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TRC:AS.
HJ
10
.A13P4
v.327
U.S. Department of the Treasury
PRESS RELEASES
Text as Prepared for Delivery
For Immediate Release
October 1, 1993
REMARKS BY TREASURY SECRETARY LLOYD BENTSEN
THE CONFERENCE TO SUPPORT MIDDLE EAST PEACE
WASHINGTON, D.C.
Our world has been transformed in the past four years. At each change, the
world community has offered its assistance. Now, we are called to make an investment
in peace, and an investment in the future prosperity of the West Bank and Gaza.
We have moved with record speed. Our meeting today demonstrates that. It also
demonstrates that more and more nations are willing to share the responsibility for
protecting peace by assuming the responsibility for financing it.
I am encouraged by the broad-based cooperation we are seeing. It is more than
just rhetoric, it is concrete commitments and action. I want to compliment the World
Bank for its invaluable contribution in assessing the needs of the Palestinians. In a few
moments Mr. Preston will explain his staffs estimates of overall assistance requirements.
While we can be encouraged by the level of cooperation demonstrated here today,
no one must underestimate the challenges which lie ahead for the Palestinian people.
They must simultaneously pursue self-government and economic development. Both are
essential to long-lasting peace.
Let me review briefly the kinds of assistance I believe we should provide. First,
we must immediately finance relief and rehabilitation of a damaged and inadequate
infrastructure. And we must also move quickly to finance the administration of the West
Bank and Gaza until the Palestinians can begin raising revenues themselves.
Over the longer-term, it is essential that we support the public and private
investment that will .lay the foundation for sustained economic growth in these areas.
Incentives for private investment will be a key element in the success of this effort.
In addition, both our immediate and ongoing efforts must be directed at building
the capacity of the Palestinian people to organize and manage their own political and
economic affairs.
LB-407
In light of these needs, we must get assistance flowing immediately, but we also
must have a multi-year plan to meet the continuing needs of the West Bank and Gaza.
As the Vice President announced, the United States plans to make $500 million
available over five years. We will shortly hear the multi-year commitments of others
willing to help over an extended period.
Because many of us face budget constraints, it is critical that we target and spend
our resources efficiently. Our assistance must be carefully designed and implemented,
and there must be regular coordination to avoid duplication and wasting resources.
The investment in peace we make today can pay dividends for generations.
-30-
FOR IMMEDIATE RELEASE
October 1, 1993
CONTACT: Michelle Smith
(202) 622-2960
TREASURY ANNOUNCES PENALTY AGAINST
NATIONAL CHECK CASHERS CORPORATION
The Department of the Treasury announced on Friday that the National Check
Cashers Corporation has paid a civil money penalty of $100,000 for failing to file currency
transaction reports as required by the Bank Secrecy Act (BSA).
The violations occurred from 1987-91 at the corporation's Oklahoma City and Tulsa,
Okla. locations and were identified and reported to Treasury by Internal Revenue Service
(IRS) examiners. Treasury determined the amount of the penalty after considering
improvements to National's BSA compliance program as noted in a recent IRS examination.
Ronald Noble, Assistant Secretary for Enforcement, said this penalty is part of
Treasury's continuing effort to enforce and ensure BSA compliance by non-bank financial
institutions. "Compliance with the BSA is a key element in our efforts to detect money
laundering," he said.
Noble acknowledged the assistance of U.S. Attorney John Green and Assistant U.S.
Attorney James Robinson. He also commended the efforts of District Director K.J. Sawyer
and Donald Shoemake, both of the IRS Oklahoma City district office.
The BSA requires banks and other non-bank financial institutions to keep certain
records, to file currency transaction reports with the Treasury on cash transactions in excess
of $10,000 and to file reports on the international transportation of currency, traveler's
checks and other monetary instruments in bearer form. The purpose of these records and
reports is to assist the government's efforts in civil, criminal, tax and regulatory
investigations and proceedings.
LB-408
-30-
Text as Prepared for Delivery
For Immediate Release
October 1, 1993
REMARKS OF TREASURY SECRETARY LLOYD BENTSEN
CONFERENCE TO SUPPORT THE MIDDLE EAST PEACE WRAPUP
Today we are making an investment in peace. About 50 nations and international
organizations have come together as we assemble a tangible show of support for the
Middle East Peace.
As you know, there are some very immediate and pressing needs in the West
Bank and Gaza that we must attend to quickly. I am gratified that there are pledges of
over $600 million for the critical first year. Over two years, it will reach $1 billion.
Commitments made today approach $2 billion over five years. With the
continuation of support from donors who have pledged today, I'm confident tha.t we will
exceed the $2.4 billion World Bank estimate of needs over five years.
You'll find some of the fine points of what we've agreed to do in the longer
statement we're handing out, but I want to point out the broad role of the multilateral
institutions in this effort. We are calling on the World Bank to play an important role,
as well as the United Nations Relief and Works Agency, the U.N. Development
Programme and the IMF.
As donor nations, we agreed that we should support urgent relief efforts and start
rehabilitating the existing infrastructure. That in itself is a challenge, but we also agreed
we must do more.
We must help the Palestinians as they work to organize and manage their own
political, economic and social affairs. The donors have agreed to start an extensive .
program of technical assistance to build the institutions of government and train
personnel. The close cooperation of the Palestinians and the Israelis will be essential in
every area of institution building. One of the critical needs will be creating a revenue
sharing system and a local revenue collection system.
Over the long term, we agreed that promoting both public and private investment
will launch the West Bank and Gaza on a path of growth. We have a five-year program
to make investments in physical and social infrastructure, as well as in the area's
productive capacity.
LB-409
2
The representatives of both the Palestinian community and Israel, and the private
donors, stressed the part the private sector will play in this. The Palestinians
acknowledged how very important it is to have an environment that encourages private
investment. And donors will encourage private investment through incentive programs.
Conference participants also stressed the need to address the development of the
West Bank and Gaza in its regional context. And there was agreement that freer trade
is needed throughout the region.
And finally, we have a shared concern that the assistance we are pledging be
managed as efficiently as possible, so there will be close cooperation among major
donors and the World Bank to meet that goal.
-30-
UBLIC ,DEB~ NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE,
October 4, 1993
-~
·it
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,899 million of 13-week bills to be issued
October 7, 1993 and to mature January 6, 1994 were
accepted today (CUSIP: 912794H31).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
2.92%
2.96%
2.96%
Investment
Rate
2.98%
3.02%
3.02%
Price
99.262
99.252
99.252
Tenders at the high discount rate were allotted 43%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
35,872
45,767,234
6,721
32,627
29,901
17,279
2,164,542
15,046
3,387
19,692
18,030
559,513
862 1 026
$49,531,870
Acce:gted
35,872
10,575,890
6,721
32,627
29,901
14,139
217,732
15,046
3,387
19,692
18,030
68,163
862,026
$11,899,226
Type
Competitive
Noncompetitive
Subtotal, Public
$44,159,267
1,349 1 273
$45,508,540
$6,526,623
1,349,273
$7,875,896
2,947,330
2,947,330
1,076,000
$49,531,870
1 1 076,000
$11,899,226
Federal Reserve
Foreign Official
Institutions
TOTALS
LB-410
111.1C
CONTACT: Office of Financing
..' .;,; ~ i
202-219-3350
p~
UBLIC DEBT" NEWS
,
,
Department of the Treasury •
FOR IMMEDIATE RELEASE
October 4, 1993
,
,,",
. '.-
CONTACT:
I
I
I
.."
',.;
",'
'.-
"
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $11,837 million of 26-week bills to be issued
October 7, 1993 and to mature April 7, 1994 were
accepted today (CUSIP: 912794J88).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.07%
3.08%
3.08%
Investment
Rate
3.16%
3.17%
3.17%
Price
98.448
98.443
98.443
$540,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 57%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED ( in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
37,138
39,442,417
4,292
21,362
30,325
19,707
1,492,084
9,863
5,313
23,399
14,085
650,858
653,019
$42,403,862
AcceQted
37,138
10,721,340
4,292
21,362
30,325
19,277
231,264
9,863
5,313
23,399
14,085
66,638
653,019
$11,837,315
Type
Competitive
Noncompetitive
Subtotal, Public
$38,086,956
1.021.006
$39,107,962
$7,520,409
1,021.006
$8,541,415
2,700,000
2,700,000
595,900
$42,403,862
595,900
$11,837,315
Federal Reserve
Foreign Official
Institutions
TOTALS
LB-411
TESTIMONY
THB HONORABLB
O~
~RAHK
UNDER SECRETARY
O~
H. HBWKAH
THB TREASURY
Before the
SUBCOKMITTEB ON
~INANCIAL
INSTITUTIOHS SUPERVISION,
REGULATIOH AND DEPOSIT INSURANCE
of the
COKMITTEE OH BANKING,
U.S. BOUSB
~INANCB
O~
Octo~er
AND ORBAN
AF~AIRS
REPRESENTATIVES
5, 1"3
Mr. Chairman and members of the Subcommittee, I appreciate
this opportunity to discuss with you the Administration's views
on reducing regulatory costs and on H.R. 962, the Economic Growth
and Financial Institutions Regulatory Paperwork Reduction Act of
1993.
Reducing the regulatory burden on the nation's insured
depository institutions, as this legislation seeks to do, is an
important objective of this Administration.
I would like to commend Chairman Neal for holding a hearing
on this issue.
I would also like to acknowledge the
contributions of Representatives Bacchus and Bereuter, as the
primary sponsors of H.R. 962.
Their thoughtful and constructive
approach to tackling the problem of regulatory burden is helpful
to all of us who share this concern.
LB-412
2
Although Congress and the Administration have focused
extensively and quite properly on the role of regulatory burden
in exacerbating the so-called credit crunch, we must be careful
not to overlook the benefits of bank regulation.
These include
maintaining the safety and soundness of the banking system,
serving the credit needs of the American public, and protecting
the interests of consumers.
Of course, the benefits of bank
regulation have to be balanced with the costs imposed on banks
and their customers.
The Administration is well aware of the
problems posed by unnecessary regulatory burden and impediments
to sound bank lending and is committed to eliminating these
costs.
At the same time, however, we are strongly committed to
maintaining the benefits of our regulatory system.
Taxpayers
cannot afford a reduction in safety and soundness; consumers
cannot afford to lose vital protections; and distressed
communities cannot afford the loss of needed financial services.
I.
Administration Actions to Address Regulatory Burden
H.R. 962, introduced in February by Representatives Bacchus
and Bereuter, identifies quite accurately many unnecessary
burdens that increase the cost of credit in the economy.
The
Administration supports many of the H.R. 962 provisions
addressing these burdens and has already implemented them in many
cases.
Given this overlap and our shared goal of eliminating
needless regulatory costs, I would like to start by highlighting
3
the steps we have taken administratively.
following three areas:
They fall into the
(1) the President's Credit Availability
Program: (2) the President's Community Reinvestment Act
Directive; and (3) the Treasury Department's examination of the
Bank Secrecy Act regulations.
A.
The Credit Availability program
The Administration's first effort to strike the proper
balance between the costs and benefits of bank regulation was its
Credit Availability Program.
On March 10, President Clinton
announced the program of regulatory and administrative changes to
improve the availability of credit, particularly to small- and
medium-sized businesses, farms, and to borrowers in low-income
communities.
The program focused on:
(1) reducing impediments
to lending to small- and medium-sized businesses; (2) reducing
the burden of real estate regulations, including appraisals; (3)
improving the fairness and effectiveness of the regulatory
appeals processes: and (4) eliminating duplicative examination
processes and procedures.
(Appendix A provides a status report
on the Credit Availability Program.)
While most of the work under the President's program has
been completed, some of the changes represent ongoing efforts.
As the attached list indicates, these longer-term items include a
comprehensive review of paperwork, corporate applications, and
4
documentation requirements.
In addition, the Office of the
Comptroller of the CUrrency (OCC) is currently rewriting and
reorganizing its regulations to make them more clear and
accessible.
We believe that these administrative improvements
will reduce the cost of lending, particularly to smaller firms,
and thereby increase the availability of credit to them.
B.
The community .einve.taent Act Directive
In addition to the Credit Availability Program, the
Administration is committed to a thorough review of the
requlations promulgated under Community Reinvestment Act (CRA).
In July, President Clinton directed the four Federal banking
agencies to reform the CRA by:
(1) developing new regulations
and procedures (by January 1, 1994) that replace paperwork and
uncertainty with greater performance, clarity, and objectivity;
(2) training a corps of examiners that specialize in CRA
examinations; (3) implementing more effective sanctions against
banks with consistently poor CRA performance; and (4) developing
more objective, performance-based CRA assessment standards to
minimize the compliance burden on banks while stimulating
improved CRA performance.
Recently, the Federal banking agencies held hearings
throughout the nation to gain more insight into these issues.
Comptroller Ludwig, who will testify immediately after me, has
5
chaired many of these meetings and can provide you with a status
report.
The Administration believes that these administrative
improvements will yield increased investment in distressed
communities and a significant reduction in the paperwork burden
on insured depository institutions.
c.
Bank Secrecy Act
One area of the Administration's efforts that focuses on the
Treasury Department directly is the Bank Secrecy Act.
The Bank
Secrecy Act and the currency transaction reports required under
it are important tools in combatting money laundering and other
crimes.
Despite these benefits, we realize that complying with
the regulations can sometimes be burdensome.
The Treasury is
therefore currently conducting a comprehensive review of Bank
Secrecy Act reporting and record-keeping requirements in an
effort to identify changes in statutes, regulations, and
implementing forms that could reduce burdens on financial
institutions without impairing the objectives of the Act.
Because our review is in its initial stages, I cannot provide
more specific information at this time.
Nevertheless, we will
aim to reduce regulatory costs while increasing our ability to
fight financial crimes.
6
II. Leqislative Proposals to Reduce Requlatory Burden
In addressing the burdens imposed by the current bank
regulatory environment, our strategy has been to focus on
administrative changes which could be implemented quickly,
recognizing that carefully considered legislation would take
longer.
We have also sought to remove direct impediments to
lending first, before attempting to reduce the cost of
regulation.
Throughout its efforts, the Administration has kept
three goals in mind:
(1) maintaining the safety and soundness oj
the banking system; (2) ensuring that vital consumer protections
are not sacrificed; and (3) promoting bank involvement and
investments in the local communities they serve.
As we turn our
attention now from administrative to legislative improvements,
these goals become even more important, given the relative
difficulty of fine-tuning legislative changes.
Therefore, my
discussion of H.R. 962 will be organized around these three
important goals.
(Appendix B more specifically delineates the
Administration's position on selected provisions of the bill.)
A.
Kaintaininq satety and Soundness
Long run economic stability and growth require a banking
system that is safe and sound.
After the savings and loan
crisis, we must be cautious and prudent in our regulatory policy
efforts, including efforts to minimize the cost of regulation.
7
We must not lose sight of the many benefits of safety and
soundness regulation.
Further, we believe that legislative
efforts to reduce regulatory burden must not hamstring
regulators, who often need flexibility to deal with problems
early on, or case by case.
From the text of H.R. 962, I can see
that Representatives Bacchus and Bereuter share these goals.
In the area of safety and soundness regulation, H.R. 962
would:
modify bank accounting and capital requirements; reduce
mandatory examination requirements; expedite bank holding company
approval procedures; and work to reduce unnecessary paperwork.
I
will address each of these areas briefly.
1.
Capital and Accounting Rul ••
In general, we believe that accounting principles and the
details of capital standards should be established
administratively, by the Federal banking agencies and the
Financial Accounting Standards Board, rather than by statute.
These rules rest on very complex technical considerations that
are not well suited to structuring within the constraints of the
legislative process.
Moreover, they must be able to evolve along
with the business of banking.
Under the bill, the Federal banking agencies must reduce the
capital required to be required against loans sold with recourse.
8
CUrrently, insured depository institutions that sell loans and
retain liability for credit losses must hold capital equal to the
amount required before the sale.
We believe that the recourse
provision in H.R. 962 is a constructive impetus to revise current
recourse rules, which we agree are excessively stringent.
However, the Federal banking agencies are already in the process
of writing new regulatory accounting rules to cover asset sales
with recourse.
These new rules will more appropriately measure
the risk of assets sold with recourse to the capital of insured
depository institutions.
H.R. 962 would also delay the implementation of the
interest-rate risk provisions of the risk-based capital standards
until other countries devise and adopt international standards.
The Federal banking agencies have already published proposed
regulations on interest rate risk.
These regulations will help
banks and thrifts better manage the risks posed by changes in
interest rates.
We believe they are cost-effective, and will
impose no significant burden on the industry.
Moreover, we
believe they will have a positive effect on credit availability
by creating an incentive for banks to lend rather than to hold
securities.
Consequently, we would like the regulatory process
to continue on schedule.
9
Examination Procedure.
2.
Examinations represent one of the most important tools in
maintaining the safety and soundness of our nation's banking
system.
Therefore, the Administration believes that annual
examinations are a vital protection against bank failures.
However, as a former officer of a large bank holding company, I
am acutely aware of the costs frequent or uncoordinated
examinations can impose.
Under the current regulatory structure,
it is possible for an institution to be examined by three of the
four Federal banking agencies at different times.
H.R. 962 finds this situation as intolerable as we do.
Section 302 of the bill would require the Federal banking
agencies to coordinate their examinations to minimize the burden
on insured depository institutions.
I am happy to report that we
have rectified much of this situation and implemented steps to
achieve most of the goals of section 302.
As part of the
President's Credit Availability Program, the agencies have
developed a program for coordinating examinations of insured
depository institutions and inspections of their holding
companies.
This program will minimize the costs that the
examination process imposes on banks.
We also note that the FDIC
recently clarified its back-up enforcement authority to restrict
the opportunity for duplicative examinations to troubled
institutions, except in extreme circumstances.
10
H.R. 962 would also modify current examination requirements
to lessen the burden on smaller institutions within a holding
company.
We agree with the thrust of these provisions.
However,
the Administration is concerned that they might be overly broad
as they exempt too many institutions.
We would be happy to work
with the committee to develop appropriate language.
In addition to reducing the costs of bank examinations,
H.R. 962 would require the Federal banking agencies to create an
independent appeals process for the supervisory decisions of the
Federal banking agencies.
As with examination coordination, the
Administration has implemented this provision of H.R. 962 as
well.
We understand that during the course of an examination,
legitimate disagreements between the institution and its
examiners are bound to arise.
To ensure that banks have an
impartial and expeditious review of these disagreements, the
Federal banking agencies have established independent appeals
processes.
The OCC has even created the position of Ombudsman to
address appeals from bankers.
The Ombudsman has discretion to
supersede any agency decision or action on appealable matters
with the prior consent of the Comptroller.
3.
Paperwork Burdens
While examination and supervisory policies are an important
part of bank safety and soundness, some of the paperwork burdens
11
that banks face are truly unnecessary.
A number of provisions of
H.R. 962 require the Federal banking agencies to study specific
regulatory areas and propose reforms.
supports these provisions.
The Administration
To improve their effectiveness,
however, we recommend that these studies be incorporated into one
comprehensive request to the Federal banking agencies.
This
request could require the agencies to review their regulations
and policies to:
eliminate unnecessary regulations and written
policies; standardize regulations among the agencies; and
eliminate duplicative requests for information.
We feel that it
would take the agencies at least a year to perform a top to
bottom review of their rules.
B.
Maintaininq Consumer protections
The Administration believes strongly that consumer
protection laws help create and maintain a fair and accessible
financial services marketplace.
They provide consumers with the
confidence that they will not be misled or defrauded.
Moreover,
customers have come to appreciate the benefits of information
that enhances their ability to make comparisons.
In addition, I
would be remiss if I failed to point out that consumer protection
laws also help banks by protecting them from unscrupulous
competitors.
As a citizen and consumer, I appreciate these
protections and believe they must not be sacrificed under the
guise of regulatory burden reduction.
We must be careful not to
12
dismantle the trust built up between bankers and their customers.
We are certain many of the Representatives who cosponsored H.R.
962 share this view.
In the area of consumer protection, H.R. 962 would require a
study of the home mortgage, small-business and consumer lending
processes.
In addition, the bill would modify provisions of the
following Acts:
the Truth in Lending Act; the Truth in Savings
Act; the Real Estate Settlement Procedures Act; the Expedited
Funds Availability Act; and the Electronic Funds Transfer Act.
We agree with the cosponsors of H.R. 962 that the current
lending process has become overly burdensome for lenders and
borrowers.
While this burden is expected to decline as lenders
develop better information systems technology, the Administration
believes that existing law can be thoughtfully revised to limit
burden.
We see merit in requiring the OCC, the Federal Reserve
Board, and the Department of Housing and Urban Development to
study the lending process and develop ways to streamline it.
The Administration is concerned, however, about limiting the
protections of the Truth-in-Lending Act based on the income of
the borrower.
We are also reluctant to reduce the protections of
the right of rescission and the benefits of expedited funds.
Banks have already expended the fixed costs to implement these
13
protections.
Weakening these laws could, however, lead to
abuses.
C.
Promotinq Community aeinvestment
As witnessed by the Community Development Banking and
Financial Institutions Act, the Administration is committed to
providing distressed communities with much needed capital.
The
Administration is also committed to ensuring that creditworthy
borrowers are not denied credit under illegal discriminatory
practices.
since taking office, we have worked actively with the
Federal banking agencies to improve their ability to detect
lending discrimination and to strengthen fair lending
enforcement.
A number of interagency efforts are under way to
improve fair lending enforcement.
These include fair lending
training for examiners and industry executives, and alternative
discrimination detection methods.
H.R. 962 seeks to reduce the compliance burdens of the Home
Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act
(CRA).
We acknowledge that the costs involved with complying
with the recordkeeping requirements of the Fair Housing Act and
the HMDA can be significant.
To limit these costs, the OCC has
published a proposed rule that would reduce the duplicative
paperwork requirements of HMDA and the Fair Housing Home Loan
Data System.
This approach allows us to minimize the costs of
14
these laws without removing the tools that the agencies need to
fight lending discrimination.
As I mentioned earlier, we are involved in a comprehensive
review of the CRA regulations.
The Administration believes that
it would be prudent to await the results of this review prior to
legislating changes to CRA.
Under the current regulatory and
enforcement system, the CRA provisions of H.R. 962 could reduce
incentives for community reinvestment.
III. Conclusion
The President, the Vice President, and Secretary Bentsen
take seriously their responsibility for maintaining and enhancing
the banking system's role in the economy as a major credit
provider.
Recognizing our mutual goals, we commend Chairman Neal
and Representatives Bacchus and Bereuter for focusing attention
on the legislative aspects of this issue.
As you can note from
my testimony, many of the Administration's efforts mirror
specific provisions of H.R. 962.
There is much more the Administration can do within existing
law to reduce the burden on insured depository institutions.
At
the same time, certain problems can only be resolved through
legislative action.
I look forward to working with the members
of this Committee on this important issue.
15
I will be pleased to respond to any questions the committee
may have.
Appendix A: Status of the Administration's Credit Availability Program
-----
----
-
-
--
Type of Action
Agencies
Involved
Announcement of the Credit Availability Program: On March 10, President
Clinton announced the program.
Interagency
Policy Statement
OCC,OTS,
FDIC, FRB
Completed
Documentation of Loans: This action eliminates unnecessary documentation
requirements for small- and medium-sized business and farm loans.
Interagency
Policy Statement
OCC,OTS,
FDIC, FRB
Completed
Documentation of Loans: The OCC has extended the preceding action from 1and 2-CAMEL-rated banks to 3-rated national banks.
Policy Statement
OCC
8/12/93
Special Mention Assets: The agencies have clarified their examination
procedures to ensure that special mention assets are not improperly placed in the
classified asset category.
Interagency
Policy Statement
OCC,OTS,
FDIC, FRB
Completed
6/10/93
Real FAtale Appraisals: The action would increase to $250,000 the threshold
level at or below which appraisals are not required.
Proposed Rule
OCC,OTS,
FDIC, FRB
Published in the
Federal Re&ister
Completed Regulatory Changes
Status
3/10/93
3/30/93
6/4/93
Other Real Estate Owned (OREO): The initiative will: (1) increase and
expand the options that a national bank may use to dispose of OREO, (2)
standardize the legal and accounting treatment of OREO, and (3) provide
flexibility in the financing of OREO.
Final Rule
Commercial Real FAtale Loans: The statement reaffirms guidelines issued in
November 1991 to provide clear and comprehensive guidance to ensure
examiners review commercial real estate loans in a consistent manner.
Interagency
Policy Statement
OCC,OTS,
FDIC, FRB
In-Substance Foreclosures: The agencies have offered additional guidance with
respect to reporting of in-substance foreclosures.
Interagency
Policy Statement
OCe,OTS,
FDIC, FRB
Returning Nonaccrual Loans to Accrual Status: The agencies have revised the
accounting for partially charged~ff loans consistent with generally accepted
accounting principles (GAAP).
Interagency
Policy Statement
OCC,OTS,
FDIC, FRB
OCC
Published in the
Federal Re&ister
9/2/93
Completed
6/10/93
Completed
6/10/93
Completed
6/10193
Appendix A - Page 1
Agend~
Chang~
Type of Action
Involved
Status
Appeals Process: The agencies have taken steps to ensure that their appeals
processes are fair and ~ffective.
Agency Program
OCC,OTS,
FDIC, FRB
TheOCC
Ombudsman will
begin work on
9/15193
Fair Lending Initiativ~: The agencies will strengthen their enforcement of fair
lending laws by revising discrimination detection methods and revising their
consumer complaint systems. In addition to revised examination procedures, the
OCC will develop a pilot program to use minority and non-minority "testers" to
identify discrimination in the way banks treat potential borrowers.
Interagency
Policy Statement
OCC,OTS,
FDIC, FRB
Completed
6110193
Examination Coordination: The agencies are working to eliminate duplicative
examination processes and procedures. The agencies have announced an
agreement to better coordinate examinations and to streamline the examination of
multibank holding companies.
Interagency
Agreement
OCC,OTS,
FDIC, FRB
Completed
6110/93
Reftnandng and Renegotiating Loans: The OCC has clarified its policy on
refinancing and renegotiating loans when market interest rates have declined,
including loans secured by real estate collateral that has declined in value.
Banking Bulletin
OCC
9/3/93
Excess Paperwork Burden: Each agency is individually performing a study of
its paperwork, corporate application, and documentation requirements.
Agency Program
OCC, OTS,
FDIC, FRB
Ongoing
Regulatory Review: The OCC has committed to rewrite and reorganize its
regulations to make them clear and accessible.
Agency Program
OCC
Ongoing
Effectiveness Measurement: The OCC is devising methods to measure the
effectiveness of the Credit Availability Program. For example, it plans to
document whether banks are taking advantage of the provisions of the
Interagency Policy Statement on Documentation for Loans.
Agency Program
OCC
Ongoing
Completed Regulatory
Continuous Review
Appendix A - Page 2
Appendix B: Comments on Selected Provisions of H.R. 962
Section 102 - Real Estate Appraisal Amendment
This section directs the Appraisal Subcommittee of the Federal Financial
Institutions Examination Council to encourage States to develop reciprocity
agreements allowing appraisers certified or licensed in one State to perform
appraisals in another State. It also prohibits States from imposing excessive
fees or burdensome requirements on out-of-State appraisers temporarily
practicing in the State. We support the section.
Section 103 - Public Deposits
Section 13(e) of the Federal Deposit Insurance Act requires agreements
that tend to "defeat or diminish" the FDIC's interest in property to meet certain
standards (e.g., be in writing), As drafted, this section exempts from section
13(e) any agreement "permitting or affecting" the deposit custody or
collateralization of public funds -- even if the agreement affects such deposits
only to the same extent as it affects other deposits. Thus the section is drafted
more broadly than necessary to effectuate its stated purpose of alleviating
technical problems involving public deposits.
We share that objective, and favor a modified version of this section,
under which section 13(e) would not invalidate an agreement providing for the
lawful collateralization of government deposits solely because of changes in the
collateral made in accordance with the agreement.
Section 111 - Audit Costs
Current law permits an institution to satisfy certain auditing, reporting,
and other requirements at the holding company level, so long as the institution
has less than $9 billion in assets. We favor removing the $9 billion limitation.
Having a single committee of the holding company's board of directors review
any problems discovered at subsidiary institutions would be less costly and
more efficient than requiring separate committees at each institution. In many
holding companies, senior management of the holding company establishes
many policies and procedures that apply throughout the organization, and such
policies and procedures are best reviewed company-wide. Moreover, members
Appendix "Q - Page 1
of the holding company's board of directors (and audit committee) may be
better able to command the attention of senior management when problems need
to be addressed, and can bring to bear the perspective borne of a broad range
of experiences across many of the banking operations.
Section 112 - Recourse Agreements
This section eliminates the Federal banking agencies' authority to
prescribe capital and accounting principles for recourse that are more
conservative than generally accepted accounting principles (GAAP). Capital
requirements seek to protect insured depository institutions and the FDIC
against unanticipated future losses. It would be inappropriate for depository
institutions to report capital levels that would not reflect the true risks
associated with recourse transactions. More fundamentally, we believe
accounting principles and capital regulations are best established
administratively, rather than by statute.
The Federal banking agencies are in the process of writing new
regulatory accounting rules to cover asset sales with recourse. These new rules
are intended to link capital-to-asset ratios more closely to the risk of assets sold
with recourse. Therefore we do not believe legislation on this matter is
necessary or appropriate at this time.
Section 114 - Report on Capital Standards
This section requires the Treasury Department, in consultation with the
Federal banking agencies, to report on the effects of risk-based capital
standards. We support the section, with a one-year deadline on submission of
the report.
Section liS - Minimize Potential Impact of Capital Standards on Credit
Availability
The FDIC Improvement Act of 1991 required each Federal banking
agency to revise its risk-based capital standards to ensure that those standards
take adequate account of interest-rate risk, concentration of credit risk, and the
risks of nontraditional activities.
This section prohibits any Federal banking agency from incorporating an
interest-rate-risk component into its risk-based capital standards until other
Appendix B - Page 2
countries have devised and implemented international standards. We oppose
such a moratorium because we believe an interest-rate-risk component
represents a cost-effective means of protecting against the very real risk that
changes in interest rates will cause losses to insured depository institutions. As
we believe that such a safeguard will yield net benefits to depository
institutions, we believe it worth implementing even in the absence of any
international agreement.
Section 121 - Due Process Protections
We support applying the due process requirements of rule 65 of the
Federal Rules of Civil Procedure to administrative and judicial enforcement
proceedings by the Federal banking agencies, so long as the agencies need not
show immediate irreparable injury. The House of Representatives has already
passed such a provision as part of H.R. 1340, the Resolution Trust Corporation
Completion Act of 1993.
Section 122 - Culpability Standards for Outside Directors
Current law defines an "institution-affiliated party" to include any
director, officer, employee, or controlling shareholder of an insured depository
institution, and authorizes the Federal banking agencies to take enforcement
action against such persons (e.g., through a cease-and-desist order or civil
money penalty) for misconduct or breach of duty. This section would exclude
an outside director from the defInition of "institution-affiliated party" -- and
thus exempt such a director from the agencies' enforcement authority -- unless
the director acted knowingly or recklessly. In so doing, the section could
create perverse incentives for a director to avoid learning about, or following
up on, facts that could give rise to liability. We believe the knowing-orreckless standard proposed here is better suited to independent contractors (e.g.,
outside lawyers, accountants, and appraisers) than to directors. Accordingly,
although we are concerned about disincentives to service as a director, we must
oppose this section.
Section 131 - Regulatory Appeals Process
We support requiring each Federal banking agency and the National
Credit Union Administration Board to establish an independent appellate
process. Indeed, as part of the President's Credit Availability Program, the
banking agencies have already established such a process. Any statute should
Appendu B - Page 3
specify that the process does not impair agencies' litigation or enforcement
authority.
Section 132 - Aggregate Limits on Insider Lending
Current law generally limits an insured depository institution's aggregate
insider lending (Le., extensions of credit to its officers, directors, and principal
shareholders) to 100 percent of the institution's capital. The Federal Reserve
Board may set a higher limit - not exceeding 200 percent of capital -- for an
institution with less than $100 million in deposits if the higher limit is important
to maintain credit availability in small communities or attract directors.
Congress enacted the aggregate limit to help protect against such excessive
concentrations of insider lending as contributed to the 1991 failure of Madison
National Bank, Washington, D.C.
This section would eliminate any need for an institution with less than
$100 million in deposits to show that lending more than 100 percent of its
capital to its insiders is important to attract directors or to maintain credit
availability in small communities. Moreover, under this section the Federal
Reserve Board could permit any institution with between $100 million and $250
million in deposits to lend up to 200 percent of its capital to insiders if the
Board determined that the higher limit were important to maintain credit
availability in small communities or attract directors.
Section 955 of the Housing and Community Development Act of 1992
allowed the Federal Reserve Board to exempt from the aggregate limit on
insider lending transactions that pose only minimal risk. Pursuant to this
authority, the Board has proposed to exempt such transactions as loans secured
by insured deposits or U.S. Government securities. The Board has also
proposed to limit the "tangible economic benefit" test, under which the
regulators may treat a loan to a third party as a loan to an insider. These
measures will render the aggregate limit on insider lending appreciably less
restrictive than it was when first enacted.
We do not believe the record indicates that existing law is overly
stringent.
The Federal Reserve Board currently permits an institution with less than
$100 million in deposits to exceed the 100 percent aggregate limit on insider
lending by taking a few simple steps: the institution's board of directors must
Appendix B - Page 4
adopt a resolution finding that a higher limit (not exceeding 200 percent) is
consistent with safe and sound banking practices in light of the bank's
experience in lending to its insiders and is necessary to maintain credit
availability or attract directors; and the institution must send the resolution to its
primary Federal regulator, with a copy to the Board.
Yet, of the approximately 8,788 banks and 1,041 thrifts with less than
$100 million in deposits, only some 44 institutions -- less than 0.5 percent of
those eligible -- have submitted resolutions increasing their aggregate lending
limits. Among these institutions, moreover, less than half have reported
aggregate insider loans exceeding 100 percent of capital.
Section 134 - Credit Card Accounts Receivable Sales
We support this provision, which facilitates the sale of credit card
accounts receivable by undercapitalized depository institutions.
Section 135 - Changes to the Federal Home Loan Bank Act to Promote
Credit Availability
Under current law, the Federal Home Loan Banks (FHLBanks) make
advances to member institutions to support housing fmance, including
residential construction lending. Because FHLBank capital cannot readily bear
credit risk (as it can be withdrawn on demand), the FHLBanks avoid credit risk
by requiring advances to be overcollateralized. This section would significantly
increase the risk exposure to the taxpayer by allowing the FHLBanks, for the
first time, to bear the credit risk associated with direct lending, and in
particular, risky construction lending. Recent data from SAIF-insured privatesector thrifts show that loss rates on single-family construction loans are more
than four times as great as single-family mortgages.
This section would also eliminate the requirements that real estate-related
collateral have a readily ascertainable value and that the FHLBank's interest in
the collateral can be perfected. Since the FHLBanks do not have the capacity
to evaluate the underwriting standards for all of their members, this provision
would allow members to use riskier, less liquid collateral for advances. This
would increase the FHLBank's risk exposure if the borrower defaulted.
We oppose piecemeal changes in the FHLBank System, believing instead
that changes should be made pursuant to a carefully prepared plan for
Appendix B - Page 5
comprehensive reform. Section 1393 established an orderly process for
considering the System's future. As part of that process, the Federal Housing
Finance Board and the Congressional Budget Office have submitted reports on
reforming the System, and the General Accounting Office and the Department
of Housing and Urban Development will submit reports. The Treasury, the
Office of Federal Housing Enterprise Oversight, the Federal Home Loan
Mortgage Corporation, and the Federal National Mortgage Association will then
comment on the reports. In this context, the Administration is conducting a
thorough review of the FHLBank System and will recommend legislation for its
reform.
Section 202 - Paperwork Reduction Review
We strongly favor eliminating needless paperwork, as the Federal
banking agencies are already seeking to do pursuant to the President's Credit
Availability Program and the Interagency Policy Statement on Credit
Availability. We support requiring the agencies to review their regulations and
written policies, streamline those regulations and policies to improve efficiency,
reduce unnecessary costs, and eliminate unwarranted constraints on credit
availability, and to remove regulatory inconsistencies, outmoded requirements,
and duplicative regulatory and filing requirements. We also support requiring
the agencies to work toward standardizing regulations and guidelines that
implement common statutory and supervisory policies. We will be happy to
work with the Committee on framing these requirements.
Section 203 - Rules on Deposit Taking
Current law prohibits an undercapitalized institution from accepting
brokered deposits, and permits an institution that is adequately capitalized (but
not well-capitalized) to do so only with a waiver from the FDIC. Similar
restrictions apply to soliciting high-cost deposits directly (e.g., through a
"money desk" offering a toll-free telephone number). The FDIC has defmed
high-cost deposits as those with interest rates more than 75 basis points above
the prevailing rates. This section would permit an institution that is adequately
capitalized (but not well capitalized) to solicit high-cost deposits without an.
FDIC waiver.
Brokered deposits and money desks are close substitutes for each other,
and hold similar potential for abuse. We believe that they should be governed
Appendix B - Page 6
by similar rules, and that the record does not demonstrate the need for the
proposed change.
Section 204 - Adequate Transition Period for New Regulations
We support a requirement that the Federal banking agencies, in
determining the effective date of new regulations that impose additional
reporting, disclosure, and other requirements on insured depository institutions,
consider the costs and benefits of the regulations. We believe a balanced,
flexible approach is better than rigid minimum time restrictions.
Section 301 - Annual Examinations
Current law generally requires a Federal banking agency to conduct an
annual on-site examination of each insured depository institution for which the
agency is the primary Federal regulator. However, an institution must be
examined only every 18 months if it: (1) has total assets of less than $100
million; (2) is well capitalized; (3) received a composite CAMEL rating of 1
(and was found to be well-managed) when last examined; and (4) has not
undergone a change in control during the past year. State examinations may
satisfy the annual examination requirement every other year.
This section would extend the 18-month cycle for small institutions to 24
months, raise the asset threshold to $250 million, let institutions qualify with a
CAMEL rating of 2 (Le., satisfactory) rather than 1 (outstanding), and
eliminate any requirement for Federal examinations of State institutions.
We support extending the 18-month examination cycle to depository
institutions with up to $250 million in assets (which account for 86 percent of
all FDIC-insured institutions.) However, we believe current law properly limits
the longer cycle to institutions with a CAMEL rating of 1, and properly
requires a Federal examination at least during alternate examination cycles (i.e.,
every 24 or 36 months).
Appendix B - Page 7
Section 302 - Coordinated Examinations
We support this section's requirement that the Federal banking agencies
coordinate examinations to minimize disruption of depository institutions'
operations. Under the President's Credit Availability Program, the agencies are
already working to achieve such coordination.
Section 303 - Differences in Accounting Principles
Current law requires the Federal banking agencies to adopt uniform
accounting principles generally consistent with GAAP. It also requires the
Federal banking agencies to review accounting principles and work to
harmonize GAAP and regulatory accounting principles. As an example of this
effort, the OCC recently published proposed rules on other real estate owned
and deferred tax assets. Current law also permits the Federal banking agencies
to adopt accounting principles more conservative than GAAP if necessary to
facilitate effective supervision and prompt corrective action to protect the
deposit insurance funds. We believe current law strikes a proper balance
between the desirability of general consistency with GAAP and the need to
ensure that insured institutions do not exploit the flexibility of GAAP to
undercut capital standards and effective supervision and disclosure.
Section 304 - Reduction of Call Report Burdens
We support requiring the Federal banking agencies to develop a single
form for core call-report information, simplify and index call-report
instructions, review any schedules supplementing the core information, and
eliminate unwarranted requirements from those schedules.
Section 305 - Regulatory Review of Capital Compfiance Burden
This section requires a review of the compliance requirements associated
with risk-based capital standards. We believe that other measures we have
endorsed already deal adequately with this issue. Section 114 requires a study
of risk-based capital standards. Section 202 requires a comprehensive review
of regulations. Section 304 requires a review of call reports. If a separate
review under this section is required, it should consider the benefits, as well as
the costs, of risk-based capital standards.
Appendix B - Page 8
Section 307 - Bank Secrecy Act Amendments
To curtail money laundering, tax evasion, and other unlawful activities,
the Bank Secrecy Act imposes recordkeeping and reporting requirements on
financial institutions. The Treasury Department is currently conducting a
comprehensive review of those requirements in an effort to identify changes in
statutes, regulations, and implementing forms that could reduce burdens on
[mandaI institutions without impairing the objectives of the Bank Secrecy Act.
Pending the outcome of that review, the Administration opposes piecemeal
changes in the Bank Secrecy Act. We would, however, have no objection to
requiring the Treasury to publish all written rulings interpreting the Act as well
as an annual staff commentary on regulations under the Act.
Section 309 - Limiting Potential Liability on Foreign Accounts
We support this section, which would limit the liability of U.S. banks for
deposits in their foreign branches. As national banks hold nearly two-thirds of
all such deposits, we believe this section should require the Federal Reserve
Board to work closely with the OCC in developing implementing regulations.
Section 310 - Repeal Out-Dated Statutory Provision
We support this section, which would repeal outdated statutory rules for
calculating bad debt - rules long since superseded by regulatory requirements
for loan-loss allowances and loan classification.
Section 321 - Expedited Procedures for Forming a Bank Holding Company
We support allowing a freestanding bank to form a one-bank holding
company after giving the Federal Reserve Board 30 days prior notice.
Section 322 - Exemption of Certain Holding Company Formations from
Registration Under the Securities Act of 1933
We support this section, which would exempt from securities registration
requirements the offer or sale of equity securities in connection with
reorganizing a bank into a one-bank holding company.
Appendix B - Page 9
Section 324 - Reduction of Post Approval Waiting Period for Bank
Holding Company Acquisitions
We support this section, which would permit the Federal Reserve Board,
with the Attorney General's concurrence, to reduce the post-approval waiting
period for bank holding company acquisitions from 30 days to five days.
Section 325 - Reduction of Post Approval Waiting Period for Bank
Mergers
We support this section, which would permit the Federal banking
agencies, with the Attorney General's concurrence, to reduce the post-approval
waiting period for bank mergers from 30 days to five days.
Section 401 - Streamlined Lending Process for Consumer Benefit
The OCC's comprehensive review of its regulations, which forms part of
the President's Credit Availability Program, will also help streamline the
lending process. Other Federal banking agencies have similar efforts under
way. If the Committee believes the study required by this section is necessary,
the Administration believes the OCC (as well as the Federal Reserve Board and
the Department of Housing and Urban Development) should participate.
Section 501 - Community Reinvestment Act Amendments
On July 15, 1993, the President announced the Administration's initiative
to reform the Community Reinvestment Act (CRA) and requested the Federal
banking agencies to reform CRA enforcement by January 1, 1994; train a corps
of eRA examiners; implement more effective sanctions against banks and thrifts
with poor eRA performance; and develop more objective, performance-based
eRA assessment standards. This effort -- aimed at achieving the most
fundamental and serious reform in the history of the eRA - should be allowed
to proceed before any statutory changes are pursued.
Appendix B - Page 10
Text as Prepared for Delivery
For Immediate Release
October 5, 1993
REMARKS OF TREASURY SECRETARY LLOYD BENTSEN
U.S.-RUSSIA BUSINESS COUNCIL
Before I get into my remarks, I want to say just a word about what has been going
on in Russia. First, I want to reiterate our strong support for President Yeltsin. He
showed extraordinary patience before acting to counter the forces who precipitated the
violence in Moscow.
We must remember that President Yeltsin, and those in Russia who support the
reform process, are engaged in rebuilding a nation, in creating a democracy. We have
no doubt about Mr. Yeltsin's commitment to let Russians speak about their future in the
elections he has promised in December. We hope that the election process contributes
to healing and national reconciliation in Russia.
We tend to get wrapped up in day-to-day events, but we must not lose sight of the
long-term goal. What we seek, and what we see evolving, is a democratic Russia, with a
market-based economy, that someday will take its rightful place in the international
economy. There will be zigs and zags, but the direction continues to be forward toward
economic and political change. We support that, and we are encouraged by it.
It's a good sign to me to see so many Americans gathered to talk about doing
business in Russia. And it's very encouraging to see so many of you from Russia here to
talk about doing business with us. This could be the start of a beautiful
friendship, as they say.
I would like to use the time I have with you today to look at the Russian situation
in the context of the economic challenges we face in the United States, and the broader
economic challenges we face globally.
First, our programs here in the United States are intended to preserve and
improve upon the economic security to which Americans are entitled. We're doing that
through deficit reduction, through reforming our health care system, and by pushing hard
on the international front for expanded trading opportunities.
We recognize that what we do does not happen in a vacuum. As much as we are
affected by events away from our shores, our actions affect lives elsewhere also. This is
particularly true when we act in concert with other industrial nations.
1B-413
2
It is against this backdrop of the new global economic reality that we look at an
era of profound political and economic transformation around the world. The change
will not happen by itself. It will take an investment of time, effort, and resources. Our
success will be measured by how well we meet three key challenges.
We must restore global growth and start creating jobs again. We must maintain
the momentum of global economic integration. And we must, as we are helping do in
Russia, rebuild economies that have undergone crises.
At the G-7 level, we now have a program that I believe will restore global growth.
It includes deficit reduction and interest rate reductions in the United States and
Europe, along with stimulative actions, structural changes and tax reforms in Japan. We
are now beginning to see results, particularly in the United States.
Our interest rates are at historically low levels. Interest rates are down
significantly in Europe, although there still is some room for improvement. Japan has
now announced a third stimulus package and a tax reform plan.
Our economy is growing again. We are creating jobs. We expect growth in the
range of about 3 percent for the final half of this year. The World Bank outlook for the
industrial world this year was just 1.1 percent. What that tells me is that we cannot by
ourselves bring the world economy along. Every economy must do all it can to restore
growth.
Encouraging trade is something we can all do to bring growth to a wider segment
of the global economy. That's why in the United States we are pushing hard for the
North American Free Trade Agreement. That is also why we are determined to reach a
successful conclusion of the Uruguay round by December 15th.
I would note that last week President Clinton announced that many of the export
restrictions of high technology products like computers will be removed. That will give
Russia and other countries better access to things that can help in the transformation
process. It's a welcome development.
In addition, I would point out that last week at the World Bank and IMP
meetings I urged Western nations to do everything possible to ensure that their markets
are open to Russia's goods.
. As bus~essmen ~d government officials, you understand that government cannot
do It all -- not m the Umted States, and not in Russia.
3
Two things are necessary to unleash the enormous potential of Russia's economic
power. First, the economic policies that support a market economy must be put in place.
That is government's role. The official community -- the nations and international
financial institutions who are helping - have limited resources. That is why it is also key
that the private sector become involved as early and as deeply as possible.
I would urge those of you from the public sector in Russia, to press on in creating
the legal framework that makes private investors feel comfortable about doing business
in Russia. I was in business for a number of years, and I've been in government for a
few more. I know how critical it is that the rules of the game be transparent, fair, and
immune from constant change.
Part of the transformation must include resolution of questions on property rights
and contract law. Tax rules must be spelled out clearly, enforced fairly, and held
relatively constant. And market-based pricing is a must if the private sector is to make
investments in Russia.
To those in the business community, I would say that Russia can become an
excellent place to invest, if it will create the climate in which you can do so.
If Russia is successfully integrated into the world economy, we will have virtually
limitless business opportunities. And, we will have created an engine of growth for the
next generation.
It has been fascinating watching the transformation of Russia take place. And it
has been gratifying to see how the world community has joined together to support this
effort. We all recognize the importance of getting this right.
While there is a certain altruism to our position, we must also recognize that
assisting in this transformation is in our security interests also. A prosperous and
democratic Russia enhances world security. It allows both of us to choose butter over
guns. It allows us to devote our attention to improving the economic security of our
citizens.
We have taken several major steps in recent days to assist in the transformation
process. And I would note that we are taking these steps even though we face serious
budget pressures of our own.
First, Congress has approved $2.5 billion in assistance for Russia and the other
republics of the former Soviet Union.
Secondly, last week in my office, Boris Fedorov and I signed an agreement to
reschedule $1.1 billion in Russian debt payments to the United States. By the way, I can
tell you that it is quite clear that Mr. Fedorov knows where Russia's economy needs to
go, and that he is doing his best to get it there.
4
Finally, I want to tell you that about 10 days ago I had an opportunity to talk with
Mr. Fedorov when he came to visit with us at our G-7 Finance Ministers meeting. He
told us of President Yeltsin's solid commitment to democracy and market reform. We
told him that we remain committed to assist Russia.
We in the United States, and indeed throughout the international community,
have made substantial commitment to Russia. We want Russia to succeed. But neither
we nor the international community nor the private sector alone can make this work.
The primary responsibility lies with Russia. Despite the day-to-day headlines, I
think we are making progress.
I was in Moscow in June to meet with President Yeltsin and a number of other
Russian leaders. I was impressed then by the significant progress that had been made in
the area of privatization. Today, some 70,000 small shops have been privatized. Onefifth of the industrial work force is in medium and large firms which have gone private.
Small private firms are springing up all over. The market system is taking hold, and I
believe this change is irreversible.
When I was in Moscow, I remember leaving my meeting with President Yeltsin
and walking through the Kremlin grounds. We went out the Spasky gate into a
delightful spring day. The sky was clear, St. Basil's was sparkling. The tourists were
lining up on Red Square for the Kremlin tour. I was struck by just how different the
economy of Russia of today is from the Russia I visited three years ago. It's like night
and day. There's food in the stores, and kiosks are springing up all over. I think it's
going to work out. Moscow's skies may have been dark the past few days, but I believe
clearer skies lay ahead.
Thank you.
-30-
CONTACT:
FOR RELEASE AT 2:30 P.M.
October 5, 1993
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $25,600 million, to be issued October 14,
1993. This offering will provide about $1,875 million of new
cash for the Treasury, as the maturing bills are outstanding in
the amount of $23,713 million.
Federal Reserve Banks hold $5,561 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $2,045 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders. Additional
amounts may be issued for such accounts if the aggregate amount
of new bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356, published as a final rule on
January 5, 1993, and effective March 1, 1993) for the sale and
issue by the Treasury to the public of marketable Treasury bills,
notes, and bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
LB-414
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED OCTOBER 14, 1993
October 5, 1993
Offering Amount .
. .
. .
Description of Offering:
Term and type of security .
CUSIP number
Auction date
Issue date
Maturity date . . . .
Original issue date
. . . .
Currently outstanding . . . . .
Minimum bid amount
...
Multiples .
$12,800 million
$12,800 million
91-day bill
912794 H4 9
October 12, 1993
October 14, 1993
January 13, 1994
January 14, 1993
$27,380 million
$10,000
$ 1,000
182-day bill
912794 J9 6
October 12, 1993
October 14, 1993
April 14, 1994
October 14, 1993
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Accepted in full up to $1,000,000 at the average
Noncompetitive bids .
discount rate of accepted competitive bids
Competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single yield
Maximum Award .
.
.
.
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .
35% of public offering
.
.
35% of public offering
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
Text as Prepared for Delivery
For Immediate Release
October 6, 1993
REMARKS OF TREASURY SECRETARY LLOYD BENTSEN
WHITE HOUSE PRESS CORPS
It's a simple message today: long term, the health of this economy depends on
health care reform.
Let me just say a few things. We have the most wasteful system in the world.
You've heard the numbers. We spend 14 percent of our total incomes on health. Our
major competitors spend 6 to 9 percent. And we're no healthier.
And not only do the other countries pay less, they cover everybody. We're the
only industrialized nation without universal coverage. 37 million Americans have no
insurance -- and the number keeps heading up.
But don't kid yourself. You're paying for everyone of those uninsured. When
CBS, NBC, ABC, CNN, or any business that pays insurance gets the bill at the end of
the month, they're picking up the tab for the uninsured parent who takes the kid to the
emergency room.
In Texas, I know a hospital that last year had $42 million in uncompensated care.
They'll recover it, by charging the insured through the nose for beds, and surgery, and
servIces.
One other point: we're hurting wages. If health care had remained the same
share of employee compensation from 1975 to 1993, the average American worker could
get an annual $1,000 pay raise in after-tax income, without any extra costs to the
employer. If current trends continue without reform, real wages may be further reduced
by over $600 per year by the end of the decade.
So we have to fix this. We have to stop this cost shifting, we have to cut this
waste, we have to restructure the system so that resources are used more efficiently, and
we have to bring some competition into health care.
-30LB-415
Text as Prepared for Delivery
For Immediate Release
October 6, 1993
REMARKS OF TREASURY SECRETARY LLOYD BENTSEN
ECONOMIC CLUB OF CHICAGO
CHICAGO, ILUNOIS
They warned me that it's been a long time since you've had a Democrat at one of
these, so let me just say it's a real honor to be here.
This month is unusual for me. I started out, the first of October, doing something
I never thought I'd ever do. I participated in a conference to support economic
development in the West Bank and Gaza.
I'm going to end the month also doing something I never dreamed I'd do. Maybe
some of you recall back in '88 when I ran for a national office I said if I could write $200
billion in hot checks every 12 months, I could make this country feel good, too. Well,
I'm about to write my $200 billionth -- and it'll be just after nine months into office. Not
12. Nine. Now I understand why Jim Baker, when he was Treasury Secretary, liked to
say: "At Treasury we earn money the old-fashioned way: We print it!"
Let me start with a little history. In 1932, Franklin Roosevelt accepted the
nomination for President here in Chicago, and he outlined the New Deal.
"What do the people of America want more than anything else?" he asked.
"To my mind they want two things: work, with all the moral and spiritual values that go
with it; and with work a reasonable measure of security -- security for themselves and for
their wives and children."
Now, you would have thought Bill Clinton said that, wouldn't you?
Around the world, America is the symbol of security -- economically and
militarily. Russia is having problems now. But yesterday Bob Strauss had me meeting
with Russian businessmen, talking about how to privatize, not how to aim missiles. The
Middle East will have problems. But I sit with Palestinians and Israelis to talk roads and
safe water, not weapons.
LB-416
2
We've won the peace -- yet in this country we still need to win some peace of
mind. Especially when it comes to jobs. That's what I want to talk about.
So, I'm going to talk NAFTA. Because the people who oppose this are playing to
the insecurities of Americans. They are out there --- with wrong facts about u.S. jobs -trying to scare people.
It is laughable to think that if NAFTA passes we are in danger of being inundated
by Mexico -- a country with an economy 5 percent the size of ours.
They say if this passes, jobs will head south because of the low wages. Baloney.
Jobs can go south now. BMW and Mercedes would be building their new plants in
Mexico rather than the U.S. if all they were concerned about were wages.
If we used that logic, Bangladesh would be our biggest competitor. Look who our
biggest competitor is -- Japan, where wages are 30 percent higher.
The NAFTA debate should not be about what country will lose jobs. It should be
about which will get the 200,000 jobs to be created -- America, Japan, or Europe?
If we don't sign up, others would be more than interested in finding a market with
90 million people growing twice as fast as ours.
The Japanese are always on the lookout for lucrative markets. They found one in
the United States in the '70s. Now they see Asia as a great opportunity, and they've
pursued that block much more aggressively than we have.
But Mexico is where we have the leg up. It's our neighbor. And Mexicans like
American products. We export $40 billion a year there, versus Europe's $6 billion, and
Japan's $4 billion.
Seventy percent of the imports they buy are American goods. Last year,
each Mexican, on average, purchased more U.S.-made products than the average
Japanese, German, or Canadian.
I was born on that border. On the Mexican side, I haven't always seen a
willingness to be partners. I've watched Mexican politicians campaign against us as the
colossus of the north, the gringos.
They've changed. For the last six years, they've opened their markets and bought
our products, and that has already created 400,000 jobs in this country. We've gone from
a $6 billion trade deficit with them, to a $5 billion surplus. And they didn't open those
markets because we held a gun to their heads -- they did it in good faith.
3
But right now, in spite of liberalization, the average product entering Mexico from
the U.S. is slapped with a 10 percent tariff. Mexican products entering the U.S. get,
on average, a 4 percent tariff.
So, tariffs there are two-and-a-half times higher than what they are here. I don't
see fairness, and we're on the bad end of that deal.
When this passes, half of our goods headed to Mexico will be eligible for zero
tariffs. Within five years, two-thirds will be. And these zero tariffs will apply only for
our goods and Canada's goods. Not Japan's. Not the EC's.
There's a small company here in Chicago -- Finkl & Sons. It's a unionized forging
shop that has started doing business in Mexico. Keep in mind, 95 percent of its
competition comes from outside this country.
I visited there last month. When I talked about NAFfA, many employees were
skeptical. They had heard the warnings: if NAFfA passes, jobs move south.
So I asked the owner flat out: "Are you planning to move jobs out of Chicago
and into Mexico?" The answer was no. The workers were not convinced. Fear is
playing on them.
When I said, "If you don't take advantage of doing more business in Mexico, your
Japanese and European competitors would be glad to," they heard me better.
Let me tell you what will happen if NAFfA fails. Our market will stay open, but
Mexico will be able to jack trade barriers right back up. They could raise them up to 50
percent, and still be in compliance with GAIT.
We'd hurt our chances to open Latin America, which after Asia, is the fastest
growing market around -- and already our exports there are rising substantially faster
than they are to Europe.
If this fails, how can we say to Europe or Japan or anybody else: Why don't you
pass the GAIT agreement?
We won't address environmental concerns on the border. In the Senate of the
United States, I talked about millions of gallons of raw sewage headed to the Rio
Grande, and babies born with brain damage on the border. And nobody listened.
Finally, we have something that will help clean up the environment, and it's not good
enough?
4
And if this fails, we'll still be importing immigrants from Mexico. There's an
awful lot of truth to the statement that if Mexicans don't have jobs, Americans will have
Mexicans.
I can't remember a political debate like this. Forty-one of 50 governors support
it. And they know about jobs, because they get elected only if they create jobs.
The opposition is led by one businessman. One. I give him credit for speaking
his mind.
I hope you respond. I'm glad to announce that I just received a letter from the
Chicago Board of Trade endorsing NAFfA, and I appreciate it. All of you are the
opinion makers in this country, and we need you out there influencing opinion.
Now, let me talk a little about health care reform -- because we're running into
the same problem. We have the American people riddled with insecurity on this.
I'll tell you what I'm afraid of. I'm afraid what will happen if we don't do health
care reform.
Now health care costs are rising three times inflation. Health care consumes 14
percent of GDP, while in the other industrialized countries it consumes 9 percent. And
we're headed for 20 percent by the end of the decade. That's not sustainable.
I don't know another major nation without universal health care coverage. We
have 37 million Americans without coverage, but everyone who has coverage is already
paying for them.
If a kid gets sick, and his uninsured parents take him to the emergency room -who pays for it? You do.
There's a hospital in Texas that has $42 million a year in uncompensated care,
and they make up for it by charging more for beds and surgery and services.
We must be able to put competition back into the system. We must become
more competitive. We're seeing some of that now, with mergers and affiliations, and we
have to do more.
You ~ow, all these insecurities, all this pessimism that the anti-NAFTA group
.
bnngs -- I t~mk masks what has really happened in this country, especially in the
manufactunng sector. We've become competitive.
5
I know what some of you've been through. Foreign competition caught you off
guard. You got fat. You had to get through a recession. You probably had some dumb
policies out of Washington to cope with. Your stockholders, boards of directors, and the
environmentalists became more demanding.
But look how you've changed. You've squeezed the fat. You've restructured your
balance sheets. Capital investments are up. Labor and management have worked
together -- to increase efficiency, to change the work rules, to improve quality.
Labor rules in this country are not frozen like in Europe.
American workers are the most productive in the world, and productivity is rising
-- rapidly. Factory work weeks haven't been this high since 1965.
"Made in America" means something again. U.S. exports have doubled since the
mid-'80s.
A few years ago, I remember reading stories about foreigners calling American
workers lazy and stupid. And how many Americans would you hear say: "We won't buy
it unless it's an import."
Yesterday, I visited with some of the heads of the Big Three and some huge auto
suppliers. The Big Three's market share is up about four points in the last two years.
Let me wind down with this. I recall being at a meeting in France three years
ago. A European got up and said: "Look at the great changes in the world. The end of
the Cold War. Europe and Asia emerging as the world leaders. And America on the
decline."
It's a little ironic that three years later much of Europe is in a recession, Japan is
in a recession, and America is not just a military leader -- we remain the world's
economic leader -- the engine of growth in the world.
I was just at a meeting with my G-7 counterparts, and many are struggling. If
longevity of finance ministers is any indication, eight months ago when I met them for
the first time, I was the freshman in the class. Now, I'm the second most senior guy.
They all look to America. They see that we have cut our deficit, and they're
impressed. They see the market's response, and they're impressed: the lowest long-term
interest rates in two decades, the highest stock market, employment up by more than a
million since January, and we're growing faster than all of them.
The only thing missing, I think, is impressing the most skeptical people around -Americans. We'll keep working on that one.
-30-
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt· •
Washin~ort,
DC 20239
Contact: Peter Hollenbach
(202) 219-3302
FOR RELEASE AT 3:00 PM
October 6. 1993
PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR SEPTEMBER 1993
Treasury's Bureau of the Public Debt announced activity figures for the month of September 1993,
of securities within the Separate Trading of Registered Interest and Principal of Securities program
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$724,745,311
Held in Un stripped Fonn
$525,117,560
Held in Stripped Fonn
$199,627,751
$26,383,810
Reconstituted in September
The accompanying table gives a breakdown of STRIPS activity by individual loan description. The
balances in this table are subject to audit and subsequent revision. These monthly figures are
included in Table VI of the Monthly Statement of the Public Debt, entitled "Holdings of Treasury
Securities in Stripped Form."
Information about "Holdings of Treasury Securities in Stripped Fonn" is now available on the
Department of Commerce's Economic Bulletin Board (EBB). The EBB, which can be accessed
using personal computers, is an inexpensive service provided by the Department of Commerce.
For more information concerning this service call 202-482-1986.
000
PA-131
TABLE VI-HOLDINGS OF TREASURY SECURmES IN STRIPPED FORM, SEP1.
(In thousands)
21
Partion Held
$6.658,554
15.135.354
$1.523,200
$171.200
6.933.881
5.562.501
1.371.360
193.120
!w'150115 .. .
7.127.0116
4,232.206
2.894.880
22.400
8n501l5 ............. .
7.955.901
4.984.301
2.971.600
55.200
28.000
lln5194 ...
Nola C.l.
21150115
11·114" Nola ""1895
11·114 .. Nola &1895
10-112"4 Nola C. 1895
n
~Farm
ToIIII
11~
a::.1tt :eSC
Nola I> 1895
l1n501l5 ........... .
7.318.550
3.915.750
3.402.600
8-7'"' Nola ...·1996
2115196 ............ ..
8.444.720
7.636.720
808.000
UD)
19.344.843
740.600
293.200
~ 112"4
!w'15196 ........... ..
20.085.643
7·1/4.. Nola 1>1895
l1n5196 ............ .
20.258.810
18.076.410
2.182.400
40.000
8- 112"4 Nola "" 1997
8-5/IMIo Nola & 1997
!w'1!'097 ............ ..
9.921,237
8.583237
1.338.000
60.000
8n!'097 ............ ..
9.362.836
7.950.036
1.412.600
11.200
8-7'"' Nola C.1997
l1n5l97 ........... ..
9.808.329
7.425.929
2.382.400
89.ma
8-1,", Nola ""1998
2I151!11
9.159.068
8.511.708
647.360
43.520
9-. Nola &1998 ............. .
51151!11 ........... .
9.165.387
6.718.587
2.446.600
60.000
~1/4"
81151!11 ...
110.400
7~
Nola C.1996
11.342.646
9.575,446
1.767,200
8-7'"' Nola 1>1998
111151!11 ........... ..
9.902.875
7,418.075
2.484.600
19.200
IH,", Nola "" 1999
2115199
9.719.623
8.962.823
756.600
30.400
~1I8" Nola
5115199 ............ ..
10.047.103
7.445.503
2.601.600
49.600
8115199 ........... .
10.163.644
8.915.019
1.248.625
49.500
7-718 .. Nola 1>1999
11/15199 ............ .
10.m.960
9,178.760
1.595,200
9.ma
8-112"4 Nola "'·2000
2115100
10.673.033
9.809.033
864.000
66.000
8-718.. Note &2000
5115100 ............. .
10.496.230
7.395.430
3.100.800
259200
8-314.. Nola C-2OOO
8115100 ... ..
11.080.646
8.729.926
2.350.720
121.440
8- 112"4 Note 1>2000
11/15100 .
11.519.682
9.547282
1.972.400
112.000
7-314 .. Note ...-2001
211Ml1
11.312.802
10.393.602
919.200
7.200
8..
511Mll ............. .
12.398.083
10.787.358
1.610.725
21.000
a..
Nola C.1998
&1999
Note C. 1999 .
Nelle
&2001
7·718" No,., C-2001
811Mll ............ ..
12.339.185
11.495.985
843,200
4.800
7·112"4 Note 1>2001
11/15o(Jl ........... ..
24.226.102
23.949.622
276.480
37.120
.().
7·112"4 Nola ,,"2002
511Ml2
11.714.397
11.205.917
508.480
&-318.. Note &2002
811Ml2
23.859.015
23.678215
180.600
.().
"'·2003
21150U3
23.562.691
23.560.675
2.016
.().
5-314% Note B-2OO3
8n50U3
12.932.637
12.932.637
.().
.().
11·5/IMIo Bond 2004 ..
1111S1:l4
8.301.806
6.037.806
2.264.000
1.323200
12'J1. Bond 2005
511Ml5
4.260.758
3.378.308
882.450
740.000
10-314% Bond 2005 .
811Ml5
9.269.713
8.510.513
759,200
362.400
9-318% Bond 2006 . .
2115106
4.755.916
4,755276
640
.().
11-314% Bond
11/1&14
6.005.584
4,034,384
1.971200
1.099.200
211&15
12.667.799
6,909,879
5.757.920
2.490.240
I 811&15
7.149.916
2.573,276
4.576.640
333.440
6.899.859
2,787.859
4.112.000
2.5n.6OO
6-114 .. Nola
~14
"·114% Bond 2015 .
10-518% Bond 2015
9-718% Bond 2015
1111&15
9-114% Bond 2016
211&16
7.266.854
5.560,454
1.706.400
1.058,400
7·114% Bond 2016
511&16
18.823.551
18.343.551
480.000
242,400
7·112"4 Bond 2016 .
11/1&16
18.864.448
17,734.608
1.129.840
25.040
8-314% Bond 2017 .
511&17
18.194,169
3.919.289
14.274.880
228.320
8-718% Bond 2017
811&17
14,016.858
5,442.458
8.574.400
1,451200
9-118% Bond 2018 ..
511&18
8.708.639
2.001.439
6.707.200
937.600
9% Bond 2018
11/15118
9.032.870
969.270
8.063.600
692.000
8-718% Bond 2019 .'
211f>119
19.250.798
3.313.198
15.937.600
200.000
8-118% Bond 2019 .
811&19
20213.832
13.815.752
6.398.080
379.840
8-112"4 Bond 2020 .
211f>/20
10.228.868
3.n4.468
6.454.400
1.287200
8-314% Bond 2020
&1f>/20
10.158.883
2.039.683
8.119.200
701,760
8-314% Bond 2020 .
811f>/20
21.418.606
3.441.006
17.9n.600
193.280
7·7,", Bond 2021
211&21
11.113.373
9.674.973
1.438.400
492.800
8-1'"' Bond 2021
&1&21 ...
11.958.888
4.123.048
7.835.840
188.800
8-1'"' Bond 2021
a.. Bond 2021
8n5l21
12.163.482
6.852.442
5.311.040
1.157.440
11n5l21
32.798.394
13.566.219
19.232.175
4.599.950
7·114% Bond 2022 .'
8n5122 ..
10.352.790
9.072.790
1.280.000
164.800
7·5/IMIo Bond 2022 .'
11n5122 .....
10,699.626
9.533.226
1.166.400
468.800
7·1,", Bond 2023
6- 114% Bond 2023 ..
2115123
18,374,361
11.530.334
18.363.161
11200
1.033.600
11.530.334
.().
.().
724.745.311
525.117 .560
199.827.751
28.383.810
ToIIII
'E~ May 1. 1987.
I 8n5123
-=-- held ., ~ 1aIIII . . . 1IIigbe tar racarwII1uIion 10 . . . ~ farm.
Nola: On ..... . . " . . 01..:11 manII T_ III.,. ............. 3:QO pm -..1irne an . . ~~. Ecanamic BI**' ao.d (EBB). The aaIIIphane ....... tar lI1OI1I i'ItaImIIiCIn
EBB • (2l2) 482-1986. The ~ iI . . _
. . at1jec11D .... inti - - - . . . . _ _ _
FOR RELEASE UPON DELIVERY
EXPECTED AT 2 P.M. EST
STATEMENT OF THE HONORABLE JEFFREY SHAFER
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
u. S. TREASURY DEPARTMENT
BEFORE THE
HOUSE BANKING SUBCOMMITTEE ON
INTERNATIONAL DEVELOPMENT, FINANCE, TRADE AND MONETARY POLICY
THURSDAY, OCTOBER 7, 1993
Sub-Saharan Africa: The Debt Dimension
I welcome this opportunity to discuss the international debt
problems of the poorest countries, particularly in Sub-Saharan
Africa. There has been considerable discussion within the
international community during the past few years about the
nature of their debt problems, and what should be done to help
resolve them. I would like to share some of my own thoughts on
this issue with you, and look forward to hearing the views of the
other members of this panel, as well.
Sub-Saharan Africa has benefitted in recent years from an
unprecedented level of external support. Despite debt burdens,
net transfers of resources as a percentage of the region's gross
national product were 7.S percent in 1991 -- well above that of
other developing countries (just over 1 percent for all those
reporting to the World Bank). Yet economic stagnation and
poverty continue to prevail. Clearly much must change before the
region can achieve economic recovery; debt burdens are only a
part of the story.
For most of the 1980s, the middle income countries of Latin
America were the major focus of debt concern. As the Latin
American debt crisis has moved toward resolution, due to both
strong reform efforts and commercial bank debt reduction
packages, the spotlight has properly focussed on the debt
problems of the poorest countries, particularly Sub-Saharan
Africa. This region has accumulated external debt since 1980 at
an even more rapid pace than Latin America -- more than tripling
as compared with a doubling in Latin America. Moreover, Sub-
- 2 -
Saharan debt has continued to grow, despite major debt reduction
programs by creditor governments, while it began to decline after
1987 in Latin America.
The nature of the debt problems and creditor profiles in the
two regions are very different, and underscore the need for
different approaches to a resolution:
In Latin America, more than half of the total debt was
owed to commercial banks, subject to variable interest
rates: agreements with the banks to reduce the stock of
debt or reduce and fix interest rates were therefore a
vital component of any solution.
In Sub-Saharan Africa, commercial banks hold only a
small share of the debt. Governments account for about.
half of the region's debt and have been the primary
source of relief. International institutions
(primarily the IMF, World Bank, and African Development
Bank) hold about 30 percent of the debt; new
concessional loans help to maintain a positive transfer
of resources to the region from these institutions.
While more than half of the region's debt to official
creditors is on concessional terms, and frequent
rescheduling of bilateral debt has provided substantial
debt service relief, the problem has continued to
snowball. The Paris Club of creditor governments has
therefore focussed increasingly on additional measures
to reduce the burden of the region's non-concessional
debt.
The u.S. share of Sub-Saharan Africa's debt is small -only 15 percent of the region's debt to governments,
and 3 percent of its total debt. Thus, U.S. action to
help these countries will have the most impact if
coordinated with other governments through the Paris
Club.
Our voice in favor of debt relief may be more
important than the relief that we provide directly.
But we have to take part in order to be heard.
The poorest countries in Sub-Saharan Africa now have total
long-term debt in excess of $90 billion. Total long-term debt
for ~e region is over $150 billion. Debt ratios for this region
are h1gher than that of any other region in the world. To place
them in perspective:
If all of the region's export earnings went to pay for
outstanding debt, and none for imports of goods and
services, it would still take the region 3 years to pay
off its debt.
-
3 -
Annual scheduled debt payments, if they could be met,
would absorb 40 percent of annual export earnings. By
contrast, the region has demonstrated an ability to pay
less than half of this amount annually.
