and abroad, and reduction of international monetary imbalances. - 3 International commodity agreements can reduce inflation by reducing fluctuations in commodity prices. This is primarily because part of the transitory increases in commodity prices tend to lead to permanent increases in the level of final product prices. Increases in commodity prices push up final product prices, which in turn provide justification for increased wages. These wage increases limit the extent to which earlier price increases for manufactured and processed goods can decline once raw material prices have receded, because wages are asymmetrically sticky in a downward direction. Through wage increases, then, part of the transitory increases in commodity prices is built into the level of final prices. Downward price rigidity in highly concentrated industries may add to the ratchet effect for a few products. The available evidence suggests that fluctuations in commodity prices have at times played a significant role in U.S. inflation. One study estimates that the direct and indirect effect of increases in commodity prices, excluding fuels and construction materials, accounted for 72 percent of the increase in the industrial components of the U.S. Wholesale Price Index during 1973. The impact of any resulting ratchet effect is a less favorable trade-off between inflation and unemployment. - 4 In an effort to quantify this effect, Professor Jere Behrman of the University of Pennsylvania has estimated that the benefits for the U.S. GNP from stabilizing prices of ten commodities through international agreements, thereby reducing inflationary pressures and the resulting need to tighten macroeconomic policy, could range up to $15 billion in a single year. Behrman ignores the effects of the buffer stock purchases themselves in his estimation; a very crude correction for such effects would reduce the net gain to perhaps $5 billion. Values in this range are not large, but neither are they inconsequential for the U.S. economy. They are fairly large in terms of the costs of the buffer stocks themselves — suggesting a quite positive cost/benefit ratio for this particular policy instrument. The key issue is whether such.gains can be realized in practice. The Principles of International Commodity Agreements The United States is now a member of two ICAs, in tin and coffee* We have been active in negotiations for the creation of a third, in sugar. Efforts are underway which could lead to agreements in wheat and natural rubber, and possibly in copper. There exists an ICA for cocoa, of which - 5 the United States is not a member at present but where we have indicated a willingness to participate in a renegotiation. Producing countries also favor arrangements for tungsten, jute, tea and hard fibers. Hence, the universe of potential ICAs ranges from perhaps six to ten. The interest of the United States differs markedly among these different commodities. We export wheat. We are a major producer, but a net importer, of sugar and copper. We rely totally on imports of tin, coffee and cocoa. We also import all of our natural rubber, though domestic production of synthetic rubber provides a close substitute in that case. U.S. policy toward ICAs must thus comprehend a number of different situations. It must promote U.S. interests as an exporter, as an importer and as a producer of different products. If we were to try to rig the tin agreement to depress prices of our tin imports, it would be harder to resist similar efforts by others to depress prices of our wheat exports. If we were to resort to blatant producer collaboration in wheat, we could hardly reject efforts by coffee exporters to use the International Coffee Agreement as a cover for cartel action. Were we to use a copper agreement to limit the output of foreign producers in periods of weak prices, we would find it all the more difficult to resist efforts by producers in the tin agreement to boost their prices. We would be hard put to seek importer financing - 6 of wheat stocks if we were unwilling to help finance tin stocks. Our policy toward international commodity agreements must be balanced and consistent. We believe that we have fashioned such a policy, which can promote price stability in commodity markets. It is clear in theory that buffer stock operations, through the purchase of stocks when prices are low and their sale when prices are high, can work to stabilize prices around market trends to the benefit of both consumers and producers of particul products. Floor and ceiling prices can be set sufficiently apart to permit market forces to determine price during the vast majority of the time, coming into play only when extreme rises or declines occur. In addition, the range itself can be reviewed frequently to avoid its losing touch with market realities. Both producers and consumers should also gain from buffer stock arrangements because they help maintain production at efficient levels over the longer run, even though demand may decl temporarily. This in turn also helps induce sustained investment in commodity production, contributing to the adequacy of future supplies. The real issue is whether price stabilization agreements can be negotiated and faithfully implemented in practice. The United States has very little experience in this regard. - 7 Hence our current efforts are devoted toward working out ways to realize the benefits which ICAs can potentially provide. Price stabilization agreements, if they are to be truly effective and balanced, must operate to the maximum extent possible through buffer stocks of sufficient size to defend against both price surges and price declines. From the standpoint of .importing countries, buffer stocks which are large enough to effectively maintain agreed price ceilings are clearly preferable to small stocks which can become depleted during periods of rapid price increases. Supply control mechanisms — export or production quotas — are, by contrast, less acceptable. They interfere directly in the production or marketing of commodities. Hence they can reduce supplies and raise prices, rather than stabilize them. Production controls and export quotas usually freeze existing production and market patterns, since they tend to be allocated on the basis of some past average of market shares and bar entry for efficient new producers. Production controls can also lock industry into inefficient patterns of production, by forcing low-cost producers to cut back along with high-cost producers. Our policy is thus to place priority on buffer stocks as a price stabilizing technique. We will seek sufficient financial resources for such arrangements, including contributions from the United States and other consuming countries, - 8 to provide for stocks which are large enough to be effective in protecting agreed ceiling levels against price surges