High and rising debt ratios over an extended period are an
indication of problems that are not going to go away by
themselves: they are solvency problems, not mere liquidity
problems that could be solved by providing new credits for a
limited period to tide them over. Regional aggregates, however,
mask a wide range of individual country debt profiles. Botswana
and Mauritius do not have debt problems. On the other hand,
Mozambique would have to dedicate all of its export earnings for
11 years to payoff its outstanding stock of debt. And Zambia's
debt is nearly twice its annual national income.
Effects of Debt Burdens
What do these types of debt burdens mean for the poorest
nations? For many of these countries there is no hope for a
return to a sustainable course without debt reduction on a large
scale. Trying to meet scheduled debt service payments means
onerous budgetary and external transfer burdens, and a constant
drain on the country's future growth potential. Not making
scheduled payments means that, unless unpaid amounts are
forgiven, unpaid interest is added to the stock of debt, which
continues to grow like a snowball from year to year.
Major unresolved debt problems, especially a build-up of
arrears, also can have a chilling effect on new financial flows,
as lenders or investors shy away from a perceived high risk
environment. Why would an investor choose to place his funds in
a country where he would have to stand behind creditor
governments already lined up for limited payments? It is
therefore no surprise that total private capital flows to SubSaharan Africa in 1991, including net direct foreign investment,
totaled only about $2 billion, compared to a level of about $30
billion each in Asia and Latin America. And these funds were
concentrated in a few countries with oil or other mineral
resources.
Africa's debt problems not only inhibit capital inflows,
they encourage those with capital in the country to move it out.
Africans and former investors have been taking funds out of
Africa at a rapid rate. According to the World Bank, flight
capital from Sub-Saharan Africa had cumulated to 95% of aggregate
GOP at the end of 1991, higher than for any other region except
the Middle East. Debt is certainly not the only reason for
capital outflows. Political actions and unsound economic
policies have all too often driven money out of African
countries.
- 2 -
Saharan debt has continued to grow, despite major debt reduction
programs by creditor governments, while it began to decline after
1987 in Latin America.
The nature of the debt problems and creditor profiles in the
two regions are very different, and underscore the need for
different approaches to a resolution:
In Latin America, more than half of the total debt was
owed to commercial banks, subject to variable interest
rates: agreements with the banks to reduce the stock of
debt or reduce and fix interest rates were therefore a
vital component of any solution.
In Sub-Saharan Africa, commercial banks hold only a
small share of the debt. Governments account for about.
half of the region's debt and have been the primary
source of relief. International institutions
(primarily the IMF, World Bank, and African Development
Bank) hold about 30 percent of the debt; new
concessional loans help to maintain a positive transfer
of resources to the region from these institutions.
While more than half of the region's debt to official
creditors is on concessional terms, and frequent
rescheduling of bilateral debt has provided substantial
debt service relief, the problem has continued to
snowball. The Paris Club of creditor governments has
therefore focussed increasingly on additional measures
to reduce the burden of the region's non-concessional
debt.
The u.S. share of Sub-Saharan Africa's debt is small -only 15 percent of the region's debt to governments,
and 3 percent of its total debt. Thus, U.S. action to
help these countries will have the most impact if
coordinated with other governments through the Paris
Club.
Our voice in favor of debt relief may be more
important than the relief that we provide directly.
But we have to take part in order to be heard.
The poorest countries in Sub-Saharan Africa now have total
long-term debt in excess of $90 billion. Total long-term debt
for ~e region is over $150 billion. Debt ratios for this region
are h~gher than that of any other region in the world. To place
them in perspective:
If all o~ the region's export earnings
outstand~ng debt, and none for imports
went to pay for
of goods and
services, it would still take the region 3 years to pay
off its debt.
- 3 -
Annual scheduled debt payments, if they could be met,
would absorb 40 percent of annual export earnings. By
contrast, the region has demonstrated an ability to pay
less than half of this amount annually.
High and rising debt ratios over an extended period are an
indication of problems that are not going to go away by
themselves: they are solvency problems, not mere liquidity
problems that could be solved by providing new credits for a
limited period to tide them over. Regional aggregates, however,
mask a wide range of individual country debt profiles. Botswana
and Mauritius do not have debt problems. On the other hand,
Mozambique would have to dedicate all of its export earnings for
11 years to payoff its outstanding stock of debt. And Zambia's
debt is nearly twice its annual national income.
Effects of Debt Burdens
What do these types of debt burdens mean for the poorest
nations? For many of these countries there is no hope for a
return to a sustainable course without debt reduction on a large
scale. Trying to meet scheduled debt service payments means
onerous budgetary and external transfer burdens, and a constant
drain on the country's future growth potential. Not making
scheduled payments means that, unless unpaid amounts are
forgiven, unpaid interest is added to the stock of debt, which
continues to grow like a snowball from year to year.
Major unresolved debt problems, especially a build-up of
arrears, also can have a chilling effect on new financial flows,
as lenders or investors shy away from a perceived high risk
environment. Why would an investor choose to place his funds in
a country where he would have to stand behind creditor
governments already lined up for limited payments? It is
therefore no surprise that total private capital flows to SubSaharan Africa in 1991, including net direct foreign investment,
totaled only about $2 billion, compared to a level of about $30
billion each in Asia and Latin America. And these funds were
concentrated in a few countries with oil or other mineral
resources.
Africa's debt problems not only inhibit capital inflows,
they encourage those with capital in the country to move it out.
Africans and former investors have been taking funds out of
Africa at a rapid rate. According to the World Bank, flight
capital from Sub-Saharan Africa had cumulated to 95' of aggregate
GOP at the end of 1991, higher than for any other region except
the Middle East. Debt is certainly not the only reason for
capital outflows. Political actions and unsound economic
policies have all too often driven money out of African
countries.
- 4 -
Measures Taken thus Far to Address Debt Burdens
What would help to keep this capital at home, and to attract
other investors as a source of new financing? The same measures
that have worked in many Latin American countries: fundamental
economic reforms aimed at creating a more favorable and stable
business climate (including basic safeguards for investments),
combined with international support to help bring the burden of
external payments into better balance with the ability of the
debtor nation to service its debt over time.
The required policies include both macroeconomic
stabilization and microeconomic reforms to improve economic
potential. Debt relief in the absence of good economic policies
cannot stimulate growth or restore access to capital markets.
Countries do not get on, and remain on, the required course
without good governance -- transparency, accountability, rule of
law, and public participation. Given these, the international
community can help countries make difficult adjustments.
The IMF and the World Bank have been working closely with
Sub-Saharan African countries to support their reform efforts
through expanded concessional assistance. Indeed, 45 - 50
percent of the World Bank's concessional loans are now targeted
for Sub-Saharan Africa. The IMF has also supported macroeconomic
stabilization efforts through the Enhanced Structural Adjustment
Facility (ESAF), and is currently discussing a successor
facility.
Government creditors have long been willing to reschedule
debts of countries that could not meet their payments in the socalled Paris Club. This became a routine and recurring practice
in the 1980s. Despite repeated reschedulings, only two of the
thirty low-income rescheduling countries have subsequently
graduated from the Paris Club.
In 1988, the creditor governments of the Paris Club
recognized that many of the poorest countries would never be able
to service fully their external debt, even with heroic economic
reforms. Most of these countries are in Sub-Saharan Africa. For
severely-indebted low-income countries which were undertaking
serious efforts to improve their economic policies, therefore,
creditor governments introduced debt and debt service reduction
for non-concessional debt. These options were designed to reduce
debt payments coming due by roughly one-third. A third option
offered long-term rescheduling, and was chosen by the United
States since we did not have Congressional authorization or
appropriations to reduce debt. These new terms were labelled
"Toronto Terms" since the impetus for moving to debt reduction
came from the 1988 G-7 Economic Summit held in Toronto.
- 5 -
The debt relief offered by Toronto Terms proved insufficient
to restore viability to many of the low-income countries. In
December of 1991, therefore, the Paris Club members agreed to
deepen the relief provided. The new agreement was reflected in
"Enhanced Toronto Terms," which included options to increase the
effective debt reduction on payments coming due to 50 percent.
The Paris Club also agreed to consider reducing the stock of
debt, rather than simply payments coming due, after a period of
three to four years. Once again the United states chose to
reschedule debts rather than to provide debt reduction.
Since the introduction of debt reduction options in the
Paris Club in 1988, creditors have reduced payments coming due on
non-concessional debt from the poorest countries by about $3
billion. In addition, the united States and several other
creditors have forgiven concessional debt bilaterally. The
United states has forgiven $1.1 billion of concessional debt owed
by Sub-Saharan Africa.
The Clinton Administration has made a priority of seeking
Congressional authorization and appropriations to enable the
united States to join other Paris Club creditors in providing 50%
reduction of non-concessional debt for the poorest countries
under Enhanced Toronto Terms. Thanks in part to the actions of
this subcommittee, we now are able do this in Fiscal Year 1994.
Future Considerations
We recognize the interest of this subcommittee in moving to
even deeper debt reduction for the poorest countries, as
reflected in the sense of Congress resolution included in the
final FY 1994 appropriations legislation. We share this
interest. We will consider how much we can do and how we can
provide debt relief most effectively as we prepare the
Administration's FY 1995 Budget request.
Debt relief is not free, although our budgetary process
recognizes that reducing by one dollar the debt of a country that
is unable to make payments is not the same thing as spending a
dollar. This is because the debt may be worth only a few cents
on the dollar, reflecting the prospect of repayment. The budget
scorers are supposed to base their charges on estimates of what
the debt is actually worth: that is, on what we expect to receive
in payments over time. For this reason, debt reduction can be a
cost-effective way of helping countries in financial difficulty.
We recognize that debt reduction's immediate economic benefits
may be limited, when compared to a dollar of aid that can be used
to buy imports. However, not only immediate benefits, but also
future growth prospects are important. If debt reduction is
sufficiently deep, it can provide the longer-term benefit of
restoring external viability.
-
6 -
with limited budgetary resources, we must consider carefully
our options for new flows, debt service relief, and debt stock
relief in crafting our assistance. If deeper debt reduction
reduces our bilateral assistance and support for multilateral
assistance through IDA and the African Development Bank and Fund,
due to budget constraints, we have to consider the relative
impact of alternative uses of our budget resources. Clearly,
without debt relief there can be little hope for the future. We
must have both debt relief and new assistance in our strategy.
We must also ensure that resources for both debt reduction and
new flows are used effectively. This means concentrating them on
countries where policy conditions are favorable. To grant
sufficient debt relief to a country that is committed to a sound
economic policy course so that its future debt service is
manageable is the key to fostering new economic success stories
among the poor countries in Africa to go with those that we now
see among the once problematic middle-income countries of Latin
America.
As called for in the Tokyo Summit communique, we will be
examining the question of stock of debt reduction in the Paris
Club. Until now the Paris Club has only reduced debt on payments
coming due during a specific time period. We will study the
appropriate timing of stock reduction and the policy conditions
that are needed to offer good prospects that the result will be
an exit from the cycle of repeated rescheduling. It will be
important to ensure that any stock of debt reduction be large
enough to make a fundamental change in a country's debt
situation, and that the resulting payments profile be manageable
when sound economic policies continue to be followed.
Conclusion
In summing up I would like to stress the following points:
Debt relief is absolutely critical, but not sufficient,
to get the poorest countries on a development track.
Sound economic policies are also essential, as are nondebt resource flows.
The United states can best "leverage" its debt
reduction efforts by joining with other creditors in
debt relief.
A dollar of debt reduction is less costly for the
United States in budgetary terms than a dollar of new
grant assistance.
- 7 -
The Administration will be movinq with the Paris Club
in FY 94 to provide debt reduction for the poorest
countries. As we develop our budget request for FY 95,
we will be examining how best to structure debt relief
so that it will have the best hope of moving countries
across the threshold to sustainable debt levels.
REMARKS BY
LA\¥RENeE H. SUMMERS
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
AT A
SYMPOSIUM ON PRIVATIZATION
DEPARTMENT OF STATE
OCTOBER 7, 1993
"PRIVATIZATION, THE MARKET, AND FREEDOM"
I am delighted to have this opportunity to address the crucial topic of
privatization. Of the many economic ideas that have gained currency in recent years -monetarism, rational expectations, supply-side economics -- privatization, I think, will
have the most enduring importance for prosperity worldwide. Economists and others
once believed that governments could and should operate industries. But today, around
the world, the state is retreating from productive sectors of the economy, and the private
sector is rushing in.
States on the retreat
•
In Mexico, the number of state owned enterprises has been reduced from 1,155 to
200, and the government has raised more than $15 billion in the process.
•
During the 1980s, Britain sold 30 major enterprises employing 800,000 people for
some £27 billion.
•
During the first 18 months of its privatization program, Russia sold 70,000 shops
and distributed shares in 4,000 large enterprises that employ almost five million
workers.
•
A private company now collects tariffs for the public water company in
Venezuela.
LB-419
1
•
Thailand, Hungary and Mexico are allowing private firms to build toll roads.
Argentina has privatized 10,000 kilometers of country roads so far, and has plans
to privatize another 16,000 kilometers.
•
And Argentina, Colombia and Pakistan are leasing railroad lines to the private
sector.
Why the rush to privatize?
•
To save money, for one.
According to the Financial Times, IRI, the gigantic Italian state-owned firm that
does everything from baking to banking, telephones to television, lost about $4
billion last year, and manages to lose money almost every year. So much money
that its total debt is now equivalent to 5% of Italy'S GDP. This is just one lossmaking company!
Another reason is to clarify sometimes conflicting roles in a "mixed" -- or mixed-up -economy.
•
Per Westerberg, Minister of Industry and Commerce of Sweden, a country once
admired as a successful welfare state, explains that his country must abandon the
"confusion economics" of the past for the market. As he puts it, "... there will no
longer be any doubt about what is and what is not the role of the state in the
economy".
Still another is that governments, influenced by political factors, have made some
shockingly bad investment decisions:
•
Over nearly two decades, Nigeria has poured $3 billion into its "integrated" steel
industry, a facility that is divided into three parts, one for each of that country's
main ethnic groups. My staff calculated that the money invested in this stillunfinished mill has cost each Nigerian man, woman and child about $34 so far.
That's no trivial amount in a country where per capita income was $340 in 1992.
Finally, it's become obvious that relying on markets works as a strategy for economic
growth.
•
Look at China. Non-state industry now employs about 100 million people and
produces more than half of industrial output. Despite the Tiannamen massacre
and Beijing's adherence to a communist political system, market reforms have
enabled the country's southeastern provinces to achieve the highest sustained rates
of growth ever achieved in the history of the world.
2
No matter what their political complexion, governments throughout the world
have changed their minds about markets. They have discovered that markets may fail,
but governments fail more often. The result: governments seem to have permanently
discarded failed notions about what the state can and should do.
So why not privatize?
The world-wide privatization boom reflects a profound redefinition of the state's
role in the economy. Yet, despite all the privatization that has taken place, the process
so far is really just the tip of the iceberg.
•
In Chile, a country that has privatized 95% of its state firms and perhaps more
than any other as a share of its economy, public enterprises still accounted for
some 16% of GDP in 1989.
•
According to one estimate, the value of assets that countries around the world are
expected to privatize by the year 2000 could be double the $328 billion in assets
that have privatized since 1985.
•
With the possible exception of the telecoms industry, most market economies, rich
or poor, have done little to privatize their public infrastructure such as roads,
power supply and railways. Many countries operate a state-owned banking
system. Most have left their major extractive industries under state ownership.
And these are the market economies. In the ex-socialist countries, they've hardly
scratched the surface.
So why aren't some governments more enthusiastic? If the benefits are great -and I believe they are -- why the reluctance, even among the enthusiasts, to go further?
I've heard various reasons.
1.
For example, that macroeconomic stability is a prerequisite to privatization. Of
course, private enterprises -- or state enterprises -- will work best in a stable
macroeconomic environment. But, as Argentina learned over many years, the wait for
macroeconomic stability before privatization can be extremely long. In fact -- this is the
critical point -- privatization is often a prerequisite to sustained macroeconomic stability.
•
The inflation in Russia today, the inflation in Brazil, or the inflation in Argentina
several years ago, can be traced, in large part, to the subsidies and soft credits
given to money-losing state enterprises. Severing those enterprises from the state,
stopping the hemorrhage, can make a crucial contribution to closing government
deficits and, therefore, to eliminating inflation.
3
2.
A second suggestion is that enterprises should be restructured before they are
privatized. This is an odd view. Why, if governments cannot operate enterprises
effectively, would we suppose that governments can carry out the more difficult task of
fundamental restructuring?
•
In thinking about privatization, I find it helpful to think about the process of
selling a house. It may make sense to do a new paint job in some rooms where
the paint is chipped. But you'd be nuts to start constructing bathrooms where you
thought potential new buyers might want them. It's the same with privatization:
the sensible way is to put the asset up for sale, and let the new owner, who has to
live with the consequences, decide what investments are necessary, how best to
restructure to suit the new owner's plans.
Those who worry that enterprises should not be sold on the cheap should
remember what can happen in "enterprise limbo".
•
A Lithuanian government official gave his version of an ancient Chinese curse:
"May you live 100 years in a transition period".
Expecting to be kicked out by the new owners, managers have every incentive not to
restructure but to live for today, not to transfer revenues to the government but to raise
wages, not to invest in the future but to strip assets.
3.
A third concern is that privatization brings job losses. It does in some cases -but not always, and certainly not forever.
•
The Mexican Government found that many of the firms that it had privatized up
to 1988, having become more profitable, increased employment. The most
striking examples were found in the auto parts industry, where privatized firms
employed 30% more workers after privatization.
There is also the broader point: because privatization lifts economic performance,
it improves the economic environment in general. The result is more jobs for people
who don't even know that the source of their benefit is privatization. The fact that the
employment gains occur only after privatization, and are not obviously attributable to the
process, leads to the political resistance which Mary Shirley of the World Bank rightly
described. Though a difficult political sell, privatization probably is a "pro-jobs"
economic policy.
4.
A fourth argument against privatization is that it "will just help the rich." But it
doesn't help the rich or anyone else for the economy to function badly, for governments
to pay large subsidies to inefficient companies. Both the rich and the poor in Britain are
better off with British Telecom in private hands, as anyone who makes telephone calls in
that country could tell you. The same is true of British Airways and Aero Mexicano,
both of which are now contributing to government coffers -- not draining from them.
4
But, there is a more fundamental point. Privatization, operated properly, can be a
major tool to promote economic democracy. Mrs. Thatcher's Government saw it this
way. Now the Czechs and the Russians are pursuing the same strategy. Both have
designed voucher schemes to distribute ownership to all adults, so that everyone has a
stake in economic and political well-being.
5.
Finally, there is the suggestion that an appropriate regulatory environment must
be put in place before privatization can go forward. Of course, it is necessary to
establish some regulatory framework. But it is important also not to let the best be the
enemy of the good. Those governments least capable of effective regulation are surely
also those governments least capable of effective management of state enterprises.
The choice is not a choice between ideal regulation and ideal public ownership.
A judgment must be made on the basis of the comparative ability to regulate privatized
enterprises and to operate public enterprises. I suspect there will be relatively few cases
in which public ownership is, in fact, the right way forward.
Privatization seen through American eyes
This message is getting through. It's getting through abroad and in the United
States.
The Clinton Administration has recently completed a six-month National
Performance Review, which laid out the steps to achieve the President's goal of
reinventing government. Privatization and using the dynamism of the market are among
them, including:
•
eliminating monopolies of the Government Printing Office and the Government
Services Administration, and forcing both to compete for business with private
companies and other government agencies;
•
restructuring the U.S. air traffic control system and introducing private sector
management;
•
allowing private inspection companies to certify compliance with workplace safety
and health requirements;
Another important step forward was made by raising grazing fees on Federally-owned
lands in the West.
States and local governments are also getting in on the act. Fifteen states have
recently passed laws which authorize private operation of roads and railways. Cities and
towns have moved to privatize everything from garbage collection to the enforcement of
parking tickets.
5
The United States is also doing its part to promote privatization abroad. We're
doing it because it's in our economic interest for other nations to grow. And we're doing
it because assisting in privatization is not a trivial export industry for the United States.
The U.S. is the largest exporter of services. We are the world's leading repository of
private sector know-how. American lawyers, accountants, bankers, and other business
people have much to contribute to the transition process itself.
Here are some of the things the Administration is doing:
•
Bilaterally, we operate enterprise funds in Eastern Europe that make investments
in and lend money to privatized firms.
Starting with just a few employees, a motorcycle factory financed by one
enterprise fund now employs more than 100 Slovak workers and sells its
products at home and abroad.
A loss-making Polish bank has been turned around after 1991, when the
Polish-American Enterprise Fund provided it with new capital and helped
to install a new Western management team.
Extending the enterprise fund concept, the Clinton Administration has
proposed creating the Russian-American Enterprise Fund to target small
and medium-sized private firms in that country.
•
To give further support to the world's largest privatization program, the
Administration has led the G-7 and the international financial institutions to
create a Special Privatization and Restructuring Program for large enterprises in
Russia. With the urging of the Russian Government, our commitment of $375
million leveraged sponsorship for a $3 billion program. By bringing equity to
privatized and privatizing enterprises, the Program will help the Government of
Russia press ahead with mass privatization.
Of the U.S. contribution, $100 million will go to creating an equity fund for
enterprises in Russia's most progressive regions. $25 million will be used
to provide technical assistance to help restructure these firms. The
remaining $250 million will be loans targeted to these same enterprises.
We expect to incorporate investment guarantees from OPIC to increase the
amount of equity.
The Administration's strategy is designed to prompt reforms on the
Russian side. The assistance will only be available to regions that
implement market reforms and support privatization. Individual companies
will also have to be committed to privatization.
6
•
Another device we use to promote privatization are OPIC's insurance and
guaranty programs, which may be used by US firms when financing investments.
Last month, OPIC provided $200 million in political risk insurance for US
investors to acquire two privatized power sector projects in Argentina.
•
The US is also using its voice at the international financial institutions to push for
privatization:
At the World Bank and the Inter-American Development Bank, we have
encouraged more private sector development operations. These
institutions have responded to our call with lending strategies that support
privatization through the design of privatization strategies and their
implementation, financing transactions, promoting financial sector reform,
and adopting policies conducive to private investment.
The US also successfully convinced the international community to insert
into the EBRD's charter a provision requiring 60% of that institution's
lending to be directed to the private sector.
Working through the IMF, the US promotes the macroeconomic stability
of countries needed for a private sector to flourish.
Privatization and freedom
I have spoken today about privatization because it is the subject of this
conference, and because there are enormous gains worldwide to be realized by
promoting privatization.
But let there be no mistake that advocacy of privatization does not in any way
deny a critical role for government. There is the old joke: "How many Reaganite
economists does it take to screw in a light bulb?" The answer (that says a lot): "None.
They all sit in the dark to wait for 'the invisible hand'."
The invisible hand can't do everything. The visible hand of government has an
essential role if societies are to defend themselves, if transactions are to be enforced, if
children are to be educated, if decent health care is to be assured. States must do what
only states can do.
Progressives have always believed in freedom of conscience, freedom of
expression, freedom of the press. This progressive Administration also believes in
freedom of exchange, freedom of ownership, free control over the means of production.
All of these freedoms are needed in a free and civilized society, and we are working to
promote them around the world.
7
STATEMENT OF LAWRENCE H. SUMMERS
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
AT CAHNER'S OUTLOOK '94 IN NEW YORK
OCTOBER 7, 1993
I'm pleased to join you here today to make the case for NAFfA -- that it should
pass, and that it will pass. There is no more important economic policy or foreign policy
decision facing the U.S. this year.
In his NAFTA kick-off speech, President Clinton stressed that the world is
becoming a smaller place and concluded that: ".. when you live in a time of change the
only way to recover your security and to broaden your horizons is to adapt to the change,
to embrace, to move forward."
This is what the NAFfA debate is all about: hope vs. fear. And hope will win
out.
People have a lot to worry about. Indeed, President Clinton was elected to fix the
things NAFfA's opponents worry about. They worry about jobs lost to Mexico, about
low Mexican wages, about investment leaving the United States, about lost American
competitiveness, the border environment... These are all valid concerns. But one thing
is certain. Without NAFfA, nothing will happen to solve any of these problems.
NAFfA offers the prospect of real progress.
NAFfA WILL CREATE U.S. JOBS
Right now the central fact obscured by those who oppose NAFT A is that there
are few barriers stopping firms in Mexico from selling in the U.S. But there are plenty
of barriers stopping firms in the U.S. from selling in Mexico. Mexico's average tariff is
two and a half times as high as that of the U.S., though they have fallen a long way on
the road to N AFTA.
That is why U.S. exports to Mexico have risen 228% since 1986 to $40.6 billion in
1992 and U.S. jobs supported by these exports rose from 274,000 to 700,000. That's why
the U.S. bilateral trade balance with Mexico moved from a deficit of $5.7 billion to one
of our largest surpluses, $5.6 billion.
LB-420
A group of almost 300 renowned economists, including twelve Nobel Laureates,
wrote to President Clinton recently, advocating NAFfA. They pointed out: "while we
may not agree on the precise employment impact of NAFfA we do concur that the
agreement will be a net positive for the United States, both in terms of employment
creation and overall economic growth. Specifically, the assertions that NAFfA will spur
an exodus of U.S. jobs is without basis. Mexican trade has resulted in net job creation in
the U.S. in the past, and there is no evidence that this trend will not continue when
NAFfA is enacted."
Indeed, careful syntheses of the available evidence reveal that NAFfA will
increase exports by $10 billion over the next three years and create some 200,000 jobs.
I've looked carefully at the study most often cited by NAFfA's opponents that
says that jobs are going to be lost in the U.S. as a result of NAFfA. But what was that
study based on? The fact that there are going to be fewer illegal immigrants working in
the United States. Even that study, cited by NAFfA opponents, does not say that there
will be any loss of jobs for Americans.
What would happen if NAFfA failed? Surely the pace at which Mexican trade
barriers are reduced would slow. Mexico would be free under the GATT to raise its
tariffs to 50%. Investment in Mexico would dry up. During the first two years of the
Mexican debt crisis, U.S. exports to Mexico dropped by almost half. If the failure of
NAFTA caused a problem even half as large, that would mean the loss of almost 200,000
jobs.
NAFfA WILL REDUCE COMPETITION FROM LOW WAGE LABOR
As I have already said, right now the United States competes with low wage
Mexican labor. We don't have tariffs that keep Mexican products out. Our average
tariff rate is only 4%: less than the sales tax in most states.
The best way to protect against low wage Mexican labor is to see that Mexican
wages rise. That has already happened in the run up to NAFfA. Mexican wages,
measured in dollar terms, have more than doubled in the last six years and that process
is continuing, as strong capital inflows into Mexico support a strong peso.
With NAFfA, with more investment in Mexico, with a shot in the arm to
Mexican reform, that process of capital inflow, that process of productivity growth
enhancement, will continue to mean higher wages in Mexico and mean less competition
for lower wage American workers.
2
There's another point to be made as well. President Salinas has vowed to ensure
that Mexican wages rise in line with Mexican productivity. If wages move in line with
productivity, do we want a more productive Mexico or a less productive Mexico?
NAFfA will mean a more productive Mexico.
Greater prosperity in Mexico is also the most effective means of enabling Mexico
to deal with its pressing social problems like the need for adequate labor standards.
Earlier in this century, the United States was undergoing a similar transformation.
Wages were low, conditions were hazardous, and children worked long hours. A glimpse
of their potential is what caused people to eventually band together to improve the
quality of their lives.
And there's a final point about low wage labor. The low wage labor that hurts
American workers most is the low wage labor that lives in the United States, and draws
on American resources for public education, for public health care, and for welfare, is
low wage immigration. A more prosperous Mexico means a more prosperous America
as Mexican workers find opportunity in Mexico.
NAFfA WILL INCREASE AMERICAN INVESTMENT AND COMPETITIVENESS
I've already given one main reason why that's true. NAFTA creates export
opportunities for American firms. That's where the jobs are going to come from. There
are other reasons as well.
NAFfA will bring home investments that have been made to get under Mexican
protection. For example, automobile companies have had to move to Mexico to get
around domestic content requirements, and because, pre-NAFfA, Mexico permitted the
import of only 1000 American cars per year. With NAFTA, we may be able to produce
as many as one million cars a year in the U.S. for sale in Mexico. They have been
discussing bringing some of those operations back. Already, our embassy has also been
informed that some textile companies are thinking of moving. With NAFTA, computer
companies will not have to move to Mexico to escape a 20% duty on PC exports.
It's a big world out there, much bigger than North America. Mexico is not the big
threat we face. Dwarfing any effect of a U.S. firm moving to Mexico is the competitive
advantage that North America will get from coming together. Look at what Japan has
done in Eastern Asia. Japanese firms invest in assembly operations in lower wage
regions. Components are shipped from Japan and incorporated into products bound for
the rest of the world. While Japan maintains its trade surplus vis-a-vis its lower wage
partner, both gain from increased production and exports.
3
Indeed, some Asian economists have expressed concerns that NAFfA will divert
investment from their shores toward North America. Their concerns seem to be well
founded. As a major leather products manufacturer noted: "NAFfA ... will be a necessary
tool in returning some of the manufacturing jobs currently held in Asia to North
America. The Agreement will lower the cost of the finished product by saving
manufacturers both transportation and inventory costs."
And there's another important point about international competition. NAFfA
makes it much harder for foreign firms to gain a North American beachhead in Mexico.
Tough rules of origin mean that products assembled in Mexico with American
components will benefit from NAFTA's liberalization, but that products assembled with
foreign components will not.
NAFfA WILL IMPROVE THE ENVIRONMENT
Fundamentally, American workers have a choice. They can wall off Mexico while
Japan embraces the rest of Asia, and Europe embraces Eastern Europe, or they can
work together with Mexico to compete globally. The protection strategy is based on
fear. The global strategy is based on hope.
Mexico and the United States have
struck the greenest trade agreement in history. Along with its side agreements, NAFfA
will:
o
ensure that the Mexicans enforce environmental regulations;
o
provide money for border clean-up;
o
disperse economic activity in Mexico rather than forcing it all to operate in
maquiladora regions along the border; and
o
most importantly, lay the basis for the prosperity that can underpin real
environmental improvement. Experience around the world shows that prospering
economies are more likely to undertake environmental regulation than those with
stagnating economies.
NAFfA is not a panacea for America's problems. We're talking about a trade
agreement with a country whose dollar GNP is roughly equal to that of the Los Angeles
metropolitan area.
So why expend all this energy on a trade agreement whose economic benefits are
moderate? Because our economy needs all the help it can get, and because NAFfA is
not only an economic policy but also a foreign policy initiative. Mexico wants NAFfA,
and the U.S. needs a pro-American Mexico. With a 2000 mile border, and major
immigration, drug, and environmental issues, the U.S. and Mexico cannot afford to miss
out on win-win trade opportunities.
4
Imagine the signal the United States would send to the rest of the world if we did
not pass NAFfA. If we're not prepared to make a trade agreement to which two
presidents have been committed, with a country with which we share a 2,000 mile border
and who has undertaken a major set of economic reforms, it will very difficult for us to
promote our exports anywhere in the world.
The American political process took a long time asking, "Who lost China?" Let
them not have to debate, "Who lost Latin America?"
The case for NAFTA is clear. It has been proven by the arguments. Now it must
be won. The President is calling Congressmen every day and is doing a NAITA public
event every week. Many thought the vote on NAITA would be moved back. It's been
moved up. We in the Administration are doing all we can. I'm encouraged that we're
going to win. On vote day minus fifty, the Panama Canal was a dead duck and if the
history of the United States says anything it is that, in the end, we do the right thing.
We're a country built on hope, not fear.
-30-
5
A group of almost 300 renowned economists, including twelve Nobel
Laureates, wrote to President Clinton recently, advocating NAFfA. They pointed out:
"while we may not agree on the precise employment impact of NAFfA we do concur
that the agreement will be a net positive for the United States, both in terms of
employment creation and overall economic growth. Specifically, the assertions that
NAFT A will spur an exodus of U.S. jobs is without basis. Mexican trade has resulted in
net job creation in the U.S. in the past, and there is no evidence that this trend will not
continue when NAFTA is enacted."
Indeed, careful syntheses of the available evidence reveal that NAFfA will
increase exports by $10 billion over the next three years and create some 200,000 jobs.
I've looked carefully at the study most often cited by NAFfA's opponents that
says that jobs are going to be lost in the U.S. as a result of NAFfA. But what was that
study based on? The fact that there are going to be fewer illegal immigrants working in
the United States. Even that study, cited by NAFTA opponents, does not say that there
will be any loss of jobs for Americans.
What would happen if NAFTA failed? Surely the pace at which Mexican trade
barriers are reduced would slow. Mexico would be free under the GAIT to raise its
tariffs to 50%. Investment in Mexico would dry up. During the first two years of the
Mexican debt crisis, U.S. exports to Mexico dropped by almost half. If the failure of
NAFTA caused a problem even half as large, that would mean the loss of almost 200,000
jobs.
NAFfA WILL REDUCE COMPETITION FROM LOW WAGE LABOR
As I have already said, right now the United States competes with low wage
Mexican labor. We don't have tariffs that keep Mexican products out. Our average
tariff rate is only 4%: less than the sales tax in most states.
The best way to protect against low wage Mexican labol is to see that Mexican
wages rise. That has already happened in the run up to NAFTA Mexican wages,
measured in dollar terms, have more than doubled in the last six years and that process
is continuing, as strong capital inflows into Mexico support a strong peso.
With NAFTA, with more investment in Mexico, with a shot in the arm to
Mexican reform, that process of capital inflow, that process of productivity growth
enhancement, will continue to mean higher wages in Mexico and mean less competition
for lower wage American workers.
2
There's another point to be made as well. President Salinas has vowed to ensure
that Mexican wages rise in line with Mexican productivity. If wages move in line with
productivity, do we want a more productive Mexico or a less productive Mexico?
NAFfA will mean a more productive Mexico.
Greater prosperity in Mexico is also the most effective means of enabling Mexico
to deal with its pressing social problems like the need for adequate labor standards.
Earlier in this century, the United States was undergoing a similar transformation.
Wages were low, conditions were hazardous, and children worked long hours. A glimpse
of their potential is what caused people to eventually band together to improve the
quality of their lives.
And there's a final point about low wage labor. The low wage labor that hurts
American workers most is the low wage labor that lives in the United States, and draws
on American resources for public education, for public health care, and for welfare, is
low wage immigration. A more prosperous Mexico means a more prosperous America
as Mexican workers find OPPC)1 tunity in Mexico.
NAFTA WILL INCREASE AMERICAN INVESTMENT AND COMPETITIVENESS
I've already given one main reason why that's true. NAFTA creates export
opportunities for American firms. That's where the jobs are going to come from. There
are other reasons as well.
NAFfA will bring home investments that have been made to get under Mexican
protection. For example, automobile companies have had to move to Mexico to comply
with domestic content requirements, and because, pre-NAFfA, Mexico permitted the
import of only 1000 American cars per year. With NAFfA, U.S. automakers estimate
they can sell 60,000 vehicles in the first year. Additionally, they have been discussing
bringing some of those operations back. Already, our embassy has also been informed
that some textile companies are thinking of moving. With NAFfA, computer companies
will not have to move to MeXlco to escape a 20% duty on PC exports.
It's a big world out there, much bigger than North America. Mexico is not the big
threat we face. Dwarfing any effect of a U.S. firm moving to Mexico is the competitive
advantage that North America will get from coming together. Look at what Japan has
done in Eastern Asia. Japanese firms invest in assembly operations in lower wage
regions. Components are shipped from Japan and incorporated into products bound for
the rest of the world. While Japan maintains its trade surplus vis-a-vis its lower wage
partner, both gain from increased production and exports.
3
Indeed, some Asian economists have expressed concerns that NAFfA will divert
investment from their shores toward North America. Their concerns seem to be well
founded. As a major leather products manufacturer noted: "NAFTA... will be a necessary
tool in returning some of the manufacturing jobs currently held in Asia to North
America. The Agreement will lower the cost of the finished product by saving
manufacturers both transportation and inventory costs."
And there's another important point about international competition. NAFfA
makes it much harder for foreign firms to gain a North American beachhead in Mexico.
Tough rules of origin mean that products assembled in Mexico with American
components will benefit from NAFfA's liberalization, but that products assembled with
foreign components will not.
NAFTA WILL IMPROVE THE ENVIRONMENT
Fundamentally, American workers have a choice. They can wall off Mexico while
Japan embraces the rest of Asia, and Europe embraces Eastern Europe, or they can
work together with Mexico to compete globally. The protection strategy is based on
fear. The global strategy is based on hope.
Mexico and the United States have
struck the greenest trade agreement in history. Along with its side agreements, NAFTA
will:
o
ensure that the Mexicans enforce environmental regulations;
o
provide money for border clean-up;
o
disperse economic activity in Mexico rather than forcing it all to operate in
maquiladora regions along the border; and
o
most importantly, lay the basis for the prosperity that can underpin real
environmental improvement. Experience around the world shows that prospering
economies are more likely to undertake environmental regulation than those with
stagnating economies.
NAFTA is not a panacea for America's problems. We're talking about a trade
agreement with a country whose dollar GNP is roughly equal to that of the Los Angeles
metropolitan area.
So why expend all this energy on a trade agreement whose economic benefits are
moderate? Because our economy needs all the help it can get, and because NAFfA is
not only an economic policy but also a foreign policy initiative. Mexico wants NAFfA,
and the U.S. needs a pro-American Mexico. With a 2000 mile border, and major
immigration, drug, ana environmental issues, the U.S. and Mexico cannot afford to miss
out on win-win trade opportunities.
4
Imagine the signal the United States would send to the rest of the world if we did
not pass NAFfA. If we're not prepared to make a trade agreement to which two
presidents have been committed, with a country with which we share: a 2,000 mile border
and who has undertaken a major set of economic reforms, it will very difficult for us to
promote our exports anywhere in the world.
The American political process took a long time asking, "Who lost China?" Let
them not have to debate, "Who lost Latin America?"
The case for NAFfA is clear. It has been proven by the arguments. Now it must
be won. The President is calling Congressmen every day and is doing a NAFfA public
event every week. Many thought the vote on NAFfA would be moved back. It's been
moved up. We in the Administration are doing all we can. I'm encouraged that we're
going to win. On vote day minus fifty, the Panama Canal was a dead duck and if the
history of the United States says anything it is that, in the end, we do the right thing.
We're a country built on hope, not fear.
-30-
5
october 7, 1993
8:54am
Page 1
Wednesday, October 6, 1993
USIA Foreign Press Center Briefing: New World Bank and IMF Policies
USIA FOREIGN PRESS CENTER BRIEFING
TOPIC:
NEW POLICIES AT THE WORLD BANK AND IMF
ATTRIBUTED TO:
SR. ADMINISTRATION OFFICIAL
WEDNESDAY, OCTOBER 6, 1993
MODERATOR:
Sr. Administration Official will make a few
ntroductory remarks and then we'll go to your questions.
SR. ADMIN. OFFICIAL:
Thanks very much.
This is a good time to take stock of the progress in the
nternational economic policy area corning just after the Bank/Fund
eetings took place.
Let me comment briefly on the three great tasks
acing the world economy:
promoting growth, promoting integration,
nd promoting reconstruction.
As far as growth is concerned, we had a successful G-7 meeting.
t wasn't a meeting that pulled any rabbit out of any hat, but it was
meeting that took stock of progress that I think would have been
early inconceivable nine months ago.
Reductions of interest of 175
asis points in each of the G-7 countries, a very sUbstantial fiscal
timulus in Japan, a very large deficit reduction in the United States
as produced the greatest bond market rally in recent years.
But the
act that the IMF forecast still implies that employment will decline
1d unemployment will increase in the industrialized countries points
J the fact that there's much more to be done.
The United states is
)ing its part, following on deficit reduction with major health care
=form. We'll be looking for others to do their part in terms of
roviding stimulus.
The second great task is the promotion of international economic
1tegration.
Let me say that I am now optimistic that NAFTA will
1SS.
I think the fortunes are turning.
The president is heavily
19aged. He is calling a number of members of Congress each day.
~tive discussions on a host of more specific issues are underway with
1e Congress.
And I believe the realization is coming through that
\FTA is about the triumph of hope over fear, that those things that
)rry people, whether it's low wages in Mexico, whether it's
lsinesses moving to Mexico, whether it's environmental problems in
;xico, are all things that for sure will not get better if NAFTA goes
)wn and that NAFTA offers the prospect of productivity growth that
LII raise wages, of an end to Mexican protection that forces American
Lrms to relocate to Mexico and offers the potential of real money to
lvest in cleaning up the border area.
At the same time, we are working very hard to finish the Uruguay
)und. The united states is determined to make real progress and to
_nish that Uruguay Round agreement by December 15th.
But that
october 7, 1993
8:54am
Page 2
equires building on, not revisiting, the agreements that have already
een reached, and that is our objective as we go back to the next
ound of negotiations in Geneva.
Our dialogue with Japan in the
o progress, and we look forward to
reas of government procurement, in
f automobiles and automobile parts
resident Clinton is likely to have
ometime early next year.
context of the framework continues
real and clear results in the
the area of insurance, in the area
prior to the meeting that
with Prime Minister Hosokawa
Finally, one of the major themes of the Bank/Fund meetings was
eonomic reconstruction.
Whether it's Russia, whether it's Romania,
hether it's Haiti, whether it's South Africa, yes, even whether it's
ietnam, reconstructing economies that have gone through wrenching
ransformations of one kind or other is an important priority if we
re to preserve the peace.
nd it's one that the United states is actively engaged in.
It would be premature to try to judge the impact of recent
olitical developments in Russia on the near-term evolution of
eonomic reform.
What is not in doubt is that the American commitment
o provide core support, to support democratization, to support
mprovements in the environment, to support the creation of
nstitutions tht underlie civil society -- that commitment is not in
oubt. Nor is the commitment that we've maintained since the April Gministerial meeting to provide direct financial support measured
ith the progress of reform in any doubt. And our hope is that
eonomic reform can now proceed more rapidly in Russia than it has in
he last several months and that that will make possible the full
obilization of the large package of financial support that was agreed
n Tokyo last April.
In that regard, Russia is far from the only reconstruction task
e face, and I'm particularly pleased by the cooperation in the
ontext of the conference that we hosted last Friday that raised over
600 million for economic reconstruction in the West Bank, in the Gaza
trip next year, and holds out the promise of as much as $2.5 billion
r more over five years, to bring some prosperity that can underwrite
he peace in what has been a very troubled area of the world.
Let me stop there.
MODERATOR:
***** has limited time, so please make your questions
rief and to the point. We'll start right here.
Q
Jose Lopez of NOTIMEX, Mexico.
Can you give us any details
bout the status of the negotiations with Mexico about the border
lean-up fund? And on the second question, how are you planning to
et the money, the $8 billion that Secretary Bentsen said will be
unneled to the border clean-up issue?
SR. ADMIN. OFFICIAL:
I'm not -- those negotiations are underway
October 7, 1993
8:54am
Page 3
nd I'm not in a position to make any public comment on the progress
hat they have made, other than the reports I get from the negotiators
ndicate that good progress is being made towards a resolution that
ill be a source of satisfaction on both sides of the Rio Grande.
As for the funding mechanism, I'm confident that we'll be able to
ind it within the existing budgetary allotments.
Of course the
ature of mechanisms based on guarantees and (callable ?) capital is
hat the budgetary allocation that's required is much less than the
Itimate amount of investment that can be supported.
And so the
udgetary amounts that are necessary I think will prove to be within
each.
Q
Parasuram, Press Trust of India. One of the major themes
n the annual meeting of the Bank and the Fund was the fact that the
eveloping countries are now the locomotives for the world economy.
nd I was wondering how the U.S. views, for instance, the reforms in
ndia and the progress of East Asia. And also, in East Asia it has
een pointed out that the government should -- (inaudible) -- the free
arket did not occur and, in fact, the government played a major role
n many of the -- (inaudible).
I wonder whether you will comment on
his.
SR. ADMIN. OFFICIAL:
Well, you've really asked two different
uestions; one involves India. And I would say there that we're
ncouraged by the wave of new thinking that has corne to India in
ecent years, encouraged by the sharp withdrawal of exchange
estrictions, by the relaxation of controls on the financial sector,
y the reduction in budget deficits, by the greater degree of comity
etween India and the international financial institutions, while at
he same time recognizing that particularly as regards to large, still
normous public enterprise sector India has a long way to go in
mproving efficiency and creating institutions for market discipline.
here is enormous potential for the Indian economy. Within India lies
n upper-middle-class economy the size of France, and the challenge 1S
o unlock that potential and spread that prosperity. We are
neouraged by the progress that India has made, but there's a great
eal more that needs to be done.
On the question of East Asia, I think it is important to read the
eeent World Bank study on that topic very carefully. And what that
tUdy demonstrates is that the most important source of success in
eonomic growth in Asia is what one might call the puritan virtues, a
trong system that protects property rights, macroeconomic stability,
focus on an outward orientation for exports, a strong educational
ystem and a high level of investment.
And it is those virtues,
arket puritan virtues, that account for much more of East Asia's
eonomic success than any particular government policy directed at
argeting or channeling economic activity in particular directions.
nd countries would be much better studying the enduring virtues of a
orea or a Japan in terms of high savings, strong education, outward
rientation than they would be trying to mimic those institutions in
erms of industrial planning and government channeling of credit that
october 7, 1993
8:55am
Page 4
orea and Japan are moving away -- are themselves actually moving away
rom.
MODERATOR:
Microphone over here, please.
Q
Sugita, Jiji Press.
If NAFTA fails to pass In Congress, is
here any negative impact to the U.S. economy?
SR. ADMIN. OFFICIAL:
NAFTA's a job-creator. NAFTA's a
rosperity-ensurer, because NAFTA ensures the trade surplus -- (drops
icrophone) -- NAFTA ensures the trade surplus that we're able to run
ith Mexico.
No question that it would be a blow to the American
conomy and an even larger blow to the Mexican economy if NAFTA were
o go down.
But I don't think it will.
Q
Just could you comment as to whether the United States is
ow completely satisfied with t:1e measures taken in the last couple of
onths by the World Bank with respect to public disclosure of
nformation, with respect to the panel that can investigate? And
Iso, can you tell us -- my understanding is that the money that was
armarked for GATT for fiscal '93 has been reprogrammed for AID.
Can
ou tell us why they didn't get the money and whether under the
egislation that was signed on Friday -- or Thursday by the president
ou expect that they will get the 30 million in '94?
SR. ADMIN. OFFICIAL: We're very pleased with the steps that the
orld Bank has taken to make itself a more open and a more accountable
nstitution.
These are very important first steps, and we look
orward to further progress building on those steps to ensure that
articipation is maximized in development projects and to ensure that
here is the highest degree of scrutiny, particularly where issues
elating to environmental protection or to the relocation of people
re involved. No more
(narmadas?) has to be a watchword of policy.
I'm not able to speak because I don't have the details clearly in
ind to the precise set of reasons why the $30 million to the GEF was
ot certified.
Essentially, it involves the inadequate steps to move
owards public participation and the free disclosure of information.
I'm encouraged by the discussions we've had in connection with
he GEF that those problems will be remedied in the next year. And so
t will be possible to make the $30 million available to the GEF.
MODERATOR:
Go here, and then back there.
Q
Hi.
I'm Susan Klenro (sp) with Reuters.
I have a sore
hroat.
I wanted to ask you to elaborate on your comments about
ussia.
You said that you saw reforms speeding up there.
I think
hat's what you said.
And I wondered if you could say -- pinpoint
hat it is that you see that, you know, makes yo~ think it's speeding
p. Is it just the issuing of more decrees in recent days? You know,
o you see some more concrete steps at this point that have taken
lace or are going to take place that you can point to in economic
eform? The other question, I wondered why you were so optimistic
October 7, 1993
8:55am
Page 5
.bout NAFTA.
SR. ADMIN. OFFICIAL:
I think what I said was that I saw the
lossibility, the real possibility of reforms accelerating because the
larliament had previously been such an obstacle to reforms that the
Iresident wanted to carry out, and because I was encouraged by my
iscussions with Russian economic officials in the course of the
,ank/Fund meetings that some of the officials had a clear
nderstanding of what needed to be done, and we're encouraged that in
he current political environment they might well get the support
ecessary to carry it out.
ut, clearly, we'll have to wait and see what progress has been made
t what is a crucial juncture.
Why am I so optimistic about NAFTA? Because ultimately I think
he right thing tends to happen.
Because I know and have studied the
istory of the Panama Canal Treaty where at vote day minus 45, which
s about where we are now, the situation looked far bleaker than it
oaks with respect to NAFTA today.
Because I think we saw in the
ourse of the budget discussions the impact the kind of presidential
nvolvement that we expect soon can have.
Because we've looked at the
low of votes and announcements, and, without going into great detail,
hat presents a more encouraging picture this week than it did a week
r two ago.
Q
Kerry o'Reilly (sp), with German Economic News.
During the
MF annual meetings, you seemed reluctant to agree with
haracterizations that the economies in Japan and Germany have turned
he corner and are -- when do you anticipate this to have an -- the
ecessions to be over? And have these countries done enough in terms
f restoring
you outlined earlier what they've done in an effort to
estore, but is it enough?
SR. ADMIN. OFFICIAL:
I don't think it is enough.
I think when
ou have the kinds of forecasts which point to rising unemployment in
oth Europe and Japan over the next 18 months, that that tells you
hat not enough is being done, and we'll look for further progress in
aking growth-enhancing measures in those economies.
Q
Louise Escobar (sp), from Knight-Ridder Financial News. On
onday, President Clinton in speaking from San Francisco somewhat
riticized the IMF policies toward Russia as being too strict.
Is
his the administration's view? And also, you mentioned the pace of
eforms in Russia.
When do you see the second IMF tranche? By the
nd of the year?
SR. ADMIN. OFFICIAL:
The administration's position is that the
ace of support has to be measured with the progress of reform because
nly in that way can reform be encouraged and because only in that way
an we assure that money provided is well spent.
The timing of the
econd tranche, that will depend upon the progress of reform in
ussia.
October 7, 1993
8:55am
Page 6
Q
Okay.
I have a second question, a completely different
;ubject.
The Competitiveness Policy Council today said that it was
:oncerned about the rise of the dollar against certain European
:urrencies and urged the administration to pay attention to that.
fhat is your response?
SR. ADMIN. OFFICIAL:
I haven't had a chance to study that
'eport, but our exchange rate policy has been articulated many times
'y the secretary of the treasury.
e believe that exchange rates have to reflect market fundamentals,
hat it's inappropriate to seek to manipulate exchange rates apart
rom fundamentals, that excess volatility can be counterproductive for
rowth, and that we're prepared to cooperate with others in foreign
xchange markets.
(Laughter.)
nd if there was any deviation between what I just said and what I
ave said on countless previous occasions, it is only because of a
erbal slip.
(Laughter.)
Because it was my firmest desire to say
othing interesting in answer to that question.
(Laughter.)
Q
Sankaran, Economic Times, India. Sir, regional trade
rrangement seems to be the fashion of the day.
Is this trend
ompatible with the Uruguay Round multilateral discussions? And,
losely related, what happens to countries like India, which are left
ut of these regional arrangements?
SR. ADMIN. OFFICIAL:
I don't think there's any question that
hese are complements.
I think the kind of environmental agreements,
he kind of labor agreement, the kind of agreements on foreign
nvestment, the kind of agreements on services that you're seeing in
AFTA are harbingers of things that will come in the multilateral
rade agreements of the future.
I think the imperative is to bring
own trade barriers everywhere and that NAFTA is an important step in
hat direction.
I think what one has to be careful of is not regional
Lading arrangements, but regional fortress arrangements, where
3rriers corne down within a region and they go up to those outside.
Jt NAFTA and the discussion of NAFTA has coincided with Mexico's
ntry into the GATT, Mexico's binding of its tariffs within the GATT.
nd for that reason I think that it is entirely supportive of the
Jltilateral trading system. And, indeed, my fear is that, were NAFTA
n the table, a good part of a political energy that has gone into
~FTA might well instead have gone into seeking protection.
Q
(Inaudible) -- Kyodo News. with regard to the opening of
1e Japanese rice market, even though it is ostensibly a one-time
nergency import, I was wondering if you could tell me how much you
1ink of an impetus that will be to the market access agreement and a
inal sort of solution to the GATT by the deadline.
SR. ADMIN. OFFICIAL:
It can't hurt.
) leave that one to USTR.
Q
I've got a second chance.
But beyond that I'll have
(Inaudible) -- of Kyodo News.
October 7, 1993
8:55am
Page 7
loes Secretary Bentsen have plans to go to China? If that's the case,
That is the purpose of making a trip at this time?
SR. ADMIN. OFFICIAL:
Q
To where?
China.
SR. ADMIN. OFFICIAL:
The presidenthas asked Secretary Bentsen
o explore the idea of having an A~!an finance ministers' dialogue as
part of the APEC process.
And in that context, Secretary Bentsen
.aintains a very active interest in Asian issues, and we in Treasury
ill very much want to be involved in the Asian region.
And I would
ot be surprised if Secretary Bentsen takes a trip to China at some
tage, but no trip has been formally scheduled as yet.
Q
N.C. Menon, Hindustan Times, India.
We were told at the
und/Bank meeting this time, as we have been told every year, that one
f the primary tasks of the Fund and the Bank is poverty alleviation.
ow I realize that growth, integration and reconstruction will
lleviate poverty, but has poverty alleviation as a theme been reduced
n the world?
SR. ADMIN. OFFICIAL:
I don't think so.
I think under Lew
reston's leadership the Bank has rededicated itself to the
verarching goal of reducing poverty. And that's certainly the
irection in which the United states is pushing; towards more emphasis
n education, more emphasis on health, less emphasis on new power
lants.
I wrote some time ago -- and I think it says a lot -- that
he cost of equalizing education worldwide for girls and boys could be
et if the rate of new power plant construction in the less-developed
orld was reduced by one-fortieth. And I think that says a good deal
bout the direction in which policy should go and the perspective that
he United states is taking within the multilateral development banks.
Q
Ev Bauman, EI Universal, Caracas. While the reports of the
ultinational organizations were favorable regarding Latin America,
here was a World Bank report that showed that the social progress was
2ry inadequate.
Your knowledge of Latin America is considerable.
On
1e whole, would you say that the prospects are favorable or
1favorable for the future of Latin America?
SR. ADMIN. OFFICIAL:
I think the prospects are favorable.
The
were a decade that was heavily about getting government out of
1ings in Latin America that it shouldn't be in: printing money,
Jilding large public companies that didn't work, controlling prices,
Locking imports.
And I think we've seen real progress on that
jenda.
You look at a country like Mexico, where only 2 percent of
1e population has ever been on an airplane and subsidies to the state
irline cost more than it would cost to pave all the roads, all the
1paved roads, and privatization stopped all of that.
That's going to
~ a continuing process.
So the 1980s were the decade of getting
)Vernment out of the things that it had to be out of.
~80s
October 7, 1993
8:55am
Page 8
I think the 1990s is going to be a decade where government has to
get in and do a better job of meeting its fundamental
responsibilities.
That means more education and more health care, not
education and health care for the elite, but education and health care
outside of the capital city.
It means primary health care, it means
primary education, it means developing a basic infrastructure, it
means working much harder to protect the e~vironment.
So I think as you see governments that now have an opportunity to
focus their efforts in Latin America, doing more of what only
governments can do, and fighting poverty is the principal thing in
that regard, that you're going to see more success not just in
promoting economic growth but also in reducing inequality in Latin
America over the next few years. So I'm encouraged.
I'm sure there
will be bumps on the road, but I think Latin America, after an
agonizingly difficult decade during the 1980s, is on the way back.
MODERATOR: We're going to stop on that high note *****, thank
you for coming today.
We covered a lot of ground and I appreciate
your answers.
Remind people, we heard a senior administration
)fficial and that we will have a briefing here tomorrow on health care
reform.
END
P.V2
E-156/93nln
October 5, 1993
INTER-AMERICAN COMMISSION ON HUMAN RIGHTS
OPENS ITS 84TH REGULAR MEETING
The President of the InteN\merican Commission on Human Rights (IACHR), Oscar Lujan
Fappiano, opened today in Washington the 84th Regular Meeting of that body and indicated that "the
promotion and observance of human rights in OAS member states involves complying with a very
practical t~k, that is one that is addressed to very specific cases and problems or to rhe functioning of
the government's or state's structure."
Lujan told the COmmission, which will meet until October 15, that "[ACHR is oontinuing efforts
aimed at strengthening and perfecting itS mechanisms for cooperation with the member states of the
Organization as a new contribution to the strengthening of the system for the promotion and protection
of human rights in the hemisphere ...
Also speaking in that ceremony were the Cbair:man of the Permanent Council of the OAS,
Ambassador Roberto Andino, of El Salvador, and the Secretary General of the OAS, Amloassador loao
Clemente Baena Soares, who undersCQred the importance of the work being done by the Commission
that, during the ten days of sessions here will evaluate the results of visits it made to Peru, Haiti and
Guatemala.
Dr. Fappiano warned that "experience demonstrates that the effective exercise of representative
democracy is the best guarantee for full observance of human rights" and pointed out that "it has been
said, on the basis of that assertion, that human righ~ con~titute the b~i.s for democracy. "
"As one talks about human rights it is important to bear in mind that the close relationship
between civil and politica.J rights and economic and social rights is not only a moral and ethical
imperative, btl[ also a condition fOJ: peace and social stability, 0, the President of lACHR pointed out.
Dr. Fappiano also said that "those in charge of economic poLicy·making must have sensibility to
perceive the problems that, under the premise of 'social cost' of the slH:a11ed a(ljustment programs,
are on many occasions serving as a cover-up of immense suffering of peoples. ,.
on
"Democracy, of course, can be improved and its endurance depends
the consolidation of
reforms and on the determination to O](tend its benefits to all segments of society," Dr. Fappiano told the
opening session of IACHR's meeting.
(more)
-2-
Lujan pointed out in concluding his remarks thai "a. new attitude i.s required to construct an
economic model that is fair and equitable. We must realize that the dangers being faced by the democratic
system stem from social conditions in our countries and we must recognize that these social problems are
constitute the underlying source of the threats to institutional stability. ,.
The Chainnan of the Permanent Council, Ambassador Roberto Andino) told those attending the
ceremony that this IACHR session "serves as a cornerstone within the process of collective reflection on
the problems and responsibilities stemming from pres em conditions and the progressive development of
the inter-American system for the protection of human rights."
He underscored the fact that the "Commission has a major role to play in not only defending the
principles inherent [0 the human rights doctrine, but also in extending its action to reach new horizons
in defense of human rights, a task in which it will have to face new obstacles, limitations and Illistrust."
Ambassador Andino reaffirmed the support of the Permanent Council for IACHR and especially
for "the invaluable work it is carrying out in defense of human dignity" and said the Commission can
count "on the support of all of us and on our spirit of dialogue for the advance of cooperation and
understanding between our peoples.·
Ambassador Joao Clemente Haena. Soares, the Secretary General of the OAS, also conveyed his
support for the Commission and underscored the importance of achieving that all member states of the
Organization become parti~ to the American Convention of Human Rights.
He also called on OAS members to demonstrate their support for the Commission by assigning
to it the resources it urgently needs. "It is necessary that this support be translated into the proviSion of
resources because otherwise we would only have the utterance of sentences without any practical
consequence or effectiveness. ,.
Ambassador Baeoa Soares underscored the importance of promoting human rights. "An essential
issue in this promotion effort is that each individual. each one of the citizens of our countries, be aware
of his dghts and of the limitations to those rights, as well as of the laws and international treaties
approved by their countries to create a legal framework for the observance of human rights in our
hemisphere," he said.
"We will so have in each member of our societies a defender of those rights and of democratic
processes," the Secretary General declared. He concluded his remarks with a reaffirmation of the
imponance of the observance of economic, social and cultural rights and said that "in the absence of such
observance, and withom a. srrong economic base and tbe lack of an answer to the social demands of our
peoples, we can't have a strong, stable and enduring democratic process."
In addition to Dr. Fappiano. the following are members of IACHR: Oliver Jackman (Barbados),
Alvaro Tirado Mejia (Colombia), Michael Reisman (United States), Leo Valladares Lanza (Honduras),
Patrick Lipton Robinson (Jamaica). and Marco Tulio Bruni CeUj (Venezuela).
Text as Prepared for Delivery
For Immediate Release
October 8, 1993
REMARKS OF TREASURY SECRETARY LLOYD BENTSEN
RHODE ISLAND LOAN PAYBACK CEREMONY
PROVIDENCE, RHODE ISLAND
Being from Texas, I'm used to big -- but not this big! The smallest state in the
nation definitely writes the largest checks.
In the past when the government has helped some of our proud companies that
fell on bad times, they came out with a slogan when they returned the money. I think I
can change some words and apply it here. Rhode Island borrows money the
old-fashioned way: they pay it back!
This puts an end to an unfortunate chapter in banki1)g history here in Rhode
Island. In the past decade, there have been several such unfortunate chapters around
the country.
But these days financial institutions are healthier than they've been in a long time.
We're doing our part in government by making sure banks are operating prudently and
safely. But the big reason the banking industry is doing so well is the low interest rates
brought on by deficit reduction.
In Washington, we became serious about reducing the deficit. In August,
Congress passed a budget that cuts the deficit by $500 billion over the next five years.
The market's response has been the lowest long-term interest rates that we've
seen in two decades. Not only do low interest rates help the financial industry, they help
a lot of homeowners. They help people buying cars. They help students taking out
college loans. And they help businesses large and small.
We're getting the economy moving again and a strong financial industry is
contributing to our recovery.
So, thank you, and I'm looking forward to getting this back to Washington and
cashing it.
-30-
LB-421
FOR RELEASE AT 2:30 P.M.
October 8, 1993
CONTACT:
Office of Financing
202/219-3350
TREASURY'S 52-WEEK BILL OFFERING
The Treasury will auction approximately $15,750 million of
52-week Treasury bills to be issued October 21, 1993. This
offering will provide about $1,475 million of new cash for the
Treasury, as the maturing 52-week bill is currently outstanding
in the amount of $14,279 million.
In addition to the maturing
52-week bills, there are $23,162 million of maturing 13-week and
26-week bills.
Federal Reserve Banks hold $9,182 million of bills for their
own accounts in the three maturing issues. These may be refunded
at the weighted average discount rate of accepted competitive
tenders.
Federal Reserve Banks hold $2,347 million of the three
maturing issues as agents for foreign and international monetary
authorities. These may be refunded within the offering amount at
the weighted average discount rate of accepted competitive
tenders.
Additional amounts may be issued for such accounts if
the aggregate amount of new bids exceeds the aggregate amount of
maturing bills.
For purposes of determining such additional
amounts, foreign and international monetary authorities are
considered to hold $465 million of the maturing 52-week issue.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities is
governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356, published as a final rule on
January 5, 1993, and effective March 1, 1993) for the sale and
issue by the Treasury to the public of marketable Treasury bills,
notes, and bonds.
Details about the new security are given in the attached
offering highlights.
000
Attachment
HIGHLIGHTS OF TREASURY OFFERING OF 52-WEEK BILLS
TO BE ISSUED OCTOBER 21, 1993
October 8, 1993
Offering Amount .
.
.
.
.
.
Description of Offering:
Term and type of security .
CUSIP number . . .
Auction date . . . . . . .
Issue date
. . . . .
Maturity date .
. ..
Original issue date
Maturing amount. . .
Minimum bid amount
Multiples . . . . . . . . .
SUbmission of Bids:
Noncompetitive bids
$15,750 million
364-day bill
912794 L8 5
October 14, 1993
October 21, 1993
October 20, 1994
October 21, 1993
$14,279 million
$10,000
$1,000
Accepted in full up to $1,000,000
at the average discount rate of
accepted competitive bids.
( 1) Must be expressed as a discount rate
with two decimals, e.g., 7.10%.
( 2 ) Net long position for each bidder
must be reported when the sum of the
total bid amount, at all discount
rates, and the net long position are
$2 billion or greater.
(3) Net long position must be reported
one half-hour prior to the closing
time for receipt of competitive bids.
Competitive bids
Maximum Recognized Bid
at a single yield
35% of public offering
Maximum Award .
35% of public offering
.
.
.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon Eastern Daylight
Saving time on auction day.
Prior to 1:00 p.m. Eastern Daylight
Saving time on auction day.
Competitive tenders . .
Payment Terms .
.
.
.
.
.
.
Full payment with tender or by charge
to a funds account at a Federal
Reserve bank on issue date.
October 10, 1993
FOR IMMEDIATE RELEASE
BENTSEN, ON BET'S "LEAD STORY," SAYS NAFTA MEANS JOBS
Secretary of the Treasury Lloyd Bentsen said in an interview on Black Entertainment
Television (BET) broadcast Sunday that the North American Free Trade Agreement will
mean more jobs for U.S. workers.
"If low wages is the main reason for placing plants abroad," Bentsen asked, "why are
BMW and Mercedes planning plants in the U.S. and not Mexico? The reason is the
American worker is the most productive in the world. It costs $410 more to build a car in
Mexico than in the U,S."
Bentsen, in an interview on BET's "Lead Story," said that NAFfA would help expand
this important market for many minority businesses.
"Small, medium and large businesses would all benefit from the lowering of Mexican
tariffs under NAFT A," Bentsen said. He added that those tariffs are now higher than U.S.
tariffs and could legally go even higher.
The Secretary noted that because Mexico is so close to the U.S., smaller and familyrun businesses interested in exporting would have an unusually good opportunity under
NAFTA.
He said that Mexicans spend approximately $450 per capita on American imports
compared to $44 on Japanese imports.
"Mexicans love American products," Bentsen said. "They now get 70 percent of their
imports from the U.S."
-30-
LB-423
STATEMENT BY LAWRENCE SUMMERS
UNDER SECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS
AT THE WORLD ECONOMIC LAB MEETING
SEPTEMBER 27, 1993
I am delighted to have the opportunity to speak to this distinguished gathering -and I am particularly happy to be here because Rudi Dornbusch threatened to take away
my PhD and vote Republican if I didn't show up.
Exchanges like this of ideas and information on international economics are
extremely important in a world that is becoming smaller and smaller. And I am
delighted to participate in this f"rum.
Everywhere today - in rich and poor countries alike - the crucial imperative is to
promote economic development: to put more of our people to work, to realize our full
productive potential, and to ensure rising standards of living.
Promoting prosperity in our country and abroad is the guiding principle of U.S.
international economic policy. Indeed, it is the guiding principal of U.S. foreign policy,
for prosperity underwrites peace.
I want to highlight three aspects of the challenge of creating prosperity this
afternoon.
First, to restore job-creating growth in the industrial countries;
.;econd to open marh .~;, expand trade, promote integration around the world;
and
. third, to finance the reconstruction and revitalization of economies that are
going through wrenching transformations.
GROWTH
Look first at the industrialized countries, which still produce most of the world's
output. We are now in a terrible recession; and one that, unlike the two OPEC
recessions of the mid '70s and early '80s, is without obvious external cause. Its cause will
be a subject for future economic historians to debate; but its consequences are beyond
dispute. Twenty four million people are now unemployed in the G-7 countries alone.
And output in the G-7 is 340 billion dollars less than Cllrrent productive potential. That
works out to 2,000 dollars a year for every family of four.
We in the United States have done our part to get the world economy moving.
President Clinton's bold program of deficit reduction has been associated with a decline
in U.S. long term interest rates of 1.S percentage points. For th~ first time in years, we
can look forward to the day when the ratio of America's debt to its income will be
declining, not increasing.
And, to get our nation ready for the challenges of the 21st century, we embark
this week on the critical journey towards the enormous task of reforming our health care
system. That system surely needs reform. It now absorbs one dollar out of every seven
that we produce -- yet a child born in New York City is more Ilkely to die before the age
of five than a child born in Shanghai, China.
We have made a substantial contribution to fostering growth through deficit
reduction, and we are cooperating with others in the process of restoring job-creating
grmvth in the rest of the G-7 nations. Indeed, the meetings of that Secretary Bentsen
held this past weekend with his finance ministry colleagues were the fourth such
meetings in the 8 months the Clinton Administration has been in office.
People look for rabbits out of hats at such meetings, and some are disappointed
when they do not materialize. But suppose we had said last January that in the next 9
months we would see:
500 billion dollars in US deficit reduction;
180 billion dollars in additional Japanese fiscal stimulus; and
a reduction in official interest rates of 150 basis points in Japan and 175 basis
points in Germany.
I think people would have been very skeptical. If there is ever a case for
watching what we do, not what we say, it is G-7 macroeconomic cooperation.
All of this is welcome, but it is not enough. Again and again, the IMF has revised
its forecasts for industrial country growth downward, and it is now forecasting only 1.3
percent for 1993 and 2.3 percent for 1994. We must do better. We must at least raise
the rate of grmvth to the level where the number of people without jobs is falling, not
nsmg.
Creating jobs requires restoring demand, because businesses need to sell more
products if they are to employ more workers. But, as \ve saw at the last economic peak
in the late 1980's, in the United States and especially in Europe, too many people are
without work even when times are good, even when there is enough demand in the
economy so that the threat of inflation looms. That is why structural changes are so
important -- to train people, to match them with better jobs, and to provide necessary
tlexibility in the labor market.
TRADE
There is another crucial area for cooperation -- the promotion of trade. This is
especially important for the United States. With our budget deficit coming down, its
1980s twin, the trade deficit, needs to come down as well. This could happen through a
weak economy reducing imports. But that is surely not what we want. The right way for
it to happen is through growing exports. That's why growth in foreign markets is so
important to us. And that's why promoting an open world trading system is important to
us as well.
Trade harriers are a world-wide economic curse. They cost the developing world
more money than is spent on foreign aid each year. And trade barriers are a problem
for the United States as well, because we need exports.
These are the reasons why the United States sees completion of the Uruguay
Round as so critical. It is important for reducing trade barriers. It is important because
it will, for the first time, bring the new areas of services, investment, and intellectual
property under the discipline of the GAIT; and it is important because it's a sign that
the nations of the world can cooperate and growth together -- rather than each going
their own way, erecting trade barriers against the products of others.
How can we in the industrialized world ask others to bring down their trade
barriers if we are not willing to keep our markets open? The stakes are high. Over the
past five years, U.S. exports to emerging markets have doubled to nearly 180 billion
dollars. And they now support almost four million jobs.
To evoke President' Clinton's phrase, the Uruguay Round is for those who are
willing to "compete, not retreat".
The U.S. is now engaged in another great trade policy debate over the fate of
NAFTA - the North American Free Trade Agreement. It is a debate that comes down
to a choice between hope and fear. NAFT A's critics are concerned ahout business
moving to Mexico, about environmental problems on the border, and about competition
from low wage workers. But, one thing is certain: rejecting NAFTA would preclude the
possibility of progress on any of these issues.
NAFTA offers the hope of progress on all of them. It will mean that:
. automobile companies will no longer have to migrate to Mexico to get in under
Mexico's protective trade laws:
that billions of dollars will be made available to support the cleanup of the
US/Mexico border;
-3-
and that Mexico will prosper, allowing its wage rates to rise with productivity as its government has promised.
NAIT A is a beginning. It is a harbinger of what could come -- trade agreements
that respect workers rights, that address environmental problems, that support
democratic transitions. Its failure would be a harbinger as well -- an America that does
not live up to its commitments; that 11"lks backward, not forward; and that retreats
behind the false promise of protection.
FINANCING RECONSTRUCTION
So far I have talked about economics. I have talked about the steps that are
necessary to create jobs. These steps are a top priority for our electorate. But there is
an even higher challenge, a challenge that has been the defining aspect of our foreign
policy since World War: maintaining the peace.
I would leave the strategic dimension of this challenge to statesmen and
diplomats. But I think we can agree that fostering the reconstruction, rehabilitation and
re-integration of those ecunomies that have been the victims of wars -- civil and
international, hot and cold -- is essential if we are to secure peace today. In the former
Soviet Union and Eastern Europe, in Haiti and the Middle East, in Cambodia and, yes,
in Vietnam, we face the critical challenge of supporting economic transitions that can
support peaceful political transitions and build the foundation for peace.
Let me talk for a moment about the biggest of these challenges: Russia. As the
old Russian proverb has it, "You don't want to be in the woods with a wounded bear".
The ultimate responsibility for building a sound economy in Russia belongs to the
Russians, but the United States is doing what it can unilaterally and multilaterally to
support reform. We've always known that the process of reform in Russia - as in any
transforming economy - would have fits and starts; and there have certainly been some
fits in recent months. But Russia today louks very different than it did a year ago:
25% of the industrial labor force now works in privatized firms;
70,000 small shops & restaurants are now owned by their proprietors;
output has stabilized;
and exports are soaring.
-4-
There is much more that needs to be done, and our support will have to be
measured with the progress of reform to make sure it is well utilized. Boris YeItsin's
bold actions offer the promise of a Russian government united behind its principles. To
paraphrase Churchill, we are not at the end, or the beginning of the end, of Russia's
reform effort, but just now, with the election of a new parliament, we just may be coming
to the end of the beginning.
Russia is just the biggest example of the challenges we face in restoring
prosperity. The historic handshake that took place on the White House lawn just two
weeks ago creates a new challenge. And I'm pleased that this week we will have the
opportunity to participate in a conference on the Middle East -- not to plan negotiations,
not to talk about weapons, but to talk about financing schools, roads, and safe water in
an area of the world that has seen so very much suffering.
Conclusion
I've spoken briefly about restoring growth, expanding trade around the world, and
reconstructing those economies that have suffered wrenching change. All of this is tile:
stuff of economic development. It's an economic imperative because we have to provide
rising living standards for our people. It is a moral imperative in a world where one
billion people live on a dollar a day or le~s; and it is a strategic imperative because
prosperity is the best guarantor of peace. We must not fail.
-30-
Depa~~~,~ HU'~~~! .~n~~~
FOR IMMEDIATE RELEASE
October 12, 1993
~?-~AS{JIt~ ,
-I»
CONTACT: -'Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $12,878 million of 13-week bills to be issued
October 14, 1993 and to mature January 13, 1994 were
accepted today (CUSIP: 912794H49).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.02%
3.04%
3.04%
Investment
Rate
3.08%
3.10%
3.10%
Price
99.237
99.232
99.232
Tenders at the high discount rate were allotted 83%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New Yo:rk
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
38,792
39,804,612
10,485
44,009
27,142
21,169
2,616,213
9,425
9,875
22,302
13,100
582,376
742,963
$43,942,463
AcceJ;lted
38,792
11,476,320
10,485
44,009
27,142
20,829
268,443
9,425
9,875
22,302
13,100
194,266
742,963
$12,877,951
Type
Competitive
Noncompetitive
Subtotal, Public
$38,719,351
1, 325,525
$40,044,876
$7,654,839
1,325,525
$8,980,364
2,711,420
2,711,420
1,186,167
$43,942,463
1,186,167
$12,877,951
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $243,733 thousand of bills will be
issued to foreign official institutions for new cash.
LB-424
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt. Washington, DC 20239
FOR IMMEDIATE RELEASE
October 12, 1993
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $12,833 million of 26-week bills to be issued
October 14, 1993 and to mature April 14, 1994 were
accepted today (CUSIP: 912794J96).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.10%
3.12%
3.12%
Investment
Rate
3.19%
3.21%
3.21%
Price
98.433
98.423
98.423
Tenders at the high discount rate were allotted 73%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
35,091
33,514,057
4,785
27,300
23,298
39,313
2,456,811
8,725
8,255
19,809
7,170
448,328
578,961
$37,171,903
Accepted
35,091
11,619,557
4,785
27,300
23,298
39,313
302,861
8,725
8,255
19,809
7,170
158,228
578,961
$12,833,353
Type
Competitive
Noncompetitive
Subtotal, Public
$32,668,441
951, 429
$33,619,870
$8,329,891
951, 429
$9,281,320
2,850,000
2,850,000
702,033
$37,171,903
702,033
$12,833,353
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $144,267 thousand of bills will be
issued to foreign official institutions for new cash.
LB-425
FOR RELEASE AT 2:JO P.M.
October 12, 1993
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $25,600 million, to be issued October 21,
1993. This offering will provide about $2,450 million of new
cash for the Treasury, as the maturing IJ-week and 26-week bills
are outstanding in the amount of $23,162 million.
In addition to
the maturing I3-week and 26-week bills, there are $14,279 million
of maturing 52-week bills. The disposition of this latter amount
was announced last week.
Federal Reserve Banks hold $9,182 million of bills for their
own accounts in the three maturing issues. These may be refunded
at the weighted average discount rate of accepted competitive
tenders.
Federal Reserve Banks hold $2,343 million of the three
maturing issues as agents for foreign and international monetary
authorities.
These may be refunded within the offering amount
at the weighted average discount rate of accepted competitive
tenders.
Additional amounts may be issued for such accounts if
the aggregate amount of new bids exceeds the aggregate amount
of maturing bills.
For purposes of determining such additional
amounts, foreign and international monetary authorities are
considered to hold $1,878 million of the original IJ-week and
26-week issues.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C.
This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356, published as a final rule on
January 5, 1993, and effective March 1, 1993) for the sale and
issue by the Treasury to the public of marketable Treasury bills,
notes, and bonds.
Details about each of the new securities are given ln the
attached offering highlights.
000
Attachment
LB-426
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED OCTOBER 21, 1993
october 12, 1993
Offering Amount .
$12,800 million
$12,800 million
Description of Offering:
Term and type of security .
CUSIP number
Auction date
Issue date
Maturity date .
Original issue date .
Currently outstanding
Minimum bid amount
Multiples .
91-day bill
912794 H5 6
October 18, 1993
October 21, 1993
January 20, 1994
July 22, 1993
$12,584 million
$10,000
$ 1,000
182-day bill
912794 K2 9
October 18, 1993
October 21, 1993
April 21, 1994
October 21, 1993
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Competitive bids
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids.
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
Maximum Award .
35% of public offering
Receipt of Tenders:
~oncompetitive tenders
competitive tenders .
Payment Terms .
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
STATEMENT OF R. RICHARD NEWCOMB
DIRECTOR, OFFICE OF FOREIGN ASSETS CONTROL
DEPARTMENT OF THE TREASURY
BEFORE THE
HOUSE COMMITTEE ON FOREIGN AFFAIRS
OCTOBER 13, 1993
Chairman Hamilton and members of the Committee:
Good morning. I am R. Richard Newcomb, the Director of the Office of Foreign
Assets Control (FAC) at the United States Department of the Treasury. I am happy to
appear before the Committee today to discuss the Administration's proposed Iraq Claims
Act of 1993.
The Administration's proposed Iraq Claims Act of 1993 was developed to provide
a fair and orderly system for satisfying the claims of U.S. nationals and the United States
against Iraq. The Iraq Claims Act follows the standard procedure utilized in the U,S. in
the past to address compensation of U.S. nationals in similar circumstances. The bill
incorporates the best approach to compensation issues, one that will permit available
compensation to be allocated equitably among similarly-situated claimants. The bill
authorizes adjudication of U.S. nationals' claims in a single forum, and permits the
President to compensate claimants by vesting blocked Iraqi assets in the United States.
We believe this approach far preferable to the piecemeal approach represented by
legislation unfairly compensating only a small segment of the business community, such
as the proposed Secured Payment Act (S. 1119) and a similar amendment to the State
Department Authorization Bill pending in the Senate.
The Iraq Claims Act complements the U.N. compensation program, which was set
up to handle claims resulting from Iraq's invasion and occupation of Kuwait. Like the
U.N. program, it establishes a priority for non-commercial individual claims. In the Iraq
Claims Act, priority is established for the non-commercial claims of Desert Shield and
Desert Storm veterans and other individuals arising out of Iraq's. invasion and occupation
of Kuwait. No other priorities are created by the Iraq Claims Act. All other similarlysituated claimants are treated equally.
The equal treatment of similarly situated claimants stands in stark contrast to the
preferen.tial treatment that would be granted a small group of businesses under the
Secured Payment Act (SPA) ami a similarly-worded amendment to the State Department
LB-427
- 2 -
Authorization Bill. These counterproposals would authorize payment of U.S.
beneficiaries from funds on deposit in U.S. banks in accounts of foreign banks that
issued or confirmed letters of credit, but are in conflict with settled principles of law.
The SPA would affect many current sanctions programs under the International
Emergency Economic Powers Act -- Libya and Yugoslavia, for example -- as well as
future programs. It could have unpredictable effects and undermine the effectiveness of
these programs, as well as permanently changing traditionally accepted trade finance
principles and practice. It creates an unfair preference for one group of unsecured
creditors, that is, businesses holding advised letters of credit, at the expense of other
unsecured creditors such as veterans and individuals, insurance companies, banks, and
businesses without letters of credit.
The SPA provides beneficiaries of foreign-issued or foreign-confirmed letters of
credit rights that they do not now have under letter of credit law. Letter of credit law
creates a fundamental difference in the obligations of banks that confirm, as opposed to
advising, letters of credit. If a U.S. bank confirms a foreign letter of credit, it becomes
legally obligated to pay the beneficiary if the credit's terms are met. In contrast, where a
beneficiary has a 'U .S.-advised foreign letter of credit, no U.S. bank is obligated to pay
that beneficiary and the foreign letter of credit does not entitle the beneficiary to any
funds held in the U.S., as a matter of well-established law. Nevertheless, the SPA gives
U.S. beneficiaries of advised letters of credit, who deserve no greater priority than any
other unsecured creditor, priority rights against blocked funds not granted by letter of
credit law. (The SPA grants a right to payment based on performance of the trade
contract, not compliance with the letter of credit terms; and a right to payment from any
funds of the foreign bank, not from an account of the foreign bank specified in the letter
of credit.)
As noted, the Iraq Claims Act does follow standard procedures utilized in the
U.S. in the past. While some have questioned why we should proceed differently with
respect to Iraq than with respect to Iran, it is important to recall that in the case of Iran
it was known at the outset that Iran had far greater assets blocked in the U.S. to satisfy
claims. In contrast, Iraq is essentially bankrupt, with hundreds of billions of dollars in
global claims, nearly $100 billion of which is pre-war debt to banks throughout the world.
The U.S. Government has the responsibility to safeguard the interests of all U.S.
nationals' claims. Otherwise, some may receive full compensation while other equally
deserving claimants receive little or nothing.
There is no reason that one class of unsecured creditors, those holding certain
letters of credit, should rate more highly than individuals with death, injury or
expropriation claims. However, the Secured Payment Act and similar proposals would
give these unsecured business creditors higher priority than veterans and other
individuals with equally valid and compelling claims for death or injury. The Secured
-
3 -
Payment Act would compensate the letter of credit holders 100% at the expense of
veterans and individuals, whose recoveries would be reduced or even eliminated so that
a small group of businesses could receive full compensation.
We hope that the members of the Committee and the Congress will join us in supporting
the inclusive and equitable approach taken in the Iraq Claims Act of 1993.
It was a pleasure appearing before the Committee this morning. I will be pleased to
respond to any questions.
FOR IMMEDIATE RELEASE
October 13, 1993
Contact: Scott Dykema
(202) 622-2960
u.S., NETIIERLANDS SIGN INCOME TAX ACCORD
The United States and the Netherlands signed a protocol Wednesday modifying their
proposed income tax treaty.
Both governments also exchanged notes containing common interpretations of several
provisions in the treaty and protocol.
The key feature of the protocol, signed in Washington, aims to stop a tax avoidance
scheme used by some Dutch investors. The scheme involves Dutch corporations investing
in the United States through branches in tax-haven countries. The combination of treaty
provisions and Dutch law would allow investors to pay little tax in any country on income
from those investments.
The protocol says that in such cases the United States may impose a withholding tax
equal to 15 percent of the interest or royalty income derived by the branch from its U.S.
investments.
A provision in the proposed tax treaty required both governments to agree to a
protocol if the Dutch government didn't enact legislation prevenL~llg this type of transaction
prior to U.S. Senate hearings on the new treaty. Since the Dutch government hasn't enacted
the legislation and U.S. Senate hearings are expected in late October, both nations had to
sign a protocol to permit Senate consideration of the proposed treaty.
Both nations are seeking early ratification of the protocol and treaty so both can take
effect in 1994. The proposed treaty was signed last December.
Copies of the new protocol and accompanying notes may be obtained by writing the
Office of Public Affairs, Room 2315, Department of the Treasury, Washington, D.C., 20220,
or calling telephone (202) 622-2960.
-30LB-428
CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE
KINGDOM OF THE NETHERLANDS OF AMERICA 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 the Netherlands, desiring to
replace by a new convention the Convention between the
United States of America and the Kingdom of the Netherlands
with respect to taxes on income and certain other taxes
signed at Washington on April 29, 1948, as modified and
supplemented by the Supplementary Convention signed at
Washington on December 30,
Have agreed as follows:
1965,
- 2-
CHAPTER I
SCOPE OF THE CONVENTION
Article 1
GENERAL SCOPE
1.
This Convention shall apply to persons who are
residents of one or both of the
Sta~es,
except as otherwise
provided in the Convention.
2.
The Convention shall not restrict in any manner any
exclusio~,
exemption, deduction, credit, or other allowance
now or hereafter accorded:
a) by the laws of either State, except, as regards
the Netherlands, with respect to Article 25
(Methods of
Elimination of Double Taxation); or
b) by any other agreement between the States.
Article 2
TAXES COVERED
1.
The existing taxes to which this Convention shall
apply are in particular:
a)
in the Netherlands:
- de inkomstenbelasting (income tax),
- de loonbelasting (wages tax),
- de vennootschapsbelasting (compan"
tax),
including the government share in the net profits
of the exploitation of natural resources levied
-3-
pursuant to the Mining Act 1810 (Mijnwet 1810)
with respect to concessions issued from 1967, or
pursuant to the Netherlands Lontinental Shelf
Mining Act of 1965 (Mijnwet Continentaal Plat
1965) hereinafter
d~
r~ferred
to as "profit share",
dividendbelasting (dividend tax) ,
(hereinafter referred to as "Netherlands tax");
b)
in the United States: the Federal income taxes
imposed by the Internal Revenue Code (but excluding
social security taxes), and the excise taxes imposed on
insurance premiums pald to foreign insurers and with
respect to private foundations
(hereinafter referred to
as "United States tax H ) .
The Convention shall, however, apply to the excise taxes
impos~d
on insurance premlums paid to foreign insurers only
to the extent that the risks covered by such premiums are
not reinsured with a person not entitled to the benefits of
t~is
O~
any other convention which
p~ovides
exemption from
these taxes.
The
Conven:ic~
s~a~~
app:y also to
an~
identical or
substantially similar taxes which are imposed after the date
of signature of the Convention :n addition tQ, or in place
of,
the existing
tax~s.
The competent authorities of the
States shall notlfy each other of any substantial changes
which have been made in their
resp~ctive
~axation
laws.
-4-
CHAPTER II
DEFINl~~ONS
Article 3
GENERAL DEFINITIONS
1.
purpos~s
For the
context otherwise
a)
of this Convention, unless the
requi~es:
the term "State" means the Netherlands or the
United States, as the context requires; the term
"States" means the Netherlands and the United States;
b)
the
ter~
"the Netherlands" comprises the part
of the Kingdom of the Netherlands that is situated in
Europe and the part of the sea bed and its sub-soil
under the North Sea, over which the Kingdom of the
Netherlands has sovereign rights in accordance with
international law for the purpose of exploration for
and exploitation of the natural resources of such
areas, but only to the extent that the person,
property, or
applied
-~
ac~ivi:y
to which this Convention is being
connec:ed with such exploration or exploi-
tation;
c)
i)
the term "United States" means the United
States o!
k~erica,
Puerto Rico,
ar.y o:ner
territory;
but does not include
the Virgin Islands, Guam, or
~n::ej
States possession or
-5-
ii)
when used in a geographical sense,
the term
"United States" means the states thereof
and the District of Columbia. Such term
also includes (Al
the territorial sea
thereof and (B) the sea bed and sub-soil of
the submarine aroas adjacent to that
territorial sea, over which the United
States exercises sovereign rights
accordance with
inter~ational
~n
law for the
purpose of exploration for and exploitation
of the natural resources of such areas, 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;
d)
the term "person" includes an individual, an
estate, a trust, a company and any other body of
persons;
e)
~ny
the term "company" means any body corporate or
entity which is treated as a body corporate for tax
purposes;
f)
the terms "enterprise of one of the States" and
"enterprise of the other State" mean respectively an
enterprise carried on by a resident of one of the
- 6-
States and an enterprise carried on bya
re~ident
of
the other State;
g) the term "nationals" means:
i) all individuals possessing the nationality
or citizenship of one of the States;
ii) all legal persons, partnerships and
associations deriving their status as such
from the laws in force in one of
L~le
States;
h)
the term "international traffic" means any
transport by a ship or aircraft operated by an
enterprise of one of the States, except when the ship
or aircraft is operated solely between places within
the other State;
i) the term "competent authority" means:
i)
in the Netherlands: the Minister of Finance
or his duly authorized representative; and
ii)
in the United States: the Secretary of the
Treasury or his delegate.
2.
As regards the application of the Convention by one
of the States any term not deflned therein shall, unless the
context otherwise requires or the competent authorities
agree to a common meaning pursuant to the provis:ons of
Article 29
(Mutual Agreement Procedure), have the meaning
-7-
which it has under the law of that State
conce~ning
the
taxes to which the Convention applies.
Article 4
RESIDENT
1.
For the purposes of this Convention, the term
"resident of one of the States" means any person who, under
the laws of that State,
of his domicile,
is liable to tax therein by reason
residence, place of management, place of
I
incorporation, or any other criterion of a similar nature,
or that is an exempt pension trust, as dealt with in Article
35
(Exempt Pension Trust) and that is a resident of that
State according to the laws of that State, or an exempt
organization, as dealt with in Article 36 (Exempt
Organizations) and that is a resident of that State
according to the laws of that State. If, under the laws of
the two States, an individual is a resident of both States,
his residence for purposes of the Convention shall be
determined under the rules of paragraph 2. An individual who
is a resident of one of the States under the law of that
State, or who is a citizen of the United States, and who is
not a resident of the other
the purposes of this
Stat~
~aragraph,
under its law, will,
for
be treated as a resident of
the State of which he is a resident or citizen only if (i)
he would be a resident of that State and r.ot a third State,
- 8-
under the principles of subparagraphs (a) and (b) of
paragraph 2 of this Article, if that third State is one with
which the first-mentioned State does not have a
comprehensive income tax Convention, or (ii) he is a
resident of that State and not a third State, if that third
State is one with which the first-mentioned State does have
a comprehensive income tax Convention, under the provisions
of that Convention. However,
a)
the term "resident of one of the States" does
not include any person who is liable to tax in that
State in respect only of income from sources in that
State; and
b) in the case of income derived or paid by an
estate or trust,
the term "resident of one of the
States" applies only to the extent that the income
derived by such estate or trust (other than an exempt
pension trust or an exempt organization organized in
the form of a trust, described above in this
paragraph!, is subject to tax in that State as the
income of a resident, either in its hands or in the
hands of its beneficiaries.
2.
Where by reason ot the provisions of paragraph 1,
an individual is a resident of both Stares, then his status
shall be determined as follows:
-9-
a) he shall be deemed to be a resident of the
State in which he has a permanent home available to
him; if he has a permanent home available to him in
both States, he shall be deemed to be a resident of the
State with which his personal and economic relations
are closer (centre of vital :nterests);
b)
if the State in which he has his centre of
vital interests cannot be determined, or if he has not
a permanent home available to him ir. either State, he
shall be deemed to be a resident of the State in which
he has an habitual abode;
c)
if he has an habitual abode in both States or
in neither of them, he shall be deemed to be a resident
of the State of which he is a national;
d)
if he is a national of both States or of
neither of them, the competent authorities of the
States shall settle the question by mutual agreement.
3.
Where by reason of the provisions of paragraph I, a
person other than an individual or a company is a resident
of both States, the competent authorities of the States
shall settle the question by mutual agreement and determine
the mode of application of the Convention to such person.
4.
Where by reason of the provisions of paragraph I, a
company is a resident of both States, the competent
authorities of the States shall endeavour to settle the
-10-
question by mutual agreement, having regard to the company's
place of effective management, the place where it is
incorporated or otherwise constituted and any other relevant
factors. In the absence of such agreement, such company
shall not be entitled to claim any benefits under this
Convpntion, except that such
com~any
may claim the benefits
of paragraph 4 of Article 25 (Methods of Elimination of
Doublel~xation)
and of Articles 28 (Non-discrimination), 29
(Mutual Agreement Procedure) and 37 (Entry into Force).
Article 5
PERMANENT ESTABLISHMENT
1.
For the purposes of this Convention, the term
"permanent establishment" means a fixed place of business
through which the business of an enterprise is wholly or
partly carried on.
2.
The cerm ftpermanent establishment" includes
especially:
a) a place of management;
b} a branch;
c} an office;
d} a factory;
e) a workshop; and
f)
a mine, an oil or gas well, a quarry or any
other place of extraction of natural resources.
- 11-
3.
A building site or construction or installation
project con'stitutes a permanent establishment only if it
lasts more than twelve months.
4.
Article,
Notwithstanding the preceding provisions of this
the term "permanent establishment" shall be deemed
not to include:
a)
the use of facilities solely for the purpose of
storage, display or delivery of goods or merchandise
belonging to the enterprise;
b)
the mainten3nce of a stock of goods or
merchandise belonging to the enterprise solely for the
purpose of storage, display or delivery;
c)
the maintenance of a stock of goods or
merchandise belonglng to the enterprise solely for the
purpose of processing by another enterprise;
d)
the maintenance of a fixed place of business
solely for the purpose of purchaslng goods or
merchandise, or of collecting information,
for the
enterprise;
e)
the
rnalntena~ce
o~
a
~ixed
place of business
solely for the purpose of carrying on,
enterprise, any
auxi~iary
f)
ot~er
for the
aC:lvlty of a preparatory or
charact~r;
the
maint€~~nce
cf a fixed place of business
solely for any comblnation of the dctivities mentioned
-12-
in subparagraphs (a) to (e), provided that the overall
activity of the fixed place of business resulting from
this combination is of a preparatory or auxiliary
character.
5.
Notwithstanding the provisions of paragraphs 1 and
2. where a person - other than an agent of an independent
status to whom paragraph 6 applies - is acting on behalf of
an enterprise and has, and habitually exercises, in one of
the States an authority to conclude contracts in the name of
the enterprise, that enterprise shall be deemed to have a
permanent establishment in that State in respect of any
activities which that person undertakes for the enterprise,
unless the activities of such person are limited to those
mentioned in paragraph 4 which, if exercised through a fixed
place of business, would not make this fixed place of
business a permanent establishment under the provisions of
that paragraph.
6.
An enterprise shall not be deemed to have a
permanent establ1shment in one of the States merely because
lt carries on business In ·that State through a broker,
general commission agent or any other agent of an
independent status, prov~ded that such persons are acting in
the ordinary course of their business.
7.
~~
t~e
The fact that a company which is a resident of one
St3tes contro:s or is controlled by a company which
-13-
is a resident of the other State, or which carries on
business in that other State (whether through a permanent
establishment or otherwise), shall not of itself constitute
either company a permanent establishment of the other.
CHAPTER I::
TAXATION OF INCOME
Article 6
INCOME FROM REAL PROPERTY
1.
Income derived by a resident of one of the States
from real property (including income from agriculture or
forestry)
situated in the other State may be taxed in that
other State.
2.
The term ftreal property" shall have the meaning
which it has under the law of the State in which the
property in question is situated. The term shall in any case
include property accessory to real property, livestock and
equipment used in agriculture and forestry,
rights to which
the provisions of general law respecting landed property
apply, usufruct of real property and rights to variable or
fixed payments as consideration for the working of, or the
right to work, mineral deposits, sources and other natural
resources; ships and aircraft shall not be regarded as real
property.
-14-
3.
The provisions of paragraph 1 shall apply to income
derived from the direct use, letting, or use in any other
form of real property.
4.
The provisions of paragraphs 1 and 3 shall also
apply to the income from real property of an enterprise and
to ir.come from real property use n
f~r
the performance of
independent personal services.
5.
A resident of one of the States who is liable to
tax in the other State on income from real property situated
in the other State may elect for any taxable year to compute
the tax on such income on a net basis as if such income were
attributable to a permanent establishment in such other
State. Any such election shall be binding for the taxable
year of the election and all subsequent taxable years unless
the competent authorities of the States, pursuant to a
request by the taxpayer made to the competent authority of
the State of which the taxpayer is a resident, agree to
tenninate the election.
6.
Exploration and exploitation rights of the sea bed,
its sub-soil, and natural resources found therein (including
rights to interests in, or to benefits of, assets to be
produced by such exploration or exploitation) shall be
regarded as real property situated in the State in which
such sea bed, sub-soil, and natural resources are located.
Such rights shall be considered to pertain to the property
-15-
of a permanent establishment in that State to
th~
same
extent that any item of real property located in that State
would be considered to pertain to a permanent establishment
in that State.
Article 7
BUSINESS PRQFITS
1.
The profits of an enterprise of one of the States
shall be taxable only in that State unless the enterprise
carries on business in the other State through a permanent
establis~~ent
situated therein. If the enterprise carries on
business as aforesaid,
the profits of the enterprise may be
taxed in the other State but only so much of them as is
attributable to that permanent establishment.
2.
Subject to the provisions of paragraph 3, where an
enterprise of one of the States carries on business in the
other State through a permanent establishment situated
therein, there shall in each State be attributed to that
permanent establishment the profits which it might be
expected to make if it were a distinct and
separa~e
enter·
prise engaged in the same or similar activities under the
same or similar conditlons and dealing wholly independently
with the
ment.
en-~rprise
of Nhich it is a
pe~nent
establish-
-16-
3.
In determining the profits of a permanent
establishment, there shall be allowed as deductions expenses
which are incurred for the purposes of the permanent establishment, including executive and general administrative
expenses, research and jevelopment expenses,
interest, and
other expenses incurred for the purposes of the enterprise
as a whole (or the part thereof which includes the permanent
establisr~ent),
whethe~
i~curred
in the State in which the
permanent establishment is situated or elsewhere.
4.
No profits sha:: be attributed to a permanent
establishment by reason of the mere purchase by that
permanent establishment of goods or merchandise for the
enterprise.
5.
For the purposes of the preceding paragraphs the
profits to be attributed to the permanent establishment
shall include only the profits derived from the assets or
activities of the permanent establishment and shall be
determined by the same method year by year unless there is
good and sufficient reason to the contrary.
6.
Where profits include items of income which are
dealt with separately in other Articles of the Convention,
then the provisions of those
A~ticles
shall not be affected
by the p-ovisions of thlS Article.
7.
The United States tax on insurance premiu~s paid to
foreign ir.surers.
to the extent that it is a covered tax
-17-
under paragraph 1 (b) of Article 2 (Taxes CoverEd), shall
~Qt
be imposed on insurance or reinsurance premiums which
are the receipts of a business of insurance carried on by an
enterprise of the Netherlands whether or not that business
is carried on through a permanent establishment in the
United States.
Article 8
SHIPPING AND AIR TRANSPORT
1.
Profits derived by an enterprise of one of the
States from the operation of ships or aircraft in
international traffic shall be taxable only in that State.
2.
For the purposes of this Article, profits from the
operation of ships or aircraft in international traffic
include profits derived from the rental of ships or aircraft
if such rental profits are incidental to profits described
in paragraph 1.
3.
The provisions of paragraph 1 shall also apply to
the proportionate share of profits derived from the
participation in a pool, a jOint business or an
international operating agency. The proportionate share
shall be treated as derived directly from the operation of
ships or aircraft in
i~ternational
traffic.
-18-
Article 9
ASSOCIATED ENTERPRISES
1.
Where
a) an enterprise of one of the States participates
directly or indirectly in the management, control or
capital of an enterprise of rhe other State; or
b) the same persons participate directly or
indirect'~·
~n
the management, control, or capital of an
enterpcise of one of the States and an enterprise of
the other State,
and in either case conditions are made or imposed between
the two enterprises in their commercial or financial
relations which differ from those which would be made
between independent enterprises, then any income,
deductions, receipts, allowances or outgoings which would,
but for those conditions, have accrued to one of the
enterprises, but, by reason of those conditions, have not so
accrued, may be included in the profits of that enterprise
and taxed accordingly.
It is
~nderstood,
howeve~,
enterprises have concluded
sha~ing
ar~angements
o~
that the fact that associated
a~~angements,
gene~al
such as cost
services agreements,
for or
based on the allocation of executive, general
administrative, technical and commercial expenses, research
-19-
and development expenses and other similar expen5es,
is not
in itself a condition as meant in the preceding sentence.
2.
Where one of the States includes in the profits of
an enterprise of that State - and taxes accordingly
profits on which an enterprise of the other State has been
charged to tax in that other State, and the profits so
included are profits which would have accrued to the
enterprise of the first-mentioned State if the conditions
made between the two enterprises had been those which would
have been made between independent enterprises, then that
other State shall make an appropriate adjustment to the
amount of the tax charged therein on those profits. In
determining such adjustment, due regard shall be had to the
other provisions of this Convention and the competent
authorities of the States shall if necessary consult each
other.
Article 10
DIVIDENDS
1.
Dividends paid by a company which is a resident of
one of the States to a resident of the other State may be
taxed in that other State.
2.
However, such dividends may a'30 be taxed ln the
State of which the company paying the dividends is a
resident and according to the laws of that State, but if the
-20-
beneficial owner of the dividends is a resident cf the other
State, the tax so charged shall not exceed:
a) 5 percent of the gross amount of the dividends
if the beneficial owner is a company which holds
directly at least 10 percent of the voting power of the
company paying the dividends;
b) 15 percent of the gross amount of the dividends
in all other
The provisions of
cas~s.
subpa~agraph
(b)
instead of the provisions
of subparagraph (a) shall apply in the case of dividends
paid by a United States person which is a Regulated
Investment Company or Real Estate Investment Trust or in the
case of dividends paid by a Dutch company, which is a
"beleggingsinstelling" in the sense of Article 28 of the
Netherlands Corporation Tax Act (Wet op de
vennootschapsbelasting 1969)
(hereinafter referred to as
"beleggingsinstelling") .
However, neither the provisions of subparagraph (a) nor (b)
shall apply in the case of:
i) a dividend pald by a United States person
which is a Real Estate Investment Trust,
such
div~dend
is beneficially owned by a
resident of the Nether:ands, other than a
Dutch company which is a "beleggingsinstelling" or other than an individual
if
-21-
holding a less than 25 percent interest in
the Real Estate Investment Trust; such
dividends shall instead be taxable at the
rate provided in the domestic law of the
United States;
ii) a dividend
pai~
by
~
Dutch company, which
is a "beleggingsinstelling", and which
invests in real estate to the same extent
as is required of a Real Estate Investment
Trust, if the dividend is beneficially
owned by a resident of the United States,
other than an individual holding a less
than 25 percent interest in the Dutch
company, or other than a Regulated
Investment Company or Real Estate Investment Trust; such dividends shall
instead be taxable at the rate provided in
the domestic law of the Netherlands.
3.
The provisions of paragraph 2 shall not affect the
taxation of the company in respect of the profits out of
which the dividends are paid.
4.
The term "dividends" as used in this Convention
means income from shares or other rights
partici~ating
in
profits, as well as income from other corporate rights which
is subjected to the same taxation treatment as income from
-22shares by the laws of the State of which the ccmpany making
the distribution is a resident. For the purposes of this
paragraph, the term "dividends" also includes, in the case
of the Netherlands, income from profit sharing bonds
("winstdelende obligaties") and, in the case of the United
State~,
income from debt
obligati~ns
carrying the right to
participate in profits.
5.
The provisions of paragraphs 1 and 2 shall not
apply if the beneficial owner of the dividends, being a
resident of one of the States, carries on business in the
other State of which the company paying the dividends is a
resident, through a permanent establishment situated
therein, or performs in that other State independent
personal services from a fixed base situated therein, and
the holding in respect of which the dividends are paid forms
part of the business property of such
perma~ent
establishment or pertains to such fixed base. In such case
the provisions of Article 7 (Business Profits) or Article 15
(Independent Personal Services), as the case may be, shall
apply.
6.
Where a company which is a resident of one of the
States derives profits or income from the other State, that
other State may not i,pose any tax on the
dividend~
paid by
the company, except insofar as such dividends are paid to a
resident of that other State or ins~far as the holding in
-23respe~t
of which the dividends are paid forms part of the
business property of a permanent
establip~ment
or pertains
to a fixed base situated in that other State, nor, except as
provided in Article 11 (Branch Tax), subject the company's
undistributed profits to a tax on the company's
undistributed profits, even if the dividends paid or the
undistributed profits consist wholly or partly of profits or
income arising in such other State.
A~ticle
11
BRANCH TAX
1.
A corporation which is a resident of one of the
States and which has a permanent establishment in the other
State or which is subject to tax on a net basis in that
other State under Article 6 (Income from Real Property) or
under paragraph 1 of Article 14 (Capital Gains), may be
subject in that other State to a tax in addition to the tax
allowable under the other provisions of this Convention.
Such tax, however, may be imposed only on that portion of
the business profits of the corporation attributable to the
permanent establishment under this Convention or the income
subject to tax on a net basis under Article 6
(Inc~me
from
Real Property) or under paragraph 1 of Article 14 (Capital
Gains) and reduced for all taxes chargeable in that State on
such profits and income, other than the additional tax
-26-
3.
The provisions of paragraph 1 shall not apply if
the beneficial owner of the interest, being a resident of
one of the States, carries on business in the other State,
in which the interest arises, through a permanent
establishment situated therein, or performs in that other
Sta~e
independent personal se~'ices from a fixed base
situated therein, and the interest paid is attributable to
such permanent
esta~]ishment
or fixed base. In such case the
provisions of Article 7 (Business Profits) or Article 15
(Independent Personal Services), as the case may be, shall
apply.
4.
Interest shall be deemed to arise in one of the
States when the payer is that State itself, or a political
subdivision, a local authority, or a resident of that State.
Where, however, the person paying the interest, whether he
is a resident of one of the States or not, has in one of the
States a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is
paid was incurred, or has income otherwise subject to the
tax d€scribed in Article 11 (Branch Tax), and such interest
is borne by such permanent establishment or fixed base or is
allocable to the income subject to the tax described in
Article 11 (Branch Tax), then such interest shal~ le deemed
to arise in the State in which the permanent establishment
-27-
or fixed base is situated or in which the income is subject
to the tax described in Article 11 (Branch Tax) .
5.
Where, by reason of a special relationship between
the payer and the beneficial owner or between both of them
and some other person,
the amount of the interest, 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 beneficial owner in the absence of such relationship,
the provisions of this Article shall apply only to the
last-mentioned amount.
In such case the excess part of the
payments shall remain taxable according to the laws of each
State, due regard being had to the other provisions of this
Convention.
6.
A State may not impose any tax on interest paid by
a resident of the other State, except insofar as
a) the interest is paid to a resident of the
first-mentioned State;
b)
the interest is attributable to a permanent
establishment or a fixed base situated in the
first-mentioned State; or
c) the interest arises in the first-mentioned
State and is not paid to a resident of the other State.
Where
t~e
payer of the
~nterest
is a resident of one of the
States and has a permanent establishment in the other State
or has income otherwise subject to the tax described in
-28-
Article 11 (Branch Tax), then to the extent the amount of
the interest arising in such other State by reason of the
permanent establishment or by reason of income subject to
the tax described in Article 11 (Branch Tax) exceeds the
total amount of interest paid by such permanent
establishment or in connection with income otherwise subject
to the tax described in Article 11 (Branch Tax), such excess
amount shall be treated as interest derived and beneficially
owned by a resident of the other State.
7.
The provisions of paragraph 1 shall not apply to an
excess inclusion with respect to a residual interest in a
real estate mortgage investment conduit.
Article 13
ROYALTIES
1.
Royalties arising in one of the States and
beneficially owned by a resident of the other State shall be
taxable only in that other State.
2.
The term "royalties" as used in this Convention
means payments of any kind received as a consideration for
the use of, or the right to use, any copyright of literary,
artistic, or scientific work (but not including motion
pictures or works on film,
repr~duction
tape or other means of
used for radio or television broadcasting), any
patent, trademark,
trade name, brand name, design or model,
-29-
plan, secret formula or process, or for information
cc~cerning
industrial, commercial or scientific experience.
The term nroyalties n also includes gains derived from the
alienation of any such right or property which are
contingent on the
3.
produ~tivity,
use, or disposition thereof.
The provisions of paragrapll 1 shall not apply if
the beneficial owner of the royalties, being a resident of
one of the States, carries on business in the other State,
in which the royalties arise, through a permanent
establishment situated therein, or performs in that other
State independent personal services from a fixed base
situated therein, and the royalties are attributable to such
permanent establishment or fixed base. In such case the
provisions of Article 7 (Business Profits) or Article 15
(Independent Personal Services), as the case may be, shall
apply.
4.
Where, by reason of a special relationship between
the payer and the beneficial owner or between both of them
and some other person, the amount of the royalties, having
regard to the use,
right. or information for which they are
paid, exceeds the amount which would have been agreed upon
by the payer and the beneficial owner in the absence of such
relationship, the provisions of this Article shall apply
o~ly
to the last-mentioned amount. In such case the excess
part of the payments shall remain taxable according to the
-30-
laws of each State, due regard being had to the other
provisions of this Convention.
5.
A State may not impose any tax on royalties paid by
a resident of the other State, except insofar as
a)
the
royalt~es
are paid to a resident of the
first-mentioned State;
b)
the royalties are attributable to a permanent
establishment or a f:xed base situated in the
first-mentioned State;
c)
the contract under which the royalties are paid
was concluded in connection with a permanent
establishment or a fixed base which the payer has in
the first-mentioned State, and such royalties are borne
by such permanent establishment or fixed base and are
not paid to a resident of the other State; or
dl
royalties are paid in respect of intangible
property used in the first-mentioned State and not paid.
to a resident of the other State, but only where the
payer has also received a royalty paid by a resident of
the first-mentioned State, or borne by a permanent
establishment or fixed base situated in that State,
in
respect of the use of that property in the firstmentioned State and provided that the use of the
intangible property in question is not a component part
of nor directly related to the active conduct of a
-31-
trade or business in which the payer is engaged as
meant in paragraph 2 of Article 26 (Limitation on
Benefits) .
Article 14
CAPITAL GAINS
1.
Gains derived by a resident of one of the States
from the disposition
c:
=~a:
prop~rty
situated in the other
State may be taxed in the other State. For the purposes of
this paragraph the term "real property situated in the other
State" shall include:
a) real property referred to in Article 6 (Income
from Real Property); and
b) shares or other comparable corporate rights in
a company that is a resident of that other State, the
assets of which company consist, directly or
indirectly,
for the greater part of real property
situated in that other State, and an interest in a
partnership, trust, or estate, to the extent that it is
attributable to real property situated in that other
State.
In the United States, the term lncludes a "United States
real propL:ty interest·· as defined in the Internal Revenue
Code on the date of signature of this Convention, and as
-32-
arnpnded from time to time without changing the _general
nrinciples described in this paragraph.
2.
a) Where after the date this Convention enters
into force a person who has been a resident of one of
the States continuously since June 18, 1980, alienates
real property situated in che other State, the
alienation of which could not be taxed by the other
State under the provisions of che prior
CO~~cl1tion
as
defined in paragraph 2 of Article 37 (Entry into
Force), and either:
i) the resident owned the alienated property
continuously from June 18, 1980 until the
dace of alienation; or
ii) each of the following conditions is
satisfied:
A) the residenc acquired the alienated
propercy in a transaction that qualified
for non-recognition (determined without
regard Co section 897 of the Internal
Revenue Code)
for purposes of taxation
in the other State, and the resident has
owned the property continuously since
such acquisition; and
8)
the resident's initial basis in the
a:ienated property was equal to either
-33the basis of the property that the
resident exchanged for the alienated
property, or the basis of the alienated
property in the hands of the person
transferring the property to the
resident immedlately prior to the
transfer; then
the gain liable to tax in the other State under this Article
shall be reduced by the portion of the gain attributable
proportionately, on a monthly basis, to the period ending on
December 31, 1984, or such greater portion as is shown to
the satisfaction of the competent authority of that other
State to be attributable to that period.
b) The provisions of this paragraph shall not
apply unless, during the period from January 1, 1992,
through the date of alienation, the resident, and any
other person who owned the property during such period,
was entitled to the benefits of this Article under
Article 26
(Limitation on Benefits), or would have been
so entitled if the Convention had been in effect
throughout such period. In addition, during the period
from June 18, 1980, through December 31, 1991, each
person who own€j the property must have been a resident
of one of the States under the prior Convention as
-34defi~ed
in paragraph 2 of Article 37 (Entry into
Force) .
c) The provisions of this paragraph shall not
apply to the alienation of property that:
i)
formed part of the property of a permanent
establishment, or pertained to a fixed
base, situated in the other State at any
time on or after June 18, 1980;
ii) was acquired directly or indirectly by any
person on or after June 18, 1980, in a
transaction that did not qualify for nonrecognition (determined without regard to
section 897 of the Internal Revenue Code),
or in a transaction in which it was
acquired in exchange for an asset that was
acquired in a transaction that did not
qualify for non-recognition (determined
without regard to section 897 of the
Internal Revenue Code); or
iii) was acquired, directly or indirectly, by
any person on or after June 18, 1980, in
exchange for property described in clause
(i) or {iil of this subparagraph, or
property the alienation of which could have
been taxed by the other State under the
- 35-
provisions of the prior
r~nvention
as
defined in paragraph 2 of Article 37 (Entry
into Force) .
3.
Gains from the alienation of personal property
forming part of the business property of a permanent
establishment which an enterprise of one of the States has
in the other State or of personal property pertaining to a
fixed base available to a resident of one of the States in
the other State for the purpose of performing independent
personal services,
including such gains from the alienation
of such permanent establishment (alone or with the whole
enterprise) or of such fixed base, may be taxed in that
other State_
4.
Notwithstanding the provisions of paragraph 3,
gains from the deemed alienation of tangible depreciable
personal property forming part of the business property of a
permanent establishment which an enterprise of one of the
States has in the other State under paragraph 3 of Article
27 (Offshore Activities)
o~
of tangible depreciable personal
property pertaining to a fixed base available to a resident
of one of the States in the other State under paragraph 5 of
Article 27 (Offshore Activities)
for the purpose of perfor-
ming independent personal services,
~hall
be taxable only in
the State of residence of the enterprise if the period
during which the tangible depreciable personal property
- 36-
fo--:'1s part ::f the business property of such permanent
~stablishrnent
or pertains to such fixed base is less than 3
months and provided that the actual alienation of the
tangible depreciable personal property does not take place
within 1 year after the date of its deemed alienation.
If the gain from the deemed alienation of the tangible
depreciable personal property is taxable only in the State
of residence of the enterprise,
in determining the profits
of the permanent establishment or the fixed base in the
other State the depreciation with respect to such tangible
depreciable personal property will be based on the lower of
book value or market value, measured when such property
became part of the business proper:y of the permanent
establishment or such property first pertained to the fixed
base.
S.
Notwithstanding the provisions of paragraph 3,
gains derived by an enterprise of one of the States from the
alienation of ships and aircraft operated in international
traffic, and
OL
personal prcperty pertaining to the
operation of such ships and alrcraft shall be taxable only
ln that State.
6.
Gains described ln Art:cle 13
(Royalties) shall be
taxable .n accordance with the provi~ions of Article 13.
7.
Gains from the allenatlon of any property other
than property referred to in paragraphs 1 through 5 shall be
-37-
taxable only in the State of which the alienator is a
~esident.
8.
Where a resident of one of the States alienates
property in the course of a corporate organization,
reorganization, amalgamation, division or similar
t~ansaction
and profit, gain
~r
iIlcome with respect to such
alienation is not recognized or is deferred for the purpose
of taxation in that State, then any tax that would otherwise
be imposed by the other State with respect to such
alienation will also be deferred to the extent and time as
such tax would have been deferred if the alienator had been
a resident of the other State, but no longer and in no
greater amount than in the first-mentioned State provided
that such tax can be collected upon a later alienation and
the collection of the amount of tax in question upon the
later alienation is secured to the satisfaction of the
competent authority of both of the States. The competent
authorities of the States shall develop procedures for
implementing this paragraph.
9.
The provisions of paragraph 7 shall not affect the
right of each of the States to levy according to its own law
a tax on gains from the alienation of sh3res or other
corporate rights participating in profits in a company, the
capital of which is wholly or partly divided into shares and
which, under the laws of that State is a resident thereof,
- 38-
derived by an individual who is a resident ot the other
State and who:
a) has, at any time during the five-year period
preceding the alienation, been a resident of the firstmentioned State, and
b) at the time of
t~c
alienation owns, either
alone or together with related individuals, at least 25
percent of any class of shares of such company.
For purposes of this paragraph the term "related
individuals" means the alienator's spouse and his relatives
(by blood or marriage)
in the direct line (ancestors and
lineal descendents) and his relatives (by whole or half
blood or by marriage)
in the second degree in the collateral
line (siblings or their spouses) .
Article 15
INDEPENDENT PERSONAL SERVICES
1.
Income derived by an individual who is a resident
of one of the States from the performance of personal
services in an independent capacity shall be taxable only in
that State, unless such services are not performed in that
State and the income derived therefrom is attributable to a
fixed base regularli available to the
individua~
in the
other State for the purpose of performing his activities.
- 39-
2.
The term "personal services in an indepeI"'rient
capacity" includes especially
independE~t
scientific,
literary, artistic, educational or teaching activities as
well as the independent activities of physicians,
engineers, architects,
lawyers,
jer.tists and accountants.
Article 16
DEPENDENT PERSONAL SERVICES
1.
Subject to the provisions of Articles 17
I
(Directors' Fees),
19 (Pensions, Annuities, Alimony), 20
(Government Service), and 21
(Professors and Teachers) ,
salaries, wages, and other similar remuneration derived by a
resident of one of the States in respect of an employment
shall be taxable only in that State unless the employment is
exercised in the other State. If the employment is so
exercised, such remuneration as is derived therefrom may be
taxed in that other State.
2.
Notwithstanding the
provisio~s
of paragraph 1,
remuneration derived by a resident of one of the States in
respect of an employment exercised in the other State shall
be taxable only in the first-mentioned State if
a)
the recipient is present in the other State for
a period or perlods not exceeding in the aggregate 183
days in the taxable year concerned;
-40~)
the remuneration is paid by, or- on behalf of,
an employer who is not a resident rof the other State;
and
c)
the remuneration is not borne by a permanent
establishment or a fixed base which the employer has in
the other State.
3.
Notwithstanding the preceding provisions of this
Article, remuneration derived by a resident of one of the
States in respect of an employment as a member of the
regular complement of a ship or aircraft operated in
international traffic, shall be taxable only in that State.
Article 17
DIRECTORS'
Directors'
FEES
fees or other remuneration derived by a
resident of one of the States in his capacity as a member of
the board of directors, a "bestuurder" or a "commissaris" of
a company which is a resident of the other State may be
taxed in that other State. However such remuneration shall
be taxable only in the first-mentioned State to the extent
to which such remuneration is derived from services rendered
in that State.
-41-
Article 18
ARTISTES AND ATHLETES
1.
Notwithstanding the provisions of Articles 15
(Independent Personal Services) and 16 (Dependent Personal
Services),
income derived by a resident of one of the States
as an entertainer, such as a
th~atre,
motion picture, radio,
or television artiste, or a musician, or as an athlete,
from
his personal activities as such exercised in the other
State, may be taxed in that other State except where the
amount of the gross receipts derived by such entertainer or
athlete for the taxable year concerned,
including expenses
reimbursed to him or borne on his behalf,
from such
activities does not exceed 10,000 United States dollars or
its equivalent in Netherlands guilders on January 1 of the
taxable year concerned. In the latter case the exemption can
be applied by means of a refund of tax which may have been
levied at the source. An application for such refund has to
be lodged after the end of the taxable year concerned and
within three years after that year.
2.
Where income in respect of activities exercised by
an entertainer or an athlete in his capacity as such accrues
not to the entertainer or athlete but to another person,
that income of that other person may, notwithstanding the
provisions of Articles 7 (Business Profits) and 15
(Independent Personal Services), be taxed in the State in
-42-
which the activities of the entertainer or athlete are
exercised, unless it is established that neither the
entertainer or athlete nor persons related theretd
participate directly or indirectly in the profits of that
other person in any manner, including the receipts of
ueferred remuneration, bonuses, fees, dividends, partnership
distributions, or other distributions.
Article 19
PENSIONS. ANNUITIES. ALIMONY
1.
Subject to the provisions of paragraph 2 of Article
20 (Government Service), pensions and other similar
remuneration derived and beneficially owned by a resident of
one of the States in consideration of past employment and
any annuity shall be taxable only in that State.
2.
If, however, an individual deriving remuneration
referred to in paragraph 1 was a resident of the other State
at any time during the five-year period preceding the date
of payment, the remuneration may be taxed in the other State
if the remuneration is paid in consideration of employment
exercised in the other State and the remuneration is not
paid in the form of perlodlc payments, or a lump sum is paid
in lieu of the right to receive an annuity.
3.
The provisions of paragraph 2 shall not apply to
the portion of the remunerarion or lump sum referred to in
-43-
paragraph 2 that is contributed to a pension plan or
retirement account under such circumscances that, if the
remuneration or lump sum had been received from a payer in
the State of the recipient's residence,
the imposition of
tax on the payment by the State of the recipient's residence
would be deferred until the amount of the payment was
withdrawn from the pension plan or retirement account to
which it was contributed.
4.
20
Subject to the provisions of paragraph 2 of Article
(Government Service), pensions and other payments made
under the provisions of a public social security system and
other public pensions paid by one of the States to a
resident of the other State or a citizen of the United
States shall be taxable only in the first-mentioned State.
5.
The term "annuity" as usen in this Article means a
stated sum payable periodically at stated times during life
or during a specified or ascertainable period of time under
an obligation to make the payments in return for adequate
and full considera:ion in money or money's worth.
6.
Alimony paid to a resident of one of the States
shall be taxable only in that State. The term "alimony" as
used in this paragraph means periodic payments made pursuant
to a written separation agreement or a decree of divorce,
separate maintenance, or compulsory support, as well as lump
sum payments in lieu thereof. which payments are taxable to
-44-
the recipjent under the laws of the Stat o of
whic~
he is a
resident.
Article 20
GO·JERNMENT S ERVI CE
1.
a) Remuneration, other than a pension, paid by one
of the States or a political subdivision or a local
authotity thereof to an individual in respect of
services rendered to that State or subdivision or
authority shall be taxable only in that State.
b) However, such remuneration shall be taxable
only in the other State if the services are rendered in
that State and the individual is a resident of that
State who:
i)
is a national of that State; or
ii) did not become a resident of that State
solely for the purpose of rendering the
services.
2.
a) Any pension paid by, or out of funds created by,
one of the States or a political subdivision or a local
authority thereof to an individual in respect of
services rendered to
t~at
State or subdivision or
authority shall be taxable only in that State.
-45-
b) However, such pension shall be taxable only in
the other State if the individual is a reside~t of, and
a national of, that State.
3.
The provisions of Articles 16 (Dependent Personal
Services), 17 (Directors' Fees) and 19 (Pensions, Annuities,
Alimony) shall apply to remuneration and pensions in respect
of services rendered in connection with a business carried
on by one of the States or a political subdivision or a
local authority thereof.
Article 21
PROFESSORS AND TEACHERS
1.
An individual who visits one of the States for a
period not exceeding two years for the purpose of teaching
or engaging in research at a university, college or other
recognized educational institution in that State, and who
was immediately before that visit a resident of the other
State shall be taxable only in that other State on any
remuneration for such teaching or research for a period not
exceeding two years from the date he first visits the
first-mentioned State for such purpose. If the visit exceeds
two years, the first-mentioned State may tax the individual
under its national law for the entire period of the visit,
unless in a particular case the
States agree otherwise.
competen~
authorities of the
-46-
2.
This Article shall not apply to income from
research if such research is undertaken not in the public
interest but primarily for the private benefit of a specific
person or persons.
Artl.c:"e 22
STUDENTS AND TRAINEES
1.
An individual who immediately before visiting one
of the States is a resident of the other State and is
temporarily present in the first-mentioned State for the
primary purpose of:
a)
full-time study at a
r~cognized
university,
college or school in that first-mentioned State; or
b) securing training as a business apprentice,
shall be exempt from tax in the first-mentioned State in
respect of:
i) all remittances from abroad for the purpose
of his maintenance, education or training,
and
ii) any remuneration for personal services
performed in the first-mentioned State for
any taxable year in an amount that does not
exceed 2,000 United States dollars or its
equivalent in Netherlands guilders on
January
1
of that taxable year.
- 47-
The benefits under this paragraph shall only extend for such
period of time as may be reasonable or customarily required
to effectuate the purpose of the visit.
2.
An individual who immediately before visiting one
of the States is a resident of the other State and is
temporarily present in the first mentioned State for a
period not exceeding three years for the purpose of study,
researc~
allowanc~
or trainii.9
or award
so:~:y
~~om
as a
~ecipier.:
2:
a grant,
a scier.tific, educational,
religious
or charitable organizatior. or under a technical assistance
program entered into by one of the States, a political
subdivision or a local authority thereof shall be exempt
from tax in the
a)
fi~s:·~ei.::=nej
State on:
the amount of such grant, allowance or award;
and
b) any remuneratior. for personal services
performed in the first·men:ioned State for any taxable
year provided such servlces are in connection with his
study,
research or train:ng or are incidental thereto,
In an amount
:~a:
dollars or its
3.
An
does i.ot exceed 2,000 United States
eq~~va:ei.:
indiviaual
Article or Article 21
~ay
~i.
~:ether:a~js
guilders on
not claim the benefits of this
?~ofessors
and Teachers)
if, during
-48-
:he
imrne~iately
preceding period, the individual claimed the
benefits of such other Article.
Article 23
27HER INCCME
,
Items of
ir.co~e
of a
r~sident
of one of the States,
wherever arising, not dealt with in the foregoing Articles
0:
:~is
Conventior. sha:: be taxable only in that State.
2.
0:
The provisior.s
paragraph 1 shall not apply to
income, other than income from real property as defined in
pa~ag~aph
2 of Article
~
\~r.CQ~e
from Real
P~operty),
if the
beneficial owner of the income, being a resident of one of
:~e
States, carries
permanent
2~
t~s:~ess
establis~~ent
:~
the
otr.~~
State through a
situated therein, or performs in
that other State independent personal services from a fixed
base situated therein, and the income is
such permanent
establis~~ent
~ttributable
or fixed base.
to
In such case the
provisions of Article 7 (Business Profits) or Article 15
(Ir.dependent Persona:
apply.
Se~vi~es:
I
as the case may be, shall
-49-
CHAPTER IV
ELIMINATION OF DOUBLE TAXATION
Article 24
BASIS OF TAXATION
1.
Notwithstanding any provision of the Convention
except paragraph 2, each of the States may tax its residents
and nationals as if the Convention had not come into effect.
For this purpose, as
~~gards
the United States, the term
national shall include a former citizen, not being a
national of the Netherlands, whose loss of United States
citizenship has as one of its principal purposes the
avoidance of income tax, but only for a period of 10 years
following such loss.
2.
The provisions of paragraph 1 shall not affect
a)
the benefits conferred cv one of the States
under paragraph 2 of Article 9 (Associated
Enterprises), under paragraph 4 of Article 19
(Pensions, Annuities, Alimony), and under Articles 25
(Methods of Eliminat:cn of Double Taxatlolll, 28
(Non-Discriminatlon), and 29
(Mutual Agreement
Procedure); and
b) the beneflts conferred by one of the States
un~2r
Articles 20
and Teachers),
22
(Government Service), 21 (Professors
(Students and Trainees), and 33
(Diplomatic Agents and Consular Officers), upon
-50-
individuals who are neither citizens or that St1te,
nor, in the case of the United
residents of
t~e
Statc~,
lawful permanent
United States.
For the implementation of paragraphs 1 and 2 of
3.
A~~ic~e
7 (Business
(~ividends),
paragraph 5 of Article 10
paragraph 3 of Arcicle 12 (Interest), paragraph
3 of Article 13
:aF~~a:
Pro:i~s),
(Royalties), paragraph 3 of Article 14
Gains),
paragr3~~
:
~~
Articl~
~S
:Independent
Personal Services), and paragraph 2 of Article 23
rnco~e),
any income, gain
permanent
o~
expense
attribu~ab~e
(Other
to a
or fixed base during its existence
establis~~ent
is taxable or deductible in the State where such permanent
establishment or fixed base is situated even if the payments
are deferred until such permanent establishment or fixed
base has ceased to exist. Nothing in the preceding sentence
shall affect the application to such deferred payments of
rules regarding the accrual of income and expenses according
to the domestic law of each of the States.
Gains from the allenatlon of personal property that at any
:l~e
formed part of the business property of a permanent
establishment or fixed base that a resident of one of the
S:a:es
~a5
or had
:~
:~~
=:~~r
~:ate
~ay
be taxed by that
other State only to the extent that the gain is attributable
:0 the period in which
t~e
personal
proper~y
in question
formed part of the afore-~entior.ed business property. Such
-51ta~
may be imposed on such gains at the time when realized
~nd
recognized under the laws of that other State, if that
date is within 3 years of the date on which the property
ceases to be part of the business property of the permanent
establishment or fixed base.
4.
If,
immediately prior to the date of a hearing
before the United States Senate
=~?~==:~J
~oreign
Relations Committee
consent to ratification of this Convention, the
Netherlands law does not contain provisions which prevent
tax avoidance or evasion with respect to taxes on income in
the situation where:
a) an enterprise of the Netherlands derives
interest or royalties from another state, which
interest or royalties are attributable to a permanent
establishment of that enterprise in a third
jurisdiction;
b)
the income of such permanent establishment is
subject to special or low taxation because of a "tax
hav~n"
to,
regime (including, but not necessarily limited
regimes intended to· encourage the use of the third
jurisdiction for tax avoidance purposes with respect to
investment income); and
c)
the income of such permanent establishment is
exempt from tax in the Netherlands,
-52~hen
a pr0vision aimed at the prevention of tax avoidance or
evasion with respect to taxes on such interest or royalty
income derived by an enterprise of the Netherlands from the
United States will be agreed upon between both States and
will be laid down in a
~~parate
Protocol to this Convention.
Article 25
~~THODS
OF ELIMINATION OF
DOUBLE TAXATION
1.
Notwithstanding the provisions of paragraph 2 of
Article 24
(Basis
0:
':'.J.X.3.::':::::,
:he Netherlands may include
in the basis of taxation the items of income which under
paragraph 4 of Article 19 (Pensions, Annuities, Alimony) and
Article 20 (Government
S~rvice)
are taxable only in the
United States.
2.
d~riv~s
Where a
resid~nt
or national of the Netherlands
items of income which according to Article 6 (Income
from Real Property), Article 7 (Business Profits), paragraph
5 of Article 10
(Divid~nds\,
(I!'1terestl., paragraph 3 of
paragraph 3 of Article 12
A~tlcle
paragraphs 1 and 3 of Artlcle 14
(Ir:.dependent Persor.al
S""':-'J~C~SI
13 (Royalties),
(Capital Gains), Article 15
lnsofar as such income is
subject to United States tax, paragraph 1 of Article 16
IDependent Personal ServlceS), paragraph 4 of Article 19
(Pensions, Annuities. Alimony), Article 2C
(Government
- 53-
Service), and paragraph 2 of Article 23
(Other Income) of
this Convention are taxable in the United States and are
included in the basis of the taxation, the Netherlands shall
exempt such items by allowing a reduction of its tax. This
reduction shall be computed in conformity with the
provisions of Netherlands law for the avoidance of double
taxation.
For that purpose the said items of income shall
be deemed to be included In the total amount of the items of
income which are exempt :rom Netherlands tax under those
provisions.
3.
Further,
the
Net~e~~ands
shall allow a deduction
from the Netherlands tax for the items of income which
according to paragraph 2
0:
Article 10 (Dividends), Article
17 (Directors' Fees), and Article 18 (Artistes and Athletes)
of the Convention may be taxed in the United States to the
extent that these items are included in the basis of the
taxation.
The amount of this deduction shall be equal to
a)
in the case of dividends which may be taxed in
the United States according to paragraph 2,
subparagraph (a) of Artlcle 10 (Dividends), 5 percent
of such dividends;
b)
in the case
0:
dividends which may be taxed ln
the C.. ited States accordlng to paragraph 2,
subparagraph (bl of Article 10 (Dividends), 15 percent
0:
such dividends;
-54-
c)
in the case of other dividends, which may be
taxed in the United States according to paragraph 2(i)
of Article 10
(Divid~~ds),
15 percent of such
dividends; and,
d)
J: other items of income mentioned
~as~
in the
in this paragraph,
the tdX paid in the United States on
such other items of income,
cas~
bu: shall in no
which would
b~
~xc~~d
allowed ::
the amount of the reduction
~h~
:':~ms
of income so included
were the sole items of income which are exempt from
Netherlands tax
und~r
the provisions of Netherlands law for
the avoidance of double taxation.
4.
In accordance w:'th the provisions and subject to
the limitations of the law of the United States
(as it may
be amended from time to time without changing the general
principle hereof),
the United States shall allow to a
resident or national of the United States as a credit
against the United States tax on income:
a)
the
appropria:~
a~ount
of income tax paid or
accrued to the Ne:her:ands by or on behalf of such
r~s:'dent
or
~etherlands
Art_cle 14
19
nat:o~ct:.
~x~ep:
the income tax paid to the
in the ~ases re~erred to in paragraph 9 of
(Capital GalnS) or in paragraph 2 of Article
(Pensions,
A::~'-..::.::.es.
A:'i:,:".ony); and
-55-
bl
in the case of a United States company owning
at least 10 percent of the voting stock of a company
which is a resident of the Netherlands and from which
the United States company receives dividends,
the
appropriate anount of income tax paid or accrued to the
Netherlands by or on behalf of the distributing company
with respect to the profits out of which the dividends
are paid.
Such appropriate amount shall be based upon the amount of
income tax paid or accrued to the Netherlands, but the
credit shall not exceed the limitations (for the purpose of
limiting the credit to the United States tax on income from
sources
ou~side
the United States) provided by United States
law for the taxable year.
For the purposes of this paragraph, the taxes referred to in
paragraphs l:a) and 2 of Article 2 (Taxes Covered) shall be
considered income taxes.
5.
Notwithstanding the provisicns of paragraph 4 of
this Ar:icle,
tLle
United States shall allow to a resident or
a national of the United States, as a credit against the
United States tax on income, the appropriate amount of
profit share paid by or
o~ beha:~
of such resident or
national to the Netherlands. The appropriate amount shall be
the product of
and
(li j
(i)
the credltable profit share income base
the maximum sta':l!,:ory U;'.ited States ':ax rate
-56-
:Q such resident or national for such taxable
~~~~icab~o
i"car.
For purposes of determining the appropriate amount,
the following terms shall have the
followi~g
meanings:
a) The creditable profit share income base is the
excess of the
(~xcluding
ir.co~e
subject to the company income tax
the income not subject to the profit share)
that is derived from sources within the Netherlands
,b~fore
deduct:8~
c~editable
2:
compar.y
:~~
P~Q::t
share due) over the
tax base.
:~~8me
b) The creditable company income (ax base is the
e::ective company
:r.~cme
tax rate divided by the
maximum statutory United States tax rate applicable to
such resident or national for such taxable year,
multiplied by the :r.come subject to the company income
tax \excluding the lncome r.ot subject to the profit
share)
that is derived from sources within the
Netherlands
~be:ore
deduction of the profit share due)
c) The effective company income tax rate is the
~o~pany
income tax pald on
company lncome tax
t~e
exclud:~3
income subject to the
the income not subject to
the profit share) d!vided by the income subject to the
company income tax,
ex~:~j:~J
the income not subject to
the profit share and before deduction of the profit
s~are
due"
-57-
~he appropriate amount is also subject to anv other
limitations imposed by the law of the Uni~2d States, as it
may be amended from time to time, which apply to taxes
creditable under sections 901 or 903 of the Internal Revenue
Code for persons claiming benefits under this Convention. In
applying such limitations to the company tax, the creditable
company income tax base (as defined in (b), above) must be
used for purposes of those limitations. Any profit share
paid in excess of the appropriate amount only may be used as
a
credi~
in another :axab:e year, and only against United
States tax on the creditable profit share income base (as
defined in (a), above). If a credit is claimed in respect of
the profit share, the taxpayer may not claim a deduction for
United States taxable income purposes with respect to any
foreign taxes for which a credit against United States tax
on income may be claimed under sections 901 or 903 of the
Internal Revenue Code, or profit share, paid or accrued in
such year.
No credit shall be allowed under paragraph 4 of
this Article for any Netherlands tax for which a credit is
claimed under the provisions of this paragraph.
6.
Where a United States citizen is a resident of the
Netherlands:
a) with respect to items of
_n~ome
not exempt from
Netherlands tax under paragraph 2, nor dealt with in
paragraph 7 of this Article, that under the provisions
-58-
of this Convention are exempt from United States tax or
that are subject to a reduced rate
when derived by a resident of the
0:
UnitAd States tax
Neth~rlands
who is
not a United States citizen, the Netherlands shall
allow as a credit dgainst Netherlands tax, subject to
the provisions of Netherlands tax law regarding credit
for foreign tax, only the tax paid, if any,
that the
United States may impose under the provisions of this
Convention, other :han taxes that may be imposed solely
by reason of citi=enship under paragraph 1 of Article
24 (Basis of Taxation);
b)
for purposes of computing United States tax
under subparagraph :a', the United States shall allow
as a credit against United States tax the income tax
paid to the Netherlands after the credit referred to in
subparagraph (a); the credit so allowed shall not
reduce the portion of the United States tax that is
creditable against the Netherlands tax in accordance
with subparagraph (al; and
cl
for the exclusive purpose of relieving double
taxation in the United States under subparagraph (b)
items of income
be
de~.ned
re~erred
~o
in subparagraph (a) shall
to arise in the Netherlands to the extent
necessary to avoid double taxation of such income under
subparagraph (b).
- 59-
7.
Where a resident of one of the States derives gains
or a remuneration or a lump sum which may be taxed in the
other State in accordance with paragraph 9 of Article 14
(Capital Gains), or with paragraph 2 of Article 19
(Pensions, Annuities, Alimony),
a deduction from its tax on such
that other State shall allow
~ains,
remu~eration
or lump
sum. The amount of this deduction shall be equal to the tax
levied in the first-mentioned State on the said gains,
remuneration or lump sum, but shall In no case exceed that
part of the income tax, as computed before the deduction is
given, which is attributable to the said gains,
remuneration
or lump sum. For the exclusive purpose of relieving double
taxation in the United
S~ates
under this paragraph,
items of
income referred to in this paragraph shall be deemed to
arise in the Netherlands to the extent necessary to avoid
double taxation of such income under this paragraph.
CHAPTER V
SPECIA~
PROVISIONS
Article 26
LIMITATION ON BENEFITS
1.
A person that
1S
a reslder.t of one of the States
and derives income from the other State shall be entitled,
in that other State,
to all
only if such person is:
t~e
benefits of this Convention
-60-
?' an individual;
b) a State, or a political subdivision or local
authority thereof;
c) a company meeting any of the following tests:
i) the principal class of its shares is listed
~ecognized
on a
stock exchange located in
either of the States and is substantially
and
r€~u~arly
traded on one or more
recognized stock exchanges;
ii) A) more than 50 percent of the aggregate
vote and value of all of its shares is
owned, directly or indirectly, by five or
fewer companies which are resident of
ei~~e~
S:a:e, the principal classes of the
shares of which are listed and traded as
described in subparagraph (c) (i), and
B)
the company is not a conduit company, as
defined in subparagraph 8(m); or
iii)
in the case of a company resident in the
Netherlands,
A) at least 30 percent of the aggregate
vote
a~d
value of all of its shares is
owned, directly or indirectly, by five or
fewer companies resident in the
~e:he~:ar.js,
:~e
principa: classes of the
- 61-
shares of which are listed a-1 tradec as
described in subparagraph ic) (i) ;
B) at least 70 percent of the aggregate
vote and value of all of its shares is
owned, directly or indirectly, by five or
fewer companies that are residents of the
United States or of member states of the
European Communities, the principal classeE
of
s~ar~s
of which are substantially and
regular:y traded on one or more recognized
stock exchanges; and
C) the company is not a conduit company, as
defined in subparagraph a(m); or
iv)
in the case of a conduit company (as
defined in paragraph arm))
that satisfies
the requirements of subparagraph (c) (ii) (A)
or (c) (iii) (A) and (8), such company
satisfies the conduit base reduction test
set forth in paragraph 5 (d) .
d) a person:
i)
more than 50 percent of the beneficial
interest in WhlCh (or,
company,
~or~
in the case of a
than 50 percent of the
ag3regate vote and value of all of its
shares, and more than 50 percent of the
-62-
shares of any
shares")
"disproportion~te
class of
is owned, directly or inditectly,
by qualified persons; and
ii) which meets the base reduction test
described in paragraph Si or
e) a not-for-profit orqanization that, by virtue
of that status, is generally exempt from income
c-~-~
-._.
--
_&
-----_ ... _-,
-~C:~O~~O
that !1".or-=
than half of the beneficiaries, members, or
parti~:pants,
if
a~y,
in such organization are
qualified persons.
2.
a)
A person resident in one of the States shall
also be entitled to the benefits of this Convention
with respect to income derived from the other State if
such person is engaged in the active conduct of a trade
or business in the first-mentioned State (other than
the
b~siness
of maklng or managing investments, unless
these activities are banking or insurance activities
carried on by a bank or insurance company), and
i)
the income derived in the other State is
derived in connection with that trade or
busir.ess in the
~irst-mentioned
State and
the trade or business vf the income
recipie~t
is substantial in relation to the
income produclng activity. or
-63-
ii)
the income derived in the other State is
incidental to that trade or business in the
first-mentioned State.-
b)
Income is derived in connection with a trade or
business if the income-producing activity in the other
wh~ch
State is a line of business
forms a part of or is
complementary to the trade or business conducted in the
first-mentioned
Stat~
by
th~
income recioient.
c) Whether the trade or business
0:
the income
recipient is substantial will generally be determined
by reference to its proportionate share of the trade or
business in the other State, the nature of the
activities performed and the relative contributions
made to the conduct of the trade or business in both
States. In any case, however, the trade or business of
the income recipient will be deemed to be substantial
if,
for the preceding taxable year, the average of the
ratios for the following three factors exceeds 10
percent
(Ol
in the case of a person electing to apply
subparagraph (h), 60 percent) and each of the ratios
exceeds 7.5 percent (or in the case of a person
electing to apply subparagraph (h), 50 percent),
provided that for any separate factor that does not
meet the 7.5 percent test
{or in the case of a person
electing to apply subparagraph (h)
I
the 50 percent
-64-
test)
~n
the first preceding taxable year the average
of the ratios for that factor in the three preceding
taxable years may be substituted:
i) the ratio of the value of assets used or
held
fo~
trade or
use in the active conduct of the
busine~s
by the income recipient
in the first-mentioned State (without
regard to any assets attributed from a
third state under subparagraph (h), except
in the case of a person electing to apply
subparagraph (hl) to all, or, as the case
may be, the proportionate share of the
value of such assets so used or held for
use by the trade or business producing the
income 1n the other State;
ii) the rat10 of gross income derived from the
active conduct of the trade or business by
the income recipient in the first-mentioned
State (without regard to any gross income
attributed from a third state under
subparagraph (hl, except in the case of a
person
elect1~g
to apply
s~bparagraph
(h))
to all, or, as the case may be, tne
proportionate share of the gross income so
- 65-
derived by the trade or business producing
the income in the other State; and
iii) the ratio of the payroll expense of the
trade or business for services performed
wit~:;.
~~e
fi~st-mentioned
State (without
regard to any services attributed from a
third state under subparagraph (h), except
in
th~
cas~
of a
subparagraph (h))
may be.
p~rson
electing to apply
to all, or, as the case
the proportionate share of the
payroll expense of the trade or business
for services performed in the other State.
d)
Income derived from a State is incidental to a
trade or business conducted in the other State if the
income is not described in subparagraph (b) and the
production of such lncome facilitates the conduct of
the trade or business in the other State (for example.
the investment of the working capital of such trade or
business) _ In the case of a person electing to apply
subparagraph (h).
the income that is considered
incidental to the trade or business shall not be
greater than four t:mes the amount of income that would
haVe been considered incidental to the trade or
business actually conducted in the Netherlands.