and floor levels against price declines. We will oppose pro- duction controls, and seek to limit the use of export quotas to circumstances of extreme downward pressure on prices. There are, in practice, several types of "international buffer stock" agreements. The prototype is the single stock held by an international organization created for that purpose, as in tin. Another is internationally coordinated national stocks, as proposed in the sugar negotiations and discussed in preparatory talks on a new wheat agreement. And it is also possible to consider export quota arrangements like the 1976 coffee agreement, which would promote holdings of national stocks, to be made available when prices rise, and would encourage investment in new productive capacity through frequent reallocation of country quotas. Progress on Individual Commodities To implement our approach, we are making efforts both to improve existing commodity agreements and to develop new ones. Tin is the only mineral now covered by an international agreement of producers and consumers. The purpose of the International Tin Agreement (ITA) is to attempt, through buffer stock operations in the world market, to stabilize prices within established limits. The Tin Council, the - 9 decision-making body for the ITA, also has the authority to impose export quotas to support buffer stock operations. The ITA has had limited success in stabilizing tin prices. A major reason is the relatively small size of the buffer stock. It has contained only about 22,000 tons, or cash equivalent, which amounts to roughly 10 percent of annual tin production and trade. This lack of resources has forced the Tin Council to resort repeatedly to export controls to support buffer stock operations. Since 1956, the buffer stock has been called on to stem major price declines on four occasions. On each occasion, the Tin Council decided, after sizable purchases of tin, that the buffer stock was in danger of being depleted of funds. It then resorted to export controls. These controls were successful in protecting the floor. But, in each .case, the imposition of export controls was quickly followed by cutbacks in tin production by private producers, who were unwilling to stockpile excess supplies. The result, once demand recovered, was tin shortages accompanied by rapid price increases that sales from the inadequate buffer stock were unable to moderate. The higher prices led the Council to raise the price range, thereby ratcheting up the support level which it would later be forced to defend again through export controls. - 10 If the buffer stock had been larger on these four occasions, it might have been successful in absorbing the surplus production and export controls would have been unnecessary to defend the floor price. Under such circumstances, the buffer stock might also have been capable of meeting later surges in demand for tin, which have repeatedly followed periods of slack demand. Treasury simulations of a hypothetical tin buffer stock suggest that a sufficiently larger stock would have successfully maintained the price of tin within a price band of +10 to +15 percent over the period 1956-1973 without any use of supply controls. It was also clear from the simulations that the ITA buffer stock, coupled of course with heavy sales from the U.S. stockpile, were successful in significantly dampening price increases during several years of that 18-year period. The Administration, however, cannot use the U.S. strategic stockpile of tin to help reduce price volatility on a continuing basis. Under current legislation, the United States is unable to purchase tin for the stockpile when tin prices are low. Sales from the stockpile can be made only after authorization by Congress. Even at present, despite the seemingly large excesses in the stockpile and high tin prices, the General Services Administration has no authority to sell. - 11 Currently, the market price of tin is about 15 percent above the ceiling price. The buffer stock is exhausted, and thus powerless to reduce current high prices. The inability of the Tin Agreement to moderate price rises has been, to a large extent, due to the refusal of consuming countries to contribute to the buffer stock. This is an important reason why the Carter Administration has decided to seek Congressional approval for a U.S. contribution of up to 5,000 tons of tin to the Agreement. This step should be particularly easy for us to take, because we now have more than 150,000 tons of tin in the U.S. strategic stockpile which are likely to be declared in excess of strategic needs following the Administration's current review of stockpile policy. Other consumers — including Belgium, Canada, Denmark, France, the Netherlands and the United Kingdom — have also pledged contributions. Their help should increase the buffer stock by the cash equivalent of an additional 4,000 tons of tin Japan has also indicated it is considering a contribution. It is our hope that, by enlargement of the buffer stock, the Tin Agreement will become more effective in stabilizing prices and its reliance on export controls to defend the floor prices can be greatly reduced. - 12 There is another problem which has contributed to the ratcheting up of the price range of the Tin Agreement. This is the levying of high production and export taxes by producing countries. Despite price rises since 1975 above the levels reached in the 1973-74 boom, these policies have led to declining investment and production by taxing away a large portion of producer revenues and reducing the marginal return to investment. We have strenuously objected to these domestic policies, both in quarterly sessions of the Tin Council and in bilateral consultations with individual producers, and believe that a key producing country may soon make important changes in its policies in this regard. - 13 I have dwelled on tin in some detail because several valuable lessons have already emerged from our experience with the Tin Agreement: — Small buffer stocks are simply not effective in moderating rapid price increases. It is in the interest of importing countries for buffer stocks to be larger rather than smaller, and the United States should contribute substantially to the stocks of ICAs in which it participates. — Resort to export quotas and/or production controls, as "back-up" measures to stem price declines, may force producers to cut back output significantly and drive out marginal producers, thus causing rapid price rebounds once demand recovers and destabilizing markets. These measures are decidedly inferior to buffer stocks for maintaining agreed price ranges. — It is difficult to reach agreement on "proper" price ranges. Beyond the purely intellectual problems which will always remain in this area, the interests of producers and consumers will frequently diverge. Nevertheless, we believe