-66-
e) A person that is a resident of
c-~
States is considered to be engaged in che
~f
th~
ac~ive
conduct of a trade or business in that State (and is
considered to carryon all, or, as the case may be,
proportionate
shn~~
suc~
or businesses)
the
if
;:; .... .:~-. pcr.son:
i)
ii)
is directly so engaged;
is n pn::-::;er i:; a partnersr.ip that is so
engaged;
iii)
is a person in which a controlling
beneficial interest is held by a single
person which is engaged in the active
conduct of a trade or business in that
State;
iv)
is a person in which a controlling
beneficial interest is held by a group of
five or fewer persons each member of which
is engaged in activity in that State which
1S a component part of or directly related
to the trade or business in that State;
v)
is a corr.pany that is a member of a group of
cor..t:a:;:":s
:'~.clt
~.):'-:;'.
or could form a
consol1dated group for tax purposes
aC:::::l::-j::;j :0 tr'. ..:: :aw of that State {as
appl:ed ~:thou: regard to the residence of
-67-
such companies), and the
g~oup
is engaged
in the active conduct of a trade or
business in that State;
vi) owns, either alone or as a member of a
group of
fiv~
or
f~wer
qualified persons,
persons that are
residents of a member
state of the European Communities, or
res:d~~:s
of an identified scate. a
controlling beneficial interest in a person
that is engaged in the active conduct of a
trade or business in the State in which
such owner is resident; or
vii)
is, together with another person that is so
engaged. under the common control of a
person (or a group of five or fewer
persons) which (or,
in the case of a group,
each member of which)
is a qualified
person. a resident of a member state of the
European
Co~~unities
or a resident of an
ident~fied state.
For purposes of subparagraphs (el
"ldentlfled State" includes any
(vi) anci (e)
thl~d
country,
(vii), an
identified by
agreement of the competent authorities. which has effective
proviSIons for the exchange of information wlth the State in
-68whi-~
the
p~=son
being tested under this paragraph is a
12sident.
f)
For purposes of subparagraph (e), a person (or
group) shall be deemed to own a "controlling beneficial
anoth~r
interest" in
person if it holds directly or
indirectly a beneficial interest which represents more
than SO percent of the value and voting power in such
~:~er
person, prov:ded that:
i) an
inte~es:
consisting of 50 percent or
less of the value and voting power of any
third
pe~son
shall not be considered for
purposes of determining the percentage of
indi~ect
owr.ersr.:p held in such other
person; and
ii) no person shall be considered to be part of
a group owning a controlling beneficial
interest in an entity unless such person
holds directly a beneficial interest which
represents at least 10 percent of the value
and votir.g power in such entity.
g)
For purposes of subparagraph (e)
I
a person (or
9 rOL;p \ sha 11 be de-::;·.;j :,J :-.a .;.~ "common cont rol" of two
persons if it holds a co~trolling beneficial interest
l~
each such
pe~sc~.
-69-
h)
~he
For purposes of applying
paragraph, where a person that
i~
rUles of this
a. resident of the
Netherlands is engaged in the active conduct of a trade
or business in the Netherlands (or considered to be so
~~gaged
under the
rul~s
of
sub~~ragraph
(e)). and
activity that is a component part of, or directly
related to that trade or business, consistent with the
rules of
subpara~r3p~
(e),
:s also conducted in other
member states of the european Communities,
that person
may elect to treat all, or. as the case may be.
the
proportionate share of such activity as if it were
conducted solely in the Netherlands, provided that each
of the following three ratios exceeds 15 percent:
i) the ratio of the value of assets used or
held for use in the active conduct of the
trade or business within the Netherlands
(without regard to any assets attributed
from a third state under this subparagraph)
to all. or, as the case may be. the
proport:onate
s~are
of the value of such
assets so used or held for use within all
such
~i)
~~~b€r
states;
the ratio of gross incume derived from the
a~t:ve
~~~juct
withl~
the
0:
the trade or business
~et~e~lands
(without regard to
-70-
any gross income attributed from a third
state under this subparagraph)
to all, or,
as the case may be, the proportionate share
of the gross income so derived within all
such member states; and
iii) the ratio of the payroll expense of the
trade or business for services performed
withir. the Netherlands (without regard to
any seLV1ces attributed from a third state
under
t~:s
subparagraph)
case xay be,
to all, or, as the
the proportionate share of the
payroll expense of the trade or business
for services performed within all such
membeL states.
3.
A person that 1S a Lesident
o~
one of the States
shall also be entitled to all the benefits of this
Convention if that person functions as a headquarter company
for a multinational corporate group. A person shall be
considered a headquarter company for this purpose only if:
a)
overall
it provides a substantial portion of the
supervislo~ a~d a~.:r.istration
which may include. tu:
car.~~t
of the group,
be principally, group
financing;
bl
the cOLpoLa:e gLOUP consists of corporations
resldent in, and engaged ln an active business in, at
-71-
least five countries, and the business activities
carried on in each of the five countries
(or five
groupings of countries) generate at least 10 percent of
the gross income of the group;
c)
the business activities carried on in anyone
country other than the State of residence of the
headquarter company generate less than 50 percent of
the gross income
d)
de~:ved
e)
0:
the group;
no more than 25 percent of its gross income is
from the other State;
it has, and exercises, independent
discretionary authority to carry out the functions
referred to in subparagraph ,a);
f)
it is subject to the same income taxation rules
in its country of residence as persons described in
2; and
pa~agraph
g)
the income derived in the other State either is
derived in
connec~ion
active business
with, or is incidental to,
refer~ed
the
to 1n subparagraph (b).
If the gross income reqUirements of subparagraphs (b),
or (d)
of this paragraph are not fulfilled,
(c)
they will be
deemed to be fulfilled :f the requlred ratios are met when
averaging the gross income of the preceding four years.
4.
a)
A company reSident in the Netherlands shall
also be entitled to :he benefits of Article 10
-72(Divid~~ds),
(Royalties)
11 (Branch Tax), 12 (Interest), or 13
if:
i) more than 30 percent of the aggregate vote
and value of all of its shares
(and more
than 3J percent of the shares of any
"disproportionate class of shares")
j:~ectly
ownej,
is
or indirectly, by qualified
persons resident in the Netherlands;
ii) more
70 percent of all such shares is
:ha~
owned, directly or indirectly, by qualified
persons and persons that are residents of
member states of the European Communities;
and
iii) such
ca~pany ~eetsthe
base reduction test
descrlbed in paragraph 5.
b: In
determini~g
subparagraph (a)
(li),
whether, pursuant to
a
co~pany's
shares are owned by
resldents of merrber states of the European Communities,
only those shares shall be considered which are held by
persons that are resldents of states with a
comprehensive
inco~e
States, as long as
tax Convention with the United
tl~e
pd~~lcular
lncome subject to the branch tax,
dividend, profit or
interest, or royalty
payment in respect of which treaty benefits are claimed
wc~:j be subJect
to a rate of tax under that Convention
- 73-
that is no less favorable than the rate of tax
applicable to such company under
(Dividends), 11 (Branch Tax), 12
Arti~les
10
(Interest) or 13
(Royalties) of this Convention.
S.
a)
A perso:---.. :~c;-2:'':;
t:---,-2
base reduct ~on test
described in this paragraph if:
il
less than 50 percent of such person's gross
income is used, directly or indirectly,
make deductible payments in
~he
to
current
taxable year to persons that are not
qualified persons; or
iil
in the case of a person resident in the
Netherlands,
Al
less
~~an
70 percent of such gross
income is used, directly or indirectly,
to make deductible payments to persons
that are not qualified persons; and
Bl
less than 30 percent of such gross
income
1S
used, directly or indirectly,
to make deductible payments to persons
that are neither qualified persons nor
res~jer.:s
o~
member states of the
European Communities.
b)
~ncome"
For pu:-poses of th:s paragraph,
means gross
:~cc~e
for
the term "gross
the first taxable year
-74-
preceding the current taxable year; provided that the
amount of gross income for the fist taxable year
preceding the current taxable year will be deemed to be
no less than the average of the annual amounts of gross
:ncome for the
fou~
taxable
ye~rs
preceding the current
taxable year.
0:
c) For purposes
"j,,?jt: ro :
:ble
:::Jya~t':"es,
pCl:r.-::·~-:="
but jo-:::-;:;
this paragraph, the term
:~":':-:~"?s
::,,)~
.:..::~~....:.je
pClymer.t~
payme:::.:3
~'"'".
_~:
:nt"~~~st
o~
arm's
length for the purchase or use of or the right to use
:~~3:t~e
prope~:y
~~
:~~
~~ji::ary
cours~
=~
business or
remuneration at arm's length for services performed in
~~c
country of
payments.
res:jer.~e
Types
0:
0:
the person making such
payments may be added to or
eliminated from the exceptions mentioned in the
preceding definition of "deductible payments" by mutual
Clgreement of the competent authorities,
d)
For purposes of paragraph l(c), the conduit
base reduction test means the base reduction test
described in th:s
··j~duct.ible
paragrap~.
except that the term
pap.er.ts" for this purpose means only those
pa'r"'?nts described
:~'.
s~tp,lrcqraph
(c~:
i) that. a::e r.',dd.;: to an associated enterprise
,as des=r:bed ::: Article 9 (Associated
~r.:~rpr.:..s~s
.
~x=~Pt
that whether two
-75-
enterprises
a~e
associated will be
determined for this purpose without regard
to the residence of either enterprise; and
ii) that are subject to an aggregate rate of
tax (including withholding tax)
in the
hands of the rec1pient that 1S less than 50
percent of the rate that would be
appl:~1bl~
had the payment been received ln
the State of residence of the payer, and
subject to the normal taxing regime in that
State.
6.
A person,
resident of one of the States, which
derives from the other State income mentioned in Article 8
(Shipping and Air Transport) and which is not entitled to
the benefits of this Convention because of the foregoing
paragraphs, shall nevertheless be entitlej to the benefits
of this Convention with respect to such lncome if:
a) more than 50 percent of lhe beneficial interest
in such person (or 1n the case of a company. more than
SO percent of 'the vaiue of the stock of such company)
1S owned, directly or indirectly, by qualified persons
cr individuals
b)
company
w~o
are res:den:s of a
in the case of a
1S
co~pany,
~hird
state; or
the stock of such
primar:ly 3nd regularly traded on an
established secur1ties
~a~~et
in a third state,
-76prov~~ed
that such third state grants an exemption under
si~ilar :erms tor profits as mentioned in Article 8 of this
Convention to citizens and corporations of the other State
either under its national law or in cornmon agreement with
that oth~r State or und~r a Conv~~tion between that third
state and the other State.
7.
A person resident of one of the States, who is not
entitled to benefits
0:
:h:s Ccr.vention because of the
foregolng paragraphs. may.
of this Convention if
tr.~
nevertheless,
~c~petent
be granted benefits
authority of the State
in which the income in question arises so determines.
making such determinati8n,
In
the competent authority shall
take into account as its guideline whether the
establishment, acquisit:8n. or
~aintenance
of such person or
the conduct of its operatlons has or had as one of its
principal purposes the obtaining of benefits under this
Conventlon.
The competent authorlty of the State in which
the income arises will consult with the competent authority
of the other
Stat~
be:~r~
Convention under thlS
8.
deny:n3 the benefits of the
~ara3ra~~.
The followlng provlslor:s apply for purposes of this
a) The term
~prln~:pal
generally the ordlr.ary or
provlded that su~~ c~ass
class of shares" is
~o~mon
0:
shares of the company,
shares represents the
-77-
majority of the voting power and val\lE:.. .::>f the LJmpany.
When no single class of shares represents the majority
of the voting power and value of the company,
"principal class
~~
s~ares"
the
is generally those classes
the voting power and value of the company.
In
determining voting power, any shares or class of shares
that are authorized but not issued shall not be counted
and in mutual
authorities
apprcp::a~e
restrictions or
shares.
any
between the competent
ag~e~~~nt
weight shall be given to any
li~~~ations
on voting rights of issued
The "principal class of shares" also includes
"disproportlo~3:e
NotWithstanding the
class
shares".
o~
p~ecedlng
rules,
the "principal
class of shares" may be identified by mutual agreement
between the competent authorities of the States.
b)
The term "shares" shall include depository
receipts thereof or trust cer:i:icates thereof.
c) The term "d'..sproport:.or.ate class of shares"
means any class of shares of a company resident in one
of the States
:~a:
disproportionately
dividends,
~3rnings
assets or
e~:~~!~s
~lgh~r
:~~
PdFtlClpatlon,
redempt ler. pay:;,ents
ger.e~at~d
:~
actlvltl~S
:~e
0:
shareholder to
~:~e~
o~
through
otherwise,
in the
State by particular
the company-
-78-
d) The term "recognized stock
i) any stock exchange
exc~·. .:lnge"
regi5~ered
me.:.ns:
with the
Securities and Exchange Commission as a
national securities exchange for purposes
of the
ii)
iii)
Se~urlties
Exchange Act of 1934;
the Amsterdam Stock Exchange;
the NASDAQ System owned by the National
Assoc:'a:::::1 of Securities Dealers.
Inc. or
the parallel market of the Amsterdam Stock
Exchange; and
iv) any other stock exchange agreed upon by the
competent authorities of both States,
includlng,
for thlS purpose, any stock
exchanges listed in an exchange of notes
signed at the later of the dates on which
the respective governments have notified
edch other ln wrlting that the formalities
constitutionally required for the entry
into
~or~e
Artlcle 37
o~
the Convention as meant in
lEntry lnto Force)
in their
respect:'ve States have been complied with.
Ho ..... ·::ve:-, w.:.th respect to
c~.:;se:y
held companies,
the term
" :-ecogr.l ::ed stock excr.a::3e" s ha:: not lnc l'lde the stock
exc~a~~es
~er.tioned
~r.de:-
s~bpa:-~graph
(iii)
I
or if so
-79i~~icated
ill mutual agreement between the competent
authorities, under subparagraph (iv).
e) The term "closely held company" means a company
of which 50% or more of the principal class of shares
is owned by persons, other than qualified persons or
residents of a member state of the European
Communities, each of whom beneficially owns, directly
or indirectly, alone or together with related persons
more than 5% of such shares for more than 30 days
during a taxable year.
f)
The shares in a class of shares are considered
to be substa ntially and regularly traded on one or
more recognized stock exchanges in a taxable year if:
il
trades in such class are effected on one or
more of such stock exchanges other than in
de minimis quantities during every month;
and
iil
the aggregate number of shares of that
class traded on such stock exchange or
exchanges
IS
durI~g
at least
of shares
~
the prevIous taxable year
percent of the average number
outs:ar:j~ng
that taxable year.
~
n t'1at class during
-80-
For
:~rposes
'o~ducted
~f
th~s
subpara~raph,
any pattern of trades
in o. jer to meet the "substantial and regular
trading" tests will be disregarded.
g) The term "qualified person" means:
i) a person that is entitled to benefits of
this Convention pursuant to the provisions
of paragraph 1; and
ii) a citizen of the United States.
h) The term "member state of the European
Communities" means, unless the context requires
otherwise:
i)
the Netherlands; and
ii) any other member state of the European
Communities with, which both States have in
effect a comprehensive income tax
Convention.
i) The term "resident of a member state of the
European Communities" means a person that would be
considered a resident of any such member state under
the principles of Article 4 :Resident) and would be
entitled to the bene~its o~ this Convention under the
principles of para9~3p~~ :, appl ied as if such member
state were the Netherlands, and that is otherwise
entitled to the be~e~lts o~ the Convention between that
person's state of
~~sid~~c~
3nd the United States.
- 81-
j) The not-for-profit organizations referred to in
subparagraph 1 (e)
of this Article include, but are not
limited to, pension funds, pension trusts, private
foundations,
trade unions, trade associations, and
similar organizations. provided, however,
events. a pens10n fund,
that in all
pension trust, or similar
entity organized tor purposes of providing retirement,
disability, or
o~~~r
employment benefits that is
organized under the laws of a State shall be entitled
to the benefits of the Convention if the organization
sponsoring such fund.
trust, or entity is entitled to
the benefits of the Convention under this Article.
k) The reference in subparagraph (cl (ii) and
clauses (A) and (8) oE subparagraph (c) (iii) of
paragraph 1 to shares that are
o'~ed,
directly or
indirectly, shall mean that all companies in the chain
of ownership that are used to satisfy the ownerShip
requirements of the respective clause or subparagraph,
must meet the res1dence requ1rements that dre described
in such clause or subparagraph.
1)
For the purpose of paragraphs 2,
3 and 5, the
competent authorities may by mutual agreement,
nOLwithstanding the provisions of these paragraphs,
determine
b~siness
or
transit:o~
operations,
new1y·estab:~s~ej
rules for newly-established
newly-established corporate groups
~eadquarter
c.mpa~ies.
-82-
m)
(1)
For purposes of subl?aragraph ':') (c) (iL :B) and
(c) (iii)
(e),
the term "conduit cumpany"
company that makes payments of interest,
m~ans
a
royalties and
any other payments included in the definition of
d<:ductible paym<:nts
'as d'?fin<:d in subpa!"'agraph (5) (c})
in a taxable year in an amount equal to or greater than
90 percent of its aggregate receipts of such items
during the sam<: taxable year.
Notwiths~anding
the
pr<:vious sentence, a bank or insurance company shall
not be considered to be a conduit company if it
<:ngaged in the
ac::v~
business and (ii)
(i)
1S
conduct of a banking or insurance
is managed and controlled by
associated enterpris<:s {within the meaning of Article 9
(Associated Enterprises). <:xcept that whether two
enterprises are associated will be determined for this
purpose without regard to the residence of either
enterprise)
that ar<: qualified persons.
Artlcle 27
OFFSHORE
1.
The provisions of this Article shall apply
~o:w::hstanding
However,
ACTIV~TIES
any
o:h~~
pr8v:s:on cf this Convention.
this Article shall not apply where offshore
a=::vitles of a person cor.stitu:e for that person a
permanent
establ1s~~ent
under th<: provlslons of Article 5
- 83(~ermanent
Establishment) or a fixed base
provisions of Article 15
2.
u~der
the
(Independent Personal Services)
In this Article the term "offshore activities"
means activities which are carried on offshore in connection
~xploitation
with the exploration or
of the sea bed and its
sub-sail and their natural resources, situated in one of the
States.
3.
An enterprise of one o~
paragraph 4,
the States WhiCh
be deemed to be carrying on,
bUSi;'~SS
those activities,
:;.
t~at
other
c~rries
on
in respect of
Sta:~
through a
permanent establishment situated therein, unless the
offshore activities in questicn are carried on in the other
State for a period
periods not exceeding in the aggregate
o~
y~a~.
30 days in a calendar
For the purposes of this paragraph:
a)
where an enterprise carrying on offshore
activities in the
~ther
State is associated with
another enterpr:se a;.j :ha: ether enterprise continues,
as part of the
sa~e
proJ~~t,
activities tha:
rt~0
or
first-mentioned
e;.:~rpr~se,
we~e
the same offshore
be:ng carried on by the
and the
~fore-mentioned
activities carried on by both enterprises - when added
together - exceed a
oe~~cj
of 30 days,
2e
=ee~ej
to be
e;.:erp~ise
shal~
then each
carrj~ng
on its
-84-
activities for a period exceedir.g 30 days in a calendar
year;
b) an enterprise shall be regarded as associated
with another enterprise if one holds directly or
indirectly at
leas~
one third vi the capital of the
ocher enterprise or if a
~erson
holds directly or
indirectly ac least one third of the capital of both
enterprises.
4.
However,
for the purposes of paragraph 3, the term
"offshore activities" shall be deemed not to include:
a) one or any combination of the activities
mentioned in paragraph 4 of Article 5 (Permanent
Es tabl ishment) ;
b)
towing or anchor handling by ships primarily
designed for that purpose and any other activities
performed by such ships; or
c)
the transport of supplies or personnel by ships
or aircraft in international traffic.
S.
A resident of one of the States who carries on
offshore activities 1n the other Scate, which consist of
professional services or other activities of an independent
character, shall be dee:;.ed to be performing those activities
from a fixed base in the other State if the offshore
activicies in question last for a continuous period of 30
days or more.
-85-
6.
Salaries, wages and other similar
remun~ration
derived by a resident of one of the States in lesoect of an
employment connected with offshore activities carried on
through a permanent establishment in the other State may,
the
~xtent
c_~~~
employm~nt
State, be taxed
7.
b~~~
that the
i~
to
is exercised offshore in that
other State.
:ha~
Where documentary eVldence is produced that tax has
oaid in the
Unit~j
S:nt~s
o~
the items of income that
may be taxed in the United States accord:ng to Article 7
(Business Profits) or Article 15 (Independent Personal
Se~vices)
in connection with respectively paragraph 3 or
paragraph 5 of this Article, and according to paragraph 6 of
t~is
Article, the
Nethe~~ands
shall allow a reduction of its
tax, which shall be computed in conformity with the rules
laid down in paragraph 2 of Article 25 (Methods of
Elimination of Double Taxation) .
Article 28
NCN-DISCR!~INATION
1.
Nationals of one of the States shall not be
subJected in the other State to any taxation or any require~e~:
connected therewlt~, wh~c~
tha~
the taxation and connected requirements tu which
lS
othe~
or more burdensome
nat:onals of that other State in the same circumstances are
or ~ay be subjected.
:~e
provisions
0:
7h:s provision shall.
Ar::=:~
:
'Go_n
.• eral-
c_~cpe),
notwithstanding
also apply to
- 86-
persons who are not residents of one or both of the States.
However,
for the purposes of United States tax, a United
States national who is not a resident of the United States
and a Netherlands national who is not a resident of the
i~~
United States are not
2.
the same circumstances.
The taxation on a permanent establishment which an
enterprise of one of the States has in the other State shall
~ot
be less
favourab~y
taxatlon levied on
:~vied
in that other State than the
ente~prises
on the same activitles.
of that
othe~
State carrying
This provision shall not be
construed as obliging or.e of the States to grant to
residents of the other State any personal allowances,
reliefs, and reductions for taxation purposes on account of
civil status or family responsibilities which it grants to
its own residents.
3.
whe~e
Except
the provisions of paragraph 1 of
Er.te~prlses),
Artlcle 9 (Associated
12
(Interest),
apply,
Sta te shall,
s~me
~
~r.i=r.
royaltleS and other disbursements paid by a
o~
~he
S:ates to a
firs:-~~~::o~~j
conditions as
S~terpr:ses
1S
(Royalties)
re~ident
of the other
f or the pu rposes of determinlng the taxable
profits of the
the
or paragraph 4 of Article 13
i;.terest,
resident of one
paragraph 5 of Article
whol!y or
s~
1:
be deductible under
tr.ey had been paid to a resident
s~e
~ar::y
~~sident,
of :r.e
owned or
S~ates,
the capital of
cc~trolied,
directly or
-87-
inriirectly, by one or more residents of
~hall
not be subjected in the
t3X3:~=~
~r
any
requi~e~ent
r~~
other
first-me._~ioned
==~ne=ted
~tate,
State to any
therewith which is
other or more burdensome than the taxation and connected
requirements to which o:her similar enterprises of the
first-mentioned State are or may be subjected.
5.
Contributions pa:d by, or on behalf of, an
:..r:d:..v:d".lal who exerC:'S-::5 ct::
e~p~oj'ment
of one of the States cr
is
State, to a pension
w~o
p~a~
1n the otr.er State w:
~:.
and
te~porarily
W
..
.., ,-,
~
is a resident
9resent in that
:s recognized for tax purposes
t~at
d·::tenr.ining the :r.come derived
:.~
from his employment, be treated in the same way for tax
~~rposes
in the
first·~~~::.=ned
State as a contribution paid
to a pension plan that !.s recognlzed for tax purposes in
that f:rst-mentioned State. prov:ded that
a) such ind1v1dual 1S not a national of the
b) such
~:..rst·mentic;.o:.::j
~resent
in that State;
State agrees that
0.
~an
t·:-:-:::'·~
S:.t:-: :r
t:-.e ,::::t.-0'=:'o::::
~.~e~sl=n
was contributlng to such
lnd:vld~al
t~e
::e became temporarily
a~d
d .• ::·.
.:.:~:yof
the first-mentioned
pension plan corresponds to a
rec=~~:.~o_d
-
~~~
---
-
~~x
~O
p urposes b y t h at S tate.
- 88-
6.
~othing
in this Article shall be construed to
prevent or limit the application by either State of its tax
on branch profits described in Article 11 (Branch Tax) .
7.
The provisions of this Article shall,
notwithstanding the provisions of Article 2 (Taxes Covered),
apply to taxes of every kind and description imposed by one
of the States or a political subdivision or local authority
thereof.
Article 29
MUTUAL AGREEMENT PROCEDURE
1.
Where a person considers that the actions of one or
both of the States result or will result for him in taxation
not in accordance with the provisions of thlS Convention, he
may,
irrespective of the remedies provided by the domestic
law of those States, present his case to the competent
authority of the State of which he is a resident or
nati0nal.
2.
The competent authority
obJection appears to It to
b~
s~all
Jus~lfled
endeavour,
and if it is not
itself able to arrive at a satls:actory solutlOn,
the case by mutual
agre~~~~t
~h~
avoldaGc~
which is not in
th~
Conv~~tlon.
agreem~nt
reached shall be
to resolve
wlth the competent authority o!
the other State, with a Vlew to
accordanc~
if the
with
l~plem~nted
time limits or other procedural
of taxation
Any
notwithstanding any
limitatio~s
in the domestic
- 89 -
law of the States, provided that the cnrnpetent authority of
the other State has received
notificat~
exists within six years from
t~e
n that such a case
end of the taxable year to
which the case relates.
3.
enG~avour
The competent authorities
to resolve by
~utual
al
cr~dits,
the States shall
dgreement any difficulties or
~nterpretation
doubts arising as to the
the States may
OF
or application of
agre~:
to the same a:tribution of inccme, deductions,
al~owanc~s
or
of an
per~ar.~r.:
States to its
enterpr:s~
of one of the
establishment situated in the
other State;
bl to the
allocation of inc0me, deductions,
al~owanc~s
credits, or
cl
sa~e
between persons;
to the same characterizatior. of particular
i:ems of inc:)me;
d)
to the same application of source rules with
respect to
:0 1"
of
income;
:-":3:::":.) of
a term;
par:~cula~
cc:-."':,Q~.
lte~s
e:
to a
f)
to increas~s ~n any specific amounts referred
:h~ Co"v~"::~,,
~~
~e~~ect
~conomic
or monetary
jevelopffients; ar.d
:;..nes, and interest
-90-
in a manner consistent with the purposes of the
Conventior..
They may also consult together for the elimination of double
taxation in cases not provided for in the Convention.
4.
The competent authorities of the States may
communicate with each other directly for the purpose of
reaching an agreement in the sense of the preceding
paragraphs.
5.
If any difficulty or doubt arising as to the
interpretation or application of this
Conve~tion
cannot be
resolved by the competent authorities in a mutual agreement
procedure pursuant to the previous paragraphs of this
Article,
the case may,
taxpayer(s) agree,
b~
if both competent authorities and the
submitted for arbitration, provided
the taxpayer agrees in writing to be bound by the decision
of the arbitration board. The decision of the arbitration
board in a particular case shall be binding on both States
with respect to that case. The provisions of this paragraph
shall have effect after the States have so agreed through
the exchange of diplomatlc notes.
6.
If the competent authority of one of the States
becomes dware that the law of one or the States is or may be
applied in a manner :hat
~ay
impede the full
implementation
of tr.is Convention. that corr,petent aut.hority shall inform
the competent
autho~~ty
:~
:he other State in a timely
-91~-_:ner.
A~
the request of one of the States, the competent
authorities shall consult with each other with a view to
establishing a basis for the full implementation of this
convention. The consultations described in this paragraph
should begin within six months of the date on which the
compe~en~
au~hority
of the first-mentioned State informed
the competent authority of the other State.
Ar:::'cle 30
EXCHANGE OF INFORMATION AND ADMINISTRATIVE
ASS rS7A."4CE
1.
The competent authorities of the States shall
exchange such information as is necessary for carrying out
the provisions of this Convention or of the domestic laws of
the States concerning taxes covered by the Convention
insofar as the taxation thereunder is not contrary to the
Convent~on,
including for the assessment, collection,
administration, enforcement, prosecution before an
adminlstrative authority or In::'t:ation of prosecution before
a ]udiclal body, or deterr:'.lna:lon of appeals with respect to
the taxes covered by
lnformation is not
Any
~n~ormation
t~e
Co~ver.::on.
rest~l~:ed
The exchange of
by A~:lcle 1
(General Scope)
received by one of the States shall be
treated as secret in the sa~e ~ar.r.er as information obtained
~r.je~
:~e
jomestic laws o~ that State and shall be disclosed
only. to persons or
aut~~Y'~;As
.. ~ ~ - ~ - -
'incl
,•
u d _ ng courts and
- 92-
ac..:"!linistra~ive bodies)
involved in the above functions in
relation to taxes covered by the Conve~tion. Such persons or
authorities shall use the information only for such
purposes.
They may disclose the information in public court
proceedings or in judicial decisions. A State may use
information obtained under this Convention as evidence
before a criminal court only if prior authorization has been
qiven by the competent authority which has supplied the
information. However,
the competent authorities may mutually
agree to waive the condition of prior authorization.
2.
If information is requested by one of the States in
accordance with this Article,
the other State shall obtain
the information to which the request relates in the same
manner and to the same extent as if the tax of the firstmentioned State were the tax of that other State and were
being imposed by the other State.
If specifically requested
by the competent authority of a State,
the competent
authority of the other State shall endeavor to provide
in:o~,ation
under this
A~:icle
i~
the form of depositions of
witnesses and authenticated copies of unedited original
documents
(including books, papers, statements, records,
accounts, and writings:,
to the
sa~e
extent such depositions
and documents can be obtalned under the laws and
a ct.,":", i ::. 1 s t ~ a t i 'J e p rae tic e s '.] ~
its own taxes.
t
hat '.] the r S tat e wit h res p e c t t
0
-93-
3.
T~e
States may release to the arbitration board,
established under the provisions of paragraph 5 of Article
29
(Mutual Agreement Procedure), such information as is
necessary for carrying out the arbitration procedure. Such
release of information shall be subject to the provisions of
Article 32
(Limitation of
Arti~les
30 and 31) and to
paragraph 2 of this Article. The members of the arbitration
board shall be sub;ect :0 the limitations on disclosure
described in paragraph .
o~
:~~s
A~ticle
w::~
~espect
to any
information so released.
Article 31
ASSIST~~CE
AND SUPPORT
IN COLLECTION
1.
The States undertake to lend assistance and support
to each other in the collection of the
subject of the present Convention,
t~xes
which are the
together with interest,
costs, and additions to the taxes and fines not being of a
penal character.
In the case o~ 3ppllcat:~ns for enforcement of
taxes,
~evenue
claims of eac~ of the States which have been
flnally determined may be accepted fo~ en:orcement by the
other State and collected ln that State in accoldance with
t~e laws applicable to :~e e;'~~~~0~er.t ar.d collection of
its
own taxes. The State to WhlCh application is made shall not
-94-
be required to enforce executory measures
no provision in the law of the State
3.
:~r
ma~~ng
which there is
the application.
Any application shall be accompanied by documents
establishing that under the laws of the State making the
application the taxes have been finally determined.
4.
The assistance provided for in this Article shall
not be accorded with respect to the citizens, corporations,
or other entities of the State to which
aoo~ication
is made,
except in cases where the exemption or reduced rate of tax
granted under the Convention to such citizens, corporations
or other entities has, according to mutual agreement between
the competent authorities of the States, been enjoyed by
persons not entitled to
suc~
te~efits.
Article 32
LIMITATION OF ARTICLES 30 AND 31
In no case shall the provisions of Articles 30
(Exchange of Information and Administr.ative Assistance)
31
and
(Assistance and Suppor: in Collection) be construed so as
to 1mpose on one of the States the obligation:
a)
to carry out admlnistrative measures at
variance with the laws and administratlve practice of
that or of the other State;
bl
to supply In:o:-:-r.at:on which
~s
not obtainable
under the laws or 1n the normal course of the
adr:'.inistratic!1 c:
::--.a~
or of the other State;
-95-
to
2)
trade,
~upply
DU5~uess,
information which would disclose any
industrial, commercial, or
professional secret or trade process, or information,
the disclosure of which would be contrary to public
policy.
Article 33
DIPLOMATIC AGENTS AND CONSULAR OFFICERS
..
~
Nothing in
privileges of
t~is
diplo~atl:
Convention shall
~gents
~:E~ct
the fiscal
or consular officers under
the general rules of international law or under the
provisions of special agreements.
2.
For the purposes of the Convention an individual,
who is a member of a diplomatic or consular mission of one
of the States in the other State or in a thlrd state and who
is a national of the sending State, shall be deemed to be a
resident of the sending State, but only if he is subjected
therein to the same obligations ln respect of taxes on
~~co~e
3.
as are residents of that State.
The Convention shall not apply to international
organizations, to organs or officials thereof and to
lndiVlduals who are me~bers o! a dlplomatic or consular
mlsslon o( a third State, being present in one of the States
and who are not subjected ln either State to the same
cb:~9a:~ons
in respec: of taxes on income as are residents
of that State.
-96-
Article 34
REGULATIONS
1.
The competent authorities of the States may by
mutual agreement settle the mode of application of Articles
10 (Dividends),
11
(Branch Tax),
(Ruyalties) and 26
2.
12
(Interest),
13
(Limitation on Benefits) .
With respect to the provisions of this Convention
relating to exchange of information and mutual assistance in
the collection of
tax~s,
~~e
aut~~~lties
competent
may,
by
common agreement, prescribe rules concerning matters of
procedure,
forms of
appli~ation
and replies thereto,
conversion of currency, disposition of amounts collected,
minimum amounts subject to collection, and related matters.
3.
The competer.t authorities of each:): the States,
in
accordance with the practices of that State, may prescribe
regulations necessary to carry out the oLher provisions of
thiS Convention.
4.
Where tax has been levied at
sourc~
i~
excess of
the amount of tax chargeable under the provisions of
Articles 10
(Dividends),
12
(!nterest) or 13
(Royalties),
applications for the refund of the excess amount of tax must
be lodged With the
levied the tax,
a~thority
of the State having
within a period of three years after the
expiration of the
levied.
co~p~:~nt
c~lendar
year
~n
which the tax has been
-97-
Article 35
EXEMPT PENSION TRUSTS
1.
Subject to the provisions of paragraph 2, income
referred to in Articles 10 (Dividends) and 12 (Interest)
derived by a trust, company or other urganization
cc~stituted
and operated
excl~sively
to administer or
provide benefits under one or more funds or plans
~s:ab:~s~ed
to
pr8v~je
~=~s:o~,
~etirement
bene:i:s shall be exempt from tax
1~
or other employee
one of the Stales if it
is a resident of the other State according to the laws of
that other State and its income is generally exempt from tax
in that other State.
The provisions of paragraph 1 shall not apply with
2.
respect to the income
0:
a :rus:, company or other
organlzation from carrying on a trade or business or from a
related person other than a person referred to in paragraph
1 .
EXE~~-:-
1.
r~s:j~~:
A trust,
ORGA:~!
ZATIO'§
company or other organization that is a
of one of the
S:~:0S
according to the laws of that
State and that is operated excluslvely for
reli~ious,
charltable, scientiflc, educaticr.al, or public purposes
S~3::
be exe~p: :ro~ tax ~; :~e o:~er State 1n respect of
:.te~s
0:
:. :1 C orr,e
,
98-'
a)
such trust,
company or other
first-men~ioned
exempt from tax in the
b)
such trust,
(_3anizat~Jn
is
State, and
company or other organization would
be exempt from tax in the other State in respect of
such items of income :: it were organi=ed, and carried
on all its activities,
2.
!:"-?s~-:::
in that other State.
The provisions of paragraph 1 shall not apply with
:0
the
ir.c:~-?
:~:'IS~.
-: '\
company""'" 0ther
organi.::ation from carry:.r.g on a. crade or bL::31neSS or from a
rela:ed person ether
[~3~
~
pe!:"~cn
referree to in paragraph
1.
3.
The competent authorities of the States shall in
mutual agreement deve18p
~roced~res
for implementing this
Article.
CHAPTER VI
FI~AL
PROVISIONS
Article 37
1.
This Convention shall enter into force on the
thirti.eth day after
:~-?
respective Governments
later
~ave
c~
:~e
dates on which the
nct:::ej each other in writing
that the formalities constltutionally required in their
proV1Sions shall have effect
for taxable years and periods
beq:~~lng,
taxes paY3b:e at source,
or in
[~~
C3S~
c~
-99-
r.yments
~ade,
on or after the first day of January in the
year following the date of entry into fOLce.
2.
Notwithstanding paragraph 1, where any greater
relief from tax would have been afforded to a person
entitled to the benefits of the Convention signed at
Washington on April 29,
1948, between the Klngdom of the
Netherlands and the Uni:ed States of America with respect to
taxes on income and cer:aln other taxes,
rr.od~fied
as set
forth in the Protocol of Exchange of Instruments of
Ratification signed at Washington on
subsequently modifiej a::j
Dece~ber
s~~p:e:nented
1,
1948, and
by ::--.-? Supplementary
Convention signed at Washington on December 30, 1965 ("prior
Convention"), under tha: Ccnvention than under this
Convention,
the prior Conventlon shall, at the election of
such person, continue to have effect in its entirety for a
twelve-month period from the date on which the provisions of
this Convention would otherWise have effect under paragraph
1.
3.
Subject to the provlsions of paragraph 4,
Conventlon shall cease
t~
~ave
~~~ect
the prior
when the provisions of
this Convention take effect :~ accordance with paragraphs 1
and 2.
ThlS Conventlon sha~~ not atrect any Agreement in
force extending the Conve~t~o~ slgned at Washington on April
29.
19~8,
In accorda:-:ce "'i..tn Ac:.icle XXVII thereof.
- 100 -
Article 38
TERMINATION
This Convention shall remain in force until terminated
by one of the States. Either State may terminate the
Convention,
through diplomatic channeLs, by giving notice of
termination at least six months before the end of any
calendar year
afte~
the expiration of a per:od of five years
~~:~y
from the date of its
lnto force.
In such event the
Convention shall cease :0 have effect for t3xable years and
pe~iods
beginning,
source,
payments made. a::er the end of the calendar year in
or
~~
:~e
cas~
of taxes
~ayable
at
which the notice of termination has been given.
IN WITNESS whereo: :he
tt,ereto.
~nde~signed,
dU:y authorized
have signed this Convention.
DONE at . . . . . . . . . . . . . . . . . . . . . . . this . . . . . . . . . . day
of . . . . . . . . . . . . . . . .
in dupllcate.
Netherlands languages.
in the English and
the two texts being equally
authentlC.
FOR
~~~
G0VERNME~~
-
--
rOR THE vOVERNMENT Or THE
S~A7ES
KINGDG~
O~
A~ERICA:
Or THE NETHERLANDS:
Understand~ng
regarding the Convention between
t~~
United
States of America and the Kingdom of the Netherlands for the
avoidance of double taxation and the prevention of fiscal
evasion with respect to tctxes on income,
siqned on
In reference to paragraph 1 of Article 4
I.
:s
~nderstood
:~3t
purposes of the Convention,
~2~
of one of
t~e
States.
or local authorities
ct~e
to be considered
Gover~~ent
(Resident).
the
its political subdivisions
~~
~esidents
of
U',at State.
II.
In reference to paragraph 4 of Article 4
It is understood that.
(Resident)
:: a company is a resident of the
Netherlands under paragraph
1
of Article 4
(Resident) and,
because of the application of Section 269B of the Internal
Revenue Code, such company 1S a:so a resident of the United
States under paragraph 1
quest10n of its
res1de~cy
app::cation of thlS
agree~en:
0:
Article 4 (Resident),
:or
Conv~~::an
procedure as :a:d
:~e
purposes of the
s~a:l
dow~
the
be subJect to a mutual
:n paragraph 4 of Article 4
-2 III.
In reference to Article 7
(Busines~
Profitsj.
It is understood that with respect to paragraphs 1 and 2 of
Article 7 (Business Profits), where an enterprise of one of
the States carries on business in the other State through a
permanent establishment situated therein,
the profits of
that permanent establishment shall not be determined on the
basis of the total income of the enterprise, but shall be
determined only on the basis of that portion of the income
of the enterprise that is attributable to the actual activity of the permanent
ness.
Specifically,
survey, supply,
eS:3b~ishment
in respect of such busi-
in the case of contracts for the
installation or construction of industrial,
commercial or scientific equipment or premises, or of public
works, when the enterprise has a permanent establishment,
the profits attributable to such permanent establishment
shall not be determined on the basis of the total amount of
the contract, but shall be determined on the basis only of
that part of the contract that is effectively carried out hy
the
per~anent
estab~is~~er.t.
7he profits related to that
part of the contract that is carried out by the head office
of :he enterprise shall not be taxable in the State in which
the permanent
establis~~ent
is s:tuated.
-3-
In reference to Article 9
IV.
(As~o_~ated
Enterprises), Article 12 (:nterest) and Article
29 (Mutual Agreement Procedure) .
Nothing in paragraph 1 of Article 9
O~
p~ragraph
Artic:~
determin~ng
State from
deduct~on
5 of
of an
~lso
by
enterpr~se
referenc~
ot tr.e enterprise.
In
(Interest) shall prevent either
:2
the appropriate amount of interest
not only by reference to the
~~sp~ct
amount of interest w:ti:
but
(Associated Enterprises)
th~
ro
~::e
to any particular debt-claim
ov~rall
amount 0f debt capital
context of a mutudJ. agreement
amount of the interest deduction shall be determined in a
~ar.r.er
c~~sistent
w:t~
:~e
prin~:ples
of paragraph 1 of
A:.:ticle 9, by reference to conditions in commercial or
financial relations WhiCh prevail between independent
enterprises dealing at arm's length. Those principles are
~o~e
\..
:ully examir.ed
a~j
~xp~a:~ed
ln OEeD publications
In reference to Article .9 (Associated Enterprises) and
Article 29 (Mutual Agreement Procedure)
~er.t
Procedure)
......
L
"
•
the
co~p~:~~:
~~:hOtlCies
shall endeavor to
-4-
clcdits or allowances caused by the application of internal
law regarding thin capitalization, earnings stripping, or
transfer pricing, or other provisions potentially giving
rise to double taxation. In this mutual agreement procedure,
the proper allocation of income, deductions, credits or
allowances under the Convention will be determined in a
manner consistent with the principles of paragraph 1 of
Article 9 (Associated
En~erprises)
by reference to condi-
tions in commercial or financial relations that prevail
between independent enterprises dealing at arm's length.
Consistent with the mutual agreement procedures of other
income tax conventions,
including those entered by both
States, a procedure under Article 29
Procedure)
(Mutual Agreement
concerning an adjustment in the allocation of
income, deductions, credits or allowances by one of the
States might result either in a correlative adjustment by
the other State or in a full or partial readjustment by the
first-mpntioned State of its original adjustment.
V:.
In reference to subparagraph 2(a) and paragraph 4 of
Article 10 (Dividends).
It 1S understood that a
b~nefic1al
owner of the dividends,
who holds depository rece1pts or trust certificates evidencing beneficial ownerShip of the shares in lieu of the shares
themselves in the coroanv in question, may also claim the
-5t~eaty
benefits of subparagraph 2{a) of Article 10
(Dividends). In addition,
it is understonc that where a
person loans shares (or other rights the income from which
is subject to the same taxation treatment as income from
fro~
shares) and receives
the borrower
~n
obligation to pay
an amount equivalent to any d1viaend distribution made with
respect to the shares or other rights loaned during the term
of such loan, such
owne~
p~~so~
shal! be treated as the beneficial
of the dividend pa:d wlth
~espect
to such shares or
other rights for purposes of the application of Article 10
(Dividends)
VII.
to any such
~quivalent
amount.
In reference to paragraph 1 of Article 14 (Capital
Gains) .
In determining for purposes of paragraph 1 of Article 14
(Capital Gains) whether the assets of a corporation resident
consiS~,
in the United States
directly or indirectly,
for
the greater part of real property situated in the United
States and whether the stock of such corporation is a
"United States rea!
co~~~~~s
va:u~
that it
w~::
of all of the
in:a~Jible
prope~:y
:a~~
ass~:s
business assets
ln~e~estR,
:~tc
of
account the fair market
t~~
s~=~
the United States
corpOration,
including
as goodwill, whether or not
appearing as an asset on the balance sheet for tax purposes,
going concern value and lntellectual property.
~
VIl~.
6-
In reference to paragraph 8 of
~-ticle
l~
(Capital
Gains) .
It is understood that paragraph 8 of Article 14 shall not
apply to an alienation of property by a resident of one of
t~:~
S~ates
if tne tax ::-:a: would otherwise be imposed on
such alienation by the other State cannot reasonably be
imposed or collected at a :ater time.
domestic law of the
Un~::ed
States, a
For example, under the
foreig~
corporation
that qualifies as a "Unlted States real property holding
corporation" is taxed
i~
so~e
circumstances
l~
lt transfers
its assets to a United States corporation in a reorganization.
In such a case, only if the shareholders of such
foreign corporation
a9~ee
the extent available)
:J reduce basis
(if and only to
ty "closing agreement" can the tax
that otherwise would be
l~posed
on such alienation be
reasonably imposed or collected at a later time.
IX.
In reference to paragraph 4 of Article 19
(Pensions,
Annuities, Alimony).
It
1S
understood that
tr-.~
used in paragraph 4 of
AlimJny)
is intended to
Railroad
~etirement
X.
~er.;1
A~t:c:e
re~e~
"o::her public pensions" as
~9
to
,Pensions, Annuities,
~nited
States tier 1
be~eEl:s.
In reference to Article 26
(Limitation on Benefits) .
-7-
It is
~nderstood
Convention
p~~~:
m~st
that a taxpayer claimina benefits under the
upc~
be able to provide
request sufficient
to establish the :axpayer's entitlement to such
benefits. It is further understood,
to provide proof that a
of Article 26
:ax~ayer
however,
f~lfills
(Limitatlon on Benefits)
that the need
the requirements
can lmpose a severe
administrative burden on the taxpayer.
tr.er~:~r7.
It is understood.
will
e~deavor
to develsp ty
procedures for the
per:od~c
entitleme~t
to support
procedures,
:r.at the
agreement
~ut~al
authorities
~~asonable
reportlng of the facts necessary
to benef:ts.
In developing such
the competent authorities will strive to mini-
mize the frequency of reporting.
E~titlement
compete~:
For example, once an
to beneflt5 has been documented and in the
absence of relevant changes in the facts and circumstances,
a taxpayer should not be required annually to provide proof
that h7 :s er.titled to the ber.e::ts of the Convention,
provided he reports relevant changes in facts and circumsti'lr.:::es.
X:.
In reference to paragraphs l(d) and 4 of Article 26
(Limitation on Benefits).
It :5 unaerstood that the proof a
orga:--.::at:sn
Art:::::"e :3
0:
:a
L~tch
"belegg:r.?s:~s:.e:::~J"
the "Wet cp ae
resident investment
~n
the sense of
ver:~ootschC'psbelasting
1969")
-8-
has of the number of its Dutch resident individual and
corporate shareholders as'a result of the procedure used by
such Dutch resident investment organization when claiming a
reimbursement of tax withheld on its foreign dividend and
interest income under paragraph l(b) of Article 28 of the
"Wet op de vennootschapsbelasting 1969", can be used by such
Dutch investment organization to show that it fulfills the
requirements of paragraph l(d),
Article 26
XII.
respectively paragraph 4 of
(Limitation on Benefits) .
In reference to paragraph 2 of Article 26
(Limitation on Benefits) .
As illustrated by the following examples,
it
1S
understood
that in applying the rules of paragraph 2 of Article 26
(Limitation on Benefits), the proportionate share of activities of a resident of one of the States that are a component
part of or directly related to a trade or business conducted
by another resident of that State who claims treaty benefits
may be attributed to the latter resident under subparagraph
2(e)
for purposes of applying the substantial trade or
business test under subparagraph 2(c).
In addition,
for
purposes of subparagraph 2(c), the proportionate share of
activi~ies
of a resident of one at the States attributable
to a trade or
busi~~ss
conducted ln the other State will be
used for purposes of the test ur.der subparagraph 2(c).
-9 -
Excu.:ple 1
:;~Co;
a Netherlands corporation, owns 100 percent of the
stock of USCo, a U.S. corporation, and 50 percent of the
stock of NLSub, a Netherlands corporation. FCo, a French
corporation, holds the remaining 50 percent of the stock of
NLSub. NLCo and FCo do not directly conduct an active trade
or business. USCo and NLSub are engaged in the same active
t~nd~
o~
business.
F~~
~l:~
concluded taxable years,
2=
:~e
fou~
mos:
~ecently
the asset values, gross income and
payroll expenses of these corporations that are attributable
to the trade or business were as follows:
NLSub
Assets
$300
$50
Income
50
10
Payroll
60
10
NLCo receives payments of interest and dividends from USCo.
In order for these payments to be entitled to treaty benefits under paragraph 2 of Article 26, NLCo must be considered to be engaged in the ac:ive conduct of a substantial
trade or business in the Ne:herlands.
:: ',c:, :r.e ratios of the
d:3S".:tS,
able tc NLCo to the assets,
to CSCo
~~s:
be at least ::
Under subparagraph
lncome and payroll attribut-
income and payroll attributable
per~e~t.
-10-
NLCo has no assets,
~-~
income or payroll that
to the trade or business.
The assets,
:~c~me
att~tb~table
and payroll of
NLSub that are related to the trade or business may be
attributed to NLCo,
however,
under subparagraph 2(e) (vi),
since NLCo and FCo togecher have a controlling beneficial
interest in NLSub and FCo is a resident of a member state of
the European Communities.
2
therefore,
(12',
50
per~e:-:t
payroll are attributed to
2(c).
In accordance
of NLSub's assets,
for purposes
~~Co
The amounts attributed co NLCo and
:;S::)' s
cc:-:-espondl~g
a~.=:...:::s
Assets
S25
8.3
Income
5
10.0
Payroll
5
8 .3
~:
th~
income and
9aragraph
gercentage of
a:-e as follows:
NLC:) as a
NLCO
subparagraph
wit~
~orcentage
of USCo
Since none of these percentages is greater
t~an
10 percent,
NLCo is not entltled to benefits under Article 26 under the
general test of
paragrap~
:: .c:.
:hree-year average :-ule u:-:de:the result,
ing years
~oreover,
:~a:
appllcation of the
paragraph does not change
since the relevant amounts for the three preced·
land the
the first oreceding
resu:tl~g
tax3t~e
:-atl0s) ale equal to those for
year.
- 11Examole 2
The
acts are the
~
"lme as i!1 Example 1, except that NLCo
owns only 80 percent of the stock of USCo.
subparagraph 2(c),
in~ome
For purposes of
the measures of USCo's assets, gross
and payroll expense must be multiplied by NLCo's
percentage ownership interest in the stock of USCo.
quently,
att~:butable
the values
the stock of these
~a~~~~:os.
attributed from NLSUD t=
USCo
a~~
to USCo and NLSub after
the ratio
a~d
~~:~
t~
Conse-
~~
the amounts
the amounts dttrlbutable to
as follows:
NLSub
Assets
$240
I:..:ome
40
Payroll
48
NLCo as a Percentage of USCo
$:5
10.4
:: . 5
10.4
5
be entitled to treaty beneflts with respect to the payments
received from
X:::.
usr~
- ' " 'un.j~_··o·
..
~~ra~
t-'Jo
h
~
:Jr3p .......
In reference to subparagraph (a) of paragraph 2 and
subparagraph (m) of paragraph 8 of Article 26
(Limitation on Benefits)
of
Articl.:.?
-12-
26
(Limitation on Benefits), a bank only will be considered
to be engaged in the active conduct of a banking business if
it regularly accepts deposits from the public or makes loans
to the public, and an insurance company only will be considered to be engaged in the active conduct of an insurance
busin~ss
if its gross income consists primarily of insurance
or reinsurance premiums, and investment income attributable
to such premiums.
XIV.
In reference to paragraph (1) of Article 9 (Associated Enterprises) and subparagraph (d) (i) of
paragraph 5 of Article 26 (Limitation on
Benefits)
It is understood that for purposes of paragrdph 1 of Article
9 (Associated Enterprises),
in determining whether an
enterprise participates directly or
indirec~ly
in the
management, control or capital of another enterprise, an
enterprise may be considered an associated enterprise with
respect to an
enterpris~
in which its only intertst is
represented by evidences of indebtedness where such indebtedness provides the holder·of the indebtedness with the
right to participate in
th~ r.~nagement,
conteol or capital
of the enterprise that issued the indebtedness, or such
holder in practice par:icipates in such
or capital.
manag~m~nt,
control
- 13 -
XV.
In reference to paragraphs 2'a) (i) arid 2(c) of
Article 26 (Limitation on Benefits) .
It is understood that in applying the measurement of "substantiality" as referred to in subparagraph 2(a) (i) of
Article 26,
the factors referred to in subparagraph 2(c) of
Article 26 as used in a specific case will take into account
the fact that there might be a less than 100% participation
in the income-producing
For- exal.:ple,
a~:lvlty.
if a Dutch :",=sident cori-'oration has a 10"0
interest in a US corporation,
in applying the substantiality
test to - for instance - dividends received from the US
corporation, each of the US corporations'
ferred to in
subparagrap~
plied by the Dutch
2(ci
factors as re-
of Article 26 must be multipercentage share in the US
reslj,=~:'S
corporation.
The above also applies to subparagraph 2(e) (vi)
26
(Limitation on Benefits).
For example,
take the case
where both the income-producing corporation,
US,
and the
cor-por-at~o~
or business in the
~ethe~~ar.js
Netherlands investment
A
\
N\
B
W~l~~
\
~\
~s
of Article
resident of the
,=r.gaged in an active trade
rt~e
controlled by five
cc~panles.
c
.',.
o
\
I
I
NI
L ____
...J
1
E
I
NI
-14-
50%
1
income
producing
/
/
US/
One of the investors
active in
the Neth.
N
~A)
owns a 50 percent interest in the
income-producing corporation;
C,
0 and E)
the other four lnvestors
(8,
each own a 12.5 percent interest 1n the income-
pr.-.:;d .... :: :r.g corporat ':'on.
:-::-:? ::""":':::1
:..r.vestor
(E)
owns a 50
percent interest in the corporation engaged in an active
trade or business; the other four investors
(A,
B, C, and D)
each own a 12.5 percent interest in the corporation engaged
in an active trade or business.
The corporation engaged in an active trade or business in
the Netherlands has assets valued at $ 1 million, and the
assets of the U.S. corporation are valued at $6 million. The
Netherlands corporation has gross income of $ 10 million,
and gross income of the U.S. corporation is $40 million. The
payroll of the Netherlands corporation is $1 million, and
the U.S. corporation's payroll is $5 million.
In applying the
substa~:la:i:y
test to the dividends paid by
the US corporation and received by the five Dutch investors,
each
o~
the factors must be mu!tlplied by the investor's
percentage share in the corporation engaged in an active
-i5-
trade or business in the Netherlands,
respect~~ely
by the
investor's percentage share in the US
corpo~ation.
The
dividends paid to the Netherlands investors
(B, C and D) and
the dividends paid to the 50 percent owner of the corporation engaged in active trade or business in the Netherlands
(E)
would pass the substantiality test. The three ratios
described in the preceding paragraph as applied to the three
Netherlands investors
;3,
:
and
~;
cent, 2S percent, and 20 percent,
ratios described in the
t~~
:~tch
investor (E)
~~~ceding
a~~
would
rema~~
respective~y.
16.7 perThe three
paragraph as applied to
66.7 percent,
lO~
~e~cent,
and
80 percent.
The dividends paid to the Netherlands investor (Al
pa~s
will not
the substantiality test; since in this Cctse the three
ratios are 4.2 percent, 6.25 percent, and 5 percent.
-16-
XVI.
In
r~ference
to paragraph 2(e)
~{
~Jticle
26 (Limi-
tation on Benefits) .
For the purpose of subparagraphs 2(e) (vi) and 2(e) (vii) of
Article 26 the following states are regarded as an "identified Staten having effective provisions
~or
the exchange of
information at the date of signatur8 of the Convention with
the United States:
Australia
Austria
Barbados
Belgium
Bermuda
Canada
Costa Rica
Cyprus
Denmark
~ominica
Dominican Republic
Egypt
Finland
France
Germany
Grenada
and wIth the Netherlands:
Honduras
Iceland
Ireland
Jamaica
Korea
Malta
Marshall Islands
Mexico
Morocco
New Zealand
. Norway
Pakistan
Philippines
St. Lucia
Sweden
Trinidad & Tobago
-17-
! Malaysia
Aruba
Australia
Austrid
Belgium
Brazil
Bulgaria
Canada
China
Czechoslovakia
Derur.-..lrk
Finland
France
Germany
Greece
Hungary
India
Ireland
Indonesia
Israel
Italy
Korea
Luxembourg
Malta
Morocco
Netherlands Antilles
New Zealand
Norway
Pakistan
Philippines
Poland
Rom..... nia
Singapore
South Africa
Spain
Sri Lanka
Surinam
Sweden
Thailand
Turkey
u:1~:: -::! Ki..r.gd::~·.
Z"\!T'n:3
Zimbabwe
It is understood that states may be added to or eliminated
from the preceding lists by
agree~ent
between the competent
authorities of both States.
XVI: .
In reference to paragraph 2(h) of Article 26
(Limitation on Benefits) .
!t is understood that
another member state
~~
0:
treatlng an activity conducted in
~~.~
~'U:-:;~-::an Communiti~s
as conduct-
ed in the Netherlands 'Under subparagraph 2(h) of Article 26
(Limitation on Beneflts
a~:!
subJect to the restrictions
the rei n), the act i v i t Y ... s u c hot her s tat e rna y be
by any p~rson which,
i:
C ond u c t
It cor.j'Uc:~d such activity in the
Netherlands, would have ::5 pr::pOrtlon:te share of such
ed
-18-
activity attributed to the resident of the ~ntherlan~s
considered to conduct such activity under subparagraph 2(e)
of Article 26
XVIII.
(Limitation on Benefits) .
In reference to paragraph 3(a) of Article 26
(Limitation on Benefits) .
It is understood that for purposes of paragraph 3(a) of
Article 26
(Limitation on Benefits) a person wlll be consid-
ered to be engaged In
":3L;-,e~visicn
and adminlstration"
activities. only if it engages in a number of the kinds of
activities listed below.
Fo~
exa~ple.
a person will be
considered a headquarters company if it performs a significant number of the followlng functions for the group: group
financing
market ing,
(which cannot ce its principal function).
internal auditlng.
pricing.
internal communications and
management. A simple comparison of the amount of gross
income that the headquarters company derives from its
different activities cannot be used alone to determine
whether group financing lS. cr
pal function. The
15
not.
above-~entloned
be suggestive of the types
0:
the company's princl-
functions are intended to
actlvities in WhlCh a
headquarters company wl11 be expectej to engage;
intended
~o
Furthermore,
it is not
be exhaustive.
it is understood that
substant:ial portion of
:~.e
in determining if a
Clverall supervision and
-19-
adrninistraticn of the group is provided by thcompany, the activities it performs as a
head~l~~ters
~~ddquarters
company for the group it supervises must be substantial in
comparison to the same activities for the same group
performed within the multinational.
For example, a Japanese corporation establishes a subsidiary
in the Netherlands to function as a headquarters company for
its European and Nor:r.
~~erican
operations. the Japanese
corporation also has tW8 o:her subsidiaries
headquarter companies;
one :or
t~e
Asian
c~e
~~~c:i8ning
as
for the African operations and
operat18~s.
The
8~tch
headq~arters
company
is the parent company for the subsidiaries through which the
European and North American operations are carried on. The
Dutch headquarters company supervises the
pricing, marketing,
internal auditing,
of the
b~lk
internal
communications and management for its group.
Although the
Japanese overall parent sets :he guidelines for all of its
Subsldiarles in definlng the world-wide group policies with
respect to each of these activities, and assures that these
guidelines are carried out Within each of the regional
gro~ps,
a~1d
it is the Dutch headquarters company that monitors
c:):1:r8~s
the way :..::
w~.:.ch
::-.-:se policies are carried out
within the group of corr,panles that it .j\";pervises. The
cap::al a::d payroll dev=:~j by :he Japanese parent to these
actiVitieS relating to the group of companies the Dutch
-20heac~arter
c~pital
c~mpany
supervises is small,
relative to the
and payroll devoted to these activities by the Dutch
headquarters company.
Moreover, neither the other two
headquarter companies, nor any other related company besides
the Japanese parent company, perform any of the abovementioned headquarter activities with respect to the group
of companies that the Dutch headquarter company supervises.
In the above case the Dutch headquarters company will be
considered to provide a substantial portion of the overall
supervision and administration of the group It supervises.
In reference to paragraph 7 of Article 26
XIX.
(Limitation
on Benefits) .
For purposes of paragraph 7 of Article 26
Benefits),
(Limitation on
in determining whether the establishment, acqui-
sition, or maintenance of a corporation resident of one of
the States has or had as one of its principal purposes the
obtaining of benefits under this Convention,
the competent
authority of the State in which the income in question
arises may consider the following factors
(1)
(among others)
The date of incorporation of the corporation in
relation to the date that this Convention entered into
force;
(2)
the contin'.;ity of
th~
ownershlp of the corporatlOrl;
historical business and
-21-
(3)
i~
the business reasons for the corDoration residing
its State of residence;
(4)
the extent to which the corporation is claiming
special tax benefits in its country of residence;
(5)
the extent to which the corporation's business
activity in the other State is depel!dent on the capital,
assets, or personnel of the corporation in its State of
res:dence; and
the extent to
(6)
w~ich
the corporation would be
entitled to treaty benefits comparable to those afforded by
this Convention if it
~ad
been :ncorporated in the country
of residence of the majority of its shareholders.
XX.
In reference to paragraph 7 of Article 26
(Limitation
on Benefits) .
It is understood that a company resident of one of the
States will be granted the treaty benefits under paragraph 7
of Article 26
(Limitation on Benefits) with respect to the
income it derives from the other State,
\1)
!~
~ot
(2)
if such company:
holds stocks and securities the income from which
predominantly
fr:~
S8~r=es
in the other State;
has widely dispersed ownership; and
- 23-
result in a denial of beneflts. Such changed circumstances
may include
~
chanye in the state of residence of a major
shareholder of a company,
the sale of part of the stock of a
Netherlands company to a person resident in another member
scace of the European Communities, or an expansion of a
company's activities in other member states of the European
Communities, all under ord1nary business conditions. The
c~~p~t~~:
~s
a~thority
~:::
=~~sij~~
these
,:.n addu:ion to 0:::-:-:::
:~:-:::vant
:actors
ered under paragraph
such a company will
7
~:
A~clc:e
~~~~:~
26)
chan,~j
=ircumstanc-
normal~y
consid-
in determining whether
q~a::~led
for
tr~aty
benefits
with respect to income received from United States sources.
If these changed
avoi~ance
circu~stances
motives,
a~s~
thlS
competent authority to
O~
are not attributable to tax
wl~l
be considered by the
tactor we1ghing 1n favor of
d
continued qualificat10n under paragraph 7 of Article 26.
XXII.
In reference to paragraph 8(d) (iv) of Article 26
(Limitation on Benefits) .
r:)r purposes of s'-.;tpara3 rap:--. 6 d, ,:..v)
~:~::ation
~n
Bene~::5
:"c;'Jjo;'J and Par1S
The
com~_tent
remov~
w:..~:
.
~:~
:~~
.J.";".';
s:~~~
:':..:1::5-.:
of Arc1cle 26
exchanges of Frankfurt,
oe llsced.
authorities 0: both Stat s may agree to add or
stock exchanges
f~~~
t~e
11St.
-22~3)
st~_f
employs:~
its state of residence
?
substar~ial
actively e~9dged in trades of stock~ and securities
.
owned by the company.
It is further understood that paragraph 7 of Article 26
(~imitation
on 3enefits) will not apply if any of the above-
mentioned factors is absent.
In reference to paragraph 7 of Article 26 (Limi-
XXI.
tation on Benefits) .
It is understood that in applying paragraph 7 of Article 26
(Limitation on Benefits), the legal requirements for the
facilitation of the free flow of capital and persons within
the European Communities,
together with the differing
internal income tax systems,
tax incentive
r~gimes,
and
existing tax treaty policles among member states of the
European Communities, will be considered. Under such paragraph,
the competent au:horlty lS instructed to consider as
its guideline whether the establishment, acquisition or
maintenance of a company or the conduct of its operations
has or had as one of its
benefits under this
pr:~cipal
Convent:~~.
therefore, determine under a
7~e
giv~n
change in Cl_cumstances that would
:0
q~3!:~y
A~::~le
=6
~or
treaty
ben~~its
purposes the obtaining of
competent authority may,
set of facts,
caus~
unj~r
(Limitation en Bene~::sl
that a
a company to cease
paragraphs 1 and 2 of
need no: necessarily
-24-
XXIII.
paragra~4~
In reference to
8Ce) of Article 26
(Limitation on Benefits)
It is understood that the term "related persons" as used in
subparagraph See) of Article 26
means associated
ente~p~:ses
(Limitation on Benefits)
under Article 9
(Associated
Enterprises) and their owners.
In reference to paragraph 8(f) of Article 26
XXIV.
(Limitation on Benefits) .
In order to meet the "substantial and regular
under subparagraph S(f)
fits),
of Article 26
trading~
tests
(Limitation on Bene-
a person claiming benefits under the Convention need
not prove that it has not engaged in,
but may need to rebut
evidence that it has engaged in. a pattern of trades on a
recognized stock exchange in order to meet these tests.
In reference to paragraph 8(k) of Article 26
XXV.
(Limitation Benefits) .
Whe~
a
co~poration
~es:j~;,:
entitled to benefits u;.jer
fits)
:;, c"e of the States that is
A~~::~e
26
Limltation on Bene·
acquires a controlling lnterest in a corporation
resident in a
t~ird
s:a:~
:ha: in
tUI·;'
owns a controlling
interest _n a second cJrporation resiJent in the firstmentioned State,
that second
to the benefits of the
co~poration
Conve~::or
due to
may not be entitled
:~.e
provisions of
-25sur~aragra~~
8(k) of Article 26 with respect to income
=2rived from sources within the other State.
It is under-
stood that in these circumstances the competent authority of
the other State,
in considering a request for benefits under
the Convention under paragraph 7 of Article 2G
on
B~~efits),
reorganization
will consider favorably a plan of
submit~~d
by the second corporation resident
in the first-mentioned
S~ate,
th~
b~:ng
s~c0nd
corporat:~~
i.E such plan WCl:ld result
~n~:::~d
to the
Convention within a reasonable transition
wit~ou:
rega~d
(Limitation
to
pa~a3~ap~
7 of
A~ticle
2~r.~fits
pe~:od
26
in
of the
(determined
,~imitation
on
Be ne fit s) ) .
xxv:: .
In reference to Article 27
(Offshore Activities)
It is understood that transport of supplies or personnel
between one of the States and a location where activities
are carried on offshore in that State or between such
locations is to be considered as transport between places in
that State.
XXVII.
In reference to paragraph 5 of Article 29
(Mutual
Agreement Procedure).
A.
:t is
nderstood that the States will in any case ex-
change dip12~atlc r.~:es as p~cvlded in paragraph 5 of
Ar::.:::e ::3
,C-:'...::ual Agree:;.c:~: r:rocedure),
wrlen the experience
-26-
within the European Communities with regard
r0
the ap~lica
tion of the Convention on the elimination :~ double taxation
in connection with the adjustment of profits of associated
enterprises, signed on 23 July 1990, or the application of
paragraph 5 of
Artic~~
~5
:~e
_c
:ax
conver.t:~~
between the
United States of America and the Federal Republic of Germany
for the avoidance of double taxation and the prevention of
fiscal evasion with
~es~ec~
t~
taxes on
inc~~~
~~d
capi~al
and to certain other taxes, slgned on 29 August 1989, has
prov~r.
to be
satisfacto~y
~o
the competent authorities of
both States. After a period of three years
into force of the Convention,
a:~~~
the entry
the competent authorities
shall consult in order to determine whether the conditions
for :he exchange of diplomatic notes have be?r. :ulfilled.
B.
If the competent authorities of both States agree to
submit a disagreement regarding the interpretation or
application of this Convention in a specific case to arbitration according to paragraph 5
8:
Article
~~,
the follow-
ing procedures will apply:
1.
If,
~ompetent
in applying paragraphs 1 to 4 of Article 29, the
authorities fail to reach an agreement within two
years of the date on
wh:~h
the competent authorities,
tlon ln a specific case,
procedures available
~~0
they
:dS~
~ay
was submltted to one of
ag_~c
to invoke arbitra-
but only after fully eXhausting the
u~je~
paragraphs 1 to 4 of Article 29
-27-
The competent authori::.ies will not generally accede to
art;~
tration with --espect to matters concerning the tax
policy or domestic law of either State.
2. The competent authorities shall establish an
arbitration board for each specific case in the following
manner:
(a)
An arbitration board shall consist of not fewer
::.har. th:-ee
m~mbers.
t!ie sar:1e n'Jmber of
t~e
Ea:-:-. -:=~';:~:-=;::
me:r.D~rs,
appointment of the
,b)
authority :3::3':'':' appoint
and these members :::3:1all agree on
o:~e:-
~errber(s)
.
The other member\s) of the arbitrat10n board shall
be from either State or from another OEeD member country.
The competent authorities may issue further 1nstructions
rega:-cing the criteria :or selecting the
othe~
member(s) of
the arbitration board.
(c)
Arbitration board member(s)
(and their staffs) upon
their appointment must ag:-ee 1n writing to abide by and be
subJect to the applicable confidentiality and disclosure
provislons of both States a;:d the Convention. In case those
p:-avlslo;:S conflict, t!ie
~~s:
:-~s:~:ctive
condition will
app~y.
3. 7he competent
the
a:-bitr~_ion
de:h::~:~es
board regardlng
sec!i as appolntment af a
~ay
agree on and instruct
specif~~
Chal:-IT~n,
~ules
of procedure,
procedures for reaching a
-28-
arbitration board shall establish its own rules of procedure
consistent with generally accepted principles of Lquity.
4. Taxpayers and/or their representatives shall be
afforded the opportunity to present their views to the
arbitration board.
C. The arbitration board sha:l decide each specific case
on the basis of the Convention, giving due consideration to
th~
t~~
domestic laws of
lnternat~onal
cc~p~t~nt
S:at~s
a~d
the
p~:~~:pl~s
law. The arbitration board
authorities
deCision of the
a~
w:~~
explanation of its
arbitrat:o~
of
provide to the
j~cision.
The
board shall be binding on both
States and the taxpayer(s) with respect to that case. While
the decision of the arbitration board shall not have precedentlal effect,
it is expected that such
decls~ons
ordinarily
will be taken into account in subsequent competent authority
cases involving the same taxpayer(s),
substantially similar facts, and may
the same issue(s), and
a~so
be taken into
account in other cases where appropriate.
6. Costs for the arbitration procedure Will be borne in
the following manner:
(a)
the
Each State
~emb~r(s)
tation in
~he
sha~l
bear the cost of
r~muneration
for
appointed by it, as well as :or its represenproceedings before the
~rbitration
~oard;
-29-
(b)
the cost of remuneration f")r the other member(s)
and all other costs of the arbitration board shall be shared
equally between the States; and
(c)
the arbitration board may decide on a different
allocation of costs.
if it deems appropriate 1n a specific case, in view
However,
of the nature of the case and the roles of the parties, the
co:r.pet.::;:~
authority;): ::::..:> cf tr..:: Stat-=-s may :'"-=-quire the
taxpa:'-=-~(s)
to agree to c.::ar that :;tate's shar-=- of the costs
as a prerequisite for arbltration.
7. The competent authoritles may agree to modify or
supplement these procedures; however, they shall continue to
be bound by the general
XXVIII.
p~lnciples
established herein.
In reference to Article 30 (Exchange of
Information and Administrative Assistance)
I~
a United States "reportlng corporatlon"
(as defined for
purposes of section 6038A of the United States Internal
Revenue Code)
that 1S a Cnlted States resident, or a United
States permanent
corporation~
nelt~e~
relevant
es:ab~
:~ansa=~lon
~.
'1
i.:nlted States "reporting
that lS not a Unlted States resident, has
possession of
t;
:'5!"_--=-;::
n~~
a::ce5S :0 records that may be
the Unitec States lncome tax
between
1t
anj a
fO:-~lgn
treatment of any
n~~lated
party"
(as
Internal
- 30-
Revenue Cooe), and such records are under
t~lP
("'ontrol r)f a
Netherlands resident and are maintained o"':.:ide the United
States, then the United States shall request such records
from the Netherlands through an exchange of information
under Article 30 (Excha::g<? cf Information a.nj Ad.':linistrative
Assistance) before issuing a summons for such records to the
United States "reporting corporation", provid<?d that under
a.ll th<? circumstanc<?s
~~os~r.tod,
obtainable through the
r<?q~est
basis. For purposes of
t~lS
considered to be
availab:~
~h~
records
on a timely
w~ll
a~d
be
~fficient
paragraph, recorcs will be
C~
a
~i~ely
and efficient basis
if they can be obtained within 180 days of the request or
such other period agreed upon in mutual agreement between
the competent authorities. except where the statute of
limitations may expire in a shorter period. Similar principles shall apply with respect to the application of section
6038C.
It is understood that for purposes of applying the conduit
base reduction test set forth in subparagraph (d) of paragraph 5 of Article
::~
competent authority of
matter, confine its
on Benefits), the
,:":..~:'t3:i:ln
of
o~<?
req·~·~sts
States will. as an initial
th~
:or
:..~formation
with respect to
a reSident of the other State to the information necessary
to
determ1~e
defined ::':1
whether
suc~
subparagrap~
reslde~:
'::;)
1S a
CO~du1t
company, as
0: paragraph 8 ot Ar::icle 26.
-31-
Such competent authority will request additional information
needed to determine whether the conduit b?se reduction test
has been satisfied only after determining that a company is
a conduit company.
XXIX.
In reference to paragraph 1 of Article 30 (Exchange
of Information and Administrative Assistance) .
"admlni.str-ation"
l
0:
A~ticle
Assistance)
corr~"it:ees
Infc~~tion
0:
:ax~s,
(Exchar.9~
30
include,
as :ha: term is
:n:or~ation
of
"~eneral
::':1 paragraph
and Administrative
in the United States,
of Congress" anj the
~:3-:::::
the "tax-writing
Ac:oc.nting Office".
exchanged ur.jer the Convention that is otherwise
confidential under the Convention may be received under the
same requirement of confidentiality by these bodies and may
be used only in the
the
a~"inistration
per:o~ance
0:
their role of overseeing
of United States tax laws.
Cor.g~ess's
and the "General Accountlng Office's" role in
ove~se~~r.g
the
Gnd~r-stood
to be
ad~inistra:lon
l~~,l:.ed
:'0
0:
Cnited States tax law is
ensur~ng
that the administration
and conslstent with leglslatlve lntenL.
-32-
xxx.
In reference to Article 31
(Asc~stance
and Support
in Collection) .
It is understood that in applying Article 31
Support in Collection)
(Assistance and
the following shall be taken into
account:
~.
The requested State shall
nc~
be obliged to accede to
the request of the applicant State:
(a)
if the applicant State has not pursued all
appropriate collection action in its own
jurisdiction;
(b)
in those cases where the administrative burden for
the requested State is disproportionate to the
benefit to be derived by the applicant State.
2. The request for administrative assistance in the
recovery of a tax claim shall be accompanied by:
(a)
an official copy of the instrument permitting
enforcement in the applicant State;
(b)
where appropriate, certified copies of any other
document required for recovery;
IC)
a certification by the competent authority of the
applicant Sta:e that. under the laws of that State,
the revenue
For the
pu_p~ses
de~e~:ned
c~al~
has been finally determined.
of this Article. a
when the
3pp::ca~:
S~ate
r~venue
claim is finally
has the right under its
internal law to collect the revenue claim and all adminis-
- 33-
trative and judicial rights of the taxpayer to restrain
collection in the applicant State have lapsed or been'
exhausted.
3.
A revenue claim of the applicant State that has been
finally determined may be accepted for collection by the
cO:-'petent authority of tt:e req·...:ested State and,
the provisions of paragraph 7,
.::-j
~::
the
,:~.?
:--?T..lested
r~quested
.s~~:.~
State's ow::
.1S
subject to
if accepted shall be collect-
t!-:.:'...:::;::
r~ven~e
suc~
claim
reV'2:::"';'c claim were
fina~~y
determined
in accordance with the laws applicable to the collection of
the requested State's own taxes.
4.
Where an application for collection of a revenue
claim in respect of a taxpayer is accepted:
(a)
by the United States,
the revenue claim shall be
treated by the United States as an assessment under
United States laws against the taxpayer as of the
time the application is received; and
(b)
by the Netherlands,
the revenue claim shall be
treated by the Netherlands as an amount payable
under appropriate Netherlands law,
the collection
of which is not subject to any restriction.
J.
ing
0:-
~0:hlng
in thiS A~::c:e s::a:l be c~nstrued as creat-
pro"iding any rights of ad..rninistrative
01
judicial
reVlew of the applicant State's finally determined revenue
c~a:m by the requested State,
based on any such rights that
- 34-
may be available under the laws of either State. If, at any
time pending execution of a request for
this Article,
ass;~tance
under
the applicant State loses the right under its
internal law to collect the revenue claim,
the competent
authority of the applicant State shall promptly withdraw the
~ol~ection.
request for assistance in
6.
Subject to this paragraph, amounts collected by the
~o
requested State pursuant
to the competent
autho~ity
this Article shall be forwarded
of the applicant State. Unless
t~e
the competent authoritleS cf
States
othe~wise
agree,
the
ordinary costs incurred ln providing collectlon assistance
shall be borne by the requested State and any extraordinary
costs so incurred shall be borne by the applicant State.
7.
The requested State may allow deferral of payment or
payment by installments,
if its laws or administrative
practice permit it to do so in similar circumstances, but it
shall first
inform the
applica~t
State. Any interest re-
ceived by the requested State as a result of the allowance
of a deferral of payment
transferred to the
C~
payr.ent by installments will be
co~peten:
authortty of the applicant
State.
8.
A revenue
collect~on
ty
acco~jed
cla:~
~:
3~
ap~:l:ant
State accepted for
shall not have in the requested State any priori
to the
reven~e
c:alms of the requested State.
- 35-
9.
The competent authorities may under this Article
grant assistance in collecting any tax dQEerred by cperation
of paragraph 8 of Article 14
10.
ICC\pital Gainsl .
The competent authOrltles of the States shall agree
upon the mode of application of this Article. The competent
a~:~=~i:ies
of the
supplement these
S:a:~5
~ay
proced~~es.
~~~:her
however,
agree to modify or
they shall continue to
Text as Prepared for Delivery
Adv 1 p.m. PDT (4 p.m. EDT)
October 14, 1993
REMARKS OF DEPUTY TREASURY SECRETARY ROGER ALTMAN
LOS ANGELES AREA CHAMBER OF COMMERCE
LOS ANGELES, CALIFORNIA
I'd like to speak with you about President Clinton's economic program. The recent
legislative struggle over the budget was so intense that it may have obscured our overall
strategy. Let me try to dispel some of the fog.
The new budget is just one element in an integrated economic strategy whose main
goal is to raise investment in this country. Increasing investment will raise our
productivity, increase real incomes and restore and improve Americans' standard of
living.
We're doing this through deficit reduction. We're doing it through investing in our
work force. We're doing it by making government smaller and more efficient. We're
doing it by controlling health care costs to improve business margins. And we're doing
it through trade policy.
Now, before I get into some of the fine points of what we're doing, let me make it
clear here at the top that the Clinton Administration is doing everything it can to get the
California economy turned around. We know you've been hammered economically. The
unemployment rate is 9.4 percent, well above the national average and far, far too high.
I am aware that the Base Closing Commission will add another 31,000 civilian and
military personnel whose jobs will be lost in California -- and that is only the direct loss.
But we know that one cannot focus on the U.S. economy without paying attention to
California. One job in every nine is here in California. That's why so much of what we
are doing is aimed at this state. The president has been here six times and I'm sure he'll
be back many more times. Commerce Secretary Ron Brown, who was here just
yesterday, is in charge of the president's California Task Force. And let me add, that
task force is doing some critical work getting projects through the pipeline, working to
tum Fort Ord into a job retraining center. They even helped us out at Treasury working
on the research and development tax credit that's important to high-tech states such as
California.
LB-429
Pg. 2
The reason we're devoting so much attention to California is because we know that
when we see the California economy beginning to respond, we'll know our policies have
taken hold sufficiently to turn the national economy to what it should be doing growing and creating new jobs.
The Task Force is getting down into the more state-specific things the administration
is doing, but it is important to look at the specifics of what we are doing for the economy
as a whole. The chief goal of the president's economic plan is to raise the level of
investment in our work force, in business and in our economy.
Many Americans are not fully aware of the poor trend in U.S. investment, but the
United States' private business investment significantly lags our G-7 competitors. The
Japanese and Germans invest 14 and 10% respectively of GOP while the U.S. averages
only 7.6% for gross business investment. Measured another way - net private investment
- we hit a forty year low last year.
This underinvestment has impacted virtually every American. There is an iron
linkage between investment, productivity and real incomes. The biggest reason that so
many of our citizens have seen stagnant or even falling incomes has been the chain
reaction effect of the investment deficit on their standards of living.
It's why they are finding it harder and harder to own a home or send a child to
college and why their economic anxiety is so high.
It will take some time to reverse the stagnation in standards of living. Years of
underinvestment cannot be cured overnight or in four years. But, the president felt an
obligation to take up this challenge, and he did so immediately upon taking office.
The first step to cure this, of course, was our budget. Every one of the president's
original budget principles, set forth in the State of the Union address, was embodied in
the final legislation. But, the key goal was to get the deficit down, way down.
The new budget cuts the deficit by $500 billion over five years. There are no
gimmicks and no rosy scenarios. The latest estimate we have suggests that the deficit for
the fiscal year that ended last month will be well below $260 billion, or about 4 percent
of GOP. That is down from the $285 billion we anticipated when we made our midsession review. With the new budget, it will fall to $180 billion a year over the 19961998 period, or 2.2% of GOP by 1998. In other words, relative to its impact on the
economy, the deficit will be cut by nearly half.
.Pg.3
Many ask, of course, if the projected amount of deficit reduction will really occur.
After all, there were similar promises made in the 1990 budget agreement, but large
deficits persisted. That earlier agreement suffered from two flaws, however, which we
have avoided here. In 1990, the economic growth projections in that agreement were
much more optimistic than the consensus private forecast of the time. Sure enough the
rosy official forecast didn't materialize and neither did the government revenues
associated with it. Its other weakness was a failure to take on entitlements which soared
above the 1990 projections. Not only did this administration achieve $64 billion in
Medicare and Medicaid reductions in the new budget, but our health care proposal
quadruples that, $240 billion.
Furthermore, Vice President Gore just unveiled the reinventing government initiative.
Coming from Democrats, these changes have a real chance of being realized. And, we
have projected another $58 billion of spending cuts over five years, particularly from
personnel reductions of more than 250,000 people and changes in the procurement
policies.
The second plank: of the Clinton economic strategy is selected public investment.
The president believes we have seriously underinvested in a few areas which vitally affect
our work force. Our economic plan made some changes on that front too. The two
most profound were expansion in the Earned Income Tax Credit (EITC) and the
National Service Plan. The former says, in effect, that families headed by full time
workers will no longer live below the poverty line. This promotes work over welfare.
The EITC will assist almost 20 million American families and low-income workers to
continue to work. After all, remaining in the work force, even at a lower wage, is the
best known way to escape poverty. The National Service Plan allows young Americans
to make a contribution to their country in return for help with the cost of a college
education.
In addition, we have committed substantial resources for defense conversion, which is
critical for California. What we're doing is paying attention to the kinds of investment
that will make the U.S. more productive, competitive and create new jobs. I think that's
the right approach.
We're also taking other steps that will help our economy become more productive
and competitive. For instance, you'll find that this administration wants to build
partnerships with the business community that will help commercialize the clean car
initiative, where the national government teamed up with Ford, GM and Chrysler to
develop more efficient automobiles.
And look at our program for information highways, which is another of the
president's initiatives. With that, we want to create the regulatory climate that will
encourage the private sector to develop the national information infrastructure we need.
Pg.4
Now that we have laid the groundwork with deficit reduction and investments, much
of our focus is on the other two elements of our economic strategy - health care and
trade. Three weeks ago, the President made a historic speech on health care, laying out
the social reasons to change our health care system, including universal coverage, and
the economic ones. Let's talk here about the economic side.
Last year, health care expenditures represented 14% of gross domestic product. By
the year 2000, based on common trends, the figure will be 19%. No other industrialized
nation is seeing health care consume such a high share of personal incomes and
employer payrolls. The share of GDP for Canada is 11% and the other G-7 countries
are in the 8-9% range. Per capita spending in the United States on health care was
about $3,400 last year. Germany and Japan spend half as much. And our health is no
better than theirs. This means a grossly inefficient allocation of U.S. economic
resources.
The inflation in private and public health care spending is also completely out of line
relative to the rest of our economy. On the private side, it is three times the national
average, and on the public side, four times. There, we're seeing explosive growth in
Medicare and Medicaid. The Medicare program today costs $130 billion annually. Over
the next five years it is projected to soar, reaching $213 billion a year. Medicaid is
growing even faster. It doubled in the eight Reagan years and then doubled again in the
four Bush years. Beyond 1997, if we do nothing, these two entitlements alone will push
the federal deficit back up -- despite everything we've done already to get it down.
We're going to rein in our costs by applying two old fashioned principles competition and consumerism. Right now, there's too little competition. Insurers and
providers have most of the leverage. All but the largest businesses are at a disadvantage
in negotiating premiums. And, there's too little consumerism. Too few consumers pay
a meaningful share of their health care bills, and so they don't shop around among
providers.
To get competition going, each state will form one or more non-profit regional
alliances, covering all employees and non-workers. These will negotiate for coverage
with providers for the most affordable quality coverage. The purchasing power inherent
in this approach, like the German system, will tilt the playing field in favor of the buyer.
Moreover, insurers will no longer be permitted to jack up prices based on age or existing
health conditions. And, workers won't be locked into jobs because of health coverage.
The result will be enormous private and public savings. Most businesses which
provide coverage today will see their margins improve.
Pg.5
The average share of payroll which they devote to health care will go down from
more than 10 percent to a cap of only 7.9 percent. This will improve the climate for
business investment and business hiring. And the destructive shifting of uncompensated
care costs to the private sector will end.
We know that there is concern among smaller firms which now will be required to
provide insurance. But, most smaller businesses already provide coverage and pay 35%
more for it than large businesses. And, for those which don't provide it now, there will
be a lower cap on the percentage of payroll which they must devote to health care.
The final component of the administration's economic strategy involves expanding
trade. As our work force and businesses become more competitive, we must ensure we
have open international markets for our goods. The better the prospects for exports, the
more export-related investment will result. Such investment improves job security and
creates jobs that, on average, pay 17 percent more than other domestic jobs.
Presently, the Administration is actively pursuing three major international trade
agreements; the Uruguay round, U.S.-Japan framework, and NAFfA With these
agreements we will have more access to the markets of our three largest trading partners
as well as the world as a whole.
To complement to our strategy of expanding U.S. exports, the president two weeks
ago announced an export strategy that should significantly impact California. We are
relaxing our export controls on the computer and telecommunications industries. Over
at the Commerce Department Ron Brown told me that 40 percent of all export license
requests come from California businesses. We're also proposing four one-stop shops -including one in here in Los Angeles to consolidate all federal export promotion efforts
into a one place. Further, we are planning to create a $150 million fund within the
Export-Import Bank to counter the tied-aid practices of some of our competitors. There
are estimates that we lose as much as $800 million in export sales each year because of
such practices. Tied aid will now link U.S. aid dollars to more U.S. exports and jobs
back home.
In looking at the trade agreements that can create employment opportunities for
Americans, our immediate focus is on NAFfA -- although we are devoting considerable
energies to the Japan framework talks also.
We have a tough fight ahead, and what we must do first is to correct the
disinformation that exists concerning NAFfA To listen to the opponents, you'd think
that the agreement was going to devastate American labor. But, from the Congressional
Budget Office, to the General Accounting Office there have been 19 studies of the
impact. Eighteen of them - yes, 18 - have concluded that it will create jobs. The
Administration estimates that it will create 200,000 jobs in the early going.
Pg.6
Someone showed me a story from the Orange County Register the other day that
quoted an economist from Cal-State-Fullerton as saying Orange County could pick up a
net of 800 jobs from NAFfA in the first year, and 10,000 jobs by 1999. With NAFI'A,
Mexico will be eliminating computer and auto duties as high as 20 percent. Opponents
must remember that here in California there are nearly 90,000 jobs that depend on trade
with Mexico, and nearly half of them have been created in the past five years alone.
To listen to the opponents you'd think we had a large and worsening trade deficit
with Mexico. But, the United States runs a $5 billion trade surplus today and it's
growing. Nearly 16 percent of all the trade we do with Mexico comes out of California,
and that's up by $4.3 billion in the past five years. And this despite their tariffs
averaging 2.5 times higher than ours. As both countries' tariffs move to zero, and
Mexico eliminates its local content requirements, the U.S. trade surplus will grow further.
This is why 48 of 50 states have seen increased trade with Mexico over the past five
years. Why 41 of 50 Governors support it. And, Governors know more than most about
creating jobs at home.
In the most basic sense, we must ask ourselves whether increased exports have ever
led to fewer jobs? Of course not. Has increased trade ever led to less prosperity?
Never.
Recently, the President characterized NAFfA as a choice between embracing change
and creating the jobs of the future, or clinging unsuccessfully to the jobs of the past.
Americans are optimists. We have always adapted to change and looked to the future.
And we have prospered by doing so.
I would also point out that if we decide not to take advantage of the Mexican market
through NAFfA, the Japanese and Europeans would be delighted to get that business.
Our goals, of course, are to complete the Uruguay Round and NAFfA, and to use
the new Japanese framework agreement to accomplish fairer trade there. Achieving all
three will give us the best trade record of any administration in many years.
In closing, let me point out that the Clinton economic strategy is already working.
You all know about the breathtaking fall in interest rates which has occurred in
recent months. Yes, there are several explanations, including the favorable inflation
outlook and weak credit demand. But, a central reason as so many press accounts and
commentators have said, is $500 billion in real deficit reduction.
Pg. 7
The interest rate change has enabled credit-sensitive industries -- like autos and
housing -- to pick up. But the best reflection of the effect of low interest rates is
business investment. Businesses have increased their purchases of durable equipment by
more than 15 percent in the first half of this year over 1992.
All of this has been gradually improving the employment outlook. For the first eight
months of this administration, in the private sector alone, we have been creating new
jobs at more than six times the rate (6.33) of the Bush administration - 133,000 per
month on average in the private sector against 21,000 per month on average across the
Bush administration.
Overall, I hope you will leave here today recognizing that this administration is
breaking from the past. In recent years, every thinking person knew that the deficit was
corroding our country. But, it wasn't brought under control. We are doing that.
Most Americans agree that our health care system is broken, and President Clinton
we will finally see comprehensive reform.
And, the Clinton administration will produce three crucial trade agreements. Except
for the Canadian treaty, we haven't entered into a major trade agreement in 14 years.
We're not just talking about change, we're implementing it. In the process, we're
fulfilling the mandate of last year's election, where nearly two thirds of the voters called
for a change in national direction. Our agenda may be a crowded one, but the American
people will ultimately judge us on deeds. And, when the dust settles, they'll be satisfied.
Thank you.
-30-
Text as Prepared for Delivery
For Immediate Release
October 14, 1993
REMARKS OF TREASURY SECRETARY LLOYD BENTSEN
TEXAS INSTRUMENTS
DALLAS, TEXAS
They warned me that on this trip home I'd have to be giving a few pep talks,
because not everybody in Dallas is sold on NAFTA yet.
But after what Jerry Junkins just said -- 2,000 jobs for Texas Instruments if this
passes -- you sure don't need any pep talk from me, do you?
The next time anybody tells you that NAFTA means jobs heading south,
I'm heading them north on Central Expressway to 11. I want them to see what I see.
A billion dollar plant going up in Dallas -- owned by Americans, using American knowhow, and American workers, who want nothing better than to take on the world.
The future of the American electronics industry is in America -- not Mexico, not
Canada, not Japan, not Europe. America. We can still cut it in this country, especially
when we have workers like those at Texas Instruments who win Baldridge Quality
Awards.
People who are against this treaty are sincere -- wrong -- but sincere. They would
have you believe that the only factor companies use to locate a plant is wages. So they
say if this passes, jobs will head south because of the low wages.
Now, if we used that logic, Bangladesh would be our biggest competitor, wouldn't
it? Yet look who our biggest competitor is -- Japan, where wages are 30 percent higher.
I understand Texas was not a shoo-in to get this plant. You don't make a billiondollar investment, until you check out all your options, and I know the one option you
checked out pretty seriously was locating this in Japan.
But you came to Texas for a lot of reasons. The cost of capital, the infrastructure,
the closeness to existing facilities, the great universities around here. And in the end, it
will be the people who work at this place who will make it successful. It always is.
LB-430
-2-
I know Texas Instruments is all over the world. Some of the other companies
represented here today are all over the world, too. You need to be to get the best
talent, the best resources, and, most of all, you need their markets.
With all this talk about wages we're forgetting to focus on what Mexico offers us:
a market with 90 million people that is growing twice as fast as the U.S. market.
The Japanese are always on the lookout for lucrative markets. They found one in
the United States in the '70s. Now they see Asia as a great opportunity, and they've
pursued that much more aggressively than we have.
But Mexico is where we have the advantage. It's our neighbor. And Mexicans
like American products. We export $40 billion a year there, almost half of which comes
from Texas. Seventy percent of the imports they buy are American goods. Last year,
each Mexican, on average, purchased more U.S.-made products than the average
Japanese, German, or Canadian.
I was born and reared on that border. On the Mexican side, I haven't always seen
a willingness to be partners. I've watched Mexican politicians campaign against us as the
colossus of the north, the gringos.
They've changed. For the last six years, they've opened their markets and bought
our products, and that has already created 400,000 more jobs in this country. Half of all
Texas jobs supported by Mexican exports have been created in the last five years. We've
gone from a $6 billion trade deficit with them, to a $5 billion surplus.
But right now, in spite of liberalization, the average product entering Mexico from
the U.S. is slapped with a 10 percent tariff. It's that way with electronic goods. But
Mexican products entering the U.S. get, on average, a 4 percent tariff. And some
products, like semiconductors, have no tariff. So their tariffs are two-and-a-half times
ours. That's not a good deal, and we're on the bad end of that deal.
When this passes, half of our goods headed to Mexico will be eligible for zero
tariffs. Within five years, two-thirds will be. And these zero tariffs will apply only for
our goods and Canada's goods. Not Japan's. Not the EC's.
Last month, I went to a unionized forging shop in Chicago. It's a small company,
maybe 450 employees. They just started selling products in Mexico. When I talked
about NAFfA, many employees were skeptical. They had heard the warnings: if
NAFfA passes, jobs move south.
-3-
So I asked the owner flat out: "Are you planning to move jobs out of Chicago
and into Mexico?" The answer was no, but the workers were still not convinced. When
I said, "If you don't take advantage of doing more business in Mexico, your Japanese and
European competitors would be glad to," then they heard me better.
If we don't sign up, Mexico will look to Japan and Europe to sign trade
agreements. President Salinas said so last weekend. I bet they'd sign up in five minutes.
Japan is always looking for lucrative markets. They found one here in the '70s.
They are pursuing Asia more aggressively than us. So the 200,000 new jobs that could
be created because of increased Mexican business will be created, but in Europe or
Japan -- not America.
If this fails, our market will stay open, but Mexico will be able to jack trade
barriers right back up.
We'd hurt our chances to open Latin America, which after Asia, is the fastest
growing market around -- and already our exports there are rising substantially faster
than they are to Europe.
If this fails, it would have a negative effect on out GAIT trade negotiations.
We won't address environmental concerns on the border. In the Senate of the
United States, I talked about millions of gallons of raw sewage headed to the Rio
Grande, and babies born with brain damage on the border. And nobody listened.
Finally, we have a green treaty that will help clean up the environment.
And if this fails, we'll still be importing illegal immigrants from Mexico. There's
an awful lot of truth to the statement that if Mexicans don't have jobs, Americans will
have Mexicans.
I can't remember a political debate like this. President Clinton and all former
Presidents support it. It is a bi-partisan trade bill. Forty-one of 50 governors support it,
including our Governor. And they know about jobs, because they get elected only if they
create jobs.
There's still some Congressmen in Texas who haven't made up their minds how to
vote yet. With your help, I hope we can convince people that this thing is good. If it
wasn't good for Dallas, for Texas, for America -- I wouldn't be out here supporting it.
-30-
Text as Prepared for Delivery
For Immediate Release
October 14, 1993
REMARKS OF TREASURY SECRETARY LLOYD BENTSEN
CHILDREN'S MEDICAL CENTER OF DALLAS
DALLAS, TEXAS
Tonight I want to say thanks, but not just for this award. I want to thank all of
you for what you do every day for the kids of Dallas.
I'm a lucky man. I have my health. I have a loving family. I don't have money
worries. I was honored to serve Texas for 22 years. And now I have a challenging job at
Treasury, shaping economic policies.
But I want you to know something. Since January, I don't think there's a kid in
all of America who's told me: "Mr. Bentsen, when I grow up, I want to be Treasury
Secretary of the United States." In fact, not many adults have told me that!
But I bet at least once a week, a child looks you straight in the eyes and says with
a great big smile: "1 want to be a nurse. Or I want to be a doctor." And many of them
will be, because you've touched their lives.
We talk a lot about health care in Washington. But we can't talk about it like
you can. We look at it from the outside-in. To really understand, you have to be
inside -- in hospitals every day. In a doctor's office -- living the challenges.
And those who really know it best -- they're the ones who don't have their health,
and they don't have insurance. And many of them are children, who don't vote, don't
hire lobbyists, don't make policies, don't have any voice in the debate on health care -but they are our future.
So, when I became a Senator, and I could have some impact on health care,
I wanted to do two things. I wanted to help the very old, and I wanted to help the very
young -- the two groups that are the most vulnerable in our society.
One lesson I learned was how difficult it is to reform the system. We never could
get comprehensive health care through. We had to move forward when and where we
could. That meant a step at a time.
LB-431
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I remember the first step in 1984. We extended Medicaid to make prenatal care
available to first-time pregnant mothers in low-income families. Every year or two, we'd
take a new step. One year we let states have the option to expand coverage. Another
year, we extended Medicaid to children up to age six. Then we got it all the way up to
18 if a child's family income was low enough.
In nine years, we helped millions of kids. And I notice that the new Census data
show we're doing better at insuring kids due to these Medicaid changes -- but we're
doing worse with respect to adults.
And we're not there with children yet. Not when the Children's Medical Center
of Dallas has $47 million a year in uncompensated care.
Now you will see some things in health care reform that you won't like. There
are things that you would do differently and maybe I would do differently. It's perhaps
the most complicated issue we've ever faced in Washington.
But President Clinton has risen to the challenge. He wants universal coverage in
this country. And let me just say, there should be no partisan solution to how to get it.
There is no party or branch of government with all the right answers. There is only an
urgent need to work together. So, I think the President deserves all of our support, and
I hope you bring forward your ideas as the legislation is drafted.
There will be many good things that will come out of this. Never again will you
have to see patients who don't pay. Never again will parents hesitate to bring a sick
child in because they can't afford it, and so by the time you see that child his illness is
way too serious. And far fewer kids will die of diseases we know how to cure.
I remember the measles outbreak in Dallas three years ago. Ten children died -- for no
reason. Under the President's plan, we will emphasize insuring preventive services.
My last year or two in the Senate, I travelled the state to discuss health care.
From Texarkana to El Paso. From the Panhandle to Paris. The story was the same.
Businesses, large and small, couldn't afford it. It was busting them.
The small companies watched their rates shoot up 40 percent. If their businesses
didn't fit the profile of a company with all young and healthy people, insurers might pass
them by.
I know how the state legislature tried to reform the insurance system. It's a good
start, but until we have universal coverage it will be impossible to do it right.
-3-
And when I went around the state, the large businesses told me they couldn't
keep picking up the tab for all the people who weren't paying. They compete with
companies in Europe and Japan -- and their competition doesn't have health care costs
like U.S. companies do.
Here we're spending 14 percent of our incomes on health care. Japan and
Germany are down around 8 or 9 percent. If we do nothing, we will be at almost 20
percent by the end of the decade, and no one else will be over 10 percent.
And the really troubling part is that every one of those countries paying less than
us covers all of their citizens -- and we still have 15 percent of the population with no
coverage. Here in Texas, that number is 26 percent.
In my job at Treasury, I attend meetings with my counterparts in Europe and
Japan. Many of those countries are struggling with recessions. In fact, if longevity of
finance ministers is any indication of a country's economic health, eight months ago when
I met them for the first time, I was the freshman in the class. Now, I'm the second most
senior guy!
They all look to America. Here we are the only remaining superpower. We have
cut our deficit. We have the lowest long-term interest rates in two decades, the highest
stock market, employment up by more than a million since January, and we're growing
faster than the rest of the industrialized countries.
And here we are with world-class doctors, world-class medical facilities, and
world-class technology. Nobody in this world has the kinds of resources we have. But
we don't have world-class health care delivery.
We're not the model on this one. The other countries are. For a country as rich
and as powerful as ours, we're behind. We need to become more efficient. We need
to cut the waste. And most of all, we need to keep health care in the private sector and
put some competition into the system.
Let me mention two other things that have an impact on children's health.
First, gun control. We have to stop the violence on the streets that ends up with
kids in the emergency room in this hospital.
I have been a gun owner all my life. As any serious gun owner will tell you, it is
unconscionable to allow children without the proper training or supervision to be around
guns. Unconscionable. But it happens, and we have to stop it. The Brady Bill is a good
first step, and that's why the President is working hard to see that pass.
-4-
Second, and finally, there is NAFfA -- the free trade agreement with Mexico and
Canada. NAFfA is about jobs, and I spent today with businessmen like Jerry Junkins
who told me that Texas Instruments could create 2,000 new U.S. jobS if this passes.
There's something else NAFfA will do. It will clean up the border. For years, as
the Senator of this state, I tried to address environmental concerns, but nobody listened.
I've seen millions of gallons of raw sewage head to Rio Grande. I've seen babies born
with brain damage. With NAFfA we have a chance to clean up the environment for the
kids, and so we're going to be fighting -- and fighting hard -- to see passage.
Let me end with this. Health care is an issue that tells a lot about America. One
reason we've had a place like the Children's Medical Center for 80 years is that we have
a tradition in this country.
A tradition that every generation always wants to make life better for our
children. That has always required sacrifice. And we will keep making those sacrifices,
because we're not going to tum our backs on our children. We're not going to deprive
them of a healthy start in life.
This place says a lot about the kind of people we are and the kind of society we
want to build.
So does universal health care coverage. What we do in Washington will mean
more to Texas children than children in any other state -- because Texas has so many
kids who don't have insurance.
You know, the balloon on this trophy you gave me it's headed up. So I accept
this award, with deep gratitude, and with high hopes that we can all lift ourselves up
higher, and higher, and higher.
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Text as Prepared for Delivery
For Immediate Release
October 15, 1993
REMARKS OF TREASURY SECRETARY lLOYD BENTSEN
UNIVERSITY OF TEXAS-PAN AMERICAN
S. PADRE ISLAND, TEXAS
It's always nice to come back to Texas, and to see all the changes. I was thinking
how my father came to the Rio Grande Valley when the land was brush land. And
people came from allover to farm it, and the county became the largest producer of
vegetables and citrus in Texas.
Then oil and gas came to the Valley, then manufacturing, and now international
trade. Always changing.
And I was thinking about all the changes on the other side of the border. For
years, I'd watch Mexican politicians campaign against the United States as the colossus
of the north, the gringos. But now President Salinas is looking to us as a trading partner
-- a true one.
For the last six years, Mexico has lowered its tariffs, opened its markets, and
bought our products, and that has created 400,000 more jobs in this country -- many of
them here in Texas. Half of the Texas jobs dependent on Mexican exports have been
created just since Mexico began lowering its tariffs.
In the Valley, people see what change has brought. They've left old jobs for new
ones. They've adapted. And they've prospered. If they hadn't made those changes,
they'd be left behind today.
In the Midwest, and New England, and the North change came, too. But people
weren't so lucky. .Mills started closing. Factories shut down. Auto and steel workers
lost their jobs. And plants that made TV sets and radios went to the Far East~ Today,
we have fewer manufacturing jobs than we did in 1965.
People remember those closings. And they still see layoffs at the big companies.
It doesn't make news when small companies around America open shop -- but pick up
the paper any day, and some Fortune 500 company is downsizing, which means another
couple thousand people are on the streets.
LB-432
2
That's why labor is so sincerely opposed to NAFrA They want to hang on to
what they have. But you can't hang on -- not when the world around you is changing.
They say if this passes, jobs will head south because of the low wages. Baloney.
Jobs can go south now. BMW and Mercedes would be building their new plants in
Mexico rather than the U.S. if all they were concerned about were wages.
If we used that logic, Bangladesh would be our biggest competitor. Look who our
biggest competitor is -- Japan, where wages are 30 percent higher. I remember when it
was Japan that people feared as the low-wage country, but it has been a long time since
Japan could be called a low-wage competitor.
The NAFTA debate should not be about what country will lose jobs. It should be
about which will gain the 200,000 jobs to be created -- America, Japan, or Europe?
The labor unions are missing a point. Change - which they cannot stop -- will
mean more jobs will be dependent on trade between countries. Now, one in eight jobs
in this country depends on trade. One in six in Canada. One in six in Mexico.
I can understand their apprehensions because of what happened in the past.
What surprises me is why now -- why after they've just spent the last five or 10 years
helping make their companies so competitive and so quality conscious.
There may be fewer manufacturing jobs now than in 1965, but those workers
produce far more. American workers are the most productive in the world. And it's
that productivity -- along with infrastructure and resources - that will help determine
where plants locate in the future, not wages.
Yesterday, I was at Texas Instruments. They're building a billion dollar
semiconductor plant in Dallas. Dallas was not a shoo-in to get the plant. You don't
make a billion-dollar investment, until you check out all your options, and the other
option Texas Instruments checked out pretty seriously was locating the plant in Japan.
But they came to Texas for a lot of reasons. The cost of capital, the
infrastructure, the closeness to existing facilities, and the great universities in Texas. And
in the end, it will be the people who work at the place who will make it successful.
It always is.
Jerry Junkins at TI told me that with NAFTA, he thinks they'd do enough
increased business to hire another 2,000 people.
3
And this morning I was with the Chamber of Commerce in Dallas, where I saw 10
products on display -- products built here, and sold in Mexico. Drill bits. Fax modems.
Kits for blood tests. Industrial strength cleaning fluids. Even a table-top com dog
processor. They tell me they'll sell more, when we have NAFfA
I hear similar stories all over the country. Look at Procter & Gamble, one of the
companies downsizing right now. They're reducing their staff, but things would be worse
without Mexican business. Six years ago, they exported nothing to Mexico. When this
thing passes, they say they'll be able to export $200 million in products. That's 1,500 to
2,000 jobs there or at their suppliers.
The auto industry, whose unions are some of the most vocal against NAFfA, says
they can go from selling a few thousand units a year in Mexico to 60,000. NAFfA
would lift the tremendous trade barriers they now face when selling an American-made
product in Mexico.
Chrysler sold five Jeep Cherokees in Mexico all last year. Five. One every ten
weeks. GM didn't sell a single Saturn. Ford didn't sell a single U.S.-built Taurus -- the
best selling car in this country. They could not sell a single .one in Mexico.
And you'll hear people say, yeah, but they'll move the auto plants to Mexico
because of the low wages. What they don't tell you is that it costs $410 more to build a
car in Mexico than in the United States because of an inadequate infrastructure in
Mexico - and transportation and communications network. Wages are only around 8
percent of the costs of building a car in this country. There's a lot more to it than
wages.
But I'll tell you what will happen if we don't build the 60,000 cars and trucks here.
European or Japanese automakers with excess capacity would be glad to ship 60,000
units into Mexico.
If we don't sign up, my friends in the energy industry in Houston tell me that
much of the $10 billion in capital equipment for power generation Mexico will buy by
1999 will most likely be produced in Japan, Germany, or Switzerland.
If we don't sign up, Europeans or Japanese would be more than interested in
finding a market with 90 million people growing twice as fast as ours. They'd sign up in
a minute.
The Japanese are always on the lookout for lucrative markets. Now they see Asia
as a great opportunity, and they've pursued that block much more aggressively than we
have.
4
But Mexico is where we have the advantage. It's our neighbor. You probably
spent the last day and a half hearing how Mexicans like American products. Seventy
percent of the imports they buy are American goods. Last year, each Mexican, on
average, purchased more U.S.-made products than the average Japanese, German, or
Canadian.
We export $40 billion a year there. Of that, about $19 billion came from Texas.
Texas alone sold double what 'Europe and Japan sold in Mexico - combined.
But don't be fooled by the big numbers. H you look at how Europeans and
Japanese have increased their exports in the last few years, you'll see they're capable of
moving in aggressively.
Last month, I toured a unionized forging shop in Chicago that has started selling
products to Mexico. When I first talked about NAITA, many of the employees were
skeptical. They had heard the warnings: if NAFfA passes, American businesses move
south.
So I asked the owner flat out: "Are you planning to move jobs out of Chicago
and into Mexico?" The answer was no. But the workers were still not convinced. But
when I said "H you don't take advantage of doing more business in Mexico, your
Japanese and European competitors would be glad to," then they heard me better.
Those steel workers want to compete - but right now they're at a handicap. In
spite of liberalization, the average product entering Mexico from the U.S. is slapped with
a 10 percent tariff. Mexican products entering the U.S. get, on average, a 4 percent
tariff.
So, tariffs there are two-and-a-half times higher than what they are here. That's
not a good deal, and we're on the bad end of that deal.
When this passes, half of our goods headed to Mexico will be eligible for zero
tariffs. Within five years, two-thirds will be. And these zero tariffs will apply only for
our goods and Canada's goods. Not Japan's. Not the EC's.
Let me tell you what can happen if NAFTA fails. Our market will stay open, but
Mexico will be able to jack trade barriers right back up. They could raise them up to 50
percent, and still be in compliance with GAIT.
We'd hurt our chances to open Latin America, which after Asia, is the fastest
growing market around -- and already our exports there are rising substantially faster
than they are to Europe.
5
If this fails, it will have a negative effect on our GAIT negotiations.
We won't address environmental concerns on the border. In the Senate of the
United States, I talked about millions of gallons of raw sewage headed to the Rio
Grande, and babies born with brain damage on the border. And nobody listened.
Finally, we have a green trade agreement.
And if this fails, we'll still be importing illegal immigrants from Mexico.
I can't remember a political debate like this. President Clinton and all fonner
presidents support it. It is a bi-partisan trade bill. Forty-one of 50 governors support it.
Our Governor supports it. And governors know about jobs, because they get elected
only if they create jobs.
Some people will lose their jobs because of NAFrA But for every job lost in
Texas, there will be six jobs created to replace it.
If when my family came to America the only thing we wanted to do was to hang
onto the jobs we had, we'd still all be making buggy whips in this country and living on
farms. Times change, and we have to change with them.
Let me wind down with this. I remember a couple summers ago I was in
Denmark, where my grandfather was born. I was talking to the American Ambassador,
and he said: "Uoyd, are you here visiting your ancestor's castles?" I said: "If my family
had castles, they would never have left this place."
There aren't many Americans with kings or queens in our genes. We're a country
of risk takers, whose ancestors came looking for a better standard of living.
NAFrA gives us a chance to improve our standards -- in America, in Mexico, and
in Canada. I don't know another vote that a Congressman or Senator will make this
year that can create 200,000 jobs.
The vote should come up next month in the House. It's going to be tough,
because the opposition is so organized and so vocal. So let Kika de La Garza and his
colleagues know where you stand, will you?
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Text as prepared for delivery
STATEMENT OF LAWRENCE H. SUMMERS
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
AT THE BAIRD LECTURE, MILWAUKEE
OCTOBER 14, 1993
I am delighted to be here today to discuss the "U.S. Strategy for Global
Competitiveness." The President has embarked on an ambitious agenda to put our
economic house in order to provide job security and health security for all Americans.
He recognized in the campaign that investment in America and Americans is
fundamental to restoring our nation's competitiveness.
His strategy is paying off. Growth is picking up, and we are laying the basis for a
solid recovery. Employment growth is not yet where we'd like 'it to be, but, even so,
there have been a million non-farm private sector jobs created since January. That is
more than in the previous four years. But I'm here today to talk about the international
complement to the President's strategy.
The Clinton Administration's guiding principle has been promoting U.S. exports
and expanding world trade. This strategy has two main components: the first is
expanding foreign markets through growth. History has shown that protectionism
increases and the momentum for integration fades during periods of recession. The
second component we have termed "export activism" or reducing barriers in foreign
markets.
The last 30 years has witnessed an
Why is are exports and trade so important?
explosion in international trade, and it is becoming more and more important to the U.S.
economy. Since the mid-1980s, over half of U.S. growth and almost all growth in
manufacturing jobs has resulted from export growth. Today, one in eight American jobs
depends upon trade.
G· 7 Economic Growth:
The first component of the Administration's strategy is expanding foreign markets
through growth. The industrialized world still produces most of the world's output. We
are now in a terrible recession, and one that, unlike the two OPEC recessions, is without
obvious external cause. Its consequences, however, are beyond dispute. Twenty four
million people are now unemployed in the G-7 countries alone, and output in the G-7 is
$340 billion less than its potential level.
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We in the United States have done our part to get the world economy moving.
President Clinton's bold program of deficit reduction has been associated with a decline
in U.S. long term interest rates of 1.5 percentage points. More global prosperity will be
especially important to the U.S. -- increased exports can make up for part of the shortfall
in demand created by budget deficit reduction.
And, to get our economy ready for the challenges of the 21st century, our nation
is embarking on the critical and enormous task of reforming our health care system.
We have made a substantial contribution to fostering growth through deficit
reduction, and we are cooperating with others in the process of restoring job-creating
growth in the rest of the G-7 nations. In February, the G-7 reached on a consensus for a
two part strategy to complement our contribution: interest rate reductions in Europe
and fiscal stimulus in Japan. Since that time interest rates have fallen by roughly 200
basis points in Europe and Japan has put in over $180 billion in fiscal stimulus.
However, these actions have not yet been sufficient to turn the corner in either
Europe or Japan. The outlook for growth in Japan is likely to be, at best, flat this year
and only slightly positive next year. We welcome the fact that the new Japanese
Administration has left open the door open for a tax reform package that would put
more money in the hands of consumers and help get the economy going again.
Japan has committed, in the context of the Summit and the framework
negotiations, to put in place policies that promote domestic demand-led growth and lead
to "highly significant" reductions in their external surplus. As Japan has the strongest
fiscal position in the G-7, it has plenty of room for more expansionary fiscal policy.
In Europe, growth prospects are even poorer. The Europeans do not have the
option of jump-starting growth through a fiscal stimulus program. It is important,
therefore, that they take advantage of their increased flexibility to move further on
reducing interest rates. Although it works at cross purposes in the short run, they must
continue their fiscal consolidation programs to set the stage for sustainable growth over
the longer term.
Creating jobs requires restoring demand, because businesses need to sell more
products if they are to employ more workers. But, as we saw at the last economic peak
in the late 1980's, in the United States and especially in Europe, too many people are
without work even when times are good, even when there is enough demand in the
economy to bring forth the threat of inflation. That is why -- and the Europeans are
beginning to recognize this -- structural changes to provide more flexibility in the labor
market are so important.
-2-
Export Activism:
But it's not enough to make sure our export markets are growing, we must also
ensure our exports can get in. The second strategy in promoting U.S. exports and
expanding world trade is export activism. Trade barriers are a world-wide economic
curse. They cost the developing world more money than is spent on foreign aid each
year. And trade barriers are a problem for the United States as well, because we need
imports.
Before I discuss what we've asked others to do, let me point our that we are also
concerned with self-examination. Two weeks ago, the President launched an effort to
remove the barriers we impose on our own exports, to neutralize the detrimental effects
of foreign export subsidies, and to make sure government is doing everything we can to
help U.S. exporters. Abolishing U.S. export controls has been cited by many exporters as
"the single most important step that the federal government (can) take to boost U.S.
exports in the short term."
The traditional trade policy debate has revolved around two extremes, with
protectionismon on one end and laissez faire on the other. The current consensus on
trade policy seems to revolve around a view that neither defies the free market nor
embraces protectionism. President Clinton has stated that "we must embrace change"
and "compete, not retreat." He also asserted that we must insist that foreign
governments keep their markets open, just as we keep ours open.
Export activism is directed at more trade, not less. It is directed at helping
America's sunrise industries, not protecting its sunset industries. And it is directed at
getting other countries to expand their imports, not reduce their exports.
Export activism recognizes that markets -- as economists model them -- do not
always work and that governments are already deeply in the business of shaping
economic outcomes.
Export activism recognizes that, while the battle may be fought at the border,
domestic policies, in the final analysis will determine whose producers prevail.
Export activism recognizes that effective trade policy cannot be supine nor
reactive. It is not pro-producer or pro-consumer. It is pro-American.
It should not be surprising that now, after the ending of a long, cold war, export
activism has become so popular. In the process of reconstruction after World War II,
Europe and Japan maintained extensive trade barriers to limit the drain on scarce
foreign exchange reserves and to promote infant industries. The United States basically
accepted protection abroad as the price of recovery, fostering stable governments, and
containing communism.
-3-
Now that these countries have caught up to our level of prosperity, it is time they
catch up to our level of openness.
Let me provide some rough indicators of how open we are in comparison to our
major trading partners.
Japan has been able to penetrate 1.6% of our market, but only 0.9% of the EC's.
Europe has been able to penetrate about 1.50/0 of our market, but only 0.8% of
Japan's.
According to World Bank estimates, imports from developing countries accounted
for about 4% of U.S. consumption of manufactured products in 1988 compared to
2.9% in the EC and 3.8% in Japan.
Even in the sectors where we protect Americans from foreign competition, we are
still more open than our major competitors. The U.S. imports more apparel
products per capita than the EC, Japan, or Canada. Foreign automobile makers
sell to 24% of our market, as compared to 12% in the EC and only 4% in Japan.
By the OECD measures, agricultural subsidies in the U.S. are substantially lower
than in Europe and Japan.
We cannot maintain support in this country for keeping our markets 'open by
simply trading minor concession for concession. The disproportionate burden assumed
by the United States in the postwar period now requires that other industrialized
countries, particularly those countries with chronic external surpluses, make a
disproportionate contribution to open their markets.
We are not asking other countries to do what we have not already done ourselves.
Export activism is the basis for our bilateral, multilateral, and regional trade initiatives.
Uruguay Round
Multilaterally, we are moving quickly to conclude the Uruguay Round by
December 15. President Clinton is committed to a "prompt and successful completion of
the Round." Ambassador Kantor met with Minister Brittan of the EC yesterday in an
attempt to iron out the remaining issues. Although the numerous issues are still under
discussion, reopening or reinterpretation of the Blair House Agreement on agriculture is
an issue we will refuse to revisit.
The Uruguay Round is the critical next step in liberalizing global trade barriers.
It will, for the first time, bring the new areas of subsidies, services, investment, and
intellectual property under the discipline of the GAIT; and it is important because it is
a sign that the nations of the world can cooperate and grow together -- rather than each
going their own way, erecting trade barriers against the products of others.
-4-
The Uruguay Round is also indispensable for maximizing the world's growth
potential. USTR estimates that it could increase world output more than $5 trillion over
the next ten years. It would integrate developing countries and emerging democracies
into the world trading community and strengthen their resolve for reform. It would lock
in the recent reductions of trade barriers in the developing world.
A successful Uruguay Round will provide substantial benefits to the U.S.
economy, including:
increasing U.S. output by over $1 trillion over the next ten years, meaning an
additional $17,000 for the average American family of four;
rules to protect the intellectual property of U.S. entrepreneurs, who lose $60
billion annually through the theft and counterfeiting of their ideas;
new markets for U.S. services firms, which export over $163 billion annually and
generate 90% of new U.S. jobs, and new rules to discipline international services
trade, including financial services, and;
Roll-back to barriers to trade from restrictive investment rules; such foreign
investment already helps to generate $260 billion, or two-thirds of total U.S.
exports in goods.
There is a long list of additional benefits, but I think my point is obvious.
Multilateral Development Banks
Totalling all country contributions and bank borrowing from private capital
markets will yield a total of $45 billion for the multilateral development banks' 1994
lending activities. The U.S. contribution is below $2 billion. This may sound large, but
it is a small amount for what it buys us.
Encouraging greater economic growth in developing countries helps us:
developing countries as a whole now comprise the most rapidly growing market for a
broad range of U.S. goods and services. In the last five years, U.S. exports to
industrialized countries rose 31 % in 1992 dollars. At the same time, exports to
developing countries rose nearly 62%.
If you look at just Latin America and the Caribbean, U.S. exports increased from
$43 billion in 1987 to nearly $75 billion in 1992. By 1992, we were exporting one and a
half times more to Latin America than Japan.
-5-
The banks played a catalytic role in helping to expand this market for U.S.
exports. They did this through broad-based policy lending that supported economic
reform, by lending for specific projects that provided physical and social infrastructure
and by relending through intermediate credit institutions that benefitted the private
sector.
We gain through procurement contracts alone. Last year, the U.S. contributed
$1.6 billion to the multilateral development banks. The banks, in turn, awarded U.S.
companies procurement contracts amounting to more than $2.2 billion. That's a gain of
39%.
Japan Framework Talks
The President is committed to strengthening the multilateral trading system. But
to do that requires special bilateral efforts with the countries who have large surpluses or
those that remain exceptionally closed to foreign imports. In July, the U.S. and Japan
launched a new framework discussions to govern their economic relations. The
framework is designed to address the two main problems we have with the Japanese
economy: its large surpluses, which deprive the rest of the world economy of needed
demand; and the low level of import penetration.
The solution of the framework is macroeconomic policies to address the surplus
and a comprehensive series of negotiations in specific sectors designed to get the
Japanese government out of the business of managing trade. Treasury is particularly
interested in improving opportunities for U.S. financial firms to participate more actively
in Japanese financial markets.
Export Activism: China
Considerable effort is being expended on opening markets in China. China has a
market of 1.1 billion people and, by recent IMF /World Bank purchasing power parity
estimates, is the third largest economy in the world. Our exports this year have already
grown 19% over a comparable time period from last year.
We are concentrating now on convincing China to accelerate its liberalizations
agreed to under our recent bilateral market access agreement. In addition, we are
negotiating with China's central bank to press for removal of restrictions on foreign
exchange access, which in turn limits China's ability to import in certain product areas.
We are also attempting to ensure that China undertakes genuine market-opening
obligations when it joins the GA TI, for example, dismantling its nontariff barrier system.
-6-
Export Activism: NAFfA
I'd like to conclude by discussing NAFfA. If you asked me about NAFfA two
weeks ago, I might have been forced to hedge in my answer. But now I'm encouraged
we're going to win. The President is calling Congressmen every day and is doing a
NAFfA public event every week. He has engaged Administration officials in a full court
press. Many thought the vote on NAFfA would be moved back. It's been moved up.
NAFfA's opponents worry about the loss of American jobs, about low wage
competition, about investment leaving the United States, about human rights, about the
environment... These are all valid concerns. But one thing is certain. Without NAFfA,
nothing will happen to solve any of these problems. NAFTA offers the prospect of real
progress.
NAFfA will create U.S. jobs and U.S. investment. There are very few barriers
stopping firms in Mexico from selling in the U.S. right now. But there are plenty of
barriers stopping firms in the U.S. from selling in Mexico. Mexico's average tariff is still
two and a half times as high as that of the U.S., though they have fallen a long way on
the road to NAFfA.
That is why U.S. exports to Mexico have risen 228% since 1986 to $40.6 billion in
1992 and U.S. jobs supported by these exports rose from 274,000 to 700,000. That's why
the U.S. bilateral trade balance with Mexico moved from a deficit of $5.7 billion to one
of our largest surpluses, $5.6 billion.
Let me repeat: Mexico's liberalizations since 1987 have already generated almost
half a million U.S. jobs.
Available evidence reveals that NAFTA will increase exports by $10 billion over
the next three years and create some 200,000 jobs.
Critics of NAFfA say that its trade effects don't matter, its investment effects
matter. The traditional case against NAFTA emphasizes investment opportunities for
U.S. firms in Mexico. But our economic future will not be determined by competition
with Mexico -- our economy is twenty times larger than Mexico's and, as workers, we are
many times more productive and prosperous than the average Mexican. Our economic
future will be determined by our ability to compete with other affluent industrial powers.
With NAFfA, Mexico joins us as a partner in that competition. Without NAFfA, our
future ability to compete will be weakened.
Dwarfing any effect of a U.S. firm moving to Mexico is the competitive advantage
that North America will get from economic integration. Production-sharing with
Mexican operations already has, and will continue to, allow U.S. firms to maintain
operations in the U.S., paying U.S. taxes, and improve their competitiveness through
eased access to U.S. inputs and technology.
-7-
And there's another important point about international competition. NAFfA
makes it much harder for foreign firms to gain a North American beachhead in Mexico.
Right now there's nothing stopping foreign firms from using Mexico as an export
platform for the U.S. With NAFfA, tough rules of origin mean that products assembled
in Mexico with American components will benefit from NAFTA's liberalization, but that
products assembled with foreign components will not.
NAFfA'is not only an economic policy but also a foreign policy initiative.
Mexico wants NAFfA, and the U.S. needs a pro-American Mexico. With a 2000 mile
border, and major immigration, drug, and environmental issues, the U.S. and Mexico
cannot afford to miss out on win-win trade opportunities.
Imagine the signal the United States would send to the rest of the world if we did
not pass NAFfA. If we're not prepared to make a trade agreement to which two
presidents have been committed, with a country with which we share a 2,000 mile border
and who has undertaken a major set of economic reforms, it will very difficult for us to
promote our exports anywhere in the world.
The American political process took a long time asking, "Who lost China?" Let
them not have to debate, "Who lost Latin America?"
The case for NAFfA is clear. It has been proven by the arguments. Now it must
be won. On vote day minus fifty, the Panama Canal was a dead duck and if the history
of the United States says anything it is that, in the end, we do the right thing. We're a
country built on hope, not fear.
-30-
UBLIC DEBT NEWS
I
I
RESULTS OF TREASURY'S
AUCTI~N
OF 52-WEEK BILLS
Tenders for $15,870 million of 52-week bills to be issued
October 21, 1993 and to mature October 20, 1994 were
accepted today (CUSIP: 912794L85).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.25%
3.25%
3.25%
Investment
Rate
3.38%
3.38%
3.38%
Price
96.714
96.714
96.714
Tenders at the high discount rate were allotted 91%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED ( in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
16,058
57,235,398
5,350
11,284
73,395
10,900
2,086,828
3,888
3,820
10,151
2,267
467,419
220 149
$60,146,907
AcceQted
16,058
15,251,351
5,350
11,284
8,395
9,810
309,578
3,888
3,820
10,151
2,267
17,419
220 149
$15,869,520
Type
Competitive
Noncompetitive
Subtotal, Public
$56,111,300
395 007
$56,506,307
$11,833,913
395 007
$12,228,920
3,550,000
3,550,000
90 600
$60,146,907
90 600
$15,869,520
Federal Reserve
Foreign Official
Institutions
TOTALS
LB-434
1
1
1
1
1
1
FOR IMMEDIATE RELEASE
October 15, 1993
STATEMENT BY TREASURY SECRETARY LLOYD BENTSEN
I am delighted that 40 Texas business leaders today presented me with a letter
endorsing the North American Free Trade Agreement. And I appreciate the efforts of
Tom Luce and John Adams, Chairman of the Greater Dallas Chamber of Commerce, in
gathering all the endorsements.
No one knows more about job creation than people who signed this letter. They
are responsible for hundreds of thousands of jobs -- and they think they can create
thousands more if the North American Free Trade Agreement is passed.
Now it's our job in Washington to pass NAFTA and to help them create jobs, for
Texans and for all Americans.
-30-
LB-435
TEXT AS PREPARED FOR DELIVERY
REMARKS BY
LAWRENCE H. SUMMERS
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
AT THE
PARTNERSHIP FOR PROGRESS: U.S.-NIS CONFERENCE
ON DEMOCRACY AND THE MARKET ECONOMY
ST. LOUIS, MISSOURI
OCTOBER 16, 1993
STRENGTHENING RUSSIAN ECONOMIC REFORM
According to an old Russian proverb: You don't want to be caught in the woods
with a wounded bear. This makes clear why our support for Russian reform is critical.
With the end of the dramatic political crisis in Moscow, Russia now stands at a
critical juncture. Ambassador Talbott has just talked about Russia's move toward
democratization. I would like to speak to you about Russian economic reform and how
the Administration aims to support concrete steps along that path.
Russian Progress toward Market Reform
Amidst Russia's problems and crises, it is all too easy to lose sight of the fact that
Russia has made genuine progress toward market reform.
For nearly a year, President Yeltsin and Parliament were locked in an epic struggle
over the reins of power. Hyper-inflation loomed large as the central bank pumped out
massive credits to state-owned firms. Prices rose over 2,300%.
But this year, reformers at the Finance Ministry have pulled Russia back from the
precipice. In the first nine months of this year, prices rose over 500%. The current
underlying monthly inflation of 20% is still excessive. But efforts are underway to stem
the printing of money. Russia doubled interest rates over the summer, and just raised
them yesterday to 17-1/2% monthly.
Russia's privatization program is a huge success. Already, 70,000 small shops are in
private hands, some 50% of all such shops. Between last December and this September,
4,000 large firms were privatized, accounting for 25% of Russia's industrial labor force.
Nearly 300 thousand private farms now exist.
LB-436
2
In early 1992, Russia freed virtually all prices. Now, high quality goods are readily
available in private stores and new kiosks which dot the Moscow landscape. The days are
gone when Russians stood three hours a day in line in the hope of purchasing some basic
necessity.
Despite these very real achievements, output has declined sharply in Russia -- by
19% last year and an estimated 15% this year. To be sure, the output declines are not
unexpected given the Soviet Union's gross misallocation of resources to the defense sector
and the waste of central planning. Unemployment in Russia is rising, though at 1.3% of
the workforce it remains modest. Capital flight is a major problem, with estimates ranging
from $10 to 20 billion in 1992 alone. And organized crime is on the rise.
Faster Reform. Not Slower
Some analysts have argued that Russia has reformed too quickly, perhaps causing
the recent unsettling events in Moscow. In fact, Russia has not reformed fast enough and
recent developments provide strong reasons why Russia should speed reform. Reform is
like a bicycle. The faster you pedal, the easier it is to stay up. But if you stop pedalling,
you are sure to fall.
What about the argument that reform is imposing austerity? The idea that Russia
needs less reform after a year when Russia's money supply rose over 1000% is bad
politics, bad economics, and a bad interpretation of the experiences of the countries in
transition.
o
It is bad politics because it misreads the aspirations of the Russian people.
A recent poll showed that 84% of respondents saw inflation as a main
problem and only 30% unemployment. During the Moscow crisis, film
footage from Russia's White House pictured elderly women, presumably
pensioners whose fIxed incomes and savings had been eaten up by high
inflation, beating police with their purses.
o
It is bad economics because inflation causes citizens to lose confidence in
the ruble as a store of value. It also causes capital flight which drains vitally
needed foreign exchange from Russia's coffers. With the ruble losing its
role as a store of value, it is no wonder people borrow as many rubles as
possible and reinvest them abroad.
o
It is a bad reading of the weight of economic evidence. Ukraine's ample
provision of credit produced hyper-inflation. But Ukraine certainly has not
been successful in maintaining output. In contrast, Poland undertook a
tough "big bang" stabilization program only four years ago. It experienced
the smallest output decline among Eastern European countries and is now
the fastest growing country in Europe.
3
Russia needs to move firmly to follow sound fiscal and monetary policies and
achieve stabilization. Remember this: History teaches that democracies do not go to war;
but economic history teaches that democracies never survive hyper-inflations.
What about the idea that Russia's government needs to guide the economy during
the transition? The Russian government has its hands simply full in trying to establish a
framework for basic commercial transactions.
It is easy to see in Russia that where the government controls less, things work
better -- when Russia liberalized milk prices, stocks reappeared and long queues ended.
But where the government controls more, things do not work so well.
o
Russia holds vast wealth beneath its soil that could be quickly harnessed to
spur growth. But oil production has plummeted over 40% since 1987. Onefifth of Russian oil wells are shut in. This collapse happened largely because
oil prices, controlled at some one-quarter of world prices, are so low that oil
firms cannot easily cover costs.
o
Russia's Mafia and organized crime feed off of government controls. Crime
in Russia thrives today because huge profits can be made whenever goods
subject to government controls can be bought cheaply and then sold
domestically or abroad at higher free market prices. The best example of
anti-crime policy in the United States was the ending of Prohibition.
o
With uncontrolled prices in Russia, there will be no black markets for the
Mafia to divert goods to. Without export controls, there will be no further
incentive to bribe customs officials. And without below market interest
rates, there will be no need to pay kickbacks to bankers.
Reform, however, is more than just the destruction of the old system. It is also the
government's job to construct. There is plenty to do to build the foundations of a market
economy. Russia must move quickly to create a legal framework for property rights, to
respect contracts, and to rationalize its tax system.
These are critical steps needed not only for Russian business. But they are also
critical for encouraging foreign investment. It is the private sector that is the key to
catalyzing the long term flow of resources, technology and know-how for sustained growth.
Russia's government must also strive to meet basic social needs. In the recent past,
average life expectancy in Russia has dropped more than three years. That is the
equivalent of what more than a doubling of cancer in the United States would do.
Women, on average, have four abortions. A third of the population now falls below the
poverty line. The murder rate is twice that of the United States.
4
What We Can Do to Help
As President Clinton reiterated this week, supporting democratization and market
reform in Russia is the top foreign policy priority of his Administration. Clearly, Russia
must bear the main responsibility for its economic transformation. But, there is no doubt
our support can make a crucial difference.
Our core support includes a wide range of initiatives to help the people of Russia
directly. We believe that this support must continue no matter how reform is proceeding,
because we are convinced that it will make a difference to the people of Russia and to
their political system. We are providing support for the development of a civil society,
cultural and technical exchanges to allow Russians to learn from Americans, programs to
clean up the environment, humanitarian assistance in the form of medical supplies and
food, and housing for decommissioned military officers.
But there is also a need for large-scale external financial support. Russia imports
only about 60 percent of what it did three years ago, with dire consequences for businesses
and consumers. This problem is unlikely to go away quickly.
The case of Russia combines supreme geopolitical importance, a deeply divided
domestic political situation as we have seen so graphically in recent weeks, and an
economic transformation that presents perhaps the most staggering economic challenge of
the twentieth century.
The package of support announced at the April G-7 Ministerial in Tokyo reflects
these complex realities. Special efforts have been made to tailor this package to Russia's
unique circumstances. The IMPs new lending facility was designed to jumpstart reforms
by reinforcing the early progress of the reformers. And, the rich countries provided debt
relief without insisting upon the standard conditionality.
But, we also see clearly that our financial support must be measured with the pace
of reform. It must be measured to assure that our support will be used effectively in
Russia, rather than ending up in Swiss bank accounts. It must be measured to reinforce
Russia's reforms, step by step. It must be measured to strengthen the hand of Russia's
reformers. This is the strategy that the G-7 countries and the international fmancial
institutions are pursuing.
Now in the wake of the recent crisis in Moscow, President Yeltsin has an
unprecedented opportunity to take the steps that Parliament has blocked and frustrated,
and to reinvigorate the process of economic reform. The G-7 have placed on the table
resources sufficient to the task. The choice is in Russia's hands.
5
Conclusion
Watching events unfold in Moscow over the past year, some have remarked on the
"Alice in Wonderland" quality of the situation. As we follow the twists and turns of events
there, let us not lose sight of another improbable story that had a happy ending.
For I am reminded of the aftermath of another revolution. Of 13 newly
independent states that formed a confederation. Each had its own currency and over the
years several experienced runaway inflation. The confederation could not raise its own
taxes, and at least one large state withheld revenues from the confederation to pay its own
debts. The legislature of another state ran a land privatization scheme in which a large
parcel of land was sold to three different buyers! Speculators won and lost fortunes
gambling on land values and whether their governments would honor their debts.
This was the American confederation. But that was not the end of the story. A
constitution was adopted and a federation formed. The rule of law was established. The
first Secretary of the Treasury, Alexander Hamilton, launched America's stabilization
program. He balanced the budget and solved the wartime debt problem. Within three
years output and trade began to recover. Democracy and a prosperous market economy
were born.
-30-
Text as Prepared for Delivery
For Immediate Release
October 18, 1993
REMARKS BY ASSISTANT SECRETARY (ENFORCEMENT)
RONALD K. NOBLE
AT THE MONEY LAUNDERING ENFORCEMENT WORKSHOP
SPONSORED BY
THE AMERICAN BAR ASSOCIATION
AND
AMERICAN BANKERS ASSOCIATION
ANA WESTIN HOTEL, WASHINGTON, DC
OCTOBER 18, 1993
I must admit to being somewhat in awe of the audience assembled here today.
As I reviewed the anti-money laundering program put together jointly by the American
Bankers Association and the American Bar Association, the quality of participants
involved in the conference, and the breadth and complexity of issues being discussed, I
thought I should be attending rather than speaking. This is particularly true because so
much of my time over the past few months has been devoted not to the critically
important issues in money laundering but to completing the Department of the
Treasury's review of the events leading to the tragedy near Waco, Texas. Now that the
report is concluded, I am anxious to return to other significant priorities. However, I am
perhaps a little stale on some of the issues that you will be focusing on at this
conference. Fortunately, the House Banking Committee has decided to continue my
training in this area by scheduling a hearing for Wednesday, which will be my third
appearance before them in the past six months. Such hearings are what pass in
Washington for mid term exams in law school, and I look forward to them as much as
my students at NYU looked forward to mine. Nevertheless, there continues to be great
interest in this important area.
As I look across this room, I am made keenly aware of the exceptional expertise
from so many different agencies and organizations that is being applied to the problem
of money laundering. We cannot reduce our resolve in addressing this important area of
criminal activity. However, we must address it intelligently, with a clear and coherent
strategy. We must focus our resources, and we must ensure that what we ask legitimate
businesses to do is sensible and relevant to the changing needs of law enforcement.
LB-437
Today, I would like to describe the priority placed by the Clinton Administration
and the Secretary of the Treasury on the problem of money laundering. Second, I will
outline the problems we see with the existing approaches to addressing the problem.
Third, I will describe the process we are going through to "reinvent" and "retool" the
programs of the Treasury Department in this area. Finally, I will outline some changes
we are contemplating.
My background is primarily that of a prosecutor and a manager of prosecutors.
My respect and admiration for the men and women in law enforcement is unbounded.
The difficult job they do, day in and day out, deserves the admiration of all Americans.
However, they cannot deal with criminal activity without help. Nowhere is this truer
than in the area of Money Laundering. Most law enforcement agents and prosecutors
are not trained in how financial institutions operate or how financial markets work.
Indeed they are seldom trained in how businesses function. However, most crime
addressed by the federal government involves an important financial dimension. At the
Department of the Treasury we have developed skills in this area because with only one
or two exceptions, all criminal activity under our jurisdiction involves money or the
pursuit of money. From fraud to firearms and from counterfeiting to drug dealing, greed
and profit are the motivation. Therefore, we have no higher priority than enhancing our
skills and abilities (as Deep Throat told Carl Bernstein) to "follow the money".
Our Administration is committed to following the money because at the end of
that trail are the organizers of criminal enterprises. While the drug dealer or arms
dealer can insulate himself from the product he is offering, he never strays far from his
money. Effective programs in this area will allow us to be as aggressive at addressing
crime in the suites as we must be at dealing with crime in the streets. Indeed, I would
suggest that this must become one of the highest priorities of federal law enforcement.
As all of you in this room know better than I, the Federal government has been
designing and implementing programs to address this need for nearly a quarter of a
century. We are spending tens of millions of dollars at Treasury managing and enforcing
these requirements and similar amounts are spent by Banks, S & Ls, casinos, retail
businesses etc. We have constructed a complex system of currency reporting which
simply makes no sense as we approach the 21st Century. Let me give you some
observations as a relative newcomer to this area. First of all when I first heard about my
new responsibilities at Treasury for the Bank Secrecy Act, I quickly discovered that what
we refer to as the Bank Secrecy Act has nothing whatsoever to do with Bank Secrecy.
This has become classic Washington-Speak. Other jargon abounds, CTRs and CTRCs,
8300's and NBFI's. We manage these matters with OFE's and FinCens through DCC. I
would like to change it all just so I could rename it!!
Seriously, these are important efforts that have made progress over the years. But
the illegal movement of currency and the camouflaging of illicit money continues to
adjust to our efforts at regulation. The laws and regulations have made it more difficult
to get illegal cash into legitimate financial institutions. Many if not all of you can take
pride in that accomplishment. But it is time for change. It is time to ask fundamental
questions about how best to use our limited resources to address this problem. Let me
recite one example. In order to better understand how the currency reporting system
works, I visited a retail branch bank in San Francisco. Talking with a bright and
conscientious teller, she explained, from her perspective, what she did when a customer
brings in over $10,000. First she checked the exempt list, and the amounts, to determine
whether the transaction required a report; discovering that it did she quickly (5 to 8
minutes) filled in the report, took the cash, counted it and placed it in the tray. She then
completed another bank form. At the end of the day she took these CTR's back and
carefully typed them out so they would be neat and presentable for her supervisor. They
were reviewed at several levels in the bank, processed at the Banks processing center,
boxed and forwarded to Detroit. In Detroit they are logged in, reviewed superficially to
make sure all of the blanks are filled in and then forwarded to the Papago Indians in the
Dakotas to be data entered. They are then returned to Detroit for filing and storage.
Later the OCC bank examiners will come visit and determine whether any mistakes were
made in the form or the decisions made by the teller. But the customer who stood there
while the form was being completed, had a business relationship with the bank for ten
years, and I am confident this was a waste of everyones time.
Nine million CTR's are completed every year. I would suggest that we are not
using that teller's time to the best benefits of law enforcement, and we are clearly not
using it well from the stand point of the bank. We must and we will change this system.
We will reduce the number of CTR's to the minimum level necessary to achieve the
purposes of the Act, i.e. to provide a high degree of usefulness for tax, regulatory and
law enforcement purposes, and we will simplify the form. We don't need all of the data
currently being required. Furthermore, we will change the system that is currently in
place which permits banks to exempt certain categories of customer from the CTR
reporting. The existing system is confusing and unnecessarily complicated. Indeed it is
so complicated that banks are increasingly unwilling to exempt any customers. As I look
through the procedures and the data the bank must maintain to manage a system of
exemptions, I understand their frustration. We should have a simpler exemption process
that shifts some of the burden of making judgments about properly exempted accounts
from the banks to the Treasury Department. We should also identify mechanisms that
would eliminate the need for a bank to monitor transactions daily for exempt accounts.
In addition, there are large classes of accounts that should unilaterally be exempted by
the Secretary of the Treasury. These are just two areas under review by a task force that
I established last month.
Established with the same purposes as Vice President Gore's reinvention efforts,
the Treasury Department's Money Laundering Review Task Force is composed of
talented and experienced individuals from all of the major Treasury Department entities
involved in anti-money laundering programs. It includes agents from Customs, IRS,
Secret Service and ATF; it includes agents and analysts from the Financial Crimes
Enforcement Network. It also includes, as a critical component, individuals from
Treasury's regulatory agencies, the OCC and OTC, and from the Office of Financial
Enforcement. The Detroit Computing Center is represented as well by individuals wellversed in the actual logistics of receiving and recording BSA data. We believe that it is
crucial to bring together as wide an array of viewpoints within Treasury as possible. We
now have all of the key Treasury players working in one room in order to identify what
works and what does not. We have set aside the resources to truly reinvent our antimoney laundering programs. I have asked the Money Laundering Review Task Force to
have recommendations to me in three areas by the end of the year. First, how can we
simplify and streamline the currency reporting system; second, how can we rationalize
and make more useful the reporting by banks and others of suspicious transactions or the
identification of criminal activity; and third, how should we be organized to best meet
the challenges of increasingly complex money laundering schemes.