that there is now a rough balance of uncertainties between producers and consumers which will promote - 14 such agreement — since both have legitimate reason to worry about the impact on their own future interests of developments in the commodity markets. — It is far better for the United States to participate in ICAs than to sit outside them. We have already succeeded in moderating increases in the price range of the ITA, and our membership in the Agreement has enabled us to be much more effective in bringing pressure on exporting countries to adopt market-oriented production policies. The second ICA in which the United States participates covers coffee. In 1976, the United States signed the Third International Coffee Agreement, which was to operate on a system of export quotas to help assure adequate export earnings for producers without creating shortages or maintaining high prices. The quota provisions, however, have never gone into effect and are unlikely to, for at least another two years, due to the short supplies and high coffee prices which are largely the result of a devastating Brazilian frost in 1975. I might add that the recently high coffee prices may have been exacerbated by Brazilian operations in world - 15 coffee markets. I am referring to Brazil's purchases from other coffee exporters, the maintenance of high Brazilian prices in the face of sharply falling world coffee prices, and Brazilian purchases on the New York and London terminal markets. These actions may be the results of a skillful marketing policy and may also be designed to assure future supplies for consumers, but they have detracted from the spirit of producer-consumer cooperation which the 1976 Coffee Agreement represents. Nevertheless, the features of the Coffee Agreement bear close examination. It permits the price zones for quota adjustment to be set by the Coffee Council at the beginning of each coffee year in light of recent price trends, providing desirable flexibility for this central feature of the agreement. This range is to be defended through increases and decreases in global quotas. Unlike previous quota arrangements, however, the latest Coffee Agreement provides incentives for producing countries to stock production which can be released once prices begin to rise. They are given credit in quota allocations for holdings of national stocks. This encourages producing countries to maintain production, and thus promotes the interests of importing countries such as the United States because these stocks are available for the next price surge. - 16 The 1976 Coffee Agreement was also an improvement over earlier quota agreements in other respects. The traditional export quota arrangements for coffee tended to misallocate resources by basing quota levels on historical market shares, which could disadvantage the lowest cost producers and freeze out new market entrants. The new Agreement, however, provides for a variable portion of the quota to be based on each producer's share of world stocks. There is also considerable flexibility in the quota system, since country quotas are to be reset and reallocated annually. As a result, the Agreement will encourage plantings by efficient producers by permitting them to increase their future market share even though quotas have been in effect during previous years. This will also result in a buildup of stocks which can be exported and thereby benefit consumers if market conditions should suddenly turn tight. The United States is now actively pursuing the negotiation of a new International Wheat Agreement. For this commodity, we have tried to learn from past errors. The 1967 Grains Agreement, for example, failed because of the complexity and unworkability of an agreement based on export and import commitments, tied to specific prices, - 17 rather than on price-stabilizing stocking operations. The Agreement finally broke down because this rigid arrangement could not be preserved in the face of large world surpluses, which resulted in competitive subsidies among exporters which shattered the floor price. We now believe that a system of nationally held, internationally coordinated wheat reserves — with costs shared among importing and exporting countries — can be the first line of defense in achieving the objectives of price stabilization and greater food security for the world. There appears to be fairly widespread agreement among major producers and consumers on this approach, although discussions have not yet reached the state where serious drafting of a new agreement can begin. The United States has already taken major steps toward meeting its potential international obligations under any new reserve agreement. The President's recent decision to set aside some wheat acreage from current production was accompanied by an announcement that we would build up our wheat stocks. Thus it fully anticipated United States acceptance of such obligations. The role of these stocks will of course depend on the outcome of the negotiating process. A preparatory - 18 conference is now in session and another is scheduled for next month in London, with the negotiations to begin in early 1978. Negotiations for a new International Sugar Agreement began last spring. Those talks ended unsuccessfully, but were followed in July by a meeting of twenty major sugar trading nations during which the United States proposed the establishment of a sugar stabilization fund to finance the carrying costs associated with reserve stocks to be held by exporting countries. This proposal was well received and gave us reason to believe that a reconvened sugar conference in September could successfully complete negotiation of an agreement based on nationally held, internationally coordinated sugar reserves. However, the most difficult issue in the negotiations has involved the allocation of export quotas, not stock-holding, and the outcome is not yet clear. Since September 1976, there have been a series of meetings to discuss possible cooperative measures which might be taken to stabilize international copper markets. An intergovernmental expert group is currently studying the economic feasibility of various stabilization schemes, as well as ways to improve consultation and exchanges of - 19 views among copper producers and consumers. The expert group is to write its report next month, for consideration at a higher level producer-consumer conference in February 1978. The expert group will complete by November 1 a study of the feasibility, and the direct costs and benefits, of market stabilization schemes with varying types of economic provisions. In addition, the group's chairman will prepare a study of the legal and operational elements of a producer-consumer forum for copper, on the basis of submissions of member delegations of the expert group. Copper satisfies many of the economic conditions for a buffer stock arrangement including standardized grading, open trading, and storeability. However, we see a number of practical difficulties in establishing a copper agreement. The buffer stock required would be large and expensive, with cost estimates varying anywhere from around $1.5 billion to $6 billion, depending upon the width of the price range and the extent of reliance on back-up supply controls. Any imposition of supply controls would cause legal difficulties for a number of producing countries, in particular the United States, - 20 whose laws may prohibit the use of export and/or production quotas. We are currently reviewing the legal ramifications for the United States of a copper agreement with supply controls. Hopefully, the feasibility study currently underway will be useful in clarifying all of these issues. We also believe that it would be helpful to establish quickly a producer-consumer forum for copper, which is now the most important traded commodity without such an international locus for producer-consumer discussions. Of all the commodities for which preparatory discussions are now taking place, the discussion on a possible price stabilization scheme for natural rubber has been the most constructive. The United States is encouraged with the progress at the natural rubber meetings held so far, and is optimistic about the possibilities. During January and June of this year, major producers and consumers of natural rubber conducted businesslike discussions on problems in the world natural rubber industry. They succeeded in identifying excessive price fluctuations as a key problem facing producers and consumers, concluded that measures designed to reduce excessive price volatility would be in the interests of - 21 both, and began to examine specific measures to alleviate this problem, focussing particularly on a buffer stock arrangement proposed by producers. This arrangement calls for a 400,000 ton stock, roughly 13 percent of annual trade, which would be financed jointly by producers and consumers. It also provides for the imposition of export controls if the buffer stock should become exhausted through defense of the floor price. A task force of major producers and consumers has been established and will meet in October and December to examine in detail the implications of this proposal and other aspects of the natural rubber market. Following completion of this analytical exercise, it is expected that a decision will be made in February 1978 on whether or not to convene a negotiating conference for a rubber stabilization scheme. The United States Government's intensive analysis of the elements of a possible scheme is not yet complete. However, preliminary results have indicated that a buffer stock arrangement may be feasible and could have economic benefits for the United States. In this case, consumers would have a particularly strong safeguard in the form of synthetic rubber, which is a ready substitute for - 22 natural rubber in a number of applications and thus provides an effective ceiling for the price of natural rubber. In addition, as in tin, the United States probably does not have the choice of living in a world without a price stabilization agreement. The producers have already agreed to a limited buffer stock arrangement, which could go into effect before the end of 1977 without consumer participation. It is also probable that several major consuming nations would agree to join such an arrangement regardless of the U.S. decision. It is therefore likely that the United States can best protect its interests by taking an active role in the design and operation of a rubber arrangement. Producer Associations The possibility of a producers-only agreement for natural rubber reminds us that the wholesale movement toward "producer associations" which began during the 1973-1974 commodity boom has not disappeared. Producing countries have not forgotten the success of OPEC and the lesser, but significant, success of the International Bauxite Association. The movement has been blunted for the moment by the weakness in commodity prices, stemming from the world recession and current sluggish growth, - 23 and by the new U.S. willingness to participate in producerconsumer approaches to commodity problems. Renewed interest in cartels, however, could be stimulated by a failure to negotiate producer-consumer arrangements coupled with a resumption of rapid growth rates in the industrialized consuming countries. There are only a few commodities in which cartel, or cartel-like, action could significantly affect the United States. And the U.S. Government has made abundantly clear its distaste for cartels of all types, whether comprised of foreign governments or of domestic firms. Nevertheless, efforts by producing countries to form such arrangements could have adverse effects on U.S. economic and political interests even if their actual success was limited. Much will thus depend on our success, in cooperation with other producers and consumers, in negotiating rational, effective agreements to mitigate the problems of instability in world and U.S. commodity markets. Conclusion The Carter Administration has adopted a positive approach toward the negotiation of individual commodity agreements to stabilize prices around market trends. We strongly prefer international buffer stocks wherever they are feasible. We will seek sufficient financial - 24 resources for those agreements we join, through contributions by producing and consuming countries, to provide sufficient buffer stocks to protect against both high and low prices. Where international buffer stocks are impractical, but greater price stablization nevertheless appears desirable, the United States could consider export quota arrangements which promote national stocking to protect against high prices and encourage investment through a flexible quota reallocation system. We could also consider internationally coordinated national stocks in cases where international buffer stocks are not feasible. Such arrangements are in the interest of the United States as a major consumer and producer of a number of important raw materials and. food products. Hence the United States is moving forward in international discussions on a number of commodities in efforts to improve previous or existing agreements, and to determine the possibilities for new agreements. As we proceed in these discussions we will undertake a thorough analysis of the technical and economic aspects of each commodity in an effort to tailor any agreement to the characteristics of that particular commodity and to structure the agreement to assure it is truly effective in stabilizing prices. - 25 When we conclude that a given commodity meets these tests, we will sign the agreement and seek Congressional approval for it. Successful completion of such ventures will promote