Now, I know that many of you are wondering why the private sector
is not playing a significant role in bringing about change in this area. Who better than
bankers and their attorneys to identify not only problems but also opportunities for
reinventing these important government programs. I could not agree more. We will be
establishing the Bank Secrecy Act Advisory Group within the next month or so, and we
hope to use it as a sounding board as well as a "reality" check for many of the ideas
generated by the Task Force. I am sure that some of you here will either be on the
Advisory Group or have close associates who can give us the benefit of your views. I
have also directed the Task Force to talk broadly in their deliberations with many
individuals from outside the government with expertise in this area. They have already
been working closely with the House Banking Committee on their draft legislation, HR
3235, The Anti-Money Laundering Act of 1993. While we might not agree with
everything in that bill and while we will be suggesting additions, it is an important step in
addressing the issues that many in this room have identified. Understandably, the
Committee and its staff have been prodding us to move faster. We are trying and our
relations with Chairman Gonzalez and his staff have been excellent. We will also work
closely with the Ways and Means Committee and Congressman Pickle who has a keen
interest in this area. Finally, we are beginning discussions with the Senate as we
consider change.
We must view these efforts as a constantly evolving process, if we are to be
successful at keeping up with increasingly sophisticated criminal enterprises. However,
this should not mean constantly adding new regulations and requirements on the nation's
financial industry. Instead we must form a partnership. No banker in America wants to
aid and abet drug dealing, terrorism, fraud or gun running. The days when Treasury and
America's banks were adversaries are behind us. Everyone I have spoken with, as I have
travelled around the country, has told me that banks are complaining about BSA
regulations, not simply because they are burdensome, but more importantly because the
requirements are often not focussing on today's problem. While the routine filing of a
erR is helpful in many cases, it is seldom sufficient. Alert and informed bank officials
are the best ally available to law enforcement. In many instances a bank official is the
first to sense something suspicious and contact IRS, Secret Service or Customs. They
have done this even after meeting all of their obligations with respect to reporting. If
there is one directive I have given those charged with reinventing money laundering it is
this: Lets reduce the focus on rigid form completion and get back to the basics of a
bank knowing its customers and reporting suspicious transactions.
Treasury Under Secretary Frank Newman and I have worked closely in forging
this Task Force and he has promised full support. He is a former Chief Financial
Officer of both Crocker Bank and Bank of America, and I intend to rely on his expertise.
Frank, unlike many of us in law enforcement, knows how a bank works. Who better to
help us design effective programs to deter money laundering? Indeed, this is the
direction that we in Treasury are undertaking throughout our law enforcement bureaus.
So much crime is sophisticated and often able to use new technologies and complex
international schemes. Law enforcement agents at Treasury, will be working much more
closely with experts in the private sector to help them understand, impede and ultimately
arrest and convict the criminal of the 21st Century. The criminal enterprise of the future
will have available to it all of the sophistication of a modern business. If we are to be
successful in dealing with these criminals, law enforcement must become not only
increasingly well trained but also must forge effective partnerships with legitimate
businesses. The comprehensive anti-money laundering strategy that we are developing
must be ready for the new criminal enterprise, and it will require the help of everyone in
this room and the organizations and businesses you represent. It is an exciting and
challenging time. Thank you for your interest and your past efforts. I look forward to
hearing your ideas and suggestions as we proceed to bring positive change to this
important problem area.
UBLIC DEBT NEWS
Department of the Treasury •
FOR IMMEDIATE RELEASE
October 18, 1993
CONTACT:
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $13,031 million of 13-week bills to be issued
October 21, 1993 and to mature January 20, 1994 were
accepted today (CUSIP: 912794H56).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.04%
3.06%3.06%
Investment
Rate
3.10%
3.12%
3.12%
Price
99.232
99.227
99.227
Tenders at the high discount rate were allotted 25%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED ( in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
32,531
45,015,788
8,408
45,652
31,687
20,688
2,158,486
7,769
10,690
19,318
13,947
698,521
744,968
$48,808,453
AcceQted
32,531
11,374,948
8,408
45,652
31,687
20,688
346,986
7,769
10,690
19,318
13,947
373,521
744,968
$13,031,113
Type
Competitive
Noncompetitive
Subtotal, Public
$43,639,543
1,227,350
$44,866,893
$7,862,203
1,227,350
$9,089,553
2,732,460
2,732,460
1,209,100
$48,808,453
1.209.100
$13,031,113
Federal Reserve
Foreign Official
Institutions
TOTALS
LB-438
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
October 18, 1993
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $12,907 million of 26-week bills to be issued
October 21, 1993 and to mature April 21, 1994 were
accepted today (CUSIP: 912794K29).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.13%
3.14%
3.14%
Investment
Rate
3.22%
3.23%
3.23%
Price
98.418
98.413
98.413
Tenders at the high discount rate were allotted 66%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED ( in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
29,964
47,002,748
6,458
31,837
21,759
18,025
1,499,629
8,198
5,405
19,692
8,988
632,531
553,506
$49,838,740
Acce12ted
29,964
11,808,028
6,458
31,837
21,759
17,005
165,509
8,198
5,405
19,692
8,988
230,531
553 1 506
$12,906,880
Type
Competitive
Noncompetitive
Subtotal, Public
$45,244,100
879,940
$46,124,040
$8,312,240
879 1 940
$9,192,180
2,900,000
2,900,000
814 1 700
$49,838,740
814,700
$12,906,880
Federal Reserve
Foreign Official
Institutions
TOTALS
LB-439
Text as Prepared for Delivery
For Immediate Release
October 19, 1993
STATEMENT OF TREASURY SECRETARY LLOYD BENTSEN
SENATE COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
WASHINGTON, D.C.
U.S.-MEXICAN AGREEMENT ON BORDER ENVIRONMENTAL CLEANUP
I am delighted to join Carol Browner and Ann Richards today
to discuss our concerted efforts to address environmental
concerns as part of the NAFTA package. We now have a trio of
agreements offering important economic benefits for Americans,
Mexicans, and Canadians alike, new protections for the
environment, and a way for the United states and Mexico to
coordinate and finance border environmental infrastructure
projects.
This is the "greenest" trade agreement the united States has
ever negotiated. It recognizes the links between trade and the
environment, encourages environmentally sensitive investment, and
promotes development that protects and preserves the environment.
The supplemental agreement on the environment
obligation to enforce environmental laws. It also
accountability and dispute settlement -- including
sanctions. Administrator Browner will discuss the
aspects of NAFTA in more detail.
recognizes the
provides for
possible trade
environmental
Border Environmental Cleanup
I want to focus on the border environmental cleanup
agreement which we tentatively completed last week with Mexico.
It is a new model for international cooperation at the grass
roots level to design, finance, and build environmental projects.
We have an innovative approach to a shared problem.
This is the best thing I've ever seen done for the border.
I grew up on that border. I've seen millions of gallons of raw
sewage heading for the Rio Grande. I've seen the babies born
with birth defects. These problems predate NAFTA, and demand
some resolution. The NAFTA package offers us the opportunity to
assure that they will be addressed.
I know the importance of clean boundary waters, safe
drinking water, and joint efforts that reflect the needs and
concerns of people on both sides of the Rio Grande.
LB-440
- 2 -
I understand the importance of involving local communities,
states, and private interest groups in the decisions that affect
their lives. And I also know that NAFTA is not the cause of
environmental problems on the border, but it is the solution.
Pass NAFTA and we clean up the environment. Fail to pass NAFTA
and it's business and polluting as usual.
Our new agreements let us address these problems, and they
will generate significant new financing to support cleanup
efforts at minimal cost. We are creating two new institutions.
The first is a U.S.-Mexican Border Environment Cooperation
Commission (BECC) to help coordinate projects and put together
financing packages. The second is a new U.S.-Mexican border
financing facility to provide an additional source of financing
to support border environmental infrastructure projects.
Border Environment Cooperation commission
The new coordinating agency will help border states and
communities arrange financing for environmental infrastructure
projects, and oversee the use of the money. It will give
priority initially to wastewater treatment, drinking water, and
municipal waste projects. The degree of public and local
participation will be unprecedented in an international
agreement. This will include a broad-based board of directors
with federal, state and local government and public
representation, as well as a public advisory council, all drawn
from the border region.
Let me emphasize that this commission has no sovereign
power. It can only offer its services to state and local bodies
and assist them in cooperative activities.
Let me take you through how this new entity would function.
If Ciudad Juarez, Mexico, decided to build a wastewater treatment
plant to prevent sewage from being dumped in the Rio Grande, it
could ask the Border Environment Cooperation commission for help
in designing the project and in finding financing. The
commission would offer that help, and encourage Ciudad Juarez to
work with El Paso, its sister city in Texas, in proposing a
project.
Once the project is ready for formal review, it will go to
the Advisory Council for comment and then on to the Board of
Directors for certification. Each project would have an
environmental assessment, and the public would be able to comment
prior to board consideration. If the directors certified the
project met appropriate engineering, environmental and financial
standards, the commission would try to assemble a financing
package from private, public and international sources.
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3 -
We want to maximize private sector financing for these
projects, based on local user fees to help service debt, but we
recognize that continued funding from the Mexican and u.s.
governments will be necessary in many cases. We estimate that
some $8 billion will be needed for border environmental
infrastructure projects over the next decade. We see this coming
from the following:
(1)
private financing, and as needed,
(2)
up to $2 billion from existing state and local
programs, including state revolving funds, municipal
revenue bonds, and the colonias program for projects on
the u.s. side of the border;
(3)
$2 billion in new funding from the World Bank and
Inter-American Development Bank, offered as loans to
Mexico;
(4)
approximately $1.4 billion in u.s. and Mexican grants
(half from the united states);
(5)
some $2 billion in loans or guarantees for
environmental infrastructure projects from the
financing facility.
Financing Facility
Financing from the new facility will backstop any shortfall
in private sector financing to make certain projects can be
completed. The united states and Mexico will provide equal
shares of paid-in capital for the financing facility -- $225
million each -- for a total of $450 million. We believe we can
leverage that into $2 billion initially and perhaps eventually up
to $3 billion in financing through loans and guarantees. The
financing facility would raise financing through market
borrowings, similar to what the World Bank does.
The cost to the united states for generating up to $3
billion in loans and guarantees is expected to be only $56
million annually over four years. That's what I call leveraging.
While we expect loan charges and investments to defray
administrative costs for the financing facility, some small
additional costs -- perhaps $5 million a year for each country -would be incurred for operating expenses for the Border
Environment Cooperation Commission. To me, that's a small price
to pay to help assure clean, safe water in the border area.
- 4 -
Conclusion
Let me close by saying that we have put considerable effort
into developing an agreement with measures that address border
region environmental infrastructure problems. We have consulted
closely with the border states and cities, with key members of
Congress, and with national and local environmental groups. We
believe the agreement we have negotiated reflects their
interests, and offers a new model for international cooperation
at the grass roots level. It is an important complement to the
NAFTA agreement.
We have a window of opportunity to help Americans in the
border region and across the united states with new trade
opportunities, new jobs, and joint environmental commitments.
Your support for the NAFTA package is essential to turn that
opportunity into reality.
Thank you.
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FOR IMMEDIATE RELEASE
October 19, 1993
CONTACT: Michelle Smith
(202) 622-2960
TREASURY ANNOUNCES CIVIL PENALTY AGAINST CORESTATES BANK
The Department of the Treasury on Tuesday announced it has negotiated a civil
money penalty of $55,000 with CoreStates Bank, N.A., of Philadelphia, for failing to report
currency transactions within the time required by the Bank Secrecy Act (BSA).
The violations involved the cashing of multiple checks by a customer who operated a
check cashing service. The transactions each exceeded $10,000 and were not reported on
currency transaction reports (CTR) at the Christiansted, St. Croix, U.S. Virgin Islands
branch of the bank. These violations occurred between 1987 and 1991.
Treasury and the bank agreed upon the amount of the penalty in complete settlement
of the bank's civil liability under the BSA for activities of the Christiansted branch of the
bank. In determining the amount of the penalty, Treasury considered the voluntary
disclosure of the violations by CoreStates, the bank's full cooperation in the government
investigation and subsequent improvements to the BSA compliance program implemented by
the bank's new regional management.
Treasury has no evidence that the Christiansted Branch or any of its employees or
officers engaged in any criminal activity in connection with the reporting violations.
Assistant Secretary for Enforcement Ron Noble said, "The bank independently
brought this matter to the attention of the Department of the Treasury and fully cooperated
LB-441
with Treasury in developing the scope of it deficiencies. Penalty actions such as this
emphasize the importance Treasury places on effective BSA compliance programs in all
affected financial institutions," Noble said.
Tne BSA requires banks and other financial institutions to keep certain records, file
CTRs on currency transactions in excess of $10,000 and file reports on the international
transportation of currency, travelers checks and other monetary instruments in bearer form.
The purpose of these records and reports is to assist the government in combatting money
laundering as well as for use in civil, criminal, tax and regulatory investigations.
-30-
FOr. RELEASE AT 2:30 P.M.
October 19, 1993
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $26,000 million, to be issued October 28,
1993.
This offering will provide about $3,625 million of new
cash for the Treasury, as the maturing bills are outstanding in
the amount of $22,382 million.
Federal Reserve Banks hold $5,392 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $2,681 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders.
Additional
amounts may be issued for such accounts if the aggregat~ amount
of new bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C.
This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (Jl CFR Part 356, published as a final rule on
January 5, 1993, and effective March 1, 1993) for the sale and
issue by the Treasury to the public of marketable Treasury bills,
notes, and bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
LB-442
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED OCTOBER 28, 1993
october 19, 1993
Offering Amount .
$13,000 million
$13,000 million
Description of Offering:
Term and type of security .
CUSIP number
Auction date
Issue date
Maturity date .
Original issue date .
Currently outstanding
Minimum bid amount
Multiples .
91-day bill
912794 H6 4
October 25, 1993
October 28, 1993
January 27, 1994
July 29, 1993
$12,277 million
$10,000
$ 1,000
182-day bill
912794 K3 7
October 25, 1993
October 28, 1993
April 28, 1994
October 28, 1993
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids .
Competitive bids
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
Maximum Award .
35% of public offering
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders .
Payment Terms .
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
Text as Prepared for Delivery
For Immediate Release
October 20, 1993
STATEMENT OF THE HONORABLE RONALD K. NOBLE
ASSISTANT SECRETARY OF THE TREASURY (ENFORCEMENT)
BEFORE THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,
SUBCOMMITTEE ON FINANCIAL INSTITUTUIONS
REGULATION AND DEPOSIT INSURANCE
OCTOBER 20, 1993
Chairman Neal and Members of the Committee, the Department of the Treasury is
happy to have an opportunity to testify on H.R. 3235, the Anti-Money Laundering Act of
1993, and to update the Subcommittee on Treasury's activities in the field of money
laundering.
Money Laundering Review Task Force
The last few months have seen unprecedented activity at Treasury. As I promised before
the full Committee last May, Treasury has established a Money Laundering Review Task
Force staffed by experienced agents, analysts, and regulators from every component of
Treasury with money laundering responsibilities. For the first time in twenty years, we
are taking a comprehensive look at our anti-money laundering programs, especially the
way we exercise our aut1!ority under the Bank Secrecy Act (BSA).
To lead this initiative, we are fortunate to have Mark Matthews, formally Deputy Chief
of the Criminal Division of the U.S. Attorney's Office, Southern District of New York.
Mark has extensive experience in prosecuting money laundering crimes.
H.R.3235
As you know, H.R. 3235 was developed in close cooperation with our staff. It arises
from many of the concerns that caused Treasury to establish the Money Laundering
Review Task Force -- in particular that aspects of our regulatory programs have become
dated, inefficient, have created undue burdens on the nation's financial institutions, and
are in need of substantial revision.
Section 2 - Bank Exemptions from Currency Transaction Reporting
The bill (section 2) addresses how to reduce the data base of Currency Transaction
Reports (erRs) filed by financial institutions. This year we expect 9 million erRs to be
LB-44
-
2 -
filed. Banks are filing millions of reports annually on transactions for accountholders
which they may exempt under Treasury regulations.
There are several causes for this phenomenon. First, the Treasury procedures for
exemptions are cumbersome and difficult to understand. Often it is easier to file than to
apply for and maintain exemptions. Second, as banks automate their BSA programs, it
may be just as cost effective to file on all transactions. Third, banks are also concerned
that if they improperly exempt transactions, they may be subject to BSA civil penalties by
Treasury.
The bill sets some broad and sensible outlines for Treasury's revision of the exemption
process with burdens shifting from the banks to Treasury.
The bill also requires that the Secretary reduce CTR filings by banks by at least 30%
and eliminate from the CTR form information of little value to law enforcement.
These two steps -- increasing those exempt from reports, and reducing the amount of
information filed -- will move us to our goal of achieving a simpler and more valuable
system to address the money laundering problem.
Section 3 - Suspicious Transaction Reporting
The Task Force is also focusing on the issue of suspicious transaction reporting. An
essential complement to currency reporting is the reporting of suspicious activity to law
enforcement by financial institutions. While banks have been taking this responsibility to
heart in recent years, the government's response has been unsatisfactory.
Treasury and this Committee have heard the complaints of financial institutions that the
reporting is too complicated and that the reports are being ignored. The proposal in
section 3 is an expression of the Committee's concern.
We must move toward a less burdensome and more effective means for reporting
suspicious transactions. The Task Force's initial thoughts are that Treasury should
develop a simple form for reporting possible money laundering or BSA violations, to be
used for cash and non-cash transactions, by both banks and non-bank financial
institutions (NBFls). The reports would be filed with Treasury and shared with other
law enforcement agencies and provided to financial institution supervisors.
Section 5 - Foreign Bank Drafts
Section 5 of the bill addresses an important expansion of reporting to Treasury -- crossborder transportations of "monetary instruments" in excess of $10,000. The provision
expands the definition to include instruments drawn on or by foreign financial institutions
abroad whether or not in bearer form.
-
3 -
This is a response to the problem of drug money laundering through foreign bank drafts.
Drug money launderers smuggle bulk currency or transmit it through a non-bank
financial institution to foreign banks. They then purchase bank drafts or checks from the
foreign banks. These instruments are easily transportable back into the United States
and negotiated.
Treasury believes that subjecting the instruments to cross-border reporting will contribute
to deterring and detecting their use as money laundering vehicles.
Section 6 - Imposition of BSA Civil Penalties by Banking Agencies
Section 6 directs the Secretary to delegate the authority to assess BSA civil penalties to
the federal banking agencies.
We agree and will consider delegation not only to the banking agencies, but to IRS for
the non-bank financial institutions.
Sections 7 and 8 - Non-Bank Financial Institutions (NBFIs)
Sections 7 and 8 address the problem of money laundering through certain NBFIs. As
banks have become more effective in prevention and detection of money laundering,
money launderers have turned to the financial services offered by a variety of non-bank
financial institutions, from casas de cambio to money transmitters and check cashers.
These institutions are subject to BSA recordkeeping and reporting, with compliance and
examination authority resting with the IRS Examination Division. While IRS has
bolstered resources for this function, the task is daunting. Estimates range from 50,000150,000 of these institutions nationwide. The job cannot be done by Treasury fIRS alone.
The Committee agrees.
Section 7 provides that there be uniform licensing and regulation of NBFl's including
provisions under state law for penalties for failure to implement BSA compliance
programs and for failure to obtain a license. The Secretary of the Treasury is to report
to Congress on the progress made by the states. We think this project will be
worthwhile.
In a companion measure, section 8 requires federal registration of NBFIs with Treasury.
This should result in the reliable identification of all NBFIs and a foundation for
identifying or eliminates illegitimate ones.
Sections 9 and 10 - Casinos
Sections 9 and 10 address two casino-related BSA issues. First, the bill specifies that
Indian gaming casinos may be designated by the Secretary as financial institutions under
-
4 -
the BSA Tribal casinos would logically be vulnerable to money laundering and tax
evasion to the same extent as non-tribal casinos.
Section 10 would revoke the 1985 exemption granted to Nevada. The exemption was
granted at the time upon the Secretary's finding that Nevada had, at that time, a
regulatory system which substantially met the BSA reporting and recordkeeping
requirements for casinos. Under the agreement, the casinos file the equivalent of
currency transaction reports with the State. Nevada then forwards the reports to the IRS
where they are processed and included in the BSA data base.
In view of differences between the Federal and Nevada system, we will be discussing the
terms of the exemption with the State of Nevada. At the same time the Task Force is
assessing the Nevada agreement and the regulatory burden on casinos generally. We
have reservations about seeking a legislative solution to this issue while the matter is
under review.
Othe"r Legislative Measures
There are a few other legislative actions necessary for Treasury anti-money laundering
programs:
For example, Treasury believes that changes are needed to the BSA summons authority
to make it a more effective tool to investigate BSA violations.
A second area regards an amendment made by this Committee in 1986 which specifies
that the warrantless border search authority of the Customs Service extends to searches
of unreported currency or monetary instruments. As BSA compliance by banks has
improved, smuggling of bulk currency and monetary instruments, such as money orders,
has become rampant. However, the Postal Service has taken the position that this
authority does not extend to letter class mail and packages. This creates a significant
loophole.
We have been working with the U.S. Postal Service on a legislative solution. We hope
to be able to provide the Committee with statutory language that will protect legitimate
privacy interests in outbound mail without sacrificing law enforcement's ability to seize
the illegal-source currency and monetary instruments.
.
Finally, there are two provisions pending with the House Ways and Means Committee
introduced by Congressman Pickle earlier this year.
The first relates to the use and dissemination of reports of cash by trades or businesses,
under section 60501 of the Internal Revenue Code. Currently, the tax disclosure
provisions limit the use of these reports for tax enforcement purposes. Temporary
authority to disseminate to federal agencies for criminal purposes expired last November.
-
5 -
Since that time, the analytic work of FinCEN and other investigative agencies has come
to a standstill.
The second provision would give IRS the authority to be exempt from certain fiscal
provisions in their conduct of large-scale undercover operations. Other investigative
agencies has this authority, without which such operations are cost prohibitive.
Conclusion
We welcome the Committee's partnership with Treasury in improving the efficiency and
effectiveness of our programs. Treasury and the Committee are working towards a
common goal -- better balance and perspective on the roles and responsibilities of the
Government and financial institutions in the fight against money laundering and better
deployment of our respective skills and resources.
Text as Prepared for Delivery
For Immediate Release
October 20, 1993
REMARKS OF TREASURY SECRETARY LLOYD BENTSEN
NATIONAL FOREIGN POLICY CONFERENCE
WASHINGTON, D.C.
It's good to be here, and I'm very pleased to see Secretary Christopher putting on
something like this.
My first year in Congress -- 1949 -- I remember former President Herbert Hoover
was put in charge of a commission to re-invent the government. One thing he
recommended was to have more economic expertise along side the diplomats and the
military experts on things like the National Security Council. Of course, it didn't
happen.
In 1975, as a Senator I co-sponsored legislation to put the Treasury Secretary on
the National Security Council because I felt our country is no stronger than its economy.
That too didn't happen. But little did I know that 18 years later I'd be named Treasury
Secretary, and I'd be sitting with Secretaries Christopher and Aspin on the Security
Council.
As the Soviet Union just reminded us -- no country has ever been a great military
or political power, unless it's also a great economic power.
I want to talk about NAFTA today. It's interesting to do it here at State, because
for the first time in a long time, this is not an aid package to an emerging country.
We're not spending billions like we did on the Marshall plan to develop Europe.
NAFrA is a trade package. We're opening markets in an emerging country so
our companies -- all of you -- can compete, and make some money, and employ
Americans.
But before I get to NAFTA, let me make a few observations. Three years ago, I
was at a meeting in France. A European got up and said: "Look at the great changes in
the world. The end of the Cold War. Europe and Asia emerging as the world leaders.
And America on the decline."
LB-444
2
It's a little ironic that three years later much of Europe is in a recession, Japan
is in a recession, and America is not just a military leader -- we remain the world's
economic leader -- the engine of growth in the world.
I've met with my G-7 counterparts four times this year. And they are all
struggling. Twenty-four million people are unemployed in the G-7 countries. In fact, if
job security of finance ministers is any indication, eight months ago when I met them
for the first time, I was the freshman. Now, I'm the second most senior!
The world is looking up to America. They see that we have cut our deficit. They
see the market's response: the lowest long-term interest rates in two decades (and the
cut in the prime rate by Morgan this week), the highest stock market, employment up by
more than a million since January, and we're growing faster than all of them.
They're also pretty impressed with corporate America. I know what you've been
through. Foreign competition caught you otT guard. You had to get through a
recession; probably had some dumb policies out of Washington to cope with; and
stockholders, boards of directors, and the environmentalists became more demanding.
But look how you've changed. You've squeezed the fat. You've restructured your
balance sheets. Capital investments are up. Labor and management have worked
together _. to increase efficiency, to change the work rules, to improve quality.
Labor rules in this country are not as inflexible as in Europe.
American workers are the most productive in the world, and productivity is rising
•• rapidly. The average factory is offering its workers more hours of work than at any
time since 1965.
You see new factories being built in America again. I was at Texas Instruments
last week. They're building a billion dollar semiconductor plant. And the site choice
came down to two places _. Dallas and Japan, and they picked Dallas.
Remember a few years ago, when some people were calling American workers
lazy? Now, BMW and Mercedes are building plants in America.
At our G·7 meetings we talk about how to stimulate economies. We've seen some
progress this year. Germany has reduced interest rates by 200 basis points, Japan by
150, and Japan has added $180 billion in fiscal stimulus.
All of this is welcome, because lack of growth abroad is bad news. I don't think
unemployed Europeans are too interested in buying American products, which only
means the U.S. trade imbalance will rise -- and that's not good news -- at all. And if
you don't have growing markets to sell to, profits won't go up.
3
So, we're working with Europe and Japan -- and we also want to work with the
emerging countries, because that's where the markets will grow fastest in the coming
years. The Asians. the Latin Americans. And let's not forget Mexico.
Over the past five years, U.S. exports to emerging markets have doubled to
almost $180 billion. They support almost four million jobs.
There's a big irony in all this, though. Just as we've made all these strides in
competing with Europe and Japan -- some people in this country are now scared to
compete in some of these new markets.
My friends in the auto industry tell me the Mexican auto market will grow
7 percent between now and the year 2005, while the U.S. and Canadian markets will
grow 1 percent.
In the old days, Henry Ford would head straight to the 7 percent growth market.
But today some people seem more content to stick with 1 percent and hope they can
hang on to what they have.
They are hearing too many false facts. They are hearing that if NAFTA passes,
jobs will head south because of the low wages. Baloney. Jobs can go south now. If we
used that logic, Bangladesh would be our biggest competitor. Look who our biggest
competitor is -- Japan, where wages are 30 percent higher.
I was at a unionized forging shop in Chicago last month. 450 employees. They
had just started selling products in Mexico. When I talked about NAFTA, they were
skeptical. They had heard the warnings. So I asked the owner flat out: "Are you
planning to move jobs out of Chicago and into Mexico?" The answer was no.
The workers were still not convinced. But when I said, "If you don't take advantage of
doing more business in Mexico, your Japanese and European competitors would be glad
to," they heard me better.
You see, the NAFfA debate should not be about what country will lose jobs. It
should be about which will get the 200,000 jobs to be created -- America, Japan, or
Europe?
If we don't sign up, others would be more than interested in finding a market
with 90 million people growing twice as fast as ours.
The Japanese are always on the lookout for lucrative markets. They found one in
the United States in the '70s. Now they see Asia as a great opportunity, and they've
pursued that much more aggressively than we have.
4
But Mexico is where we have the advantage. It's our neighbor. And Mexicans
like American products. We export $40 billion a year there. Seventy percent of the
imports they buy are American goods. Last year, each Mexican, on average, purchased
more U.S.-made products than the average Japanese, German, or Canadian.
I was born and reared on that border. On the Mexican side, I haven't always
seen a willingness to be partners. I've watched Mexican politicians campaign against us
as the colossus of the north, the gringos.
They've changed. For the last six years, they've opened their markets and bought
our products, and that has already created 400,000 more jobs.in this country. We've
gone from a $6 billion trade deficit with them, to a $5 billion surplus.
But right now, in spite of liberalization, the average product entering Mexico
from the U.S. is slapped with a 10 percent tarilT. Mexican products entering the U.S.
get, on average, a 4 percent tarilT. So their tarilTs are two-and-a-half times ours. That's
not a good deal, and we're on the bad end of that deal.
When this passes, half of our goods headed to Mexico will be eligible for zero
tarilTs. Within five years, two-thirds will be. And these zero tariffs will apply only for
our goods and Canada's goods. Not Japan's. Not the EC's.
If we don't sign up, Mexico will look to Japan and Europe to sign agreements.
President Salinas has said so. I bet they'd sign up in five minutes.
If this fails, our market will stay open, but Mexico will be able to jack trade
barriers right back up.
We'd hurt our chances to open Latin America, which after Asia, is the fastest
growing market around -- and already our exports there are rising substantially faster
than they are to Europe.
If this fails, it would have a negative effect on our GATe trade negotiations, and
we'd still be importing illegal immigrants from Mexico.
And we won't address environmental concerns on the border. In the United
States Senate, I talked about millions of gallons of raw sewage headed to the Rio
Grande, and babies born with birth defects on the border. Nobody listened.
Finally, we have a green treaty that will help clean up the environment. On Tues~ay, I
testified before my fonner colleagues with a plan -- in hand - on how we'll clean It up.
I can't remember a political debate like this. President Clinton and all former
Presidents support it. It is a bi-partisan trade bill. Forty-one of 50 governors support
it. They know a,bout jobs, because they get elected only if they create jobs.
5
If we could take a vote on a secret ballot this thing would pass -- overwhelmingly.
It is so strongly in our interests, so strongly in the interests of our businesses,
so strongly in the interests of 200,000 Americans who want to find work. I don't know
another vote, where America can create 200,000 jobs.
I would not be supporting this if I didn't think it was good for American workers,
believe me.
The opposition is out in force. They're organized. They have money.
We can't win this one, unless we win it with the American people. Congressmen
want to know what their constituents want.
So get the message out to the people. The vote is less than a month away -- and
we need to convince Americans, if we're going to convince Congress.
With your help, I think we can win it.
-30-
FOR RELEASE AT 2:30 P.M.
October 20, 1993
CONTACT:
Office of Financing
202/219-3350
TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $27,500 MILLION
The Treasury will auction $16,500 million of 2-year notes
and $11,000 million of 5-year notes to refund $14,150 million of
publicly-held securities maturing October 31, 1993, and to raise
about $13,350 million new cash.
In addition to the public holdings, Federal Reserve Banks
hold $1,566 million of the maturing securities for their own
accounts, which may be refunded by issuing additional amounts
of the new securities.
The maturing securities held by the public include $2,535
million held by Federal Reserve Banks as agents for foreign
and international monetary authorities. Amounts bid for these
accounts by Federal Reserve Banks will be added to the offering.
Both the 2-year and 5-year note auctions will be conducted
in the single-price auction format.
All competitive and noncompetitive awards will be at the highest yield of accepted
competitive tenders.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
This offering of Treasury securities is governed by the terms and
conditions set forth in the Uniform Offering Circular (31 CFR
Part 356, published as a final rule on January 5, 1993, and
effective March 1, 1993) for the sale and issue by the Treasury
to the public of marketable Treasury bills, notes, and bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
LB-445
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC OF
2-YEAR AND 5-YEAR NOTES TO BE ISSUED NOVEMBER 1, 1993
October 20, 1993
Offering Amount .
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date.
Interest rate
Yield .
Interest Payment dates.
Minimum bid amount
Multiples .
Accrued interest
payable by investor .
Premium or discount .
Maximum Recognized Bid
at a Single yield
Maximum Award .
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders .
Payment Terms .
$11,000 million
2-year notes
Series AC-1995
912827 M5 8
October 26, 1993
November 1, 1993
November 1, 1993
October 31, 1995
Determined based on the
highest accepted bid
Determined at auction
April 30 and October 31
$5,000
$1,000
5-year notes
Series T-1998
912827 M6 6
October 27, 1993
November 1, 1993
November 1, 1993
October 31, 1998
Determined based on the
highest accepted bid
Determined at auction
April 30 and October 31
$1,000
$1,000
None
Determined at auction
The followinq_rulesapplv to all
Submission of Bids:
Noncompetitive bids .
Competitive bids
$16,500 million
secu~ities
None
Determined at auction
mentioned above:
· Accepted in full up to $5,000,000 at the highest accepted yield
(1) Must be expressed as a yield with two decimals, e.g., 7.10%
(2) Net long position for each bidder must be reported when the
sum of the total bid amount, at all yields, and the net long
position is $2 billion or greater.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
· 35% of public offering
· 35% of public offering
· Prior to 12:00 noon Eastern Daylight Saving time on auction day
· Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
· Full payment with tender or by charge to a funds account
at a Federal Reserve Bank on issue date
.~
.
--" .... .
~~
DEPARTMENT OF THE TREASURY
WASHINGTON
.
OFFICE OF FOREIGN ASSETS CONTROL
HAITIAN TRANSACTIONS REGULATIONS
31 C.F.R. Part 580
GENERAL NOTICE NO. 2
NOTIFICATION OF BLOCKED INDIVIDUALS
OF HAITI
General Notice No. 2 announces the names of 41 individuals who have
been determined by the Treasury Department to be Blocked
Individuals of Haiti. The persons identified on the attached list
are included for one or more of the following reasons:
A.
They are persons who seized power illegally from the
democratically elected government of President JeanBertrand Aristide on September 30, 1991, or who since the
effective date of Executive Order 12775, acted or
purported to act directly or indirectly on behalf of, or
under the asserted authority of, such persons or of any
agencies, instrumentalities or entities purporting to act
on behalf of the de facto regime in Haiti or under the
asserted authority thereof, or any extra constitutional
successor thereto; or
B.
They (1) have contributed to the obstruction of the
implementation of United Nations Security Council
Resolutions 841 and 873, the Governors Island Agreement
of July 3, 1993, or the activities of the United Nations
Mission in Haiti, (2) have perpetuated or contributed to
the violence in Haiti, or (3) have materially or
financially supported any of the persons listed in B. (1)
or B. (2), above.
This action by the Office of Foreign Assets Control is pursuant to
the authority of Executive Order No. 12775 of October 4, 1991,
Executive Order No. 12779 of October 28, 1991, Executive Order No.
12872 of October 18, 1993, the International Emergency Economic
Powers Act, 50 U.S.C. 1701 et seq., and sections 580.303 and
580.307 of the Haitian Transactions Regulations, 31 C.F.R. Part
580.
U. S. persons are prohibited from engaging in transactions with
these individuals unless the transactions are licensed by the
Office of Foreign Assets Control. Additionally, all assets within
U. S. jurisdiction owned or controlled by these individuals are
blocked.
U.S. persons are not prohibited, however, from paying
funds owed to these entities or individuals into blocked Government
of Haiti Account No. 021083909 at the Federal Reserve Bank of New
York, or, pursuant to specific licenses issued by the Office of
Foreign Assets Control, into blocked accounts held in the names of
the blocked parties in domestic U.S. financial institutions.
WARNING: This list is not all-inclusive and will be updated from
time to time.
Unlicensed transactions with entities and
individuals who fall within the definition of the de facto regime
in Haiti found at section 580.303 of the Haitian Transactions
Regulations are prohibited.
NOTE:
section II ("Blocked Entities of the De Facto Regime in
Haiti") of Appendix A to the Haitian Transaction Regulations, as
amended on August 31, 1993 (58 Fed. Reg. 46540), remains in full
force and effect.
Issued:
OJ 20
,
Foreign Assets Control
/
/CfCj3
-~
.•
Y""""'I-.
•
.
DEPARTMENT OF THE TREASURY
WASHINGTON
NOTE: The following is provided to alert the public that Section
II ("Blocked Entities of the De Facto Regime in Haiti") of Appendix
A to the Haitian Transaction Regulations, as amended on August 31,
1993 (58 Fed. Reg. 46540), remains in full force and effect.
27TH COMPANY, FIRE DEPARTMENT
(a.k.a. 27EME COMPAGNIE, CORPS POMPIER)
HaYti.
ACCIDENT/INSURANCE OFFICE
(a.k.a. OFFICE D'ASSURANCE MALADIE/ACCIDENT)
(a.k.a. OFATMA)
(a.k.a.
WORKERS'
COMPENSATION,
SICKNESS
AND MATERNITY
INSURANCE AGENCY)
(a.k.a. OFFICE D'ASSURANCE ACCIDENTS DU TRAVAIL, MALADIE ET
MATERNITE)
Chancerelles - cite Militaire, P.O. Box 1012, Port-au-Prince,
HaYti.
BANK OF THE REPUBLIC OF HAITI
(a.k.a. CENTRAL BANK OF HAITI)
(a.k.a. BANQUE DE LA REPUBLIQUE D'HAITI)
(a.k.a. BRH)
(f.k.a. BANQUE NATIONALE DE LA REPUBLIQUE D'HAITI)
Angle rue du Magasin de l'Etat et rue des Miracles, BP 1570,
Port-au-Prince, HaYti.
BANQUE POPULAIRE HAITIENNE
(a.k.a. BPH)
Angle rues Eden et Quai, P.o. Box 1322, Port-au-Prince, HaYti
BUREAU OF THE INSPECTOR GENERAL SERVICE
.
(a.k.a. BUREAU INSPECTEUR GENERALE, GRAND QUARTIER GENERALE
(G.Q.G.) )
HaYti.
CEMENT COMPANY
(a.k.a. LE CIMENT D'HAITI, SA)
( a . k . a . CDH)
Office cite de l'Exposition, Port-au-Prince, HaYti;
Fond Mombin, Port-au-Prince, HaYti.
ELECTRICITY COMPANY
(a.k.a. ELECTRICITE D'HAITI)
(a.k.a. ELECTRICITY OF HAITI)
(a.k.a. EDH)
Rue Dante Destouches, Port-au-Prince, Hayti;
Boulevard Harry S Truman, P.O. Box 1753, Port-au-Prince,
-2-
HaIti.
FLOUR COMPANY
(a.k.a. LA MINOTERIE D'HAITI)
(a.k.a MDH)
Lafitteau, P.O. Box 404, Port-au-Prince, Haiti.
HAITIAN ARMED FORCES
(a.k.a. FAD'H)
(a.k.a. FORCE ARMEE D'HAITI)
HaIti.
METROPOLITAN
(a.k.a.
(a.k.a.
(a.k.a.
Paul VI
WATER CONCERN
WATER COMPANY)
CENTRALE AUTONOME METROPOLITAINE D'EAU POTABLE)
CAMEP)
Avenue 104, Port-au-Prince, HaIti.
MILITARY DEPARTMENT - ARTIBONITE REGION
(a.k.a. DEPARTEMENT MILITAIRE DE L'ARTIBONITE)
HaIti.
MILITARY DEPARTMENT OF THE METROPOLITAN ZONE
(a.k.a. DEPARTEMENT MILITAIRE DE LA ZONE METROPOLITAINE)
(a.k.a. COMET)
Haiti.
MINISTRY OF AGRICULTURE, NATURAL RESOURCES AND RURAL DEVELOPMENT
(a.k.a. MINISTERE DE L'AGRICULTURE, DES RES SOURCES NATURELLES
ET DU DEvELOPPEMENT RURAL)
(a.k.a. MARNDR)
Damien, Port-au-Prince, HaIti.
MINISTRY OF COMMERCE AND INDUSTRY
Rue Legitime, Champ de Mars, Port-au-Prince, HaIti.
MINISTRY OF ECONOMY AND FINANCE
(a.k.a. MEF)
Palais des Ministeres, Port-au-Prince, Haiti.
MINISTRY OF EDUCATION, YOUTH AND SPORTS
(a.k.a. MENJS)
Boulevard Harry Truman, cite de l'Exposition, Port-au-prince,
HaIti.
MINISTRY OF FOREIGN AFFAIRS AND WORSHIP
Boulevard Harry Truman, cite de l'Exposition, Port-au-prince,
HaIti.
MINISTRY OF HEALTH UNIT FOR POTABLE WATER
(a.k.a. COMMUNITY HEALTH AND DRINKING WATER POSTS)
(a.k.a. PROGRAMME DE SANTE DE L'EAU POTABLE)
(a.k.a. POSTES COMMUNAUTAIRES D'HYGIENE ET D'EAU POTABLE)
(a.k.a. POCHEP)
Petite Place Cazeau, P.O. Box 2580, Port-au-Prince, Haiti.
DEPARTMENT OF THE TREASURY
WASHINGTON
BLOCKED INDIVIDUALS
OF HAITI
ATOURISTE, Antoine, Colonel; Delmas 31, Rue Verly 9, Port-auPrince, Haiti; 4141 N.W. 5th Avenue, Miami, FL 33127, U.S.A.;
Passport No. 79-039396; DOB 03 Jul 51.
BEAUBRUN, Mondesir, Colonel; Delmas 75, Port-au-Prince, Haiti; DOB
10 May 49.
BEAULIEU, Serge; Haiti; U.S.A.
BIAMBY, Philippe, Brigadier General; Haiti; DOB 21 Sep 52.
CAZEAU, Jean-Lucien, Lieutenant Colonel; Haiti; DOB 04 Jan 51.
CEDRAS, Raoul, Lieutenant General; Haiti; 6501 S.W. 113th Avenue,
Miami, FL 33173, U.S.A.; DOB 09 Jul 49.
CHAMBLAIN, Louis Judel; Haiti.
CLERJEUNE, Leopold, Colonel; Delmas 31, Rue E. Laforest, Port-auPrince, Haiti; Passport No. 90678797; DOB 24 Aug 50.
CONSTANT, Emmanuel "Toto"; Haiti; DOB 27 Dec 56.
DEEB, Joel; Haiti; U.S.A.; DOB 28 Jun 54.
DORELIEN, Carl, Colonel; Haiti; Passport No. 82-57899; DOB 24 Jan
49.
DOUBY, Frantz, Colonel; Rue Cheriez 9, Rue 4 No.8, Port-au-Prince,
Haiti; 1900 Newkirk Avenue, No. 5E, Brooklyn, NY 11226, U.S.A.; DOB
19 Jan 48.
DUFRESNE, Jean Roland, Major; Haiti; DOB 11 Jun 56.
DUPERVAL, Jean-Claude, Major General; Haiti; DOB 19 Feb 47.
FRAN~OIS,
Evans Macfarland; Haiti; Dominican Republic; Passport No.
466-91; Diplomatic Passport No. 92-012658; DOB 06 May 52.
FRAN~OIS,
Joseph Michel, Lieutenant Colonel; Route Aeroport, Rue
Bergera, Imp. Beauchamp No.2, Port-au-Prince, Haiti; Passport No.
81151112; DOB 08 May 57.
GEDEON, Jean Evans, Lieutenant-Colonel; Haiti; DOB 11 Apr 44.
GEORGES, Reynold; Haiti; DOB 16 Oct 46.
GERMAIN, Henri P., Lieutenant-Colonel; Haiti; Brooklyn, NY, U.S.A.;
DOB 06 Sep 51.
-2-
GROSHOMME, Belony, Colonel; Haiti; 2422 Marpoc street, Hollywood,
FL U.S.A.; Passport No. 81-161845; DOB 12 Feb 48.
GUERRIER, Derby, Lieutenant-Colonel; Drouillard Sarthe Village,
Port-au-Prince, HaYti; 71 Webster Street, Irvington, NJ 07111,
U.S.A.; Passport No. 85-271932; DOB 14 Oct 49.
JOANIS, Jackson, Captain; Ruelle Alix Roy, Imp. Telemaque No. 22,
Port-au-Prince, HaYti; 942 Barlow Road, Apt. D, Fort Belvoir, VA
22060, U.S.A.; DOB 25 Oct 58.
JOSAPHAT, Andre Claudel, Lieutenant Colonel; Haiti; DOB 17 Aug 56.
JUSTAFORT, Serge, Major; Haiti; DOB 12 Jun 55.
KERNIZAN, Marc, Major; Delmas 45, No.8, Port-au-Prince, Haiti; DOB
05 Sep 55.
LASSEGUE, Pierre Philippe; Haiti; U.S.A.
LEONIDAS, Bernardo R., Lieutenant-colonel; Rue Oscar No. 23, Portau-Prince, HaYti; Brooklyn, NY, U.S.A.; DOB 28 Feb 42.
LOISEAU, Joel, Major; Haiti; DOB 11 Nov 54.
MAYARD, Henry (Henri) Max, Brigadier General; Haiti; DOB 07 Feb 47.
PAUL, Max; Bourdon, Impasse Iginac No.7, HaYti; 1019 Lenox Road,
Brooklyn, New York 11212, U.S.A.; La Saline Boulevard, P.O. Box
616, Port-au-Prince, HaYti; P.O. Box 1792, Port-au-Prince, HaYti;
Passport No. 90-705113; DOB 17 May 45.
POISSON, Bernadin, Colonel; Haiti; DOB 16 Feb 48.
PRUD'HOMME, Ernst, Colonel; Haiti; DOB 22 Sep 54.
RENAUD, Lener, Major; Haiti; DOB 22 Mar 56.
ROMAIN, Franck; Haiti; DOB 29 Jan 36.
ROMULUS, Dumarsais, Colonel; Haiti; DOB 18 Aug 48 (or) 16 Aug 48.
ROMULUS, Martial P., Colonel; Haiti; DOB 26 Feb 49.
SAINVIL, Ramus, Colonel; Delmas 68, Rue C. Henry No.2, Port-auPrince, Haiti; 1040 Carroll Street, Apt. 4K, Brooklyn, NY 11225,
U.S.A.; Passport No. 84-161640; DOB 15 Sep 52.
SIMON, Estimien, Lieutenant Colonel; Haiti; DOB 03 Mar 41.
SYLVAIN, Diderot Lyonel (Lionel), Colonel; Haiti; DOB 10 Jun 50.
VALME, Marc, Major; Avenue Martin Luther King No. 152, Port-auPrince, Haiti; Passport No. 81-142979; DOB 05 Dec 53.
VALMOND, Hebert, Colonel; Haiti; DOB 17 May 49.
-3-
MINISTRY OF INFORMATION AND COORDINATION
300 route de Delmas, Port-au-Prince, HaIti.
MINISTRY OF INTERIOR AND NATIONAL DEFENSE
(a.k.a. MINISTERE DE L'INTERIEUR ET DEFE~SE NATIONALE)
Palais des Ministeres, Port-au-Prince, HaIti.
MINISTRY OF JUSTICE
Boulevard Harry Truman, cite de l'Exposition, Port-au-Prince,
HaYti.
MINISTRY OF PLANNING AND EXTERNAL COOPERATION
(a.k.a.
MINISTERE
DE
LA PLANIFICATION
ET
COOPERATION
EXTERNELLE)
Palais des Ministeres, Rue Monseigneur Guilloux, Port-auprince, HaIti.
MINISTRY OF PUBLIC HEALTH
(a.k.a. SANTE PUBLIQUE)
(a.k.a. MINISTRY OF PUBLIC HEALTH AND POPULATION)
(a.k.a. MINISTERE DE LA SANTE PUBLIQUE ET DE LA POPULATION)
(a.k.a. MINISTRY OF PUBLIC HEALTH AND HOUSING)
Palais des Ministeres, Port-au-Prince, HaIti.
MINISTRY OF PUBLIC WORKS, TRANSPORT AND COMMUNICATIONS
(a. k. a.
MINISTERE
DES
TRAVAUX
PUBLICS,
TRANSPORT
COMMUNICATIONS)
(a.k.a. MTPTC)
Palais des Ministeres, BP 2002, Port-au-Prince, HaIti.
ET
MINISTRY OF SOCIAL AFFAIRS
Rue de la Revolution, Port-au-Prince, HaIti.
NATIONAL CREDIT BANK
(a.k.a. BANQUE NATIONALE DE CREDIT)
( a . k . a . BNC )
Angle rue du Quai et rue des Miracles,
Prince, HaIti.
BP 1320,
Port-au-
NATIONAL INSURANCE
(a.k.a. OLD AGE INSURANCE)
(a.k.a. OFFICE NATIONAL D'ASSURANCE VIEILLESSE)
(a.k.a. ONA)
Champ de Mars, Port-au-Prince, HaYti.
NATIONAL OFFICE FOR INDUSTRIAL PARKS
(a.k.a. NATIONAL INDUSTRIAL PARK COMPANY)
(a.k.a. GOVERNMENT INDUSTRIAL PARK)
(a.k.a. SOCIETE NATIONALE DES PARCS INDUSTRIELS)
(a.k.a. SONAPI)
Industrial Park, P.o. Box 2345, Port-au-Prince, HaIti.
NATIONAL PORT AUTHORITY
(a.k.a. AUTORITE PORTUAIRE NATIONALE)
(a.k.a. PORT AUTHORITY)
(a.k.a. AIRPORT)
-4-
(a.k.a. APN)
La Saline Boulevard, P.o. Box 616, Port-au-Prince, HaYti;
P.O. Box 1792, Port-au-Prince, HaYti.
NATIONAL WATER SERVICE
(a.k.a. SERVICE NATIONAL D'EAU POTABLE)
(a.k.a. SNEP)
Delmas 45 - Delmas Road, Port-au-Prince, HaYti.
OFFICE FOR PERMANENT MAINTENANCE OF ROAD NETWORK
(a.k.a. SERVICE D'ENTRETIEN PERMANENT DU RESEAU ROUTIER
NATIONAL)
(a.k.a. SERVICE D'ENTRETIEN DU RESEAU ROUTIER NATIONAL)
(a.k.a. SEPRRN)
(a.k.a. OFFICE OF ROAD MAINTENANCE)
Varreux - National Road, 10 Varreux Road, Port-au-Prince,
HaYti.
OFFICE OF CUSTOMS
(a.k.a. ADMINISTRATION GENERALE DES DOUANES)
161 Route de Delmas, Port-au-Prince, HaYti.
OFFICE OF MILITARY ATTACHES
(a.k.a. BUREAU DES ATTACHES HILITAIRES)
HaYti.
TELEPHONE COMPANY
(a.k.a. TELECOHHUNICATIONS D'HAITI, SAH)
(a.k.a. TELECO)
J.J. Dessalines Boulevard, P.o. Box 814,
HaYti.
Port-au-Prince,
FOR IMMEDIATE RELEASE
October 21, 1993
STATEMENT BY TREASURY SECRETARY BENTSEN
RE: German interest rate cuts
"I'm pleased by today's 50-basis point cut in official German interest rates. It's an
important step in the downward trend of European rates that will help strengthen world
growth and create jobs."
-30-
LB-446
For Immediate Release
October 21, 1993
Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data for the month of
September 1993.
As indicated in this table, U.S. reserve assets amounted to $75,835 million at the end
of September 1993, up from $75,231 million in August 1993.
U.S .. Reserve Assets
(in millions of dollars)
End
of
Month
Total
Reserve
Assets
August
Sepember
Gold
Stock 1/
Special
Drawing
Rights 2/1/
1./
Reserve
Position in
IMF2/
75,231
11,057
9,133
42,923
12,118
75,835
11,057
9,203
43,474
12,101
Foreign
Currencies
1993
1/
Valued at $42.2222 per fine troy ounce.
1/
Beginning July 1974, the IMF adopted a technique for valuing the SDR based on a
weighted average of exchange rates for the currencies of selected member countries. The
U.S. SDR holdings and reserve position in the IMF also are valued on this basis
beginning July 1974.
J/
Includes allocations of SDRs by the IMF plus transactions in SDRs.
~/
Valued at current market exchange rates.
LB-447
j,
'-
-
FOR IMMEDIATE RELEASE
October 21, 1993
Contact: Peter O'Brien
(202) 622-2960
TREASURY BLOCKS ASSETS OF OPPONENTS OF DEMOCRACY IN HAITI
The U.S. Treasury Department has blocked the assets of 41 individuals who have
obstructed the restoration of democracy in Haiti, perpetuated or contributed to Haiti's
violence, or provided material or financial support to these activities. The list includes
many senior military and police officials, some of whom were members of the illegal
regime which seized power in 1991, and others who are involved with the "attaches" or
are their financial patrons.
This action blocks all assets of these individuals within United States jurisdiction
and effectively prohibits transactions with them. This is the first blocking action taken
under the authority of Executive Order 12872, which went into effect just before
midnight on October 18. It begins the process of identifying and blocking those
individuals who are involved in obstructing the international community's determination
to restore democracy to Haiti or are involved in the violence in Haiti.
In announcing this action, R. Richard Newcomb, Director of the Office of Foreign
Assets Control, said "It is essential that economic sanctions against Haiti be as firm as
possible to convey to the military and police in Haiti the cost of defying the Haitian
people's choice of a democratic government, the international community's
determination to support that exercise of democracy in Haiti, and to stop the violence
that oppresses Haiti's political process."
These measures against the opponents of Haitian democracy complement the
remaining elements of U.S. sanctions which were reinstated in full on October 18. These
sanctions prohibit most trade and financial transactions with Haiti, restrict access to U.S.
ports for vessels calling in Haiti for transactions that would be prohibited by the U.S.
sanctions, and continue to block assets of the Haitian government and the de facto
regIme.
Violations of the Haiti embargo carry maximum criminal penalties of $500,000
per count for corporations, $250,000 for individuals, and 10 years in prison for
individuals, including corporate officers. OFAC also may levy administrative civil
penalties of up to $10,000 per violation.
The list of blocked individuals and entities of Haiti may be expanded or amended
at any time, as new information becomes available to the Treasury Department. Persons
with information on individuals or firms violating the Haiti sanctions may call 202-6222430, or questions about licensing may call 622-2480. All calls will be kept confidential.
-30-
LP'-448
REMARKS OF JEFFREY R. SHAFER
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
BEFORE THE
PRESIDENCY LEADERSHIP CONFERENCE
INDIANAPOLIS, INDIANA
OCTOBER 22,1993
. This evening I want to talk about the North American Free Trade Agreement.
NAFTA is one of President Clinton's favorite causes, it's one of Secretary Bentsen's and
it's one of mine. I want to explain why. And, since the theme of this Conference is
leadership, I'd like to use this opportunity to argue the need for strong leadership to win
NAFTA, and the need to win NAFTA so America can be a strong leader.
America would not be in a position of leadership today unless Americans had
taken risks to compete and faced challenges head on, even when they were the
underdogs.
Let me try to drive this point home. I'm a big soccer fan, and a couple of weeks
ago I went to a soccer game between the United States and Mexico. Anyone who
follows World Cup soccer knows that the United States is not regarded as a first rate
international competitor, and Mexico was heavily favored to win. Mexico did go up a
goal and looked headed for victory, but in the closing minutes, the U.S. scored on an
elegantly executed play, and we came away with a tie. For the U.S., this was a real
victory, and if we'd been afraid to compete, we never would have proven that we could
hold our own against a top-ranked team.
If our players can do that well against Mexicans on the soccer field, our workers
should have nothing to fear in the factories, since they've been competing on a playing
field sharply tilted in favor of Mexico, and still coming out ahead. And I can't
understand why anyone can oppose NAFTA when one of its fundamental
accomplishments is to level that playing field so Mexico no longer has an advantage.
LB-449
If you don't agree with me, consider some other views on NAFTA: the authors of
18 out of 19 reputable studies on NAFTA have concluded that it will benefit the U.S.; a
group of 300 renowned economists, including twelve Nobel Laureates, wrote to President
Clinton in support of NAFTA.
And it is the real prospects for exports and jobs that have led 41 out of 50
governors to support the agreement. Five American Presidents- two Democrats and
three Republicans- publicly support NAFTA.
I think this shows that winning NAFTA means getting the simple facts out about
the agreement, and appealing to common sense instead of fear. And to do this, strong
leadership is critical because NAFTA opponents are preying on fear-- fear of losing jobs,
losing competitiveness, and more generally, fear of change.
We need to get the message out that rejecting NAFTA will not eliminate the
fears that many Americans have about their future. In fact, I can't think of a more
certain prescription than rejecting NAFTA for making them worse.
We need leadership to give us the courage to change. President Clinton is doing
this by making NAFTA his own and leading the campaign for its passage. And, the
message is getting through: after people listen to the facts about NAFTA, they seem to
change their minds and agree that NAFTA will help us to conquer the anxieties about
job loss and competitiveness that provoke their worries about the agreement in the first
place.
Real leadership helps people see opportunities in change. It gives people the
courage to embrace competition and win. It doesn't paralyze them with fear. We will
need real leadership all across America, supporting President Clinton and all the exPresidents, in the effort to get the truth about NAFTA out. Let me give you a concrete
example of how this can be done:
Recently, my boss, Larry Summers participated in a debate in front of about 30
people, and at the beginning, the majority opposed NAFfA. By the end, all but one
supported NAFfA-- and remember, they heard both sides of the argument. Larry is a
champion debater, but he also had the facts on his side.
And when you hear the facts, I think you'll agree:
1. NAFTA creates the world's largest market-- 370 million people with $6.5
trillion of production. It locks in preferential access for the United States to its first and
third largest trading partners. Mexico is only offering preferential access to the United
States and Canada-- the EC and Japan are excluded from this deal.
2
2. NAFTA levels a playing field that is sharply tilted in favor of Mexico. Mexican
tariffs are now 2 and 1/2 times higher than ours. They will come down to zero.
3. NAFfA gets us more than we give. Mexico has to liberalize significantly more
than we do to achieve the same level of openness.
4. NAFfA requires Mexico to change laws that today force our companies to
move to Mexico in order to sell there.
5. NAFTA is the first trade agreement to address environmental and labor issues,
and a new U.S./Mexican agreement that I negotiated provides money to clean up the
border.
6. NAFfA gives us a larger secure market so we can become more competitive.
For a wide range of products, we need to produce more than we can sell at home to be
competitive. With greater demand from Mexico, Americans can produce more for less,
and sell goods at a lower price, which is what being competitive is all about. And if we
sell products at a lower cost, we'll also be more competitive in other markets where we
won't get special treatment but go head on against Japan and the EC
Mexico will win from NAFTA too, but not at our expense. We will both gain
from the larger market and from combining our efforts to compete against Europe and
Japan.
The bottom line: NAFTA is not a zero sum game. Everyone can benefit. And
the United States will gain, particularly in terms of jobs and the environment. You've
been hearing different views on these issues, and I want to set the record straight by
looking directly at what the critics are telling us and why I think they're wrong.
NAFfA opponents say that jobs will go South because wages in Mexico are lower
than wages in the U.S. That's wrong on three counts. First, it's simplistic: compames
take a lot more than wages into account-- productivity matters, as does
infrastructure and access to technology-- all areas where we have a big advantage.
In fact, U.S. workers are competing with Mexican workers now, and winning.
Take the example of Quality Inc., a maker of electromagnetic coils that lost money in
Mexico due to high absenteeism, low productivity and problems with long distant
management. The company moved its factory back to Connecticut this year and
discovered that one worker in the U.S. does the job of three employees in Mexico.
3
And most companies don't have to experiment to come to this conc1usion-- they
only have to do a little research to know that the U.S. is a better location than Mexico
for almost everything we do. For example, Haworth Inc., an office furniture maker in
Michigan, has twice considered moving to Mexico and determined in both cases that it
could manufacture furniture more cheaply in the U.S.
Second, NAnA will keep jobs at home, and bring some back, by eliminating
high tariffs that mean companies have to move to Mexico in order to be competitive
there. Here's another example: Mcilhenny Co. set up a Tabasco factory in Mexico to
escape high tariffs and other import barriers, but then moved to Louisiana after these
barriers were lowered in 1989. NAFTA will lead to more of this.
Third, NAFTA will eliminate Mexico's requirements that companies have to
produce in Mexico to sell there. Due to burdensome regulations in the auto sector, for
example, auto manufacturers have to move to Mexico if they want to do business there.
To understand the impact of these barriers, just look at how the top ten selling American
cars are doing in Mexico. The Big Three sold 2.1 million of their best-selling cars last
year in the United States compared to only 162 in Mexico (all Cadillacs). With NAFTA,
we expect to sell 60,000 new American cars to Mexico in the first year alone. And these
cars will be made here because it costs over $400 more to build a car in Mexico.
Some people are skeptical about the claim that NAFTA will create jobs because
Mexicans will buy more products, like cars, from the U.S. They don't believe that a poor
country like Mexico really buys a lot from the U.S. But in fact, Mexicans buy 70 percent
of their imports from the U.S.-- only 23 percent of Japan's imports came from the U.S.,
and for the EC the figure is only 7 percent. And Mexicans buy more per capita from us
than the Europeans or Japanese.
Mexicans are already buying everything from tacos to tractors. F or example,
there is a corporation here in Indianapolis (SaniServe) that sells slush machines (for ice
and ice-cream products) to Mexico. In 1992, its sales to Mexico reached nearly 1/2
million dollars, and they are expected to grow 20 percent this year. The workers who
make these machines depend on sales to Mexico for their jobs.
And incomes in Mexico will rise as they join with us in realizing the gains from
trade. This point is overlooked by NAFTA opponents who see Mexico as forever a lowwage supplier with low-income demand.
So that's my case for why NAFTA is good for jobs. The best estimates are that
200,000 jobs will be created in the first couple of years with NAFTA I won't tell you
that this is a lot in an economy the size of our own. But those who would have you
believe that there will be fewer jobs in America after NAFTA, or lower paid jobs for
that matter, are just wrong.
4
Now for my case on the environment:
Opponents say that NAFTA will generate more pollution. I don't believe that,
and neither should you. In fact, NAFTA is the greenest trade agreement in history. It
contains commitments to maintain and enforce domestic environmental laws. It is the
first trade agreement to provide fines and trade sanctions for failure to enforce
environmental laws.
The essential point, however, is this: NAFTA will help create a richer Mexico,
which will be able to devote more resources to clean up its air and water, and preserve
its natural resources. Poor countries can't afford to make the environment a high
priority. Cutting off Mexico's best shot at pulling itself up through free trade and
investment is no way to help the environment.
We are also doing something along with NAFTA to clean up the U.S. Mexico
border area-- where hundreds of thousands of households lack clean drinking water and
garbage collection.
- We have just completed an agreement on border environmental cleanup with
Mexico that creates two new institutions to design, finance and implement environmental
infrastructure projects. The first is a U.S.-Mexican Border Environment Cooperation
Commission Organization (BECC) to -help coordinate projects and put together financing
packages to support them. The second is a U.S.-Mexican financing facility to support
environmental infrastructure projects along the border.
These facts about what NAFTA does on the environment explain why the
agreement is supported by major environmental groups like the National Wildlife Fund,
the Audubon Society, the National Resources Defense Council, and the Environmental
Defense Fund. I've talked directly to their representatives about what we are doing for
the environment in NAFTA, and they like it. If you care about the environment, you
should care about winning NAFTA.
I started by promising to tell you why we need leadership to win NAFTA and why
I think winning NAFTA is important to America as a world leader-- I've tried to
accomplish the first objective, and
make my case for NAFTA as well.
Now, let me turn to the second:
Several times during this century the United States has been called upon to take a
position of leadership in the world, politically, economically and militarily. Each time
there has been pressure to turn inward.
5
In 1932 fear got the upper hand and we got the Smoot-Hawley tariff. But we had
the courage to lead the world to establish the GAIT in 1947, and have persevered over
the last 46 years in pressing for lower trade barriers.
I can't think where we would be today if the forces of isolation and protectionism
had triumphed after World War II, as they did after World War I.
Today President Clinton talks about economic security as a defining principle of
national and international security. Since he recognizes that our own economic security
depends on our ability to sell to other nations, we are aggressively trying to open
markets. We are urging countries to follow our example of embracing an open economy
by liberalizing trade regimes and adopting market-oriented reforms. We are counting on
the success of these initiatives to provide us with economic security. If other markets are
not open to our goods and services, America can't prosper.
Consider, in this context, the importance of NAFTA. We need NAFTA, not only
because it opens the markets of our first and third-largest trading partners, but because it
reinforces our ability to lead the world in the direction of free markets and open
economies. We need to be strong, and to be seen as strong in our commitment to the
principles of a market economy, if we hope to convince our trading partners to remove
barriers in the Uruguay Round, persuade countries in the former Soviet Union to adopt
market-oriented reforms and induce Japan to buy more of our goods and services.
How can we expect other countries to respond to our demands for openness if we
fail to open our market to Mexico-- a country with an economy roughly the size of Los
Angeles-- because we give in to those who believe the best way to cope with economic
insecurity is to retreat behind barriers? And it leaves me wondering how many times
this approach has to fail, in the United States and around the world, before we learn that
protectionism will not give us jobs, will not make us competitive and will not provide
economic security.
Before I conclude, I ask that you consider what could happen if we lose NAFfA:
We spent years pressuring Mexico to adopt democratic reforms and market
oriented policies. If we say no to NAFfA, there would be pressure in Mexico to
reimpose barriers against us. Mexico would be free to raise its tariffs up to 50 percent.
Think about what that means for the 700,000 jobs in the United States that depend on
exports to Mexico.
Mexico would have less incentive to be cooperative in the areas of illegal
immigration or drug smuggling. We need a good neighbor in Mexico if we really want to
solve these problems. And for this we have to be a good neighbor, and build a
relationship of mutual trust with the rest of Latin America.
6
We could lose a chance to build a strong partnership with our southern neighbor
that has not come before in our history and may never come again, and in the bargain
gain secure and greater access to the rest of Latin America-- the second fastest growing
region in the world. Worse yet, we could be displaced by Japan and the Ee in our own
backyard.
We would pass up a chance to address environmental problems on the border,
and lose our leverage for improving environmental protection and labor rights in Mexico.
To sum up, NAFfA means more jobs for more workers in the United States and
a cleaner environment on both sides of the border. We can't afford to miss this
opportunity. And to see that we don't, we need strong leadership to get the facts out
about NAFfA, so we can dispel the myths and conquer the fears that are hurting us in
this debate. And we need to win NAFTA at home if we expect to convince our other
trading partners abroad that open markets, and not closed economies, are the key to
international security and prosperity.
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7
TESTIMONY OF RONALD K. NOBLE
ASSISTANT SECRETARY (ENFORCEMENT)
DEPARTMENT OF THE TREASURY
BEFORE
THE U.S. HOUSE OF REPRESENTATIVES
HOUSE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON TREASURY, POSTAL SERVICE,
AND GENERAL GOVERNMENT
OCTOBER 22, 1993
I WOULD LIKE TO THANK THE COMMITTEE AND YOU MR.
CHAIRMAN FOR THE SUPPORT AND PATIENCE YOU HAVE EXTENDED TO
THE DEPARTMENT OF THE TREASURY WHILE WE CONDUCTED OUR
LENGTHY AND SEARCHING REVIEW OF THE EVENTS LEADING UP TO THE
ASSAULT ON THE BRANCH DAVIDIAN COMPOUND OUTSIDE WACO,
TEXAS. AS YOU WILL ALL RECALL, WHEN THE CHAIRMAN FIRST
CONVENED HEARINGS BACK IN JUNE OF THIS YEAR, WE WERE
CONCERNED ABOUT THE EFFECT HEARINGS MIGHT HAVE ON OUR
PENDING INVESTIGATION AS WELL AS THE IMPORTANT CRIMINAL
PROSECUTIONS IN WACO. THE CHAIRMAN AND THE COMMITTEE
MEMBERS WERE SENSITIVE TO OUR CONCERNS AND DEMONSTRATED A
WILLINGNESS TO WORK WITH US COOPERATIVELY TO REACH A SOUND
ACCOMMODATION OF THE MANY INTERESTS AND ISSUES PRESENTED BY
THE VARIOUS INQUIRIES. I HOPE, AND BELIEVE, THAT THE REPORT WE
ISSUED IS WORTHY OF THE CONFIDENCE YOU SHOWED IN OUR ABILITY
TO CONDUCT A THOROUGH, FAIR AND IMPARTIAL INVESTIGATION.
THE INVESTIGATION PRODUCED A REPORT THAT IS MORE THAN
500 PAGES LONG. IT REFLECTS THE HARD WORK AND DEDICATION OF
MANY INDIVIDUALS. THE DAY TO DAY DIRECTION OF THE
INVESTIGATION WAS DIRECTED BY THE PROJECT DIRECTOR, H.
GEOFFREY MOULTON, JR., A FORMER FEDERAL PROSECUTOR WHO
EARLIER WAS A LAW CLERK FOR CHIEF JUSTICE WILLIAM REHNQUIST.
WITH ME HERE TODAY ARE THE TWO ASSISTANT PROJECT DIRECTORS.
DAVID DOUGLASS, ALSO A FORMER FEDERAL PROSECUTOR, IS ON LEAVE
FROM PRIVATE PRACTICE AT WILEY, REIN & FIELDING HERE IN
WASHINGTON.
LB-4S0
SPECIAL AGENT LEWIS C. MERLETTI, THE OTIIER ASSISTANT PROJECf
DIRECfOR, IS PRESENTLY A DEPUTY ASSISTANT DIRECfOR WIlli THE
SECRET SERVICE.
TO ASSURE THE AMERICAN PEOPLE THAT THE REPORT WOULD BE
AN UNCOMPROMISING EXAMINATION OF THE EVENTS LEADING UP TO
THE TRAGEDY ON FEBRUARY 28, WE REACHED BEYOND THE TREASURY
DEPARTMENT. WE ALSO CONSULTED 10 NON-TREASURY EXPERTS IN
TACTICAL OPERATIONS; FIREARMS AND EXPLOSIVES.
THE INVESTIGATION AND REPORT WERE GUIDED BY THREE
INDEPENDENT REVIEWERS OF NATIONAL PROMINENCE AND
UNQUESTIONED INTEGRITY.
EDWIN O. GUTH MAN , A PULITZER PRIZE WINNING
JOURNALIST AND FORMER EDITOR OF THE PHILADELPHIA
INQUIRER AND NATIONAL EDITOR OF THE LOS ANGELES
TIMES. HE WAS ALSO FORMERLY PRESS SECRETARY TO
ATTORNEY GENERAL AND LATER SENATOR ROBERT F.
KENNEDY.
HENRY S. RUTH, JR. - A LONGTIME JUSTICE OFFICIAL AND
FORMER WATERGATE PROSECUTOR. MR. RUTH ALSO
SERVED ON THE COMMISSION TO REVIEW LAW
ENFORCEMENTS HANDLING OF THE MOVE CRISIS.
WILLIE L. WILLIAMS - CHIEF OF THE LOS ANGELES POLICE
DEPARTMENT. RECIPIENT OF NUMEROUS AWARDS AND
CITATIONS, HE IS ALREADY CREDITED WITH SIGNIFICANT
IMPROVEMENTS IN POLICE AND COMMUNITY RELATIONS IN
THE CITY OF LOS ANGELES.
ALL OF THE EXPERTS AND INDEPENDENT REVIEWERS SERVED
WITHOUT PAY AND PUT IN MANY LONG HOURS REVIEWING REPORTS,
VIEWING VIDEOTAPES, MEETING WITH THE INVESTIGATIVE TEAM AND
ATF AGENTS. THEY BROUGHT UNMATCHED EXPERIENCE AND
PROVIDED INVALUABLE INSIGHT.
I WOULD BE REMISS IN NOT MENTIONING ONE FINAL GROUP
WITHOUT WHOM WE COULD NOT HAVE CARRIED OUT THE MANDATE OF
PRESIDENT CLINTON TO CONDUCT A "VIGOROUS AND THOROUGH"
REVIEW OF THE EVENTS IN WACO--THE ATF AGENTS. WE RECEIVED
UNQUALIFIED COOPERATION FROM THE HUNDREDS OF LINE AGENTS WE
INTERVIEWED.
-2-
THEY WANTED THE TRUTH TO BE TOLD. AND TO ENSURE THAT IT WAS,
THEY NOT ONLY SUBJECTED THEMSELVES WILLINGLY TO PROTRACfED
AND NO DOUBT PAINFUL SCRUTINY--THEY WELCOMED IT. WITHOUT
THEIR SUPPORT OF OUR EFFORTS AND THEIR PROFESSIONAL
COMMITMENT TO EFFECTIVE LAW ENFORCEMENT, A DIFFICULT TASK
MAY HAVE BEEN RENDERED IMPOSSIBLE. IN SUM, MR. CHAIRMAN,
WHILE THE EVENTS OUTSIDE WACO LED TO A TRAGEDY UNEQUALLED
IN TREASURY LAW ENFORCEMENT, I BELIEVE THE EFFORT UNDERTAKEN
TO LEARN FROM THESE EVENTS DEMONSTRATED THE EXCEPTIONAL
PROFESSIONALISM OF TREASURY'S LAW ENFORCEMENT BUREAUS. THE
MEN AND WOMEN INVOLVED IN THE WACO INQUIRY AND REPORT
SHOULD MAKE ALL OF US PROUD.