both the economic and foreign policy interests of the United States, and can thus be a useful component of our international economic policy in the years and decades ahead. FOR RELEASE UPON DELIVERY EXPECTED AT 2:00 P.M. OCTOBER 4, 1977 STATEMENT OF THE HONORABLE LAURENCE N. WOODWORTH, ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY BEFORE THE COMMERCE, CONSUMER, AND M O N E T A R Y AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS Mr. Chairman and members of this distinguished subcommittee: The Subcommittee has asked the Treasury Department a number of questions with respect to the foreign tax credits claimed by U.S. petroleum companies. Before proceeding to these questions, I would like to make the following general comments with respect to the foreign tax credit. First, Treasury and Internal Revenue Service have, in recent years, focused rather closely on the parameters of the foreign tax credit. A revenue ruling issued in 1976 concerning Indonesian production-sharing agreements explains, in the Indonesian context, the governments views on the distinction between a royalty and a tax. Later in 1976 the IRS issued a news release outlining the circumstances under which a foreign tax credit would be allowed for a levy imposed by a foreign government owning minerals extracted by U. S. taxpayers. The IRS has been working on the creditability issues raised in other O P E C countries. The Treasury expects to focus specifically on these issues within the very near future. In your letter of September 12, 1977, you note that in April of this year the Subcommittee requested certain information from the Treasury concerning foreign tax credit issues. Secretary Blumenthal responded to the Subcommittee in a letter of June 28, which explains our procedures and general rules. W e transmitted to you at that time certain documents you requested concerning the foreign tax credit. W e were, however, unable to turn over certain additional documents to the B-470 -2Subcommittee because they constitute tax return information. The Chief Counsel of the Internal Revenue Service has given us his opinion that these additional documents constitute tax return information. The Chief Counsels analysis was made on a document by document basis. W e would, of course, turn those documents over to you if the procedures of section 6103(f) of the Internal Revenue Code were followed. That section provides that your Committee m a y receive tax return information from the Treasury if it obtains a resolution from the House or the House and Senate. I must, regardless of any personal inclination, be cautious in m y replies to your questions because of the criminal penalties imposed by our law. Code section 7213 provides that the unauthorized disclosure of tax return information is a felony punishable by a fine of up to $5, 000 and imprisonment of no more than five years, plus dismissal from office. The first question asked by the Subcommittee is with respect to the revenue losses since 1961 resulting from foreign tax credits claimed by U. S. petroleum companies. Between 1961 and 1972, the tax liability of U. S. oil companies would have been $300-$600 million a year higher if foreign taxes had been deducted rather than credited; of that amount, between $150 and $400 million is attributable to O P E C countries. (See table. ) W e do not have data on carryovers, but their use has been virtually eliminated since the changes made by the Tax Reduction Act of 1975. Data from 1974 and 1976 shows a much higher effect because of the jump in oil prices and because of tax credits claimed with respect to certain non-recurring gains from the disposition of capital assets. The decrease between 1974 and 1976 is in part due to the effect of the Tax Reduction Act of 1975. Using SEC data adjusted by Treasury estimates, I would guess that the 1976 figure might be close to $1.2 billion. I want to emphasize that these figures can only be taken as estimates of increased revenue to the Treasury if the denial of the credit would have been accompanied by two rather important changes in U. S. tax law: (1) the denial of credit for any part of the payments made to a foreign country on oil income even if that part is unquestionably a tax on net income (and, it is unrealistic to assume that the countries would not endeavor to meet whatever standards the U. S. sets for a creditable income tax), and (2) the end of the deferral of U. S. tax on the foreign income of foreign subsidiaries so that the U. S. companies could not avoid the U. S. tax by operating abroad through foreign subsidiaries rather than branches. -3- The second question posed by the Subcommittee concerns whether U.S. tax rulings and policy with respect to multinational petroleum compa nies have created a preference for foreign versus domestic operations. This question is complex. It is, of course, our Code, and not Treasury policy or rulings, which provides that foreign income taxes are creditable against U.S. income tax. There is no equivalent credit in the domestic context. However, an unintended advantage would arise with respect to the foreign tax credit if the foreign government inflates its income tax to include payments which are really royalty payments in disguise. I might also note here that potential abuse of the U. S. foreign tax credit mechanism was substantially reduced by the Tax Reduction Act of 1975. Among other changes, this Act placed a separate limitation on the U. S. credit for taxes paid with respect to foreign oil and gas extraction income. For example, those taxes will no longer be credited against oil company foreign profits on refining, marketing, or shipping petroleum. While we will continue to focus on the issue of credits for oil company payments to foreign governments, the cost to the U. S. Treasury of crediting foreign taxes has been materially reduced by this change in our tax legislation. The third question asked by the Subcommittee concerns the comparison of U.S. firms with international operations with exclusively domestic producers. In assessing the competitive advantage of corporations with international operations vis a vis domestic producers, one must consider not only the creditability of foreign taxes, but also other tax considerations. For example, domestic investment qualifies for the 10 percent investment tax credit and for accelerated depreciation, but foreign investment does not. Whether a company with international operations enjoys a net advantage over a domestic producer is hard to say in the abstract. Some m a y be better off, others worse off. The fourth, fifth and ninth questions posed by the Subcommittee concern Treasury policies with respect to the review of rulings and Treasury contacts with taxpayers and the IRS concerning foreign tax credits. The Assistant Secretary for Tax Policy is responsible for the review of rulings proposed