WE BEGAN OUR FIRST INTERVIEWS ON MAY 24. BETWEEN THAT
DATE AND THE CONCLUSION OF OUR INVESTIGATION WE INTERVIEWED
MORE THAN 500 INDIVIDUALS INVOLVED IN THE RAID ON THE 28TH.
IN ADDITION TO INTERVIEWING INDIVIDUALS, WE TRIED TO
GATHER EVERY DOCUMENT AND ITEM OF RECORDED INFORMATION
RELEVANT TO THE INVESTIGATION. WE COLLECTED THOUSANDS OF
DOCUMENTS AND MATERIALS. WE ALSO COLLECfED VIDEOTAPES AND
PHOTOGRAPHS. IN SHORT, WE PURSUED AND REVIEWED ALL MATERIAL
THAT MIGHT HAVE HELPED US TO UNDERSTAND WHAT HAPPENED ON
THE 28TH.
THE REVIEW FOUND THAT THERE WAS AMPLE JUSTIFICATION FOR
INVESTIGATING DAVID KORESH AND HIS FOLLOWERS AND THAT THE
INVESTIGATION WAS PROPERLY AND PROFESSIONALLY CONDUCfED.
MAKE NO MISTAKE: DAVID KORESH HAD COMMITTED NUMEROUS
FELONY VIOLATIONS OF FEDERAL FIREARMS AND EXPLOSIVES LAWS
AND HE PRESENTED A DANGER TO THE COMMUNITY.
ACCORDING TO OUR FIREARMS AND EXPLOSIVES EXPERTS, BASED
SOLELY ON SHIPPING INVOICES, LET ME DESCRIBE JUST SOME OF THE
CULTS ARSENAL:
1. APPROXIMATELY 136 ASSAULT RIFLES, 29 PISTOLS, 4
SHOTGUNS, 786 MAGAZINES FOR FIREARMS AND 211,000
ROUNDS OF AMMUNITION;
2. SUFFICIENT UPPER AND LOWER RECEIVERS TO ASSEMBLE
AN ADDITIONAL 110 AR-15/M16 RIFLES.
3. GRENADE LAUNCHER ATTACHMENTS FOR THE AR-15/M16
RIFLES.
-3-
4. SUFFICIENT CHEMICALS AND COMPONENTS TO CONSTRUCT
AT LEAST 50 GRENADES AND PERHAPS AS MANY AS 250. THEY
ALSO HAD CHEMICALS AND COMPONENTS TO CREATE 70 PIPE
BOMBS.
KORESH WAS INVESTIGATED BASED ON THE EVIDENCE THAT HE WAS
VIOLATING FEDERAL FIREARMS AND EXPLOSIVES LAWS. HE WAS NOT
INVESTIGATED FOR HIS RELIGIOUS BELIEFS.
AS YOU ALL NOW KNOW, WE FOUND THAT THE TACTICAL PLAN
DEVELOPED TO SERVE THE WARRANTS WAS SERIOUSLY FLAWED IN
SEVERAL RESPECTS. HOWEVER, FOUR OF OUR TACTICAL EXPERTS
CONCLUDED THAT THE PLAN COULD HAVE SUCCEEDED HAD TIlE
INTELLIGENCE ON WHICH IT WAS BASED BEEN ACCURATE. BUT ALL SIX
EXPERTS IDENTIFIED SERIOUS DEFICIENCIES IN TIlE PLAN AND
ULTIMATELY CHALLENGED THE WISDOM OF CONDUCTING A RAID
UNDER THE CIRCUMSTANCES PRESENTED. ALTHOUGH WE CANNOT
PREJUDGE ALL FUTURE SITUATIONS, WE MUST BE OPEN TO THE
POSSIBILITY THAT A DYNAMIC ENTRY AS ATF CONFRONTED EXPOSING
AGENTS, INNOCENT PERSONS AND CHILDREN TO GUNFIRE, MAY SIMPLY
NOT BE AN ACCEPTABLE LAW ENFORCEMENT OPTION.
WE NOW KNOW THAT KORESH WAS ALERTED TO THE RAID BASED
ON A WARNING--ALBEIT UNINTENTIONAL--FROM A TELEVISION
CAMERAMAN TO ONE OF KORESH'S FOLLOWERS. WE ALSO KNOW THAT
ON THE MORNING OF FEBRUARY 28, IN THE HOURS BEFORE THE RAID,
THERE WERE SEVERAL VEHICLES THAT OBVIOUSLY CONTAINED
REPORTERS. IN ADDITION, A SIGNIFICANT NUMBER OF NON-LAW
ENFORCEMENT PERSONNEL KNEW OF THE RAID. THE POSSIBILITY THAT
THESE CONDITIONS COULD LEAD TO THE RAID BEING COMPROMISED
SHOULD HAVE BEEN RECOGNIZED BY THE RAID COMMANDERS.
THE REPORT DETAILS THE ACTIONS TAKEN AND STATEMENTS
MADE BY SOME ATF FIELD SUPERVISORS AND NATIONAL MANAGERS
AFTER THE RAID. THE REPORT CONCLUDES THAT STATEMENTS WERE
MADE TO THE PUBLIC AND THE REVIEW TEAM WHICH WERE LESS THAN
ACCURATE. INDEED, IT IS DIFFICULT TO CHARACTERIZE THEM AS
ANYTHING OTHER THAN LIES. MOREOVER, AS A POLICY MAKER AND
MANAGER, IT IS CLEAR TO ME THAT THEIR CONDuer FELL FAR BELOW
WHAT CAN BE ACCEPTED OF EXPERIENCED AGENTS WHO ARE
RESPONSIBLE FOR THE LIVES OF OTHERS. AS YOU KNOW, THE ACTIONS
OF SEVERAL INDIVIDUALS ARE UNDER REVIEW BY TREASURY'S OFFICE
OF INSPECTOR GENERAL.
-4-
AS IMPORTANT AS FINDING OUT WHAT HAPPENED IN WACO AND
WHY, IS ENSURING AS BEST WE CAN THAT SIMILAR TRAGEDIES DO NOT
OCCUR AGAIN. WE HAVE ALREADY TAKEN SOME STEPS IN THAT
DIRECTION, ON NEW ACTING DIRECfOR OF ATF JOHN MAGAW.
DIRECfOR MAGAW GRACIOUSLY AGREED TO LEAVE HIS POSITION AS
DIRECfOR OF THE SECRET SERVICE AND CONTRIBUTE HIS MANY YEARS
OF LAW ENFORCEMENT EXPERIENCE TO STRENGTHENING ATF.
NEXT ALLOW ME TO INTRODUCE ATF'S NEW ASSOCIATE DIRECfOR
FOR LAW ENFORCEMENT, CHARLES THOMSON, FORMERLY THE SPECIAL
AGENT IN CHARGE OF ATF'S NEW YORK OFFICE.
APART FROM BRINGING IN NEW LEADERSHIP, THE OFFICE OF
ENFORCEMENT HAS INITIATED STEPS TO IMPROVE ITS ABILITY TO
OVERSEE AND DIRECf THE LAW ENFORCEMENT BUREAUS OVER WHICH
IT EXERCISES OVERSIGHT RESPONSIBILITY. THESE STEPS ARE NOT
TAKEN IN AN EFFORT TO ASSUME ROUTINE OPERATIONAL CONTROL
OVER THE BUREAUS. AS WE NOTE IN THE REPORT, SUCH AN ATTEMPT
WOULD BE AN EXERCISE IN FUTILITY. IN 1992 ALONE, ATF'S MORE THAN
2,000 AGENTS EXECUTED 10,134 FEDERAL WARRANTS. IN ADDITION,
THEY PARTICIPATED WITH STATE AND LOCAL AGENCIES IN THE SERVICE
OF 12,884 SEARCH WARRANTS NATIONWIDE. GIVEN THE SPEED WITH
WHICH MOST ENFORCEMENT ACTIVITIES OCCUR AND THE DEGREE OF
FAMILIARITY THAT IS NEEDED BEFORE AN OPERATION CAN BE
ASSESSED, INVOLVEMENT BY THE OFFICE OF ENFORCEMENT IN MOST
ATF RAIDS, AND SIMILARLY IN THOSE OF THE OTHER LAW
ENFORCEMENT BUREAUS, WOULD BE IMPOSSIBLE. THE OFFICE OF
ENFORCEMENT POSSESSES NEITHER THE EXPERTISE NOR THE CAPACITY
FOR SUCH MICRO-MANAGEMENT.
THE ROLE OF THE OFFICE OF ENFORCEMENT SHOULD BE TO
ENSURE THAT THE LAW ENFORCEMENT BUREAUS ARE EXECUTING
THEIR MISSIONS CONSISTENT WITH THE POLICIES, PRINCIPLES AND
PRIORITIES ESTABLISHED BY THE DEPARTMENT OF THE TREASURY. TO
ACCOMPLISH THIS OBJECTIVE, THE OFFICE OF ENFORCEMENT HAS
ESTABLISHED A TREASURY LAW ENFORCEMENT COUNCIL COMPRISING
THE DIRECfORS OF THE U.S. SECRET SERVICE, ATF, THE FEDERAL LAW
ENFORCEMENT TRAINING CENTER, THE FINANCIAL CRIMES
ENFORCEMENT NETWORK, THE COMMISSIONER OF CUSTOMS AND THE
ASSISTANT COMMISSIONER FOR THE CRIMINAL INVESTIGATIVE DIVISION
OF THE INTERNAL REVENUE SERVICE. ITS PURPOSE IS TO PROVIDE
TREASURY LAW ENFORCEMENT LEADERS A FORUM TO DISCUSS
SIGNIFICANT POLICY OR OPERATIONAL MATTERS WITH ONE ANOTHER
AND WITH THE ASSISTANT SECRETARY FOR ENFORCEMENT.
-5-
IN CONJUNCTION WITH THE COUNCIL, I HAVE ESTABUSHED FORMAL
REPORTING REQUIREMENTS AND CRISIS MANAGEMENT PROCEDURES
FOR THE BUREAUS.
SECOND, I HAVE INSTITUTED A SERIES OF WEEKLY AND MONTHLY
MEETINGS WITH BUREAU HEADS TO ENSURE THAT POLICY-LEVEL
OFFICIALS ARE PROVIDED WITH TIMELY INFORMATION.
ULTIMATELY, EFFECTIVE OVERSIGHT AND SUPERVISION CANNOT
BE REDUCED TO A FORMULA OR A LIST OF PRESCRIPTIVE ACTIONS,
DUTIES AND RESPONSIBILITIES. RATHER, IT MUST BE THE PRODUcr OF
A WORKING RELATIONSHIP CHARACTERIZED BY CLEAR DIRECTION,
OPEN DIALOGUE AND MUTUAL TRUST. NONETHELESS, IT IS NOT TOO
MUCH TO EXPECf OF THE DIRECTORS OF THE BUREAUS THAT THEY
RECOGNIZE WHEN AN INVESTIGATION OR OPERATION SHOULD BE
BROUGHT TO THE ATTENTION OF THE OFFICE OF ENFORCEMENT.
AMONG THE FACfORS I EXPECf THE BUREAU HEADS TO CONSIDER IN
DETERMINING WHETHER AND WHEN TO INVOLVE MY OFFICE ARE THE
FOLLOWING:
1. WHETHER THE OPERATION PRESENTS A SIGNIFICANT RISK TO
THE LIVES OF LAW ENFORCEMENT PERSONNEL OR CIVILIANS.
2. WHETHER THE OPERATION IS OF A SIGNIFICANTLY
DIFFERENT SCOPE OR SCALE THAN PREVIOUS OPERATIONS
UNDERTAKEN BY THAT BUREAU.
3. THE EXTENT TO WHICH THE OPERATION ENTAILS USE OF
NOVEL OR UNTESTED TECHNIQUES OR TECHNOLOGY.
4. THE EXTENT TO WHICH THE OPERATION OR
INVESTIGATION INVOLVES SENSITIVE ISSUES SUCH AS
RELIGION OR POLmCS.
5. WHETHER THE OPERATION REQUIRES ARE-ALLOCATION
OF BUREAU FUNDS OR OTHERWISE ENTAILS
EXTRAORDINARY EXPENSES.
THIS LIST IS NOT INTENDED TO BE EXHAUSTIVE OR RIGID.
RATHER IT INDICATES SOME ISSUES THAT SHOULD ACf AS A RED FLAG
TO A BUREAU HEAD, SUGGESTING THAT THE OFFICE OF ENFORCEMENT
SHOULD BE INFORMED OF THE OPERATION. OUR ROLE WOULD THEN BE
TO ENSURE THAT THE BUREAU HAD TAPPED ALL OF THE EXPERTISE,
INTELLIGENCE AND KNOWLEDGE AVAILABLE THROUGHOUT THE
FEDERAL GOVERNMENT.
-6-
ULTIMATELY NO RULE OR POLICY WILL GUARANTEE THAT NO
MORE AGENTS WILL LOSE THEIR LIVES ENFORCING THE LAW. LAW
ENFORCEMENT WILL ALWAYS BE DANGEROUS AND AT TIMES DEADLY.
NONETHELESS, WE OWE IT TO THOSE WHO RISK THEIR LIVES, AS WELL
AS THOSE WHOSE LIVES MAYBE PUT AT RISK, TO ENSURE THAT EACH
OPERATION IS THOROUGHLY PLANNED AND EXECUTED WITH THE
UTMOST REGARD FOR SAFETY. I BELIEVE THAT THESE MEASURES, AND
THE ONES THAT DIRECTOR MAGAW WILL DESCRIBE WILL BRING US
SIGNIFICANTLY CLOSER TO REACHING THAT GOAL.
MR. CHAIRMAN, IN CLOSING, I WOULD LIKE TO THANK THE
HUNDREDS OF PEOPLE WHO ASSISTED US IN OUR REVIEW INCLUDING
THIS COMMITTEE AND YOUR STAFF. WE MUST LEARN FROM THE PAST
AND OUR MISTAKES IF WE ARE TO IMPROVE THE FUTURE. I HOPE THAT
OUR EFFORTS AT TREASURY SINCE THAT FATEFUL SUNDAY IN
FEBRUARY WILL CONTRIBUTE TO GREATER SAFETY FOR OUR OFFICERS
AND BETTER LAW ENFORCEMENT. AGAIN, THANK YOU FOR YOUR
SUPPORT AND FOR ALLOWING ME TO SPEAK TO YOU TODAY. DIRECTOR
MAGAW HAS A SHORT STATEMENT AND THEN WE WOULD BOTH BE
HAPPY TO ANSWER ANY QUESTIONS YOU MAY HAVE.
-30-
Text as Prepared for Delivery
Embargoed for wire movement until 12:30 p.m. EDT
October 25, 1993
ADDRESS OF TREASURY SECRETARY llOYD BENTSEN
CENTER FOR NATIONAL POllCY
WASIllNGTON, D.C.
I want to discuss with you in broad terms the Clinton administration policies and
approach to financial services issues. Undersecretaries Frank Newman and Lawrence
Summers, and Comptroller of the Currency Gene Ludwig, will go into more detail
tomorrow and over the next few weeks in testimony on the Hill.
President Clinton was elected to rebuild the American economy so it can grow,
create jobs, and improve the standard of living of our citizens. To do that, it takes a
well-functioning, efficient economy. It must be nourished by a steady flow of capital and
credit -- to build businesses and create jobs.
One goal for our administration, then, is to take the steps that ensure our
financial system can operate efficiently. There are impediments which we can remove.
We have anachronistic, inconsistent, and sometimes excessive legislative and regulatory
restrictions on our financial system. This is too critical an element of our economy to
have its potential held back.
Our approach to freeing the flow of credit has two clear rules. First, government
has a responsibility to involve itself in the marketplace to the extent of protecting the
interests of all consumers and communities. And secondly, every action we take must
make certain that our financial institutions remain safe and sound.
We have made important progress in beginning to put the American economy
back on track. We have begun to curtail the federal deficit. Interest rates and thus the
cost of capital are down to the lowest level in 20 years. Business investment is up. We
are creating jobs.
A critical way to increase investment by American businesses - small and large -is to increase the flow of credit. We have taken administrative actions to do that,
focusing particularly on the regulations that affect lending to our small businesses
because of their importance in job creation. The Credit Availability Program initiative is
largely in place. We are working hard now to implement it at the grass roots level.
Credit is again beginning to fuel economic growth.
LB-451
2
As we look to what else can be done, the range of issues is broad. It stretches
from the future of the thrift industry to fair trade, regulatory consolidation and interstate
banking.
In recent years, there have been some well thought-out proposals, from past
administrations, from Congress, from academics and from business. But too much
energy has been spent spinning too many wheels at the same time.
Rather than spread ourselves too thin, this administration will take a deliberate,
disciplined approach that will produce more and better results over time. We will focus
on achievable goals and pick our targets carefully. We will build consensus, issue by
issue. And we will listen seriously to the concerns of all those with a genuine public
policy interest in an issue.
As we work on the issues before us, everyone must exercise self-restraint. This is
one of the most complicated aspects of our economy. It is critical to our continued
economic growth. Over-reaching, polarization and piling-on can only lead to failure.
Our economy needs success, not failure.
Let me mention three areas we're looking at where we can improve the flow of
credit and strengthen the competitive position of our financial system. Two are well
along in the legislative process. The third - fair trade - can be shortly.
First, nothing highlights the importance of a strong financial industry more than
the thrift problem of the 1980s. When you must take time, and huge taxpayer resources,
to restore health to an industry, it takes momentum from your economy. It takes
resources from other productive uses. The House and Senate have done the right thing
and passed an RTC funding bill. I urge them to go to conference and pass a final bill.
We need to make depositors whole and return these remaining thrifts to the economy so
their assets can work again for the American people. We must quickly close this chapter
in our history.
Secondly, the Community Development Financial Institutions measure has come
out of Senate Banking with an important program for our distressed cities and poor rural
areas. It also has a very sensible approach to reducing the regulatory burden on our
financial institutions. It doesn't go overboard. It's a balanced, disciplined approach that
has much to commend it. I hope the Senate passes it and the House acts with the same
sense of practicality and balance.
There is a third area where we can move with some dispatch. H our institutions
are to compete effectively at home, they must be free to compete on an equal basis
abroad. Competition in the auto industry might look a lot different today if the Big
Three had been producing cars in Japan for 40 years. Financial institutions, just like
manufacturers, need distribution outlets in their major markets.
3
We have some of the most open financial markets in the world. Foreign firms are
treated like they were American businesses. They are doing so well here they hold onequarter of all the banking assets in the United States. Similarly, our banks, securities
firms, insurance businesses and other lenders are major players in many international
markets. But too often the global playing field looks like the Rockies. Barriers -- both
formal and informal -- prevent U.S. firms from entering markets on an equal footing
with their competitors.
This administration is committed to improving opportunities abroad for U.S.
financial institutions. Our companies are world class innovators and competitors. They
will succeed anywhere they are allowed to compete fairly. We are working to level the
playing field on several fronts.
In the framework negotiations with Japan, the administration has identified
financial services as a critical priority. We are focussing our efforts on pension fund
management and corporate underwriting, where U.S. firms are far ahead of the domestic
competition. We made some progress last summer, but we have a long way to go.
Regionally, we have negotiated a financial services chapter in the North American
Free Trade Agreement that may serve as the model for agreements in Latin America
and other regions as well.
Our highest priority is the Uruguay Round negotiations, which are now entering a
critical stage. We are committed to achieving a multilateral agreement that opens
financial markets on a non-discriminatory basis. But we have made it clear that we will
not agree to lock our markets open on an MFN basis, unless or until other countries
commit to open their markets to U.S. financial institutions.
We have not seen dramatic progress. So, we are making a major push over the
next few weeks to encourage the key emerging markets of Asia and Latin America to
offer better commitments. Countries that are now closed must do more than simply
offer a standstill that locks in existing barriers against U.S. financial institutions. I have
asked my assistant secretary to visit key capitals in early November to carry this message.
We are prepared to guarantee national treatment and full access to countries that
commit to open their markets. And, we are prepared to guarantee their existing
operations in our market. But we will not assure countries that keep their markets
closed the right to expand operations here, or to take advantage of new powers or
benefit from future reforms.
This approach is designed to lever additional progress by the end of the Uruguay
Round and ensure that we retain incentives that encourage further liberalization in the
event these negotiations don't produce enough liberalization.
4
Therefore, we are prepared to support the objectives of the Fair Trade in
Financial Services legislation now on the Hill. It would give the Secretaty of the
Treasury the authority, consistent with Uruguay Round obligations, to deny new benefits
to financial institutions in countries which discriminate against us. This is a reasonable
way to ensure that just as we keep our markets open to others, others open their markets
to our firms.
Beyond those issues, there are others we are looking at closely, such as regulatory
consolidation and interstate banking. Over the long-term, both of those hold the
prospect of removing more impediments to the flow of credit.
There is no question in anyone's mind that our regulatory structure is too
overlapping and confusing. There are four federal agencies which look at the books of
our banks and thrifts. We've all heard the stories. I saw one recently about a bank in
California with 22 employees. One day they had 26 examiners in there looking them
over. The customers couldn't even get into the parking lot. Surely there are more
productive uses of the bank staff's time, and of the government's resources.
We're already addressing the problem of overlapping regulation in the Credit
Availability Program. And, the additional steps we have in mind follow the spirit of Vice
President Gore's initiative to reinvent government.
We can further streamline the existing structure and create one that can make
more timely decisions. And, by eliminating duplicative regulatory agencies, we can help
reduce inconsistent interpretations of the same laws and rules. Furthermore, interagency turf battles would be avoided. Finally, financial institutions could reduce their
operating expenses and spend more time making sound loans than filling out papers in
quadruplicate.
We are interested in pursing a rational consolidation of regulatory functions. If
we go down that road, any new institution must remain responsive to the electorate with
regard to policy. Banking policy is such a vital component of economic policy, that those
who direct the policy must be able to affect its implementation. I have asked Frank
Newman to discuss this with Congress next month.
Insofar as interstate banking is concerned, as our banking system has evolved over
the years, impediments to efficiency have crept in. One of our eventual aims is to
eliminate these roadblocks and make it less expensive and cumbersome for our banks to
operate across state lines.
The Washington area is a perfect case, and it isn't unique. Down the street from
my office is a branch of a banking organization that hangs out its shingle in Maryland,
Washington, Virginia and a few other states. People who use this branch but have their
account at a branch in Maryland or Virginia can walk up and cash a check.
5
They can draw hundreds of dollars out of the ATM machine, or transfer thousands of
dollars between accounts. But they can't make a deposit in that branch and get a
deposit slip showing the bank has accepted it.
I imagine people in Kansas City, or St. Louis, or Chicago and Gary have exactly
the same problems.
In the age of fiber optics, when I can go to a machine on the streets of virtually
any capital in the world and get cash with my bank card, not being able to make a
deposit at my own bank just because that branch is in another state is like requiring that
the space shuttle stay within the school-zone speed limit. We are the only country in the
industrialized world with this kind of artificial restriction.
We currently have a de facto system of interstate banking. But it's a patchwork
system, and it's clumsy. Change will not happen overnight. A number of complex policy
issues must be worked through. And, more importantly, we need to concentrate our
legislative efforts on more immediate priorities just now. But we look forward to
working with Congress to develop interstate branch consolidation legislation in the
future.
Our preference is to build upon what the marketplace has created rather than
reinventing the banking business. The basic approach would be to let banking
organizations convert existing multi-bank, multi-state operations into a single bank,
multi-branch operation.
Customers could deal with the same bank, in every state where it operated. You
could make a deposit in one branch while at work or traveling, and have it posted
promptly.
But let me emphasize, this would continue to leave it entirely to the states to
decide if they don't want out-of-state banks doing business within their borders. It would
just end the necessity of having to maintain a separate subsidiary.
As a Texan who grew up with no branch banking whatsoever, I understand the
sensitivities of states and localities. I know that no community wants to deposit its
money but receive no benefits in return. Bank reform must move forward, but states can
still have the power to decide where within their borders institutions can do business.
This approach can take some of the structural inefficiency out of our system.
Consumers get better access to services, and banks will have the opportunity to operate
more efficiently because of economies of scale, and because of the more efficient
regulatory policies we also intend to pursue. And, states retain the authority to
determine many of the key rules for banks in their markets, including where they can
operate.
6
The dual banking system will continue to have its place in the nation's economy.
I believe we can do this with appropriate protections for consumers, and proper
implementation of the Community Reinvestment Act and Fair Lending. At the same
time, community banks, with their orientation toward servicing local areas, can continue
to play important roles in the banking system.
Ultimately, permitting a true interstate banking system can translate into
increased lending, a safer and stronger banking system, and more competitive services
.
for all consumers in all communities.
There is no shortage of issues for us to deal with. But we have a careful
approach calculated to produce the results that will free up the flow of credit and make
our system operate efficiently. We will focus on problems in a deliberate manner, and
seek achievable goals.
For instance, early next year the regulators will present a new plan to make the
Community Reinvestment Act a much more effective tool in actually generating lending
services and investment in our communities, for all the people who live there, and for
the businesses that provide them with jobs and services. It will also include paperwork
reduction steps, keeping in mind the disproportionate burden paperwork requirements
have on community banks.
Let me close with this: We must change our banking system in a careful,
deliberate manner, to get it ready for the next century. We're operating with laws and
regulations made for another time in America. We're paying a price for inefficiency. It
touches every American who pays a service charge on a checking account, who borrows
for a new car or buys a new home. It affects how businesses invest to create jobs, and
how our economy grows. The Clinton Administration is committed to the careful steps
that will assure an efficient flow of credit, while protecting consumers and communities,
and ensuring the safety and security of our financial system.
Thank you.
-30-
UBLIC DEBT NEWS
FOR
October
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $13,031 million of 13-week bills to be issued
October 28, 1993 and to mature January 27, 1994 were
accepted today (CUSIP: 912794H64).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.07%
3.08%
3.08%
Investment
Rate
3.14%
3.15%
3.15%
Price
99.224
99.221
99.221
Tenders at the high discount rate were allotted 90%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED ( in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
34,355
46,865,535
6,321
33,361
26,015
22,707
1,940,013
8,589
9,563
30,991
19,295
528,379
538,922
$50,064,046
Accegted
34,355
11,871,410
6,321
33,161
26,015
22,207
219,913
8,589
9,563
30,991
19,295
210,379
538,922
$13,031,121
Type
Competitive
Noncompetitive
Subtotal, Public
$45,193,846
1,030,200
$46,224,046
$8,160,921
1,030,200
$9,191,121
2,592,200
2,592,200
1,247,800
$50,064,046
1,247,800
$13,031,121
Federal Reserve
Foreign Official
Institutions
TOTALS
LB-452
UBLIC DEBT NEWS
Fo9.C~~lfBI~+9f l~tWisE·
Bureau 01 the PublIc Debt • Washington, DC 20239
iI}'
·51-))
CONTACT: Office of Financing
202-219-3350
October 25, 1993
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,066 million of 26-week bills to be issued
October 28, 1993 and to mature April 28, 1994 were
accepted today (CUSIP: 912794K37).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.17%
3.19%
3.19%
Investment
Rate
3.27%
3.29%
3.29%
Price
98.397
98.387
98.387
Tenders at the high discount rate were allotted 69%.
The investment rate is the equivalent coupon-issue yield .
•
TENDERS RECEIVED AND ACCEPTED ( in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
32,216
42,313,390
3,885
28,696
20,430
17,333
1,895,330
10,540
6,112
22,881
11,446
536,515
387.741
$45,286,515
AcceQted
32,216
11,969,100
3,885
28,696
20,430
17,023
347,080
10,540
6,112
22,881
11,446
209,015
387.741
$13,066,165
Type
Competitive
Noncompetitive
Subtotal, Public
$40,373,620
731.095
$41,104,715
$8,153,270
731,095
$8,884,365
2,800,000
2,800,000
1.381.800
$45,286,515
1.381.800
$13,066,165
Federal Reserve
Foreign Official
Institutions
TOTALS
LB-453
A&~~~I
~~'"
EXCERPT FROM REMARKS OF THE HONORABLE
LESLIE B. SAMUELS
ASSISTANT SECRETARY (TAX POLICY)
U.S. DEPARTMENT OF THE TREASURY
October 25, 1993
International Taxation
In General.
International taxation issues will be a
priority for the Office of Tax Policy in the coming years.
The
continued rapid evolution of a global economy makes it imperative
that tax policies be developed with a worldwide perspective.
It
is clear that cross-border transactions are taking on ever
increasing importance in the world of business operations. The
tax policies of every nation must recognize that reality and
reflect it.
We are taking steps to do just that.
First, we plan to make
the Advance Pricing Agreement process a centerpiece of the
international tax agenda.
We plan to promote APAs at every
opportunity, not just with international businesses but with
foreign tax authorities.
Second, we plan to adapt our tax treaty
policies to the changing and increasingly sophisticated business
practices of international investors. Third, we plan to step up
the pace of issuing international tax regulations.
Guiding Principles.
Our actions in these areas will be
guided by two principles. The first is the promotion of
international tax compliance. The second is to consider the
impact of tax rules on the competitiveness of U.S. businesses
operating abroad.
These twin themes complement each other by
balancing the charge of the Treasury to protect the government's
revenue base with the need for U.S. business to operate as
efficiently as possible in the global marketplace.
This Administration is committed to improving and applying
the tax laws to ensure that all corporations engaging in
international transactions pay their proper share of taxes.
The
Treasury and the IRS cannot relax in the effort to enforce
existing tax laws.
Progress has been made.
Legislation was enacted as part of
OBRA '93 to encourage compliance and to provide the IRS with
contemporaneous documentation on intercompany pricing decisions.
This legislation was accomplished within the framework of the
arm's-length pricing standard.
However, more remains to be done.
LB-4S4
-2-
I wish to emphasize that the purpose of the efforts to
improve compliance with the tax laws is not to inhibit the
development of global business activity nor to discourage foreign
investment in the united states. On the contrary, the
Administration welcomes and values these activities which create
jobs for u.s. residents. The enforcement policies of the united
states apply to both foreign and U.S.-controlled businesses, and
will be administered reasonably and in a balanced, even-handed
manner.
To this end, the IRS and the Treasury plan a coordinated
initiative to further improve international tax compliance.
Advance Pricing Agreements. As I have mentioned, one
successful recent experiment in improving voluntary compliance
and reducing controversies has been the Advance Pricing Agreement
(APA) program.
Designed as a dispute resolution process, the APA
program supplements the traditional administrative, judicial, and
treaty dispute resolution mechanisms for resolving intercompany
pricing issues.
The program enables taxpayers to arrive at an understanding
with the IRS on three basic issues:
(i) the factual nature of
the intercompany transactions to which the APA applies; (ii) an
appropriate transfer pricing method applicable to those
transactions; and (iii) the expected range of results from
applying that method to the transactions.
Both sides win in an
APA: The taxpayer obtains certainty, and the IRS and foreign tax
authorities can devote fewer resources to subsequent audits of
the taxpayer's business.
The Treasury and the IRS are committed to the APA program
and will actively encourage taxpayers and foreign tax authorities
to participate in the process. To accomplish this goal, the IRS
plans several improvements in the APA program, intended to make
the APA process more accessible to taxpayers and to reduce the
costs of obtaining agreements.
For example, in light of its
experience, the IRS plans to revise Revenue Procedure 91-22 to
make it easier for taxpayers to obtain APAs.
In addition, the IRS is preparing a notice that will provide
generic guidance on the methodologies and approach taken in APAs
involving global trading. As experience is gained with
additional industries, similar guidance will be issued for other
lines of business.
Treaties.
In keeping with our emphasis on international
compliance, the Treasury is committed to preventing abuse of the
United States' extensive tax treaty network. A principal means
to prevent the abuse of tax treaties is to limit the benefits of
such treaties to bona fide residents of the treaty partner
residents with a sUbstantial nexus to the treaty partner.
Our
-3-
new treaty with the Netherlands, one of our most important treaty
partners, contains an extensive limitations-on-benefits
provision. We also recently signed a Protocol to this treaty to
prevent abuse created by permanent establishments of Dutch
companies located in third countries -- the so-called "triangular
case." We now look forward to approval by our respective
legislatures of both agreements in time for them to become
effective on January 1, 1994. This treaty and protocol
demonstrate that the treaty-shopping problem can be addressed
bilaterally and that unilateral action is unnecessary.
We are preparing for a hearing on Wednesday, October 27,
before the Senate Foreign Relations Committee that will cover
treaties and protocols with seven countries. This hearing will
include the Dutch treaty and protocol, the Mexican treaty, the
Russian treaty, and the Israeli and Barbados protocols.
The
Israeli protocol will bring that treaty into force.
The Slovak
treaty and the Czech treaty will be also considered at the
hearing.
Now that the Dutch treaty and protocol are concluded, we
have turned our attention to the treaty with Luxembourg. We have
asked for a renegotiation of that treaty and those meetings are
scheduled to begin in December.
As you know, our treaty with switzerland does not contain a
limitations-on-benefits clause. There have been recent erroneous
reports in the tax press about the Swiss treaty, suggesting that
we had reached agreement on a limitations-of-benefits article
with the Swiss. That is not the case.
But we are extremely
interested in renegotiating the treaty to include a limitationsof-benefits provision.
There have been technical talks with the
Swiss recently, but we are stalled on the issue of bank secrecy
and exchange of information.
It is my hope, however, that the
Swiss will soon see the merits in reaching agreement with the
united States.
We also are working on a new model treaty with the OEeD that
we hope will facilitate future treaty negotiations and the
expansion of our treaty network.
The treaty process, of course, serves more than an
international compliance objective. We expect our nation's
treaty network to facilitate the global business operations and
competitiveness of American businesses. The presence or absence
of a tax treaty is often a factor in international business and
investment location decisions. There can be little doubt that
tax treaties facilitate international flows of goods, capital,
services, and technology.
In addition, by reducing foreign
taxes, u.S. businesses, especially those with excess foreign tax
credits, benefit. These considerations guide our choice of
treaty partners and the substance of our negotiations.
-4-
Regulations.
Several regulation projects will be priorities
for the Treasury in the international tax area.
•
section 482. Treasury issued proposed and temporary
regulations under section 482 in January 1993. They
replace proposed regulations that were issued in 1992.
The new regulations allow taxpayers greater flexibility
in selecting a method to determine an arm's-length
price for their intercompany transactions.
The IRS has received extensive comments from taxpayers
and treaty partners on the new regulations.
Taking
into account these comments, revised final regulations
should be issued in the first quarter of 1994.
•
section 6662 penalty. The OBRA '93 amendments to
section 6662(e) require taxpayers to prepare, maintain,
and provide documentation substantiating the arm'slength nature of intercompany prices in order to avoid
the penalties applicable to SUbstantial or gross
valuation misstatements for transactions subject to
section 482. This documentation generally must have
been prepared contemporaneously with the intercompany
transaction under review and apply one of the
methodologies set forth in the section 482 regulations
to the transaction. The question in every case will be
whether there was a good-faith, reasonable attempt to
apply the 482 regulations prior to filing the tax
return. Taxpayers should not be concerned that a minor
"foot fault" will result in a penalty.
By effectively requiring taxpayers to comply with
section 482 contemporaneously, the amended provision
should substantially improve compliance with section
482.
Taxpayers have expressed concern that the penalty is
essentially automatic if they fail to comply with any
minor aspect of the documentation requirements or do
not correctly apply one of the methods under the
section 482 regulations, and an adjustment is
eventually made. The statute is not intended to be
automatic. The penalty is intended to apply if the
taxpayer failed to analyze its related party
transactions and to apply reasonably the SUbstantive
section 482 regulations. The penalty is intended to
change taxpayer behavior from post hoc justification of
a return position to pre-return analysis and
documentation of related-party transactions.
The
question in every case therefore will be whether the
taxpayer made a reasonable attempt to apply the 482
regulations prior to filing its tax return.
The
-5-
penalty is not targeted to minor errors made in
attempting to apply the transfer pricing rules.
However, by the same token, taxpayers should not plan
on escaping the penalty because of leniency on the part
of the IRS.
Rather they shouJd make good faith efforts
to comply with the new rules.
We expect to release regulations implementing the new
rules by year-end.
•
Anti-conduit regulations. Another OBRA '93 provision
authorizes the Secretary to issue regulqtions that set
forth rules for recharacterizing any multiple-party
financing transaction as a transaction directly among
two or more of the parties in cases where the Secretary
determines that such recharacterization is necessary to
prevent avoidance of tax. This provision is intended
to bolster the IRS's ability to prevent tax avoidance
through use of "conduit" transactions. The Treasury
and the IRS are in the process of drafting proposed
regulations under this provision.
I would also note that various regulation projects are close to
completion.
•
Foreign currency, et al.
We hope to finish up
regulations governing the application of the dollar
approximate separate transactions method, the
international aspects of section 338 transactions,
interest expense allocation regulations, and final
subpart F regulations.
•
section 904(i) regulations.
In addition, we expect to
issue regulations under section 904(i).
section 904(i)
provides that in any case in which domestic
corporations achieve deconsolidation through the use of
nonincludable entities, the Secretary may by
regulations provide for resourcing of income or
modifications to the consolidated return rules to the
extent necessary to prevent avoidance of the foreign
tax credit limitation rules.
Section 904(i) was
adopted by the Revenue Reconciliation Act of 1989. The
statutory language requires implementing regulations.
We hope to complete and release proposed section 904(i)
regulations by year-end.
STATEMENT OF THE HONORABLE LAWRENCE H. SUMMERS
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
U.S. TREASURY DEPARTMENT
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
TUESDAY, OcrOBER 26,1993
Fair Trade in Financial Services
I am pleased to have this opportunity to testify on S. 1527, the Fair Trade in
Financial Services Act of 1993. Secretary Bentsen asserted in his confirmation hearing that,
"The touchstone of our policy, including in international negotiations on financial services, is
that we must demand reciprocity." He added that he would "be pleased to take a close look
at the Fair Trade legislation and work with its supporters on an appropriate policy." I am
here today in an effort to carry out that commitment.
We in the Administration appreciate the efforts by the sponsors of this bill and this
Committee to provide the means to secure national treatment and equality of competitive
opportunity abroad for U.S. financial institutions. We believe this legislation will give U.S.
negotiators the same leverage available to their counterparts in most major industrial
countries. The Administration supports the objectives of S. 1527 and will work closely with
the Co~gress to iron out final details and obtain passage as soon as possible.
Why Do We Sumx>rt Fair Trade in Financial Services Legislation?
We support this legislation because we want to open foreign markets and enable U.S.
financial firms to compete in those markets, just as foreign firms are able to do here in the
U.S. This falls in line with a broader objective of the Administration to improve the U.S.
economy by increasing U.S. exports of goods and services. As President Clinton indicated
early in the Administration, we must "compete not retreat."
LB
455
2
To compete, we need the tools to make the competition a fair onc. Improved
negotiating leverage through S. 1527 is important because U.S. financial services firms
comprise an increasingly important component of the U.s. economy, because our financial
institutions need to compete in the markets of their major competitors if they are to remain
competitive at home, and because moral suasion has not proven a sufficiently effective tool in
inducing countries to liberalize. Our fmancial services fmns are world class innovators: they
will succeed when they are given the opportunity to compete. The specific negotiating
leverage we seek is the following:
o
Incentives for improved Uruguay Round commitments by a core of roughly a dozen
important emerging market countries and Japan, whose current proposals for market
liberalization are simply insufficient. I'll speak more on that in a few minutes.
o
Authority to retaliate against objectionable foreign practices which violate
international obligations. This authority must be more flexible than existing tools
and, thus, more appropriate to financial services where safety and soundness concerns
and potential international "spillover" effects involve unique considerations.
o
Leverage in future negotiations with countries whose fmancial services markets are
relatively closed to foreign participation and which do not make adequate market
opening commitments in the Uruguay Round. We would have the tools necessary to
negotiate effectively with these "free riders" which seek to benefit from international
agreements without undertaking the responsibilities of maintaining an open
international financial system.
I'd like to spend a few minutes explaining our current strategy in the Uruguay Round.
Our objective in the negotiations is an agreement that contains obligations to provide national
treatment and most favored nation treatment in the financial sector. We want an agreement
that achieves sufficient liberalization to justify accepting a Uruguay Round MFN obligation.
The offers from many of the participants in the negotiations are not sufficient to meet
our objectives. Standstill commitments that lock in existing protection are not a sufficient
basis for a satisfactory agreement in financial services. We cannot justify committing to lock
our markets open without comparable commitments from others. We have therefore taken
the position that the U.S. will maintain an MFN exemption unless or until we are able to
negotiate adequate commitments from other countries.
We are prepared to narrow the scope of our MFN exemption in order to provide
substantial commitments on access and national treatment to all countries. We will guarantee
existing operations of all firms now in the United States and provide entry to those not
already here.
Also, we are prepared to improve our commitments and provide a higher level of
benefits to countries that are already open or will commit to full liberalization within a
3
reasonable transition period. To these countries, we would provide additional commitments
on expansion and new powers.
We consider Fair Trade in Financial Services legislation as an essential complement
to our Uruguay Round strategy.
To help unblock the logjam in Geneva, we are sending a team of high level officials
to several key emerging markets during the first week of November. The European
Community has agreed to do the same over the next few weeks.
We believe this strategy will do two things. First, it will lever additional
commitments between now and the end of the Round. Second, it will help ensure that in the
event we fail to achieve sufficient progress that we have incentives in the agreement to
encourage other countries to liberalize in the future. This should reassure those who are
concerned that we may lock our markets open with no reciprocal commitments and that we
will have little recourse in the future to improve the situation.
Why We Need A Fair Trade in Financial Services Statute
The fundamental basis of Fair Trade in Financial Services legislation is fairness.
U.S. financial firms face two challenges when they look abroad for markets in which to
compete. First, they must receive the right to establish, and second, they must obtain the
right of national treatment and equality of competitive opportunity. Unfortunately, U.S.
financial institutions - our banks, securities firms, investment managers, and non-bank banks
- which are major players in some international markets, have had little or no success in
clearing both hurdles in many other countries.
Our firms face both formal and informal obstacles. De facto barriers often exist,
preventing foreign firms from full participation in the market, even when there are no legal
barriers to access. Some countries apply discriminatory restrictions designed to protect
domestic institutions under the guise of prudential regulation. We must be concerned with
assuring the equality of competitive opportunity for U.S. firms abroad by preventing the
artful use of informal or nontransparent barriers.
The barriers we face differ widely across countries. Most developed countries with
sophisticated financial markets welcome foreign financial firms on a nondiscriminatory basis,
have made strong financial services commitments in the Uruguay Round, and would not fall
afoul of Fair Trade in Financial Services legislation. It is worth mentioning, however, that
21 OEeD countries have reciprocal national treatment provisions for trade in financial
services; and, the numbers have increased despite the standstill to the OECD Code of
Liberalization in Capital Movements agreed in 1986.
In the emerging markets where financial liberalization is just getting underway,
foreign financial institutions still face explicit barriers to entry and active discrimination.
4
These countries are the primary focus of our efforts in the Uruguay Round. Many have
largely state-owned financial systems and still restrict a broad of range of capital
transactions, but the door is beginning to open. Many of the newly industrializing economies
of Asia and Latin America fall into this category.
Let me give you just a few examples of some of the problems our financial
institutions face in seeking access and competitive opportunities in the emerging markets:
o
In Korea, inadequate access to local currency funding sources by foreign banks, tight
restrictions on offering new financial products, and pervasive foreign exchange and
capital controls severely limit U.S. banks' opportunities for expansion in this
important market.
o
In Indonesia there are serious limitations on the ability to establish a commercial
presence, including a requirement to establish joint ventures with Indonesian firms,
and a 49 percent equity limit on those investments.
o
The Philippines denies national treatment to banks with more than 40 percent foreign
equity. Among other restrictions on foreign banks are limitations on the number of
branches they may have and prohibitions on establishing additional branches or
shifting existing ones.
o
Taiwan, while not yet in the GAIT, engages in fmancial policy discussions with
Treasury. At present, Taiwan still imposes ceilings on banks' foreign exchange
liabilities, particularly by limiting capital flows, and imposes restrictions on
branching.
o
Brazil's current legal framework presents a variety of problems. There are
constitutional prohibitions on foreign investment. Financial institutions may not hold
private issues of securities in their portfolios or place them. Most pension funds are
in the public sector and managed by public sector entities, which effectively excludes
foreign institutions from a major role in the sector.
U.S. financial frrms have interests in other emerging markets as well. These include
Malaysia, India, Egypt and a number of other Latin American countries.
Japan is a special case; it falls somewhere between the industrial and the newly
emerging countries. Despite almost 15 years of deregulation and liberalization, foreign firms
are still only marginal players, excluded explicitly by regulation from certain types of
business and by more informal barriers from others.
We seek to level the playing field in areas where U.S. frrms have a strong
competitive advantage but are now constrained from exploiting that advantage. In both the
Uruguay Round and the U.S.-Japan framework negotiations, we are seeking specific
5
commitments that will enable foreign firms to compete in the areas of asset management and
securities - where they are way ahead of domestic Japanese fmns in terms of experience,
innovation and efficiency.
o
Over 80 percent of the $900 billion corporate and public pension fund markets are
closed to discretionary investment advisors. Moreover, rules on how these assets
must be invested limit the ability of investment advisers to mobilize their considerable
skills even in those portions of the market open to them.
o
In the securities area, U.S. investment banks are virtually excluded from Japanese
underwriting by a combination of industry practices and legal and regulatory barriers
hindering the development of a viable corporate finance market. There are
constraints on distribution of securities products, who can issue them and how they
can be structured. Again, innovative, cutting edge U.S. firms cannot exploit their
competitive advantages.
o
The $450 billion mutual funds market in Japan has only a handful of foreign
participants due to economic barriers. It cost 30 times more to establish a mutual
fund in Japan than in other major markets, and foreign mutual fund managers must
market their products through Japanese securities firms, which are their major local
competitors.
o
Restrictions in Japan's foreign exchange regime are, despite Japan's large external
surplus, the most comprehensive of the G-7 countries. This hampers Japanese
investors' access to the full range of financial products offered cross border in
overseas markets. Once again, innovative products and efficient services provided by
foreign financial institutions are effectively shut out of the market.
In contrast to the variety of obstacles which U.S. firms face in foreign markets, the
U.S. market is one of the most open financial markets in the world. Our policy is to
welcome foreign firms and once they are established, to provide them national treatment and
essentially the same competitive opportunities as U.S. firms in similar circumstances.
In the U.S. market, more than 700 offices and subsidiaries of foreign banks account
for almost a quarter ($850 billion) of the total assets of the banking system and 35 percent of
business loans. We benefit from this liberal regime in many ways, not least in terms of the
estimated 300,000 direct and indirect jobs attributed to foreign banks. There are also
approximately 130 foreign-controlled registered broker-dealers and roughly 200 registered
foreign investment advisers in the United States.
Discussion of S. 1527
This brings me to S. 1527. The Administration believes that Fair Trade in Financial
Services should reflect a number of important considerations in order to help achieve our
6
international strategy of opening foreign markets while retaining the benefits of foreign
participation in the U. S. market.
o
The legislation must be consistent with and sywortiye of the commitments that are
undertaken in the Uruguay Round. It should provide protections for those countries
which have committed to maintain open markets or to substantially liberalize their
markets within a reasonable transition period.
o
Second, existing operations of foreign financial institutions already established in the
United States should be grandfathered. The impact of this legislation should be
promective in order to minimize the potential disruption to our market and possible
retaliation.
o
Third, the bill must provide ample discretion for negotiators, rather than automatic
triggers tied to rigid deadlines. Therefore, any sanctions must be a last resort, not an
opening salvo.
o
Fourth, there must be effective provision for full consultations within the Executive
Branch to ensure that consideration is given to all implications of any action. Most
importantly, the regulatory authorities must be fully engaged throughout the process
to ensure that the interests of borrowers, lenders, investors and consumers are
considered.
The bill goes a long way to meeting these goals. It provides a careful, step-by-step
approach involving analysis, identification and determination of problem countries and
negotiation. There is discretion throughout the process, including in the application of
sanctions. And, provision is made for grand fathering the existing operations of firms from
countries that meet certain criteria.
There are two key areas, however, where we believe some improvements can be
made to strengthen the overall approach.
o
We believe that the Secretary of the Treasury, not the regulatory agencies, should
exercise authority to impose sanctions in accordance with the specific direction of the
President, if any. Application of the discretion in this bill could have wide-ranging
implications for U.S. economic and foreign policies. The Secretary of the Treasury,
under the direction of the President and in consultation with other Executive Branch
agencies, is in the best position to make such decisions.
o
We recommend a more flexible approach to grandfathering that would cover all
foreign financial firms already established in the U.S. This would obviate any need
to rely on the European Community'S Second Banking Directive as the criterion for
determining access to our market.
7
Let me respond to some of the concerns raised by critics of Fair Trade in Financial
Services. First, our objective is to open foreign markets not to close the U.S. market. Our
approach is designed to insure that we continue to enjoy the benefits of an open investment
regime which has helped make U.S. financial markets the most liquid, competitive and
sophisticated in the world.
In developing a new approach, we have sought to address the concerns expressed by
some that reduced access to our market could hurt consumers, borrowers and investors.
However, the current activities of all existing fmns will be protected and countries not now
in our markets will be provided access. In addition, we will guarantee non-discriminatory
treatment on expansion and new powers to those countries with open markets or which are
prepared to commit to liberalization within a reasonable transition. The ability to expand in
our market would be limited only to those countries that fail to open their markets, and we
would introduce such constraints only after full consideration of the likely impact on the U.S.
economy.
Some have also raised the risk of counter retaliation. We do not believe the risks are
significant. Most industrial countries will be protected from sanctions and clearly have the
same powers being provided in this legislation. The scope of any sanctions is limited.
Moreover, the approach we are pursuing is much more forthcoming and positive than our
original proposal by providing very substantial commitments to all countries regardless of
their degree of openness. Finally, the authority in the bill will be consistent with our GA'IT
obligations.
Conclusion
This Administration has clearly stated its objective to open foreign financial markets.
Fair Trade in Financial Services legislation will complement our efforts multilaterally,
bilaterally and regionally to gain access to foreign markets on the basis of national treatment
and equality of competitive opportunity. We believe that S. 1527 provides the basis for
effective legislation and will work with this Committee and others on the Hill to place a final
bill on the President's desk as soon as possible.
STATEMENT OJ'
THE HONORABLE J'RANlt N. NE1fKAN
UNDER SECRETARY OJ' THE TREASURY
BEJ'ORE THE
SUBCOMMITTEE ON J'INANCIAL INSTITUTIONS SUPERVISION,
REGULATION AND DEPOSIT INSURANCE
OJ' THE
HOUSE COMMITTEE ON BANKING, J'INANCE AND URBAN AFFAIRS
October 26, 1993
Chairman Neal, Mr. McCollum, and members of the
subcommittee, I am pleased to discuss with you today the
Administration's views on the geographic restrictions imposed on
commercial banks in the United states. These restrictions are
unique among the industrialized nations of the world, and many
observers consider them among the least defensible of our banking
laws.
The Administration supports the idea of relaxing these
geographic restrictions, as secretary Bentsen stated yesterday.
In my testimony today I will explore some of the reasons for that
conclusion, discuss the concerns most commonly raised with
respect to geographic liberalization, and provide the
Administration's views on key issues with respect to interstate
banking and branching.
I. Reasons to Relax Geographic Restrictions
Geographic restrictions on commercial banks originated in
the earliest days of American banking. The purpose of these
limits was to protect banks from competition and preserve local
markets for local banks. However, these restrictions warrant
reassessment because financial markets and institutions, and the
economy itself, have evolved dramatically since then.
We no longer find the current framework of geographic
restrictions appropriate, for several reasons. First, modern
banks operate beyond local markets, and they compete with nonbank institutions that face no similar geographic restrictions.
Second, the states themselves have relaxed geographic barriers.
Third, removing these restrictions could improve the safety and
soundness of the banking system. Fourth, the public could
benefit from greater competition, improved bank performance, and
greater customer convenience. Finally, removing geographic
LB 456
restrictions would give banks the flexibility to structure
themselves more efficiently, which could permit banks to make
more credit available for businesses and consumers.
Current Operating Realities
Banking organizations can no longer be defined in terms of
the limited services and facilities that might have been
appropriate in past generations. New realities are apparent on
both sides of the banking balance sheet. For example, on the
liability side of the balance sheet, banks fund themselves not
only with traditional (local) retail deposits, but also with
large negotiable certificates of deposit, foreign deposits,
Eurodollar borrowings, Fed funds, repurchase agreements, and debt
and equity issues, among others. These funding transactions can
involve local, regional, national, and international financial
markets.
On the asset side, large banks have for many years reached
for business opportunities beyond local markets. Real estate
loans, commercial loans, foreign government loans, securitized
loans, and various types of loan participations typically require
inVOlvement in non-local markets. The same can be said of such
other services as money management, cash management, electronic
funds transfers, private placements, credit card distributions,
foreign exchange dealing, and various risk management activities.
Further, geographic restrictions keyed to local markets have
proven porous. Unlike brick-and-mortar branches, banks' loan
production offices and Edge Corporations are not geographically
limited. In addition, banking organizations have routinely used
subsidiaries to offer such financial services as mortgage
finance, consumer finance, and securities brokerage across state
boundaries. Moreover, numerous bank holding companies have used
grandfather rights, emergency acquisitions, and evolving state
laws to establish extensive, though unwieldy interstate banking
networks.
Non-Bank Institutions. Many non-bank financial institutions
offer products that compete directly with bank services. Yet
these non-banks can operate more efficiently because they face no
geographic restrictions. Mutual funds, many of which offer
check-writing and ·other consumer conveniences, have become the
most notable substitute for insured deposits. Securities firms
also compete for the funds of savers by offering cash management
accounts, with check-writing and credit card features, through
large networks of geographically dispersed offices. Insurance
companies provide a bank-like savings service nationwide through
insurance policies with redeemable cash value; and they compete
directly with banks in making large commercial and real estate
loans. Other major competitors that operate free of geographic
2
restri 7tions include consumer, business, and sales finance
compan1 7s; mortgage,companies; the captive finance firms of
automob1le and app11ance manufacturers; and retail credit
grantors.
On balance, geographic restrictions have outlived their
usefulness and no longer reflect bank practice or competition.
Rather, they require banks to organize themselves in cumbersome
and inefficient ways to compete.
The Trend Among the states
The states already have come to recognize the inefficiencies
of geographic restrictions. For example, as recently as 1980,
over 50 percent of the states retained highly restrictive
intrastate branching policies. Since 1980, however, branching
rules have loosened considerably. Today, 46 states (plus the
District of Columbia) permit statewide branching. Four states
continue with limited branching, and no state retains unit
banking -- the old policy of allowing a bank to have only one
office.
Interstate banking has developed even more dramatically.
From the time of the Bank Holding Company Act of 1956 to the mid1980s, interstate banking barely existed, and then only through
grandfathering or other limited exceptions. But once the Supreme
Court upheld New England's regional interstate banking compact in
1985, the states rapidly implemented regional interstate banking.
Currently, all states but Hawaii allow out-of-state bank holding
companies to acquire banks within the state. However, these laws
vary considerably from state to state. Consequently, we lack a
uniform, efficient, and truly national approach to interstate
banking.
A number of factors help to explain the 1980s' trend toward
easing geographic restrictions on banks.
These include: (1) the
desire of states to attract and pool capital that could be used
to support a state's economic growth and development; (2) the
need to facilitate the resolution of troubled banks and thrifts
by permitting acquisitions by out-of-state institutions; and (3)
the growing case presented to state legislators to establish
competitive equity for banks vis-a-vis their non-bank
competitors.
Safety and Soundness
Relaxing geographic restrictions will tend to promote safety
and soundness in the banking system. Allowing banks to diversify
their assets geographically promotes an aggregate income flow
that is more stable than that from each area taken individually.
3
The earnings of geographically limited commercial banks are more
susceptible to the vagaries of local market cycles which renders
such banks more likely to fail. Indeed, a large n~er of the
bank failures of the 1980s involved institutions which were
overcome by regional economic weakness.
Moreover, a strong retail deposit base represents additional
protection against failure and is furthered by geographic
diversification. Historically, we have had instances where banks
heavily dependent on purchased funds have experienced rapid
deposit outflows, reducing their stability. We also have had
instances where a large, geographically diverse retail deposit
base reduced liquidity risk for weak institutions, thereby
protecting them against failure.
Finally, to the extent interstate consolidation and
branching reduced bank operating costs, bank profitability would
increase. This would help banks build their capital accounts,
directly contributing to overall safety and soundness.
competition and Performance
Geographic restrictions represent barriers to market entry
that may permit protected banks to perform less favorably in
serving consumers and businesses. Bank customers pay for
geographic barriers through higher prices for loans and other
financial services, reduced locational and product convenience,
and lower interest rates earned on deposits. A number of studies
of geographic market barriers found that competition and bank
performance improved with ease of market entry, resulting in
lower prices, higher returns, and greater convenience for bank
customers.
Efficiency and Cost Savings
A number of banking organizations and bank analysts argue
strongly in favor of the cost savings that many bank holding
companies could realize through consolidation via interstate
branching. Banks could achieve these cost savings largely by
reducing non-interest expenses, as duplicative functions were
reduced. While the amount of savings may vary from one bank to
another, we are convinced that very substantial efficiencies can
be realized by many. Moreover, the fact that savings may vary
across banks is not reason enough to deny banks an opportunity to
realize these savings.
4
II.
Concerns Raised by Liberalization
A number of concerns are commonly raised with respect to
geographic liberalization. Included among these are that
liberalization might:
(1) lead to a decline in the number of
small banks; (2) result in an excess concentration of resources;
(3) siphon credit from local communities; and (4) damage the dual
banking system. I would like to discuss these concerns further.
Decline in Small Banks
One of the most frequently voiced concerns is that
interstate branching will inevitably reduce the number of small
banks: large institutions will enter local markets and drive out,
or buy up, small community banks. However, ample evidence
indicates that this outcome is not inevitable or even likely.
For example, in states where intra- and interstate geographic
restrictions were significantly relaxed over the years, such as
New York, small banks have continued to prosper.
Even in states that have long had liberal branching laws,
small banks prosper and compete successfully with large banks.
For example, hundreds of small banks, as well as many thrifts and
credit unions, operate alongside banking organizations with their
far-reaching branch networks in California, which has had
unrestricted branching since the early 1900s. Other longstanding branching states, such as New Jersey and North Carolina,
also have strong small bank communities.
Thus, fears about the viability of small banks and the
maintenance of competition in the face of relaxed geographic
restrictions are, we believe, ill-founded. OVer the years small
banks have been among the most profitable and best-capitalized
banks in the nation. Well-managed small banks that know and
attend to their customers' needs will not be displaced if
barriers to market entry are removed. Moreover, the availability
of new bank charters will help to maintain a reasonable balance
between large bank organizations and small, independent
institutions.
Concentration of Resources
A long-standing concern with respect to the removal of
geographic restrictions involves the potential concentration of
banking resources and its effects on competition. While this
concern cannot be dismissed lightly, new measures to limit
concentration are not necessary, and would be extremely difficult
to define by statute in a meaningful way. Despite progressive
consolidation at the state and national levels, the level of
5
c~ncentration in local urban and rural markets has remained
v~rtually unchanged for almost two decades.
The federal
regulato:y agencies rou~i~ely examine bank merger and acquisition
~ransact~o~s for compet~t~ve effects, and this remedy will remain
~n ef~ec~ ~n the event of further relaxation of geographic
restr~ct~ons.
No Local Reinvestment
Another concern raised is that interstate branching may
undermine the intent of the community Reinvestment Act of 1977,
and siphon funds from local communities. But interstate
branching legislation need not alter the CRA: all existing
requirements for community reinvestment will remain intact and
serve to ensure that banks meet local credit obligations.
Moreover, no firm evidence indicates that branch banking is more
likely than other banking structures to divert funds from local
communities. On the contrary, the historical evidence shows
generally higher bank loan-to-asset and loan-to-deposit ratios in
jurisdictions with more liberal branching.
Indeed, the propensity to export capital or lend locally is
unrelated to bank branching structure. For example, a community
bank not wishing to lend locally -- or not finding sufficient
local loan demand -- can sell Fed funds upstream to a
correspondent bank, share in loan participations, or invest in
securities rather than loans.
Finally, the siphoning argument amounts to a double-edged
sword: a bank can also inject credit into an area, and bring
funds into local communities. This is among the reasons why
states liberalized their branching and interstate banking laws.
That is, broader geographic expansion authority can produce more
efficient credit distribution, including a greater flow of funds
to communities where the demand for credit is greatest.
The Dual Banking System
An often-raised concern is that interstate branching will
damage the dual banking system, but this should not happen.
Current legislative proposals for interstate branching generally
preserve states' authority to determine banking structure and
otherwise regulate financial institutions within their
jurisdiction. Under these proposals states would continue to
control intrastate branching, by national and state banks, and to
limit interstate branching by their own state banks. These
proposals also permit states to impose on bank~ and ~ranche~
within their borders certain state laws regard~ng fa~r lend~ng
practices, unsafe and unsound banking practices, and community
6
reinvestment requirements (as if the bank were headquartered in
the host state).
III.
The Administration'. Principle.
As I mentioned earlier, the Administration generally
supports the idea of further relaxing geographic restrictions.
But in that process, we believe that certain principles should be
adhered to. The principles include: (1) promoting efficiency and
competition; (2) protecting safety and soundness; (3) meeting
consumer and community needs; and (4) respecting the interests of
the states.
Additionally, we believe that any legislation in
this Congress to further relax geographic restrictions should be
kept separate from other issues so that it can be considered on
its own merits.
We believe it would be consistent with these principles to
allow mUlti-state banking organizations to consolidate their bank
subsidiaries. Consolidation would permit these organizations to
structure themselves more efficiently, reducing overall banking
system costs. And it would benefit consumers and businesses
through lower costs and greater convenience in the market for
financial services. Moreover, simply consolidating existing
interstate banks will not change the amount of banking assets
under common control, and does not raise new issues regarding
concentration.
Indeed, we believe the issue of market share limits (and
other concentration safeguards) demands further analysis. As I
discussed in detail earlier, modern banks engage in a wide
variety of activities in competition with a wide variety of nonbank financial intermediaries. Because of this, determining the
appropriate limits on market share, or even the proper definition
of market, can be complicated. Among other things, serious
questions need to be answered involving the size of market, the
range of institutions covered, and the degree of uniformity of
limits across different jurisdictions. without good answers to
these questions, market share limits may not render the intended
effect. For these reasons, we believe it is better to continue
to rely on reviews of merger and acquisition transactions by the
appropriate federal agencies.
We are seriously concerned that any relaxation of geographic
restrictions not undermine banks' obligation to serve their local
communities. In this respect, it is useful to emphasize that all
existing CRA requirements will remain in effect. Moreover, we
support provisions for the applicability of state community
reinvestment laws to the branches of out-of-state banks. A final
concern here is that interstate consolidation of banks into
branch systems may reduce the availability of information on
banks in their communities. We believe an appropriate response
to this concern is a separate CRA evaluation for each
7
metropolitan area: this matter will be addressed in the new
performance-based CRA approach currently being developed by the
regulatory agencies.
Finally, any legislation enacted must provide foreign banks
with national treatment -- the same competitive opportunities as
u.s. banks.
xv. Conclusion
In conclusion, we believe relaxing current geographic
restrictions could yield a number of benefits. Banks could
benefit from greater efficiency. Businesses and consumers could
benefit from less costly financial services, higher returns on
savings, and greater locational and product convenience. And the
banking system could benefit from improved safety and soundness.
Mr. Chairman, I commend you and the other members of the
subcommittee for the seriousness and commitment you bring to this
important issue. We look forward to working with you to achieve
our common objectives.
I would be pleased to respond to any questions you might
have.
UBLIC DEBT NEWS
Department of the Treasury •
FOR IMMEDIATE RELEASE
October 26, 1993
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $16,530 million of 2-year notes, Series AC-1995,
to be issued November 1, 1993 and to mature October 31, 1995
were accepted today (CUSIP: 912827M58).
The interest rate on the notes will be 3 7/8%. All
competitive tenders at yields lower than 3.94% were accepted in
full.
Tenders at 3.94% were allotted 63%. All noncompetitive and
sucessful competitive bidders were allotted securities at the yield
of 3.94%, with an equivalent price of 99.876. The median yield
was 3.91%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 3.83%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
42,312
37,484,257
26,136
51,726
95,162
60,178
1,296,010
35,478
14,800
60,887
26,298
538,248
245,292
$39,976,784
Accepted
42,312
15,118,057
26,136
51,726
95,162
38,328
679,160
35,478
14,800
60,887
26,298
9E),248
245,292
$16,529,884
The $16,530 million of accepted tenders includes $866
million of noncompetitive tenders and $15,664 million of
competitive tenders from the public.
In addition, $905 million of tenders was awarded at the
high yield to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $816 million
of tenders was also accepted at the high yield from Federal
Reserve Banks for their own account in exchange for maturing
securities.
LB-457
FOR RELEASE AT 2:30 P.M.
October 26, 1993
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $26,800 million, to be issued November 4,
1993. This offering will provide about $3,750 million of new
cash for the Treasury, as the maturing bills are outstanding in
the amount of $23,044 million.
Federal Reserve Banks hold $5,740 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $2,262 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders.
Additional
amounts may be issued for such accounts if the aggregate amount
of new bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356, published as a final rule on
January 5, 1993, and effective March 1, 1993) for the sale and
issue by the Treasury to the public of marketable Treasury bills,
notes, and bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED NOVEMBER 4, 1993
October 26, 1993
Offering Amount .
$13,400 million
$13,400 million
Description of Offering:
Term and type of security
CUSIP number
. . .
Auction date
. . . .
Issue date . . .
Maturity date . . . . .
Original issue date
Currently outstanding .
91-day bill
912794 H7 2
November 1, 1993
November 4, 1993
February 3, 1994
August 5, 1993
$12,407 million
182-day bill
912794 K4 5
November 1, 1993
November 4, 1993
May 5, 1994
May 6, 1993
$14,354 million
Minimum bid amount
Multiples .
$10,000
$ 1,000
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids .
Competitive bids
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single yield
35% of public offering
Maximum Award .
35% of public offering
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .
Prior to 12:00 noon Eastern Standard time on
auction day
Prior to 1:00 p.m. Eastern Standard time on
auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m. EDT
October 27, 1993
STATEMENT OF
LESLIE B. SAMUELS
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
Mr. Chairman and members of the Committee, I am pleased to
be here today to discuss the bilateral tax treaties and protocols
with seven countries that are currently pending before you. My
colleague, Mr. Sessions, will discuss the treaty with Mexico.
Although these treaties were, for the most part, negotiated and
signed by prior Administrations, I am here on behalf of the
Administration to urge the committee to take prompt and favorable
action on all of these agreements.
The treaties and protocols before the Committee today
include a range of u.S. interests. There are treaties and a
protocol with some of our most important trading partners, such
as the Netherlands. There are agreements with smaller, but
nevertheless significant, u.S. partners -- Israel and Barbados.
There also are three treaties with countries that are likely to
become significant partners in the future -- the Russian Federation, the Czech Republic and the Slovak Republic.
Since this is my first appearance before this Committee, and
is also the first opportunity for some members of the Committee
to consider tax treaty issues in detail, I would like to take
this opportunity, before discussing the individual agreements, to
share with you the Administration's views regarding the u.S. tax
treaty program. As the Committee is aware, the Administration is
committed to ensure that foreign investors in the United states
are bearing their fair share of the U.S. tax burden. An extensive tax treaty network greatly facilitates that process through
the cooperation that it engenders between the tax authorities of
the contracting States. An active tax treaty program is also a
significant element in the overall international economic policy
of the United States. The presence or absence of a tax treaty is
often a factor in international business and investment location
decisions. A treaty does affect the ability of a firm to compete
in international markets. There can be little doubt that tax
treaties facilitate international flows of goods, capital,
services and technology.
LB 459
-2-
A network of bilateral tax treaties is a necessary addition
to tax legislation that deals with the taxation of international
flows of income, because legislation, by its nature, is unilateral, and, to the extent that it deals with such income, it,
cannot easily distinguish among countries. It cannot take ~nto
account other countries' rules for the taxation of particular
classes of income, and how those rules interact with the U.S.
statutory rules. Neither can legislation reflect variations in
countries' bilateral economic relations with the United States.
We cannot, for example, distinguish in any practical way, between
income flows to or from another industrial country and those
flowing to or from a developing country. This is often an
important distinction. By contrast, all of these factors can be
taken into account in international agreements which can alter,
in an appropriate manner, domestic statutory law as it applies to
income flowing between the parties to the agreement.
General Purpose of Tax Treaties
International flows of income are generally subject to
taxation in at least two jurisdictions -- the country in which
the income arises (i.e., the source country) and the country of
residence of the income recipient. Unlike most countries, the
united States also taxes on the basis of citizenship, taxing its
nonresident, as well as resident, citizens on worldwide income.
Thus, when a u.S. citizen is involved, a third taxing right may
also be present. Treaties are designed to avoid the resulting
double (or triple) taxation by assigning to one country the
primary right to tax each class of income.
Strong arguments can be made for assigning primary taxing
rights on cross-border income flows to either the source country
(the country in which income arises) or the residence country
(the country of residence of the owner of the income). Since the
source country provides the infrastructure, legal protections and
many other resources that support the income generating activity
and enhance its profitability, a strong case can be made for
giving that state the primary taxing right. Furthermore, since
source taxation is frequently imposed on gross income flows, it
offers a relatively simple, objective basis for application.
Developing countries, in particular, tend to prefer this basis
for taxation because it does not require the acquisition and
verification of extensive information on expenses associated with
particular items of income.
There are, however, also strong arguments that can be made
against source taxation and in support of residence-based taxation of international income flows. Residence taxation can be
based on worldwide net income, taking into account the economic
circumstances of the taxpayer. With source-basis tax, only a
portion of the taxpayer's income and expenses can be taken into
account. For example, the taxpayer may generate a small amount
-3-
of income in the source country which may be more than offset by
losses in the rest of the world. The result of a tax at source
is the taxation of a person with overall losses. Furthermore,
source basis tax is most often imposed by means of withholding
tax on gross income payments, particularly for dividends, interest and royalties. Even a moderate rate of tax on gross income
can often translate into an excessively high rate of tax on net
income. Treaties generally limit withholding rates at source on
dividends, interest and royalties to a maximum well below the
statutory rate, in many cases to zero, at least with respect to
interest and royalties.
with respect to income from business activities or personal
services carried on in one country by a resident of the other,
treaties generally require a greater level of activity in, or a
closer nexus to, the host country than that required under
domestic law before it can tax the income. When the threshold
test for host-country tax has been passed, tax is imposed at
ordinary statutory rates, but the tax is on net income, not
gross, thus avoiding the major problem with high source country
tax on passive income.
For example, unrelieved double taxation can arise from a
difference in views between two countries on the allocation of
the income that arises from a transaction between two related
parties. The tax treaty norm for resolving these so-called
"transfer pricing" disputes is the arm's length standard. Some
have questioned whether it is advisable to continue to adhere to
that standard in our tax treaties. For at least three reasons,
this Administration firmly believes that such adherence is
essential in the context of our tax treaties. First, it is
essential that tax treaties maintain an agreed standard for
resolving transfer pricing disputes. Second, if the international community at some point decides that it is advisable to
accommodate use of a different standard, it will do so irrespective of the provisions of these and other treaties. Finally,
adherence to the arm's length standard in our tax treaties is
essential to the success of the Administration's efforts to
improve compliance with our transfer pricing rules.
It is imperative that tax treaties apply a common treaty
standard to determine transfer prices and to resolve transfer
pricing disputes. It is unlikely that our trading partners will
conclude tax treaties with the united States, including those
treaties under consideration today, that do not adhere to the
arm's length treaty standard. If the united States and its treaty
partners employed different standards, the burdens on taxpayers
and tax administrations would be incalculable. One set of
transfer pricing rules based on the arm's length standard and
another set of rules based on a different standard would lead to
different answers in virtually every case. By effectively
requiring taxpayers to report ~wo different levels of income for
-4-
the same set of transactions, a system would be created that
effectively required taxpayers to violate the transfer pricing
rules of either the United states or its treaty partner or to
perform two completely different types of calculations for each
transaction.