for publication by the Internal Revenue Service. This review is carried out, in the case of foreign tax credit rulings, primarily by the International Tax Counsel. In the foreign tax credit area, as in other areas, proposed revenue rulings are examined to determine whether the positions taken therein represent sound tax policy and are consistent with the statute and outstanding interpretations such as regulations and rulings. -4As I stated earlier, the Treasury has submitted to the Subcommittee copies of memoranda found in the files concerning the Assistant Secretary for Tax Policy's evaluation of foreign tax credit rulings which have arisen since 1955. These memoranda discuss legal and policy considerations in the context of specific foreign tax credit situations. You have asked for m y comments on the memorandum of April 8, 1976 submitted by the Treasury to you in April of this year. That memorandum makes certain statements with respect to Treasury's role in a foreign tax credit controversy among the IRS, a foreign country and a taxpayer. The m e m o r a n d u m goes on to state that if Treasury cooperated in a particular manner, this would give the appearance of "secret-dealings with big oil companies to negotiate a tax credit as was done in the early 1950!s. " I think the meaning of the memorandum is that some people believe there were in-secret dealings in the 1950fs between the Treasury Department and the oil companies to negotiate a tax credit, and that such people might well take a similar view if the Treasury Department cooperated in any manner in 1976. I personally have not seen evidence of impropriety in the course of the issuance of Revenue Ruling 55-296, the Saudi Arabian revenue ruling to which the memorandum is referring. With respect to your question concerning Treasury contacts with private parties since October 1, 1973, we have discussions from time to time on a number of issues with taxpayers and their representatives. W e believe our actions must be taken on an informed basis. The Treasury has not maintained a list of such discussions and therefore we are unable to present you with summaries of all discussions since October 1, 1973. I can tell you that in August of 1977 the Treasury heard arguments that the concept of O P E C posted prices fits in with the philosophy of the foreign tax credit as reflected in judicial decisions. Your sixth question concerns the issue of what constitutes an "appropriate royalty." IRS News Release IR 1638, issued on July 14, 1976, requires that where a foreign government owns mineral resources, there must be a payment of an appropriate royalty before a foreign tax can be found. The news release does not define the term "appropriate royalty. " The Treasury Department has not yet been faced with the problem of determining under current conditions what amount of royalty payment will be viewed as appropriate. As you can imagine, that will depend very much on the facts and circumstances just as, for example, the determination of an arm's-length price under section 482 depends very much on the nature of the goods being transferred. In cases in which there are no non-governmental owners of petroleum, it will -5- doubtless be very difficult to determine what an appropriate royalty should be, because in those situations there m a y be no basis for comparison and because there is no economic difference to the foreign government between a royalty and a tax. However, where there are non-governmental owners of petroleum in the same country there m a y be objective standards by which to judge the appropriateness of the royalty. Your seventh question concerns whether the income tax in OPEC countries, Canada, Mexico and Trinidad is calculated separately and independently of the amount of royalty and of any other tax or charge imposed by the governments of those countries. Your eighth question is whether in each of these countries income is determined on the basis of arm's-length transactions and whether the receipts are actually realized in a manner consistent with U.S. income tax principles. The IRS News Release of 1976 lists these issues as being relevant in determining whether a foreign tax qualifies as an income tax. Whether a particular country's system of taxation has these characteristics is largely a question of fact. Procedurally, these questions would be initially addressed by the IRS in the context of specific ruling requests or requests for technical advice arising from audits of taxpayers. In such a context the government has before it the material necessary to reach a decision: the foreign statute or statutes, any agreements between the taxpayer and the foreign government and all other relevant material. The IRS has stated that it is considering these questions with regard to certain OPEC countries, and Treasury will, of course, focus on these questions in those specific instances. Finally, you ask for a discussion of the substance of all communications since January 1, 1971 between Treasury and the IRS regarding foreign tax credits claimed by U.S. petroleum companies. W e have already submitted to the Subcommittee copies of memoranda of IRSTreasury communications which we are able to give you without revealing tax return information. Needless to say, there are frequent oral communications between m y office and the IRS concerning the foreign tax credit and many other issues. Many of these are quite informal and are not recorded by the Treasury Department. U.S. Tax Liability of U.S. Oil Companies, 1975 (billions of dollars) Total : Domestic : Foreign Taxable income 38.5 6.6 31.9 Tentative U.S. tax 17.8 2.5 15.3 Credits 15.4 0.6 14.8 Foreign tax credits 14.8 Investment and WIN credits 0.6 Tax after credits 2.4 Office of the Secretary of the Treasury Office of Tax Analysis Source: 14.8 0.6 1.9 0.5 October 4, 1977 Preliminary (unaudited) data from 1975 corporate tax returns. Estimates of Increased U.S. Tax Liability If Foreign Oil Taxes Deducted Instead of Credited, Selected Years ($ millions) r : jr~ Year : All Countries : OPEC $301 $150 406 254 406 253 372 232 1/ 352 219 1/ 446 309 435 301 2/ 591 410 2/ 506 427 $2.6 billion 3/ $2.2 billion 4/ $1.2 billion $1.0 billion 4/ Office of the Secretary of the Treasury October 4, 1977 Office of Tax Analysis 1961 •1962 1964 1965 1966 1968 1969 1970 1972 1974 P/ 1976 £/ V Possibly overstated. In the absence of data on foreign tax credits claimed, it was assumed that there was no U.S. tax after credits. For some OPEC countries this was not necessarily the case. p/ Preliminary e/ Estimate 1/ Assuming the same ratio to the total as in 1964. 2/ Assuming the same ratio to the total as in 1968. 3/ The estimate is increased by special factors not related to oil production. 4/ Assuming the same ratio to the total as in 1972. Sources: 1961-1974: IRS tabulations of forms filed claiming a foreign tax credit. See attached table for underlying numbers. 1976: SEC and other company data adjusted by Treasury. Foreign Income and Taxes of U.S. Petroleum Companies Operating in OPEC Countries Selected Years, 1961-1972 ($Thousands) Taxable Foreign Income 4/ Foreign Tax 5/ After Tax Foreign Income Taxable Foreign Income Including "Gross-up" 6/ Credit Claimed Increase in Tax if Deduction Not Credit 1961 All countries Middle East 1/ African OPEC 2/ Venezuela Indonesia Subtotal, OPEC 3/ ,404,776 687,687 n.a. n.a. n.a. n.a. 740,958 400,082 n.a. n.a . n .a . n.a. 663,818 287,605 n.a. n .a. n .a. n.a. 1,404,776 686,298 n.a. n.a. n.a. n.a. n.a. 301,000 149,555 863,551 382,712 388,815 52,132 14,298 487,957 1,650,590 815,291 n.a. n.a. n.a . n.a. n.a. 406,030 253,738 1962 All countries Middle East 1/ African OPEC 2/ Venezuela Indonesia Subtotal, OPEC 3/ 1,650,590 826,687 43,293 5/ 327,901 14,298 1,212,179 787,039 443,975 4,478 5/ 275,769 — 724,222 -2- Taxable : Foreign Foreign income 4/; Tax 5/ : Taxable Foreign : After Tax : Income Including : Credit Foreign Income : "Gross-up" 6/ : Claimed : Increase in : Tax if Deduction : Not Credit 1964 All countries Middle East 1/ African OPEC 2/ Venezuela Indonesia Subtotal, OPEC 3/ 2,006,706 913,319 191,688 319,972 126,516 1,551,495 1,123,370 581,216 108,200 318,137 37,027 1,044,580 883,336 332,103 83,488 1,835 89,489 506,915 2,073,431 1,001.626 n.a. n.a. n.a. n.a. n.a. 406,579 253,458 2,142,849 n.a. n.a. n.a. n.a. 1,212,179 1,303,447 n.a. n.a. n.a. n.a. n.a. 839,402 n.a. n.a. n.a. n.a. n.a. 2,209,239 1,029,049 n.a. n.a. n.a. n.a. n.a. 371,545 1965 All countries Middle East 1/ African OPEC 2/ Venezuela Indonesia Subtotal, OPEC 3/ : Taxable Foreign After Tax : Income Including : Foreign Income : "Gross-up" 6/ : Increase in Credit : Ta x if Deduction Claimed : Not Credit Taxable Foreign Income 4/ Foreign Tax 5/ 2,278,945 n.a . n.a . n.a. n.a. n.a. 1 ,479,550 n.a. n.a. n.a. n.a. n.a. 779,396 n.a. n.a. n.a. n.a. n.a. 2,402,177 1,131,235 n.a. n.a. n.a. n.a. n.a. 352,271 All countries Middle East 1/ African OPEC 2/ Venezuela Indonesia Subtotal, OPEC 3/ 1969 3,086,017 1,538,798 564,898 452,223 66,496 2,622,415 2,138,701 1,177,646 506,200 353,758 60 2,037,664 947,316 361,152 58,698 98,465 66,436 584,751 3,149,135 1,609,393 n.a. n.a. n.a. n.a. n.a. 446,833 308,749 All countries No country detail available 3,374,819 2,457,215 917,604 3,462,698 1,779,254 435,444 3,515,345 2,338,291 1,177,054 3,622,503 1,820,143 590,881 7/ All countries Middle East 1/ African OPEC 2/ Venezuela ~~ Indonesia Subtotal, OPEC 3/ 1968 1970 All countries No country detail available -4- Taxable : Foreign Income 4/: Foreign Tax 5/ : Taxable Foreign : After Tax : Income Including : Credit Foreign Income : "Gross-up" 6/ : Claimed Increase in Tax if Deduction Not Credit 1972 All countries OPEC 6,612,335 5,630,877 4,948,606 4,741,539 1,663,729 889,338 6,760,227 2,952,226 n.a. 505,907 427,882 1974 p/ All countries 32.1 b. 9/ Office of the Secretary of the Treasury Office of Tax Analysis 26.7 b. 5.4 b. 32.1 b. 15.4 b. 2.6 b. 8/ October 4, 1977 p/ preliminary Source: IRS, Statistics of Income, Foreign Income and Taxes Reported on Corporation Income Tax Returns, 1961, 1962, and 1964, and unpublished IRS tabulations. -51/ For 1961 includes only Saudi Arabia, Iran and Kuwait and includes all mining and manufacturing (presumably almost all of which was oil extraction and refining). For 1962 and later years, includes some non-OPEC Middle East (e.g., Oman, Bahrain, Israel) and covers oil extraction only. 2/ Algeria, Libya, Egypt, Nigeria. Does not include Gabon. 3/ Excluding Ecuador and Gabon and including some non-OPEC as indicated in note 1. V Excluding "gross-up" of dividends from related foreign corporations where applicable. 5/ Foreign taxes paid or accrued, excluding carryovers and taxes deemed paid. 6/ For years after 1962, U.S. corporations must "gross up" their foreign taxable income by part or all of the foreign corporate tax on subsidiary dividends for which they could claim a deemed paid credit. With a deduction, neither the gross up nor the deemed paid credit are relevant; with a credit both are. 7/ This figure is probably overstated. The corporate tax rate for 1970 was 50.4% for January-June and 48% from July through December, or an average annual rate of 49.2 percent. However, the credit claimed amounts to 50.2 percent of foreign average income, so it was assumed that there was no U.S. tax after the credit (although there is in most other years), and the 50.2% rate was applied to after-foreign tax income to estimate the revenue if those taxes were deducted. 8/ This is an atypical year due to special circumstances in several companies. 9/ Includes gross-up. Note: The U.S. corporate tax rate was 52% for 1961-63, 50% in 1964, and 48% thereafter, but the 48% was raised to 52.8% in 1968 and 1969 and to 49.2% in 1970 by surcharges. The potential revenue gain is the excess of the actual rate times after-tax foreign income over the amount by which the actual rate times column 4 exceeds the credit claimed. Foreign Tax Credits Claimed 1972-1975 (billions of dollars) • • • D / . : 1972 : 1973 : 1974 : 1975" Total 6.3 9.6 20.6 19.8 Petroleum companies Other 3.0 3.3 5.2 4.4 15.5 5.2 14.8 5.0 Office of the Secretary of the Treasury October 4, 1977 Office of Tax Analysis p/ Preliminary Source: IRS tabulations. FOR IMMEDIATE RELEASE MONDAY, OCTOBER 3, 1977 CONTACT: Al Hattal 566-8381 TREASURY DEPARTMENT MAKES DETERMINATIONS IN STEEL CASES The Treasury Department today announced a tentative determination that carbon steel plate from Japan is being sold in the United States at "less than fair value." Importers will be required to post bonds sufficient to cover estimated dumping duties of about 32 percent on all further Japanese carbon steel plate imports. Technically, the steel is subject to a withholding of appraisement under which the assessment of Customs duties is suspended for up to six months. This allows any dumping duties which are finally determined to be levied on all imports occurring after the tentative determination. A final determination must be made by the Treasury Department within ninety days. If the final determination confirms sales at less than fair value, the matter is referred to the International Trade Commission for its ruling on whether these imports have injured or threaten injury to domestic industry. The ITC must make its finding within 90 days of the final determination by the Treasury Department. If injury is found, dumping duties will be imposed. The investigation, initiated on the petition of the Oregon Steel Mills Division of Gilmore Steel Corporation, involves Nippon Steel Corporation, Nippon Kokan K. K. , Sumitomo Metal Industries, Ltd., Kawasaki Steel Corporation, and Kobe Steel, Ltd. These companies accounted for over 7 0 percent of recent carbon steel Plate imports from Japan. In 197 6, imports of carbon steel plate from Japan amounted to about $174 million. The Treasury Department investigation found that Japanese Producers have been marketing steel plate in the United States at Prices below the cost of production. The average margins of dumping, which determine the estimated dumping duties, amounted t0 32 percent. These margins were calculated in most cases by comparing the purchase price paid by importers not related to the B-473 producers with the "constructed value" of the merchandise, based essentially on the Treasury Department's estimated cost of production plus statutory minimum general expense and profit margins. This case represents the largest volume of trade potentially affected by the 1974 cost of production amendments to the Antidumping Law. The Treasury Department also announced actions in two other cases. In a case involving welded stainless steel pipe and tubing from Japan, the Treasury Department determined that there was inadequate information to reach a tentative determination concerning sales at less than fair value and extended for 90 days the period within which the determination must be made. Trade which amounted to about $10.7 million in 1976 is involved. A previously discontinued anti-dumping proceeding initiated by eight U.S. companies was reopened at the initiative of the International Trade Commission! The companies under investigation are Yamoto Industries Co., Ltd.; Nisshiu Steel Co., Ltd,; Stainless Pipe Industries, Ltd.; Brasinet . Industries Corp., Ltd. and Toa Seiki Company. A final negative Determination has been made under the Countervailing Duty Law in a case involving grain oriented silicon steel from Italy. The Treasury Department determined that there was insufficient evidence to indicate that the production or exportation of this product was benefiting from government subsidies. The steel was produced by Terni, a company that is part of the Finsider Group of which an agency of the Italian Government owns a majority of the stock. The case was initiated by Armco Steel Corp. This grade of steel, which is used in electrical transformers, was last imported from Italy in 1975 in a volume of about $6.6 million. APP-2-04-0:D:T SN/dt DEPARTMENT OF THE TREASURY OFFICE OF THE SECRETARY CARBON STEEL PLATE FROM JAPAN ANTIDUMPING WITHHOLDING OF APPRAISEMENT NOTICE AGENCY: U.S. Treasury Department ACTION: Withholding of Appraisement SUMMARY: v This notice is to advise the public that an antidumping investigation has resulted in a preliminary determination that carbon steel plate from Japan is being sold at less than fair value. (Sales at less than fair value generally occur when the price of merchandise sold for exportation to the United States is less than the price of such or similar merchandise sold in the home market or to third countries or the constructed value of the merchandise) . Appraisement for the purpose of determining the proper duties applicable to entries of this merchandise will be suspended for 6 months. Interested parties are invited to comment on this action. EFFECTIVE DATE: (Date of publication in the FEDERAL REGISTER) . FOR FURTHER INFORMATION CONTACT: Mr. Stephen Nyschot, Operations Officer, U.S. Customs Service, i Duty Assessment Division, Technical Branch, 1301 Constitution Avenue, W, Washington, D.C. 20229, telephone (202-566-5492). -2SUPPLEMENTARY INFORMATION: On March 8, 19 77/ information was received in proper form pursuant to sections 153.26 and 153.27, Customs Regulations (19 CFR 153.26, 153.27), from counsel acting on behalf of Oregon Steel Mills, Division of Gilmore Steel Corporation, indicating a possibility that carbon steel plate from Japan is being, or is likely to be, sold at less than fair value within the meaning of the Antidumping Act, 1921, as amended (19 U.S.C. 160 et seq.)(referred to in this notice as "the Act"). An "Antidumping Proceeding Notice" was published in the FEDERAL REGISTER on March 30, 1977 (42 F.R. 16883). That notice indicated that there was evidence on record concerning injury to or likelihood of injury to, or prevention of establishment of, an industry in the United States. For purposes of this notice, the term "carbon steel plate" means hot-rolled carbon steel plate, 0.1875 (3/16) inches or more in thickness, over 8 inches in width, not in coils, not pickled, not coated or plated with metal, not clad, and not cut, pressed or stamped to non-rectangular shape. TENTATIVE DETERMINATION OF SALES AT LESS THAN FAIR VALUE On the basis of the information developed in the Customs Service investigation and for the reasons noted below, pursuant to section 201(b) of the Act (19 U.S.C. 160(b)), I hereby determine that there are reasonable,, grounds to believe or suspect that the purchase price or the exporterfs sales price of -3carbon steel plate from Japan is less, or is likely to be less, than the fair value of such or similar merchandise. STATEMENT OF REASONS ON WHICH THIS DETERMINATION IS BASED a. Scope of the Investigation. It appears that during the period of investigation covering October 1, 1976 to March 31, 1977, over 70 percent of the imports of the subject merchandise from Japan were manufactured by Nippon Steel Corporation (Nippon Steel), Nippon Kokan K.K. (NKK), Sumitomo Metal Industries, Ltd. (Sumitomo) , Kawasaki Steel Corporation (Kawasaki), and Kobe Steel, Ltd. (Kobe). Therefore, the investigation was limited to these five manufacturers . b. Basis of Comparison. For the purpose of considering whether the merchandise in question is being, or is likely to be, sold at less than fair value within the meaning of the Act, the proper basis of comparison appears to be between purchase price and constructed value on all sales by Nippon Steel, NKK, and Kobe, and on most sales by Sumitomo and Kawasaki. Purchase price, as defined in section 203 of the Act (19 U.S.C. 162), was used since those export sales were made to unrelated Japanese trading companies. On the remaining sales by Sumitomo and Kawasaki, the proper basis of comparison appears to be between exporterfs sales prices, as defined in section 204 of the Act (19 U.S.C. 163), and constructed value, since those sales in the United States are made by importers who are related to those manufacturers. Constructed value, as defined in section 206 of the Act (19 U.S.C. 165) was used pursuant to section 205(b) of the Act (19 U.S.C. 164 { since on the basis of the best evidence available at this time sales in the home market which were at not less than the cost of production appear to be inadequate as a basis for comparison. As the exporters declined to provide any information concerning their sales in third countries and no other information to the contrary was available, it has been assumed that sales to third countries which were at not less than the cost of production would also provide an inadequate basis for>. home comparison.