Some critics of the arm's length standard fear that the
united states ties its hands for the future by concluding new tax
treaties that adhere to. the arm's length standard. These treaties do not, however, tie our hands for the future. Due to the
heavy burdens, described above, that would arise if a country
unilaterally departed from the arm's length treaty standard, it
would only be feasible for a nation to move to another treaty
standard in conjunction with the rest of the world. If the major
economic actors in international trade agree that the arm's
length standard is no longer viable and that another treaty
standard must be adopted, they will agree on that standard and
develop guidelines for uniform application of that standard.
Such consensus will avoid the economic dislocations that would
ensue from unilateral abandonment of the arm's length treaty
standard.
The world's existing tax treaties would inevitably give way
in the face of such a consensus. They would either be interpreted in a new way to permit the use of the new standard or be
revised to permit it. If the time comes to shift to a new treaty
standard, we and our treaty partners will do so, regardless of
the provisions of these particular treaties.
Finally, departing from the arm's length standard in these
treaties would undermine the centerpiece of this Administration's
transfer pricing compliance efforts, the Advanced Pricing Agreement (APA) program. Under the APA program, the taxpayer works
together with the IRS and a foreign tax administration to develop
an agreed approach to that taxpayer's transfer pricing issues.
An effective APA program depends on an agreed standard for
determining transfer prices and the ability to exchange information. These essential ingredients are provided by our tax
treaties.
If we do not have tax treaties, the APA program and
our transfer pricing enforcement efforts will be seriously
undermined. Based on the forgoing, I ask that this Committee
endorse the Administration's enforcement efforts and embrace the
provisions of these treaties that adhere to the arm's length
standard.
Having granted a limited primary taxing right to the source
country, treaties then obligate the residence country to relieve
international double taxation either by exercising a residual
taxing right and granting a foreign tax credit for the tax
imposed by the source country, or by exempting the income that
has been taxed in the source country. The united States avoids
double taxation, both in internal law and by treaty, by means of
-5-
a foreiqn tax credit. For the United States, its treaties merely
confirm the already available statutory treatment. Some countries, however, provide only a deduction for foreiqn taxes by
statute and rely solely on treaties for full removal of double
taxation.
Given the fact that we provide a qenerous foreiqn tax credit
unilaterally, which we do not expand upon by treaty, one miqht
ask why it is necessary to devote resources to the neqotiation of
an extensive network of "treaties for the avoidance of double
taxation." There are, in fact, a number of qood reasons. The
presence of a unilateral foreiqn tax credit, does not necessarily
avoid double taxation, and certainly does not eliminate the need
for a double taxation treaty. Ordinarily a deqree of coordination between the countries' tax systems, which is accomplished by
treaty, is required.
To take another case, it miqht appear that reductions in
source-country withholdinq rates on investment income payments
can do little to facilitate foreiqn investment because one miqht
assume that the lower foreiqn tax merely lowers the foreiqn tax
credit that the residence country is required to allow, and the
reduction in source-country tax merely transfers revenues from
the source country to the residence country. This is not, in
fact, likely to be the result in most cases. The income tax
rates imposed by the United states on its residents tend not to
be hiqh by world standards, even after the recent amendments to
the Code. When a dividend is paid to a U.s. parent by a subsidiary in a country with a corporate rate rouqhly comparable to, or
even sliqhtly lower than, that in the united States, that dividend is subject to a withholdinq tax in the source country. In
the absence of a treaty, that withholdinq tax will frequently be
imposed at a rate of 25 or 30 percent. Thus, the amount allowed
as a foreiqn tax credit in the united states for the combination
of the withholdinq tax and the amount of corporate tax on the
income from which the dividend is paid, can exceed the limit on
the credit, set under the Internal Revenue Code by reference to
the U.S. tax on that income. A reduction in the foreiqn withholdinq tax, therefore, may reduce excess foreiqn tax credits,
and provide a direct benefit to the u.s. investor.
Tax treaties also operate to minimize the effects of tax
considerations on investment location decisions and minimize tax
effects on decisions affectinq trade, technoloqy transfer and the
provision of personal services. This tends to facilitate the
cross-border flow of services and technoloqy. For example,
treaties exempt, or substantially reduce, source-country taxation
of royalties and know-how payments. Also, the personal service
provisions of tax treaties often permit a resident of one country
to work in the other for short periods of time without becominq
subject to host-country tax.
-6-
Tax treaties also provide for cooperation between the tax
administrations of the two countries. Much of this cooperation
is aimed at the "prevention of fiscal evasion" purpose of tax
treaties. Every treaty designates a competent authority for each
partner. The competent authorities exchange information, including otherwise confidential taxpayer information, as may be
necessary for the proper administration of the countries' tax
laws. As mentioned previously, effective information exchange is
central to the success of the APA program.
This aspect of tax treaties has increasingly come to be
recognized, both by our tax administration and by the administrations of our partners, as one of the most important. We have
several kinds of information exchange programs in place and
working with our treaty partners. The information that is
obtained by these programs may be used, for example, to identify
unreported income or to investigate transfer pricing cases.
Information exchange is particularly important in the context of
transfer pricing, as administration of our transfer pricing rules
frequently requires the United states to acquire financial data
not only from the U.S. taxpayer, but also from the U.s. taxpayer's foreign affiliates.
In addition to exchanging information, the competent authorities are empowered to resolve disputes that arise under a
treaty, thus giving investors a place to turn in the event of a
conflict with host-country tax authorities. We believe that this
is an important benefit of treaties, and the Internal Revenue
Service has recently developed new procedures intended to make
the process more accessible to taxpayers and more efficient.
The treaty with the Netherlands builds upon the German
treaty signed in 1989 and approved by the full committee in 1990,
by providing for the possibility, in the future, of expanding
dispute resolution through the use of voluntary, binding arbitration. In approving the German treaty, the committee suggested
that the use of arbitration in international tax disputes be
given an opportunity to be tested, under the U.S.-German treaty
and under the EC procedures on the subject, before making it a
standard part of U.s. bilateral tax policy. The Netherlands
treaty, therefore, contains an arbitration provision that can
become operational only after being triggered by a formal exchange of diplomatic notes. We do not intend to exchange such
notes until we are satisfied, on the basis of experience, that
arbitration offers a practical, workable, back-up to the traditional competent authority mechanism for the resolution of
bilateral international tax disputes.
Treaties with Developed and Developing countries
There are treaties under consideration today with both
developed and developing countries. They differ in certain
-7-
respects both in form and in objective. In a treaty between two
industrial countries, capital and technology tend to flow in both
directions. The income generated from these flows, therefore,
also flows in both directions. Each partner is the source
country with respect to some flows of income, and, therefore,
costs and benefits of the treaty tend to be roughly reciprocal.
It follows further, then, that each partner has the same general
interests in a treaty -- to ensure that the benefits granted by
the partner flow to its residents, and to encourage trade and
investment in its country by residents of the partner. Such
treaties, exemplified by the treaty before you with the Netherlands, are designed in a reciprocal manner to enhance the bilateral economic relations between the partners.
The economic relationships between the united States and its
developing country treaty partners, in contrast, are generally
quite different. The vast bulk of the capital and technology
flowing between the partners moves from the united States to the
developing country. The income, therefore, flows almost exclusively from the developing country to the united states. Since a
typical tax treaty provides for a substantial reduction of taxes
at source, it is the developing country partner that is called
upon to bear the bulk of the revenue cost. The cost is magnified
when the tax reduction relates to payments that are normally
deductible in the source state. Accordingly, the objectives of
the partners in such a treaty are not the same as those of two
developed country treaty partners.
The developing country partners' often conflicting objectives are attracting u.S. capital and technology, while, at the
same time, preserving scarce revenues. Developing countries
often try to square those two objectives by seeking to retain
high source-country taxes, while asking the united States, the
capital exporting country partner, to provide a tax incentive for
its residents to invest in the developing country. This incentive generally takes the form of a "tax sparing credit". This is
a "phantom" foreign tax credit for the taxes that would have been
paid to the developing country but were waived under its tax
holiday regime.
The united States will not agree to such incentives. This
is a major factor in the relatively small size of the u.S.
network of treaties with developing countries. The objective of
the United States is to move in the direction of neutrality for
u.S. investors (often by lowering the frequently high developing
country's taxes), while seeking to minimize the revenue sacrifice
by the developing country to the extent possible consistent with
this objective.
In support of their interest in preserving revenues, developing countries tend to be reluctant to reduce their withholding
taxes on dividends, interest and royalties paid to residents of
-8-
the other country. Further, they typically apply such withholding taxes to broad categories of income, including payments for
the lease of equipment, and, in some cases, payment for technical
services, whenever the payment is made (and, thus, a deduction is
taken) by a resident. One of the most difficult articles to
negotiate in a treaty with a developing country is frequently
that dealing with royalties, because of the one-way flow of
income and the high rates and broad base sought by developing
countries.
Each of the treaties under consideration today is the result
of a negotiated bargain between countries with some conflicting
objectives. The objectives that developing countries bring to
the table are frequently much different than those of other
developed countries. Thus, our treaties with developing countries are often a reflection of the practical reality that an
agreement requires greater concessions and compromises. Therefore, the choice in many cases is between a treaty that accomplishes much, but not all, of our objectives, and no treaty at
all, not a more nearly perfect treaty from the u.s. viewpoint.
Although there are certainly some aspects of u.s. treaty policy
that are non-negotiable (e.g., the inclusion of anti-abuse rules,
the preservation of taxing rights with respect to u.s. citizens
and residents and the refusal to grant tax sparing) we believe
that the interests of the united states are best served by
minimizing preconditions for negotiations.
Relationship between statutes and Treaties
We are all certainly aware, as are our treaty partners and
potential partners, that our constitution grants the right to
Congress to override obligations under bilateral treaties by
unilateral act of Congress. Since treaties and statutes are both
"the law of the land" and have equal status, the general principle is that the later in time prevails in the absence of specific
congressional indications to the contrary.
Under the constitutional systems of many of our treaty
partners, treaties constitute a higher form of law than statutes,
and cannot, therefore, be overridden by a later statute. In some
countries, such overrides are constitutionally possible, but
seldom, if ever, exercised. I would strongly urge Congress to
avoid such overrides.
The treaties under consideration by this committee today
contain two lessons on this important subject. First, I believe
that our new treaty with the Netherlands provides clear and ample
evidence that serious problems in the operation and effect of our
treaty program do not require treaty override, but can be resolved by bilateral negotiation. Our present Dutch treaty has
been one of the most widely abused in our entire treaty network.
Investors from allover the world have used that treaty as a
-9-
vehicle for investing in the United States in order to derive
benefits to which they are not properly entitled. Congress has,
on occasion, considered the use of overrides to eliminate treaty
shopping into the United states. I believe that the new Dutch
treaty provides us with as clear a statement as can be made that
even problems as serious as this one can be resolved bilaterally.
The second lesson is of the strong negative feelings that
our treaty partners hold regarding the entire process of treaty
overrides. Our negotiators are finding that our treaty partners
are becoming increasingly concerned by the possibility that
agreements that are reached in good faith at the negotiating
table may, in future years, cease, by unilateral U.s. action, to
have effect. This has two consequences. First, countries are
less willing to make concessions that would benefit U.s. business
and investors because they fear a treaty is likely to be "unbalanced" by future legislation. Also, they increasingly are
insisting on some provision in new treaties that preserves a
right to respond to U.S. overrides.
Our new treaty with the Netherlands and the pending Protocol
to the treaty with Israel, provide for the competent authorities
to consult if a change in law or its application in one of the
Contracting states is thought to impede the application of the
treaty. These consultations would, if appropriate, lead to a
reopening of negotiations to reach agreement on amendments to the
treaties to restore the overall balance that had existed prior to
the statutory change in question. While we hope that there will
be no need in the future to resort to this type of provision, we
believe that it does offer a reasonable mechanism for dealing
with treaty overrides, should they arise. This provision does
not commit the Administration to agree to a future protocol that
may result from the application of this provision. Nor does
approval by the Senate of a treaty containing such a provision
imply a commitment to approve a future protocol.
Treaty Abuse
The united states has been the leader among OECD countries
in identifying problems of treaty abuse, and dealing with these
problems in bilateral treaties. We have included some form of
anti-abuse provision in almost every treaty concluded since the
mid-1970's. Other countries are now, increasingly, following the
u.s. lead on these matters, and in 1992 the Commentary of the
OECD Model income tax treaty was substantially revised to describe these issues and suggest possible solutions. I think,
because of the emphasis we have placed on these issues in recent
years, the united States Government can take much of the credit
for this development.
When I speak of "treaty abuse," I refer to circumstances in
which a structure is established that will allow a person, who
-10-
mayor may not be a resident of one of the Contractinq states, to
enjoy the benefits of a treaty where such benefit was not intended. The most widespread of such abuses is a practice known as
"treaty shoppinq". I do not intend in this part of my testimony
to describe either the nature of the abuses or of the remedies,
other than to assure the committee that we believe that the antiabuse provisions in each of the treaties under consideration deal
appropriately and adequately with the potential for abuse. I
will, however, discuss these issues in some detail below in my
discussion of the individual treaties, particularly that with the
Netherlands.
My purpose now is to assure the committee that this Administration continues to view treaty abuse as an important issue. We
want to make certain that those seekinq to take undue advantaqe
of the system, will not, with the revision of the Netherlands
treaty, merely be able to turn to another u.s. treaty partner and
receive the same unintended advantaqes. We intend, as promptly
as time and resources permit, to modify all of our existinq treaties to include modern, effective, anti-abuse provisions. We
have, in this connection, announced that we will be openinq
neqotiations with Luxembourq in early December.
Future Treaties
The united states currently is neqotiatinq treaties or
protocols with more than 20 countries. Generally these neqotiat ions have the purpose of updatinq an existinq treaty to reflect
chanqes in u.s. tax law since the treaty was neqotiated (or last
amended by protocol) -- particularly the Tax Reform Act of 1986 and to expand the u.s. treaty network to include additional
countries. In particular, the united states is now neqotiatinq
with many of the republics of the former soviet Union to replace
the existinq treaty with the USSR, which althouqh still in force
in those countries does not reflect the political and economic
developments of the last few years.
We also hope to expand the
network to include more of the fast-qrowinq economies of East
Asia and Latin America. However, as I have noted, concludinq
treaties with developinq countries is often a difficult task
because of the hard compromises that need to be made.
Netherlands Convention and Protocol
General Background
I would like to turn first to the new Convention and Protocol with the Netherlands, and the detailed memorandum of understandinq and exchanqe of notes that accompany the Convention and
the Protocol. This aqreement has, without doubt, attracted the
most attention in the international tax and business communities
of all of those before this Committee today. The proposed new
Convention with the Netherlands, and the Protocol amendinq that
-11Convention, will replace the existing treaty, which was originally signed in 1948, and was last amended in 1965. The present
treaty has become one of our most important tax treaties, in part
because of our extensive bilateral economic relations with the
Netherlands, and in significant part because the Netherlands has
become a major conduit through which third-country residents
invest in the United States. Many of these third-country residents are engaged in a practice known as "treaty shopping."
Treaty shoppers are frequently from a country with which the
united states has no tax treaty, or a treaty providing limited
benefits with respect to the relevant classes of income. such
persons can obtain the benefits of the U.S.-Netherlands treaty by
establishing a resident entity in the Netherlands, providing
capital to that Netherlands entity and then directing the entity
to invest in the united states on the third-country resident's
behalf. Since the entity is a resident of the Netherlands, the
income that it receives from the united States is entitled to the
full benefits of the U.S.-Netherlands income tax treaty. The
entity, its capital structure and its income flows will frequently be arranged in such a way that it will pay little tax in the
Netherlands, and will be able to make income payments from the
Netherlands to the third-country resident at little tax cost. If
the third-country resident had invested directly in the United
States, income flows from the united States potentially would be
subject to full U.S. withholding tax of 30 percent.
I would like to explain why treaty shopping is a concern to
the United States, and why it is important to our treaty program
that it be controlled. The concern is not so much the loss of
revenues that occurs when a payment to a resident of a treaty
country receives the benefits of a U.S. treaty, even though the
ultimate beneficial owner of the income (~, the real investor)
is a resident of a third country who would not be entitled to the
benefits of that treaty if the investment had been made directly
from the real investor's home country. A much more significant
problem growing from the extensive use of treaty shopping is that
the residence country of the real investor is under little
pressure from its residents to enter into a treaty with the
united States. If that country's residents can obtain the best
treaty benefits that the United States has to offer, for example
through use of the U.S.-Netherlands treaty, that country will
have no strong reason to enter into a treaty with the United
States, which would require it to grant reciprocal benefits to
U.S. residents. U.S. residents, therefore, will receive no
benefits with respect to income from their investments in that
country. This is not a theoretical matter. When the initialling
of the new U.S.-Netherlands treaty was announced, and it became
clear that it would deal with this treaty-shopping issue, investors in several other countries suddenly became interested in the
progress, if any, in developing a treaty relationship between
their countries of residence and the United States, and began
-12-
pressuring their home countries to move forward quickly toward
agreement with the united states.
As I indicated, at least in part because of the use of the
present Netherlands treaty as a vehicle for treaty shopping, that
treaty has become one of the most important elements in our tax
treaty network. The proposed new treaty, therefore, is also of
tremendous significance, since it is designed to limit treaty
shopping through the Netherlands. While there are many important, and in some cases innovative provisions in this treaty,
there is no question that it is the anti-treaty shopping rules
that have attracted the most attention. I think that it is fair
to say, as well, that the anti-treaty shopping rules under
Article 26, called the Limitation on Benefits provisions, constitute the most complicated set of tax treaty provisions ever
devised. I will discuss these rules in some detail below, but I
would like merely to note at this point that I believe these
rules constitute an effective and comprehensive method of dealing
with treaty shopping. In evaluating the balance of costs and
benefits that is reflected in this agreement, it is important for
the committee to bear in mind that the effective elimination of
the Netherlands as a path for treaty shopping into the united
states represents an important concession on the part of the
Netherlands, a concession that will prove costly to many in the
Dutch private sector. The extreme complexity of the provision is
the result of the desire by the Dutch negotiators to provide the
maximum degree of certainty for its taxpayers who are not engaged
in treaty shopping. I would not expect such complexity to be
considered necessary in most bilateral relationships.
There is a second abusive structure under the Netherlands
treaty that has become widely used by residents of the Netherlands to derive a combination of u.s. and Dutch tax benefits in
an unjustified manner. This structure is known as the "triangular case," under which an enterprise that is a resident of the
Netherlands sets up a permanent establishment (i.e., a branch) in
a low-tax, third jurisdiction and derives interest or royalty
income from the United states that is attributable to that
branch. The branch is an integral part of the Dutch enterprise,
and the income that it derives, therefore, is the income of a
resident of the Netherlands, entitled to u.s. benefits under the
U.S.-Netherlands income tax treaty (assuming that resident has
met at least one of the tests of the Limitation on Benefits
provisions). Under Dutch law, as well as under bilateral arrangements between the Netherlands and a number of other jurisdictions, the profits of a branch of a Dutch enterprise are
exempt from tax in the Netherlands. Had the interest or the
royalty income been earned directly by the Dutch enterprise, and
had it not been attributable to the branch, it would have been
subject to full Dutch tax (35 percent in the case of a Dutch
corporation). By passing the income through the third point in
the triangle (i.e., the third-jurisdiction branch), the income is
-13-
subject to no tax in the United states, to little or no tax in
the host jurisdiction of the permanent establishment, and is
exempt from Dutch tax.
When the new Convention was being negotiated, the united
states wanted to include a rule that would prevent such abuse.
Since this is primarily a problem of abuse of the Dutch system,
which the Dutch Government has recognized as being considerably
broader than a U.S.-Netherlands bilateral issue, the Netherlands
negotiators asked that their Government be given an opportunity
to correct the problem unilaterally before dealing with it in the
new treaty. A provision was, therefore, put into the treaty
(Article 24(4» under which the issue was identified and it was
agreed that if the problem had not been unilaterally resolved by
the time of hearings before the Foreign Relations Committee on
the treaty, a Protocol would be negotiated to deal with the
problem.
Legislation has been proposed in the Netherlands to deny the
Dutch exemption of permanent establishment profits in certain
abuse cases. I have received assurances from my counterpart in
the Dutch Government that they are pressing forward to enactment.
The legislation, however, has not yet been enacted, and, in any
event, the problem cannot be entirely solved by unilateral action
of the Dutch Parliament, because in some cases the Dutch exemption is the result of treaties and other bilateral agreements
that in the Netherlands cannot be overridden by statutory enactment. As a result, it was necessary to agree to a Protocol to
cover cases that would not be addressed by the proposed Dutch
legislation. The Protocol before you today, therefore, was
negotiated to carry out the intent of Article 24(4).
Despite the public attention that has been devoted to
Article 26, and, more recently, to the Protocol, it is important
to bear in mind that the objective of the treaty is to provide
treaty benefits for the "qualified" residents of the two contracting states, not to deny benefits to those residents that do
not qualify. Before discussing those rules that will deny
benefits to certain residents of the Contracting states, therefore, I would like to review with the Committee the significant
benefits that the treaty will provide to residents of the two
countries and to both tax administrations.
General Provisions
The tax treaty provisions that generally affect the largest
numbers of taxpayers are the investment income articles -- those
articles that limit the rates of taxation at source on dividends,
interest and royalties. The proposed treaty, like the present
treaty, follows the standard for U.s. treaties with other industrial countries -- generally low or zero rates. Most dividends
are subject to tax at source at a rate of 15 percent, except when
-14-
the shareholder is a corporation that owns at least a 10 percent
interest in the paying corporation, in which case the rate is 5
percent. This 5 percent rate also applies to the "dividend
equivalent amount" under the u.s. branch tax. The treaty also
reflects what has now come to be the standard u.s. policy for the
taxation of dividends paid by RICs and REITs. In order to
prevent the transformation of what should be relatively hightaxed income paid into these entities into lower taxed income,
special rules are provided for dividends paid by these entities,
as well as by their Dutch counterparts.
Interest and royalties are both generally exempt from tax at
source. Once again, in conformity with what has become standard
u.s. treaty policy, excess inclusions with respect to residual
interests in REMICs are subject to the statutory withholding rate
of 30 percent. A minor variation in our standard approach to the
taxation of royalties is found in the source rule, under which
certain royalties paid by residents of the Netherlands can be
treated as u.s. source. These are cases in which the Dutch payor
acts as a conduit for the payment of royalties from the United
states to residents of a third state.
As a general matter, various types of business profits are
subject to the standard treaty rules under this proposed treaty.
Business profits of an enterprise of one State can be taxed in
the other State only when those profits are attributable to a
permanent establishment in that other State. The definition of a
"permanent establishment" in the treaty is also standard for
treaties between industrial countries. The proposed treaty
incorporates a provision of the 1986 Tax Reform Act that attributes to a permanent establishment income that is earned during
the life of the permanent establishment, but is deferred, and not
received until after the permanent establishment no longer
exists. Two other types of business income -- income from real
property, and profits from the operation of ships and aircraft in
international traffic, are subject to the normal rules. Real
property income is taxable in the country of situs of the property, under its statutory rules, and transport income is taxable
only in the state of residence of the operator.
Some types of business income, however, are subject to nonstandard rules. Income from offshore petroleum exploration
activities is subject to special rules under which lower taxation
thresholds apply than under standard treaty rules. The rules in
the proposed Convention are similar to those found in our treaties with two of our other treaty partners bordering on the North
Sea -- the United Kingdom and Norway. In addition, income from
the rental of ships and aircraft, that is not incidental to the
operation of ships and aircraft, and income from the use or
rental of containers, are treated as business profits rather than
as transportation income. As such, to the extent attributable to
a permanent establishment in that country, these classes of
-15-
income are subject to tax in the country where the income arises.
While I recognize that this treatment is not consistent with
standard u.s. treaty policy, and is something that U.S. negotiators work hard to avoid, the Committee should understand that
this is the policy underlying the rules found in the OECD Model
treaty, and is the result on which the Netherlands insisted.
The taxation of capital gains under the proposed Convention
will be essentially the same as under the present treaty and the
u.s. Model, with two exceptions. A special "fresh-start" rule,
similar to the rule in the U.S.-Canada treaty, is provided to
increase basis to fair market value as of the end of 1984 (when
the current U.S.-Netherlands treaty was overridden by the 1980
Foreign Investment in Real Property Tax Act (FIRPTA) legislation)
for gains on certain U.S. real property interests that have been
held continuously by a Netherlands resident since 1980. In
addition, deferral of tax on gains arising from certain corporate
reorganizations is provided until such gains are also recognized
in the other state, provided the payment of tax is adequately
secured.
The proposed Convention contains rules, not found in the
U.S. Model, for exemption, on a reciprocal basis, for certain
income earned by exempt pension trusts and charitable organizations.
The proposed Convention provides a U.s. foreign tax credit
for the Dutch profit share tax imposed on offshore oil income.
since this credit may go beyond the credit allowed under the
Internal Revenue Code, special limitations are provided to assure
that the credit for this tax cannot be applied with respect to
income that was not subject to the profit share tax.
Also included in the proposed Convention are the normal
rules necessary for administering the Convention, including rules
for the resolution of disputes under the treaty and the exchange
of information. As I noted above, the dispute resolution provisions include the possibility of using an arbitration procedure
for certain disputes that cannot be resolved under traditional
tax treaty procedures by the competent authorities. The use of
arbitration, however, will not begin until the two States have
agreed that it is appropriate to do so.
The proposed Convention authorizes the General Accounting
Office and the tax-writing Committees of Congress to obtain
access to certain tax information exchanged under the Convention
for use in their oversight of the administration of U.S. tax laws
and treaties. Like the present Convention, but unlike the U.S.
Model, the proposed Convention also provides for the mutual
assistance by each state in the collection of taxes for the
other.
-16-
The proposed convention is subject to ratification. It
enters into force 30 days after each State has notified the other
that it has completed all of its ratification procedures. It
will have effect, with respect to taxes payable at the source for
payments made or credited on or after the first day of January
following entry into force, and in other cases with respect to
taxable years beginning on or after that date. Where, however,
the present Convention affords a more favorable result for a
taxpayer than the proposed Convention, the taxpayer may elect to
continue to apply the provisions of the present Convention, in
its entirety, for one additional year. This will, among other
things, provide ample opportunity for investors who may be
affected by the anti-abuse provisions to restructure their
operations in a manner that will permit them, legitimately, to
enjoy the benefits of the Convention.
Anti-abuse Provisions
Treaty Shopping
The proposed Convention contains, in Article 26, significant
rules to extend the benefits of the Convention only to persons
that are not engaged in treaty shopping. In addition to the
significantly greater detail than that found in other antitreaty-shopping provisions, with respect to residents of the
Netherlands, greater explicit recognition is given than in other
recent treaties with EC members to the position of the Netherlands as a member of the European Communities. This latter
concession reflects the closer economic relationship that exists
between EC member countries than between other trading partners.
I cannot do justice in this kind of presentation to the
degree of specificity that is included in the Article, but I will
try to describe its provisions for the Committee in general
terms.
First, Article 26 identifies, in paragraph 1, certain
classes of residents of a Contracting state that are entitled to
the benefits of the Convention. Individual residents and the
Governments of the Contracting states, and their political
subdivisions and local authorities are entitled to benefits.
Benefits are granted to resident companies that are publicly
traded on a "recognized stock exchange", including an exchange in
one of the Contracting states, and, subject to certain tests, a
subsidiary of a publicly traded company. Ownership by residents
of certain EC countries may also be taken into account in determining qualified ownership of Netherlands companies. Benefits
are also granted to a resident that is more than 50 percent
owned, directly or indirectly, by the persons described above,
and that is not engaging in "base erosion" (i.e., less than 50
percent of its gross income is used to make deductible payments
to non-qualified persons). Finally, paragraph 1 provides that
-17-
residents of a Contracting state that are not-for-profit organizations that meet certain tests will be entitled to benefits.
Any person that qualifies for benefits under the provisions of
paragraph 1 is entitled to benefits with respect to any item of
income derived from the other Contracting state.
Paragraph 2 provides that even if a person does not qualify
for benefits under the rules described in paragraph 1, that
person may qualify with respect to specific items of income that
are related in a specified manner to an active trade or business
carried on by that person in his state of residence. Either the
income generating activity in one state must be related to the
active business in the person's state of residence, and that
active business must be sUbstantial in relation to the size of
the income producing activity in the other state, or the item of
income must be incidental to the trade or business carried on in
the state of residence. In the case of a Netherlands resident,
some of the residence country activities may be carried on in
other EC countries.
Paragraph 3 specifies conditions under which a resident of a
Contracting state that is functioning as a headquarters company
for a multinational corporate group may qualify for benefits.
These requirements ensure that a significant amount of real
business activity is being carried on in a qualified headquarters
company in the Netherlands or the United states, as the case may
be.
Paragraph 4 grants, in a limited and highly specified
manner, what has become known as "derivative benefits". This
term relates to the fact that the entitlement to benefits derives, in part, from the provisions of treaties between the
source country and third countries. The benefits granted under
this paragraph are only those relating to dividends, interest,
royalties and branch tax. These benefits are to be granted if
the resident of the Netherlands claiming benefits is at least 30
percent owned by qualified Dutch persons, and at least 70 percent
by resident of EC member countries whose treaties with the united
states provide the same or greater benefits with respect to the
item of income in question.
Finally, paragraph 7 provides that in cases where a resident
of a Contracting state does not qualify for benefits under any of
the objective tests described above, but, nevertheless believes
that it should be entitled to benefits, it can seek a ruling from
the competent authority of the state of source of the income
granting benefits.
The Memorandum of Understanding to the Convention and the
Exchange of Notes to the Protocol provide extensive guidance to
taxpayers and to the competent authorities in interpreting and
administering the provisions of this Article.
-18Triangular Case
Articles 1 and 2 of the Protocol deal with the two classes
of income affected by the triangular case issue--the taxation of
interest and royalties, respectively. These two items of income
were the focus of our concern in negotiating the Protocol because
they are the classes of income that are exempt from u.s. tax
under the treaty and that, if earned directly by a resident of
the Netherlands and not attributable to a third-jurisdiction
permanent establishment, would be subject to Netherlands tax.
Those Protocol provisions specify the factors that identify the
abusive cases, and provide rules to prevent the abuse. Although
the provision is drafted reciprocally, it will almost invariably
apply in cases where the income recipient is a Dutch resident
deriving income from the United states. An abusive triangular
case is one in which income is paid by a u.s. resident to a
resident of the Netherlands and is attributable to a permanent
establishment in a third jurisdiction, and the income is subject
to a combined effective rate of tax in the Netherlands and the
host jurisdiction of the permanent establishment that does not
reach a specified threshold. That threshold is 50 percent of the
rate of tax generally applicable in the Netherlands (currently 35
percent for corporations) for income arising before January 1,
1998. For income arising on or after January 1, 1998, the
threshold rate of aggregate tax is 60 percent of the tax generally applicable. Regardless of the aggregate rate of tax, a
structure will not be treated as abusive if the income is generated by an active business carried on within the permanent
establishment. In the case of interest, the making or managing
of investments is not treated as an active business for this
purpose, unless the activities are banking or insurance activities carried on by a bank or insurance company. In the case of
royalties, an active business is one in which the intangibles in
respect of which the royalties are paid are produced or developed
by the permanent establishment. When on the basis of these
factors, a payment of interest or royalties is deemed to be an
abusive transaction, the maximum rate of u.s. withholding tax is
increased from zero to 15 percent, which corresponds, with only
limited exceptions, to the highest rate of withholding tax on
interest and royalties found in u.s. tax treaties.
The provision for a 15 percent rate of u.s. withholding tax
on gross income payments makes it unlikely that this structure
will be used in the future.
We believe that the anti-abuse provisions of the Convention
and Protocol, coupled with the enforcement of new statutory rules
such as those relating to back-to-back loans, will serve to allow
the new Convention as amended by the Protocol to serve its
intended function -- the encouragement of increased economic
activity between the United states and the Netherlands, unaccom-
-19panied by the concern that benefits are flowing to persons that
are not intended to be beneficiaries of the Convention.
Russia Convention and Protocol
The proposed new treaty and protocol with Russia would
replace the treaty concluded with the former soviet Union, which
has been in effect since 1976 (and continues in effect for other
countries of the Commonwealth of Independent states). The new
treaty retains some features of its predecessor, but for the most
part reflects more recent treaty policy as indicated by the OECD
Model and the 1981 US Model.
With respect to investment income, the proposed treaty
introduces a provision, not included in the prior treaty, that
limits the tax at source on dividends and branch profits. The
tax may not exceed 5 percent of dividends paid to companies
owning at least a 10 percent interest in the paying corporation,
and 10 percent of other dividends. The 5 percent rate also
applies to the dividend equivalent amount of branch profits.
Profits distributed by Russian joint ventures are treated as
dividends for purposes of these rate limitations. However,
dividends distributed by U.s. regulated investment companies and
real estate investment trusts are not subject to the rate limitations of this article, but are taxed at the U.s. statutory rate.
As in the existing treaty, interest and royalties are exempt from
tax at source.
In the new treaty, income from the rental of personal
property is not treated as a royalty, but as business profits.
Profits from the rental of ships, aircraft, and containers used
in international traffic are exempt from tax at source under
Article 8 (International Transport). Other equipment rentals are
subject to the rules applicable to business profits in general;
when such income is derived by a resident of one Contracting
state, it may be taxed by the other State only if attributable to
a fixed place of business ("permanent establishment") in that
other state. The new treaty defines the term "permanent establishment" in a manner similar to the definition in the OECD and
us models. It reduces the time threshold for a construction site
to become taxable from 36 to 18 months, still considerably longer
than the 12 month rule of the OECD and US models. It also
expands the scope of that provision to include drilling rigs.
The rules applicable to the taxation at source of income
from independent personal services retain the 183 day presence
test of the existing treaty, in addition to the requirements that
the services be performed in the other state and attributable to
a fixed base there. The standard treaty rules apply to the
taxation at source of dependent personal services in general.
-20-
However, special exemptions at source are provided for employees
on ships or aircraft engaged in international transport, employees working at construction sites or on drilling rigs, and
employees providing technical services connected with a patent,
process, or other right giving rise to a royalty payment.
Special tax relief applies to grants and amounts from abroad for
living costs received by students, trainees, and researchers.
However, the new treaty does not preserve the two year exemption
of personal service income earned by teachers, researchers and
correspondents that is found in the existing treaty. It is not
the policy of the OECD model or of either of the two countries to
provide special exemptions of the compensation earned by teachers, researchers, or journalists. Individuals who enjoyed those
benefits under the existing treaty may choose to apply the
provisions of that treaty, in full, for one additional year
beyond the time at which it would otherwise cease to apply.
The new treaty confirms the availability of a foreign tax
credit in the country of residence, subject to the provisions of
domestic law. The treaty does not provide a credit for the
Russian taxes covered that is independent of the criteria required by u.s. law; but by providing in the treaty for certain
deductions not otherwise available under Russia's domestic law,
it intends to ensure that the Russian taxes qualify for a foreign
tax credit.
The administrative provisions of the treaty have been
modernized and expanded. The new treaty contains a limitation on
treaty benefits, provisions for the exchange of information, and
cooperation between the tax authorities of the two countries for
purposes of avoiding double taxation and preventing tax evasion.
-21-
Israel Protocol
Before discussing the substantive provisions of the pending
U.S.-Israel Protocol, an explanation of the historical context in
which the Protocol has come before the committee may be helpful.
U.S. efforts to conclude a tax treaty with Israel go back to the
late 1950's. Because two early treaties negotiated with Israel
in the 1950's and 1960's contained U.S. investment incentives,
they never entered into force. A treaty that did not contain
such incentives was signed in 1975. It became clear shortly
after signature, however, that some changes would be necessary
before the treaty could enter into force. These changes are
reflected in a Protocol signed in 1980. The 1975 Convention, as
amended by the 1980 Protocol, was approved by the Senate in 1981.
As with the entire group of tax treaties approved in 1981,
the Israeli treaty was approved with an understanding assuring
GAO and tax-writing committee access to information exchanged
under the treaty for use in the performance of the tax oversight
functions of these organizations. At the time, Israel was
unwilling to agree to the understanding, because of concerns
regarding the confidentiality of information, and instruments of
ratification could not be exchanged bringing the treaty into
force. When Israel reconsidered its position in 1986, and agreed
to exchange instruments reflecting the 1981 Senate understanding,
the Tax Reform Act of 1986 had been enacted, requiring additional
changes in U.S. treaty policy.
The 1993 Protocol makes all of those necessary changes, and
others reflecting changes in U.S. policy subsequent to 1986. The
Protocol also includes amendments that reflect changes in Israeli
law since 1980. Furthermore, it provides for GAO and tax-writing
committee access to otherwise confidential information exchanged
under the treaty, thus, resolving the issue that gave rise to the
1981 Senate understanding and the delay in ratification.
When, as we expect, the Senate gives its advice and consent
to the ratification of this second Protocol, it is our intention
to exchange instruments for the 1975 treaty, the 1980 Protocol
and the 1993 Protocol at the same time, thus, putting the treaty
as amended by the two protocols into force at the same time.
Attached to the Protocol, but not forming an integral part
of it, is an exchange of notes spelling out a number of understandings reached during the negotiation of the Protocol regarding its interpretation and application.
The Protocol contains a number of significant amendments to
the pending convention, as well as a number of minor refinements.
Among the more significant changes are the following: The
coverage of the nondiscrimination protection will be broadened to
include state and local taxes, as well as national taxes. The
-22-
"saving clause," under which the united states reserves its
statutory taxation rights with respect to its citizens and
residents, will be extended to include former citizens who have
expatriated for tax avoidance purposes. consistent with the Tax
Reform Act of 1986, the convention will be amended to make clear
that any income earned by a perm~nent establishment, the receipt
of which is deferred until after the permanent establishment has
ceased to exist, will be attributable to the permanent establishment.
The Convention will be amended to assure that dividends paid
by non-taxable conduit entities, such as u.s. Regulated Investment Companies and Real Estate Investment Trusts, will not
receive unjustified treaty benefits. The pending Convention
allows relatively high withholding taxes at source on interest
payments. The Protocol will amend the Convention to provide an
election for the interest recipient to be taxable on his interest
income by the source country on a net basis. We believe that this
provision will mitigate, in many cases, the impact of the high
gross-basis withholding rates. The Protocol will amend the
interest provisions of the pending Convention to deny treaty
benefits to so-called "excess inclusions" with respect to a
residual interest in a real estate mortgage investment conduit.
The Convention will be amended to permit the application of
branch taxes, which were introduced into u.s. law by the Tax
Reform Act of 1986. Although Israel does not now impose such
taxes, it has preserved the right in the Protocol to do so.
The pending Convention permits one contracting state to
impose tax on a resident of the other state on gain from the sale
of stock in a corporation resident in the first-mentioned state
if the alienator owned at least 50 percent of the voting power of
the corporation. The Protocol will lower the holding requirement
to 10 percent, and make certain other technical amendments.
The Protocol will replace the limited anti-treaty-shopping
rules in the pending Convention with a modern, comprehensive set
of rules to prevent treaty-shopping abuse of the Convention. The
Protocol will conform the exchange of information rules in the
Convention to the senate understanding in connection with its
1981 approval of the pending Convention. As amended, the Convention will provide for GAO and Congressional tax-writing committee
access to confidential information exchanged under the convention
in connection with their performance of oversight functions.
A provision will be added to the Convention stating an
agreement by the Contracting states to consult to determine
whether it would be appropriate to amend the Convention in
response to changes in the tax laws or treaty policies of one of
the states. In the event that it is deemed appropriate, or in
the event of a unilateral override of a provision of the Convention which has a significant impact on the balance of benefits,
-23-
the Contracting states agree to endeavor to make the necessary
amendments to the Convention.
Finally, the effective dates for the provisions of the
Convention will be amended by the Protocol to provide that, for
other than withholding taxes, the Convention will have effect
retroactively to the beginning of the year in which it enters
into force if the entry into force takes place within the first
half of the year. The Convention will have effect prospectively,
from the beginning of the year following that in which the
Convention enters into force, if entry into force occurs during
the second half of the year.
We believe that, particularly as amended by the second
Protocol, the pending Convention will provide a significant
positive force in U.S.-Israeli economic relations, and, therefore, should receive a favorable recommendation by this Committee.
Conventions with the Czech Republic and the Slovak Republic
Because these two proposed treaties are substantively the
same, I will summarize by referring to them both in the same
section. In both cases, the proposed treaties will be the first
such tax treaties between the united States and the respective
republics. They are based on the OECD model income tax treaty
and the 1981 U.S. model and are similar to other treaties recently concluded by the united States.
With respect to investment income, the two treaties provide
for taxation of dividends at source at a rate not higher than 5
percent of dividends paid to companies having at least a 10
percent interest in the paying corporation and of 15 percent on
other dividends. The 5 percent rate also applies to the "dividend equivalent amount" of branch profits. Dividends distributed
by U.S. regulated investment companies are taxed at the 15
percent rate and dividends distributed by real estate investment
trusts are taxed at 15 percent in some cases and at the statutory
rate (30 percent) in other cases.
Interest is exempt from tax at source. However, this article
does not limit the tax on excess inclusions with respect to
residual interests in a real estate mortgage investment conduit
(REMIC). Copyright royalties are also exempt from tax at source,
and other royalties are taxable at not more than 10 percent.
The taxation of business profits follows, in most respects,
the rules of the OECD and U.S. Model income tax treaties. However, the definition of a "permanent establishment," which gives
rise to taxation of business income, is modified to include the
furnishing of personal services, such as consultants' services,
-24for more than 9 months in a 12 month period. The UN model
treaty, developed as a guide for treaties between industrial and
developing countries, provides a similar rule, but with a 6 month
threshold. Some other u.s. tax treaties with developing countries also provide such a rule with a threshold period of 3-6
months.
The proposed treaties contain standard rules with respect to
the taxation of capital gains and most income from personal
services. Special rules apply to the personal service income of
entertainers and athletes, who are taxable at source without any
minimum time presence or earnings level unless the visit is
substantially supported by either Government or is made under an
inter-Government arrangement; in the latter two cases the earnings are exempt from tax at source. Relief is provided from the
taxation of certain scholarship grants to visiting students and
researchers and to amounts they receive from abroad to meet
living costs, but not for personal service income. The article
governing the taxation of capital is also standard. It is included to cover possible future property taxes; none of the three
States currently imposes such a tax at the national level.
The new treaties contain the usual limitation on benefits
article and other provisions designed to improve the administration of the treaty, itself, and the tax laws covered by the
treaty, such as the exchange of information and competent authority procedures. They also provide for nondiscrimination in
taxation and ensure a foreign tax credit, subject to the limitations of domestic law.
Barbados Protocol
This Protocol will amend the u.S. income tax convention with
Barbados signed on December 31, 1984. Barbados has taken a new,
and, we believe, highly constructive approach to its tax treaty
policy with capital exporting countries. The most significant
provisions of the Protocol reflect this basic alteration in
Barbadian treaty policy since negotiation of the present Convention in the early 1980's. The Protocol also incorporates a
number of changes in u.S. statutory law and treaty policy since
the Convention was signed in 1984.
At the request of Barbados, the Protocol substantially
reduces withholding taxes on interest and royalties, from a
general rate of 12.5 percent to a general rate of 5 percent. The
dividend Article already reflected the OECD Model rates of 5 and
15 percent on direct and portfolio dividends, respectively.
The Protocol also replaces the Convention's relatively low
thresholds for the presence of a permanent establishment with
much higher thresholds, which are generally consistent with those
in u.s. treaties with other developed countries. For example,
-25the Protocol eliminates the Convention's special 90 day threshold
for the furnishing of services to constitute a permanent establishment, and a similar 120 day threshold for the maintenance of
substantial machinery and equipment. Further, the "limited force
of attraction" rules in the present Convention for the taxation
of business profits, taken from the U.N. Model, will be eliminated, and, thus, bring the Convention into conformity with the
preferred U.s. position. The result is that only business
profits actually attributable to a permanent establishment will
be taxable in the host country.
The Convention will be amended to assure that dividends paid
by non-taxable conduit entities, such as U.s. Regulated Investment Companies and Real Estate Investment Trusts, will not
receive unjustified treaty benefits.
Although the present Convention does not prohibit the
application of the U.s. branch tax, which was enacted subsequent
to the signature of the Convention, it does not provide rules for
its application. The Protocol will include a new article providing for the imposition of a branch tax both in the united states
and Barbados.
The Protocol will replace the anti-treaty-shopping rules in
the present Convention with a more modern set of rules, based on
the recent U.S.-Germany treaty, which will increase the flexibility that may be used in applying the Article. The Protocol is
accompanied by a memorandum of understanding, similar to the
memorandum that accompanied the U.S.-Germany treaty, regarding
the anti-treaty shopping provisions. This memorandum is intended
to provide guidance to taxpayers and to tax administrations as to
the proper interpretation and application of the provisions. The
presence of this comprehensive anti-treaty-shopping provision
assures that Barbadian entities operating in the Barbados offshore sector, thus, enjoying special benefits under Barbados law,
will not be entitled to U.s. benefits under the Convention.
The pending protocol to the tax treaty with Barbados is an
encouraging exception to the normal pattern of treaties with
developing countries. This protocol reflects a fresh look at
these issues by the Government of Barbados. When amended by the
1991 Protocol, the U.S.-Barbados treaty will much more closely
conform to standard U.s. treaty policy, resembling a developed
country treaty rather than one with a developing country. This
change reflects a realization by Barbados that lowering withholding taxes and raising thresholds for the taxation of business
profits will remove impediments to cross-border business activity
that are present in the Convention. Perhaps we will see other
developing countries follow the Barbadian example in the future.
In considering the current treaty with Barbados in 1985, the
Senate attached a reservation to an accumulated earnings tax
-26-
provision which contains an inadvertent drafting error. It was
decided while negotiating the Protocol to incorporate the reservation into the treaty itself by means of the Protocol. In doing
so, we preserved the drafting error. We have explained this
problem to the Barbadian Government, which has agreed that the
signed text of the Protocol does not reflect the intent of the
negotiators on this point. As Barbados has already concluded its
ratification procedures, it has graciously agreed that a Senate
reservation would be the most efficient method of correcting the
text at this point. They have advised us that the Government of
Barbados will agree to such a reservation. We, therefore, would
not object if the provision in question (paragraph 2 of Article
III of the Protocol) were amended, as suggested by the staff of
the Joint committee on Taxation, by means of a Senate reservation, to refer to voting power ~ value, rather than voting
power ~ value.
I am pleased to note that the Government of Barbados has
reviewed our Technical Explanation of the Protocol and has stated
that they regard it, for their purposes, as a correct explanation
of the Protocol.
Let me conclude by urging the Committee, on behalf of the
Administration, to take prompt and favorable action on all of the
Conventions and Protocols before you today. Such action will
send a number of important messages both to our trading partners
and to our business community. It will make clear our intent to
deal bilaterally in a forceful and realistic manner with treaty
abuse. It will expand our economic relations with those countries that have seen significant economic and political changes
in the last several years. Finally, it will demonstrate our
desire to expand the u.S. treaty network with income tax treaties
formulated to enhance the worldwide competitiveness of u.S.
companies.
FOR IMMEDIATE RELEASE
OcrOBER 27, 1993
REMARKS OF FRANK N. NEWMAN
UNDER SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE THE
CFTC CONFERENCE ON OTC DERIVATIVE MARKETS
WASHINGTON, D.C.
It is a pleasure to be here this afternoon to discuss the over-the-counter derivative
markets and their regulation. I would like to thank Sheila Bair and the CITC for
affording me this opportunity to present the Treasury's views on this important topic.
As you know, the issue of risks posed by derivative products is currently a subject
of considerable attention. This should not be surprising due to the rapid growth of the
international market for these innovative instruments, some of which are quite complex.
As a result, a number of studies prepared by different organizations have been
issued in recent years regarding the over-the-counter derivative market. These include
studies prepared by the Bank for International Settlements, the Basle Committee on
Banking Supervision, the Bank of England, Moody's, U.S. banking regulators, and the
Group of Thirty. The Commodity Futures Trading Commission has just released its
study, and the General Accounting Office is currently working on a study which should
be out sometime in the next several months.
Of course, Congress is interested in this subject. As I am sure this audience is
aware, the House Banking Committee is scheduled to hold hearings on derivatives
tomorrow moming. Also, the subject of derivatives is almost certain to be discussed
during the Congressional reauthorization process of the CITC that will take place next
year.
In an important sense, all the studies, conferences, and hearings on derivatives are
welcome. A great deal of useful information has been made available, certain problems
have been identified, and work has been done to resolve these problems. The intense
interest in derivatives also indicates that both the private sector and governmental
entities take seriously their responsibilities with respect to this market.
LB
460
2
However, as useful and productive as all the interest shown in derivatives has
been, there is also a danger of overreaction. We hear it said that these instruments are
too complex and beyond human understanding. Management is letting the "rocket
scientists" in their organizations make heavy bets that put their firms at risk. In different,
and more difficult, market environments, which are coming, we are told, all the
derivative activity, which seems so beneficial now, will prove to be a curse.
It does not help matters that discussions of the size of this market have focused
on notional amounts, and that estimates include numbers as different as $4 trillion and
$7-1/2 trillion. These numbers, of course, are based on different definitions of
derivatives and do not tell us anything about the amount at risk. Short-term derivatives
and long-term derivatives are equally weighted in the calculation, and nothing is
indicated by these numbers about the credit quality of the counterparties or the volatility
of the underlying cash markets.
Rather than being focused on the size of this market, we need to examine how
participants are using over-the-counter derivative products and how their use is affecting
the risk profiles of the participants. In other words, while we recognize that there are
legitimate policy questions, careful analysis is required before we reach the conclusion
that there is something going on here that requires a major legislative response.
As a former banker and as a Treasury official with responsibility for bank
regulatory policy, I would like to make some observations concerning how commercial
banks use the derivative markets.
Let me give four examples of the ways in which commercial banks are involved in
the derivative markets:
•
First, as end users, banks use derivatives to hedge business risk. For
example, a bank with a portfolio of floating rate loans may find it cost
effective to raise long-term funds and enter into a swap in order to create a
synthetic floating rate liability that more closely matches the duration of the
assets it is funding.
•
Second, as dealers, banks enter into swaps as a service to their customers
and to earn fees. For example, a bank with a strong business relationship
with a corporation provides a swap to that firm for a fee to help its customer
hedge a business risk. The bank may in tum layoff the risk from its book of
customer swaps by entering into other swaps or by using the futures markets.
•
Third, banks may enter into swaps with other banks so that one or both of
these banks can create a matched book. For example, a large bank with
customer swaps may layoff some of that risk by entering into a swap with a
3
smaller bank. There may be a sharing of customer fees in this situation, and
the set of transactions is then analogous to a loan syndication.
•
Fourth, banks, even those with no derivative portfolio, act as liquidity
providers to other financial institutions who participate directly in the
derivative markets. An example is a bank that is the primary lender and line
of credit provider to a major investment bank. As that investment bank
enters into the swaps market vigorously, the bank's exposure to the
investment bank's derivative portfolio grows.
These examples indicate the diversity of ways banks can participate in the
derivative markets. The formulation of guidelines, rules, and examination and
supervision procedures has to take into account the risks stemming from the business
strategies of the particular banks involved in the derivative markets. In addition, the
bank regulators have to assess the execution of a bank's derivative business. For
example, what techniques are being used to manage risk? What type of management
and information systems are in place to monitor and control derivatives activities? What
management oversight is there?
Let me turn now to discuss briefly some of the recent activities of the Office of
the Comptroller of the Currency and the Office of Thrift Supervision in the derivatives
area. The OCC has coordinated an informal interagency group consisting of the OCC,
OTS, the FDIC, and the Federal Reserve to discuss procedures for information sharing
among the bank regulators and to discuss regulatory accounting standards for derivatives.
This morning the OCC issued guidelines on risk management for national banks that
engage in derivative transactions. The major elements of the OCC guidelines include
discussion of senior management and board oversight, market risk management, credit
risk management, liquidity risk management, operations and systems risk management,
legal issues, and capital adequacy.
In addition, the OCC is working on guidelines for its bank examiners to use in
examination of banks that engage in derivative transactions either as dealers or end
users. These examiner guidelines will provide further guidance as to safe and sound
procedures for risk management of derivative activities. OCC also has various training
programs concerning derivatives for its bank examiners.
OTS has developed and implemented an interest-rate risk model that can include
derivatives in its assessment of an institution's interest rate risk exposure. Quarterly
reports for individual savings associations of their interest rate risk are provided to the
institutions and to OTS supervisory and examination personnel.
OTS also has developed a reporting form for derivatives that is capable of
distinguishing among nearly 300 different types of off-balance-sheet derivatives. This
4
reporting form was introduced in March, and except for some small, highly-capitalized
institutions, this form must be submitted quarterly by savings associations.
OTS, like OCC, has training programs for its staff. Both agencies are intensively
studying this fast-changing market and developing strategies to meet the supervisory and
regulatory challenges.
These activities should not be taken to imply that derivatives are a crisis waiting
to happen. While I believe that derivatives pose certain challenges to the government in
terms of understanding the sometimes complex instruments and strategies employed, I
think it is important to emphasize that derivatives are both a potentially profitable
activity for financial institutions acting as dealers and a useful risk management tool.
If one looks at some of the actions taken by the government in recent years, we
can conclude that the government has been trying to remove impediments to this market
so that the risk-management and financial innovation potential of derivatives can be
realized.
For example, FIRREA, FDICIA, and the 1990 amendments to the Bankruptcy
Code have addressed issues related to the validity of netting and the avoidance of the
automatic stay of the Bankruptcy Code with respect to many types of derivatives when
certain types of entities become insolvent or file for bankruptcy. The Federal Reserve
has proposed a rule, under the authority granted to it under FDICIA, to broaden the
class of institutions which can benefit from the bilateral and multilateral netting
provisions of that Act.
The Futures Trading Practices Act of 1992 enabled the CFTC to remove legal
uncertainty concerning the applicability of the Commodity Exchange Act to the swaps
market. The CFTC promptly used its new exemptive authority in order to remove the
threat that the Commodity Exchange Act might be interpreted to mean that some swaps
contracts were illegal, and hence unenforceable. This was a very positive and helpful
step. In addition, the CFTC has let it be known that it is willing to consider extending
this exemption from most provisions of the CEA to swaps that are cleared by a
multilateral clearinghouse if a specific application for this is made.
As many in this audience have no doubt appreciated, there were some questions
concerning the tax character of hedging gains and losses under the Supreme Court's
Arkansas Best decision. The IRS has recently clarified this matter in temporary and
proposed regulations. We are aware that the regulations do not resolve all tax-related
hedging questions, but I am sure that most market participants are greatly relieved by
the recent IRS action.
Finally, it should not surprise anyone that the Treasury has had a continuing
interest in a provision of the Commodity Exchange Act known as the ''Treasury
5
Amendment," a provision that was put into the CEA, on the recommendation of the
Treasury Department, in 1974 at the time of the creation of the CFfC as an agency
separate from the Agriculture Department. Without getting into all the nuances and
semantic arguments surrounding this provision, the Treasury Amendment excludes
transactions in foreign currency, government securities, and a list of other instruments
from the provisions of the CEA unless such transactions "involve the sale thereof for
future delivery conducted on a board of trade." The Treasury has a strong interest in the
foreign currency and government security markets. In recent years, we have been
concerned that a narrow reading of the Treasury Amendment could stifle innovation and
have other undesirable impacts on the government securities market, which since 1986
has been subject to regulation under the Government Securities Act.
Consequently, we were pleased with the October 18 Fourth Circuit decision in the
Tauber case, which holds, among other things, that options in foreign currency, whether
exercised or not, are excluded from the provisions of the CEA I would note that the
Treasury Department commented in May 1986 that the Treasury Amendment exempts
certain types of transactions and says nothing about the participants to those transactions.
We indicated at that time, and have since repeated, that we are sympathetic to some of
the concerns that the CFfC might have with respect to contracts that might be offered
to the general public that might be excluded from the CEA by the Treasury Amendment.
In other words, we were not, and are not, in favor of boiler room operations marketing
derivatives in foreign currency to the general public. If there is a problem in this area,
we are happy to work with the CFfC and others toward a legislative solution.
While the government has been removing impediments to the OTC derivative
markets, this should not be taken to mean that there are no areas of concern. Let me
mention some of the challenging issues that these markets pose. As the industry itself
has recognized, there are questions concerning the legal enforceability of contracts,
particularly in cross-border situations, and accounting issues that need to be addressed.
It is not always clear, for example, that netting will be recognized in all
jurisdictions in insolvency situations. Also, as some market participants learned in their
dealings with local councils in the V.I<., it is extremely important to determine that
counterparties have the necessary legal authority to enter into these contracts.
Financial statements have become harder to analyze due to large off-balance
sheet activity. While the bank regulators are working on this issue, accepted accounting
practices need to be developed for participants in this market.
Other concerns are more controversial, such as those revolving around the
potential difficulty of unwinding derivative positions of a firm that is in liquidation or the
systemic risk these instruments may pose for the financial system. As one might be able
to discern from my remarks, based on what we now know, I believe that concerns that
derivatives could perpetrate a financial meltdown are overblown.
6
With respect to the liquidity question, it is possible to conceive of situations where
regulators are constrained in their ability to deal with a failing finn because it has a
large and illiquid derivatives book. Also, the liquidity issue is partly a concern about
price transparency. Accurately pricing these complex and custom-tailored products is in
some cases difficult. As the market develops further, these two concerns related to
liquidity should lessen, but they are issues that need to be thought about. We believe
that dealers who arrange derivative transactions bear responsibility to continue to make
markets and provide pricing information to their customers.
While I think it is premature to make wholesale changes to regulatory structures
in order to deal with derivatives, let me make a few observations concerning the current
regulatory scheme.
First, it is true that there is a group of derivative dealers that are unregulated,
mainly affiliates of investment banking firms. It is reassuring in this respect that the
market has demanded that these affiliates be very well capitalized and have very high
credit ratings. Also, under the Market Reform Act, the SEC is able to obtain financial
information about these unregulated entities in order to determine whether they pose
any risks to the regulated broker-dealer.
Second, the established futures exchanges have been arguing that there should be
a level playing field among those who offer risk shifting instruments. The two major
Chicago exchanges have tossed this issue to the CFfC with proposals for exemptions
from provisions of the CEA for certain futures contracts limited to institutional investors.
We realize that this is a difficult issue and believe that the CFfC in its request
for comments on the futures exchanges' proposals is asking many of the right questions.
However, let me make some observation:; concerning the relationship between the
futures exchanges and the OTC derivative markets.
To a certain extent, the OTC derivative markets and the futures exchanges
compete. The OTC derivative markets have been successful in part because of their
ability to offer custom- tailored products that precisely meet the requirements of end
users, while futures contracts cannot be customized. However, the OTe derivative
markets have also complemented the traditional futures markets. End users that may
not use the futures markets can now go to a commercial or investment bank and get a
customized product that meets their needs. The OTe derivatives dealers may then offset
some of the risk in their derivative book by entering into futures contracts. In a sense,
then, the OTe derivative market serves for some customers a "retail" function, while the
futures markets can be used as a "wholesale" risk management vehicle.
In other words, whatever the eventual decisions on some of the difficult regulatory
questions to which the futures exchanges are pressing for answers, I am sure that they
7
will continue to thrive. They offer exceptional liquidity, transparency, and well-run
clearinghouses, which take away much of the need for credit evaluation that is currently
necessary for participants in the OTC derivative markets.
Third, while I believe that major regulatory change is premature at this point, let
me suggest a possible model for regulation that might be usefully considered at some
future time. A model I have had recent experience with is the one established by the
Government Securities Act of 1986. Under the Government Securities Act model, one
entity makes rules for all brokers and dealers involved in the particular market. These
rules are enforced by the appropriate regulatory agencies, i.e., the bank regulators and
the SEC. OTC derivative dealers are similar to government securities dealers in that
they are currently regulated by various regulatory agencies and some are not subject to
any regulatory agency at all. This latter group is analogous to the unregulated
government securities dealers that existed prior to passage of the Government Securities
Act.
The Treasury believes that the Government Securities Act structure has worked
well. If, at some future time, a change in regulatory structure is considered necessary to
deal with the OTC derivative market, a regulatory approach in some ways similar to the
Government Securities Act model might be usefully considered.
In the meantime, while details need to be worked out, I am happy to join in the
CFfC's recommendation that a mechanism be developed for more and better
interagency coordination with respect to derivatives. We certainly want to work with the
CFfC, the various financial institution regulators, and the SEC to bring this about.
In closing, I want to caution all of us not to fight the last war. The derivative
market is not just the latest investment craze from Wall Street to be guarded against by
vigilant regulators. This market can trace some of its roots, for example, to transactions
in foreign currency that have been around for a very long time. We in the government
need to consider, first, what we need to do to ensure that financial institutions
understand what they are doing when they participate in the derivative markets, and,
second, whether there are additional steps that the government can usefully take so that
derivatives can meet their potential for enhancing the efficiency of financial markets.
While I am not convinced that there is a problem here that demands a large dose of
additional regulation, I do believe that this fast evolving market bears watching, further
study, and a coordinated approach from the existing regulators.
For Release Upon Delivery
Expected at 8:30 A.M. EST
October 27, 1993
STATEMENT OF THE HONORABLE JEFFREY SHAFER
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SENATE COMMITTEE ON FOREIGN RELATIONS
WASHINGTON, D.C.
U.S.-MEXICAN AGREEMENT ON BORDER ENVIRONMENTAL CLEANUP
It is a pleasure to join Deputy Secretary Wharton and Deputy
USTR Yerxa in discussing the NAFTA agreements.
NAFTA offers an historic opportunity to improve our
competitiveness, create new U.S. jobs and develop a strong
partnership with Latin America.
Here's why:
o
NAFTA will create the world's largest market and level a
playing field sharply tilted in Mexico's favor;
o
NAFTA will lock in preferential access for the united States
to its first and third largest trading partners;
o
NAFTA will give us a secure market that offers new
opportunities for Americans to sell to Mexico;
o
NAFTA will create an estimated 200,000 high wage jobs
related to exports to Mexico by 1995;
o
NAFTA will give us special access to the rest of Latin
America -- the second fastest growing region in the world
where demand for U.S. products is escalating rapidly.
What makes NAFTA truly historic is that it is the first
trade agreement to address labor and the environment.
I will
focus my remarks on our recent negotiations with Mexico to
LB-461
- 2 -
improve cooperation and increase financing for border
environmental infrastructure projects. Our agreement offers a
new model for international cooperation at the local level to
design, finance, and build environmental projects to resolve
problems having a direct impact on u.s. citizens. It will also
provide loans or guarantees to help those throughout the United
states and Mexico who are in communities facing NAFTA-related
adjustment.
The problems of raw sewage dumped in boundary waters, unsafe
drinking water, and inadequate municipal waste disposal on both
sides of the border predate NAFTA, and demand resolution. The
NAFTA package offers us the opportunity to assure that they will
be addressed. Failure to pass NAFTA would be a major setback for
both u.s. trade opportunities generally and for environmental
efforts along the border.
Our new agreements will create two new institutions. The
first is a U.s.-Mexican Border Environment Cooperation commission
(BECC) to help coordinate projects and assemble financing
packages. The second is a new U.s.-Mexican North American
Development Bank (NADBank). It will provide financing at minimal
budget cost that will support border environmental infrastructure
projects and NAFTA-related community adjustment and investment
programs.
Border Environment Cooperation Commission
The new coordinating agency will help border states and
communities to design and arrange financing for environmental
infrastructure projects, and oversee the use of the money. It
will give priority initially to wastewater treatment, drinking
water, and municipal waste projects.
The degree of public and local participation will be
unprecedented in an international agreement. Hallmarks of the
agreement include a strong emphasis on state and municipal
government involvement in proposing, and deciding upon,
environmental infrastructure projects in the border area with
transboundary impacts -- and decision-making procedures to ensure
that the views of affected states, local communities, and members
of the public will be fully taken into account. The new
Commission will have a binational Board of Directors with
federal, state and local government, and public representation
It will also have a public advisory council, with members drawn
from the border region. Provision is made in the agreement for
public notice and comment on proposed projects.
The new commission will have no sovereign power of its own.
It can only offer its services to state and local bodies and
assist them in cooperative activities.
-
3 -
Let me illustrate how this new entity would provide valuable
assistance to border communities. If EI Paso should seek to
expand its wastewater treatment facility, it would likely
approach the Border Environment Cooperation commission for
assistance. The BECC would be able to provide EI Paso with
access to considerable expertise in planning, designing,
financing, constructing and operating the facility, and assessing
its economic benefits.
In addition, the BECC would serve as a conduit for improving
coordination among the various groups and jurisdictions on both
sides of the border that have an interest in the results of the
project.
In this example, the BECC would encourage EI Paso to
include its sister city in Mexico, Ciudad Juarez, in the planning
process to help ensure that mutual concerns are addressed and,
where appropriate, economies of scale in design, construction,
and operations are considered.
Once the project is ready for formal review, it will go to
the Advisory council for comment and then on to the Board of
Directors for certification. Each project would have to meet
local environmental requirements. The agreement provides that
project proposals with trans boundary effects should have an
environmental assessment. The public would be able to comment on
all projects prior to board consideration. If the directors
certified that the project met appropriate engineering,
environmental and financial standards, the commission would try
to assemble a financing package from private, public and
international sources. The BECC will try to mobilize private
capital to the maximum extent possible.
Sources of Financing
We want to maximize private sector financing for these
projects, based on local user fees to help service debt, but we
recognize that continued funding from the Mexican and u.s.
governments will be necessary in many cases. We estimate that up
to $8 billion will be needed for border environmental
infrastructure projects over the next decade. We see this coming
from the following sources:
(1)
private financing, and as needed,
(2)
up to $2 billion from existing state and local
programs, including state revolving funds, municipal
revenue bonds, and the colonias program for projects on
the u.S. side of the border;
(3)
$2 billion in new funding from the World Bank and
Inter-American Development Bank, offered as loans to
Mexico;
- 4 -
(4)
approximately $1.4 billion in u.s. and Mexican grants
(half from the united states);
(5)
some $2 billion in loans or guarantees for
environmental infrastructure projects from the NADBank.
NADBank Financing
Creation of the NADBank responds to the need for additional
financing -- both for border environmental projects and for those
anywhere in the nation in communities facing difficulties due to
NAFTA, and who seek credit support in order to undertake
adjustment. We do not expect many displacements as a result of
NAFTA, and few communities will face difficult adjustment. We
are nevertheless committed to providing all the help we can to
workers who are affected by NAFTA, and are extending a similar
commitment to support investment in affected communities, so that
they can have the confidence of knowing measures are in place to
assist them.
The financing structure of the NADBank would mirror that of
the multilateral development banks: this will enable us to
minimize budgetary resources by leveraging paid-in capital into
substantially larger loans and guarantees through borrowing in
the capital markets, backed by u.s. and Mexican callable capital.
Total capital of the NADBank will amount to $3 billion. The
united states and Mexico will provide equal shares of paid-in
capital for the NADBank -- $225 million each, provided over a
period of four years -- for a total of $450 million. Through
market borrowings, we believe we can leverage the paid-in capital
into $2 billion initially and perhaps eventually up to $3 billion
in financing via loans and guarantees. Market borrowings would
be limited to assure a AAA credit rating for the institution.
The paid-in amounts represent 15 percent of the total
capital, which we estimate to be appropriate for this kind of
activity. Callable capital would amount to $2.55 billion; as
with other multilateral development banks, we would not expect it
to be called.
The NADBank would have a six-member board of directors,
composed of three members from the u.s. and three from Mexico,
appointed by the respective Governments. The Board would elect a
Manager to conduct the business of the Bank.
To minimize any new staff requirements, we anticipate that
the NADBank could negotiate a management arrangement with a
multilateral development bank, possibly the Inter-American
Development Bank. It could then draw on the expertise of the
multilateral bank's staff for borrowing in the capital markets
loan administration, and financial evaluation of the projects.'
- 5 -
The bulk of NADBank financing will be available to support
environmental infrastructure projects. NADBank loans and
guarantees will backstop any shortfall in private sector
financing to make certain projects can be completed.
Environmental projects financed by NADBank would require
certification by the Border Environment Cooperation Commission.
Ten percent of the u.s. and Mexican capital would be
reserved for NAFTA-related community adjustment and investment in
the u.s. and Mexico. Community adjustment and investment
financing on the u.s. side would be funneled through existing
government sponsored credit programs targetting special help for
those in u.s. communities particularly affected by NAFTA.
We expect that the program could generate at least $200
million in community adjustment financing through loans and
guarantees on the u.s. side. A special advisory and review
committee, including representatives of low-income communities
and other private representatives, would provide advice on loan
guidelines and community adjustment issues.
The cost to the United states for generating up to $3
billion in loans and guarantees is expected to be only $56
million annually over four years. That's significant leveraging.
While we expect loan charges and investments to defray
administrative costs for the financing facility, some small
additional costs -- perhaps $5 million a year for each country -would be incurred for operating expenses for the Border
Environment Cooperation commission. The price is a small one to
help assure clean, safe water in the border area, and support for
communities affected by NAFTA even outside the border area.
Conclusion
Let me close by saying that we have put considerable effort
into developing an agreement with measures that address border
region environmental infrastructure problems. We have consulted
closely with the border states and cities, with key members of
Congress, and with national and local environmental groups. We
believe the agreement we have negotiated reflects their
interests, and offers a new model for international cooperation
at the local level.
It is an important complement to the NAFTA
agreement.
We have a window of opportunity to help Americans and
Mexicans in the border region undertake joint environmental
commitments. Your support for the NAFTA package is essential to
turn that opportunity into reality.
For Release Upon Delivery
Expected at 3:00 P.M. EST
October 27, 1993
STATEMENT OF THE HONORABLE JEFFREY SHAFER
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT, FINANCE,
TRADE AND MONETARY POLICY
WASHINGTON, D.C.
U.S.-MEXICAN AGREEMENT ON BORDER ENVIRONMENTAL CLEANUP
It is a pleasure to testify before this Subcommittee on the
NAFTA agreements.
NAFTA offers an historic opportunity to improve our
competitiveness, create new U.S. jobs and develop a strong
partnership with Latin America.
Here's why:
o
NAFTA will create the world's largest market and level a
playing field sharply tilted in Mexico's favor;
o
NAFTA will lock in preferential access for the united States
to its first and third largest trading partners;
o
NAFTA will give us a secure market that offers new
opportunities for Americans to sell to Mexico;
o
NAFTA will create an estimated 200,000 high wage jobs
related to exports to Mexico by 1995;
o
NAFTA will give us special access to the rest of Latin
America-- the second fastest growing region in the world-where demand for U.S. products is escalating rapidly.
What makes NAFTA truly historic is that it is the first
trade agreement to address labor and the environment. I will
focus my remarks on our recent negotiations with Mexico to
LB-462
- 2 -
improve cooperation and increase financing for border
environmental infrastructure projects. Our agreement offers a
new model for international cooperation at the local level to
design, finance, and build environmental projects to resolve
problems having a direct impact on u.s. citizens. It will also
provide loans or guarantees to help those throughout the united
states and Mexico who are in communities facing NAFTA-related
adjustment.
The problems of raw sewage dumped in boundary waters, unsafe
drinking water, and inadequate municipal waste disposal on both
sides of the border predate NAFTA, and demand resolution. The
NAFTA package offers us the opportunity to assure that they will
be addressed. Failure to pass NAFTA would be a major setback for
both u.s. trade opportunities generally and for environmental
efforts along the border.
Our new agreements will create two new institutions. The
first is a U.s.-Mexican Border Environment Cooperation commission
(BECC) to help coordinate projects and assemble financing
packages. The second is a new U.s.-Mexican North American
Development Bank (NADBank). It will provide financing at minimal
budget cost that will support border environmental infrastructure
projects and NAFTA-related community adjustment and investment
programs.
Border Environment Cooperation commission
The new coordinating agency will help border states and
communities to design and arrange financing for environmental
infrastructure projects, and oversee the use of the money. It
will give priority initially to wastewater treatment, drinking
water, and municipal waste projects.
The degree of public and local participation will be
unprecedented in an international agreement. Hallmarks of the
agreement include a strong emphasis on state and municipal
government involvement in proposing, and deciding upon,
environmental infrastructure projects in the border area with
trans boundary impacts -- and decision-making procedures to ensure
that the views of affected states, local communities, and members
of the public will be fully taken into account. The new
Commission will have a binational Board of Directors with
federal, state and local government, and public representation
It will also have a public advisory council, with members drawn
from the border region. Provision is made in the agreement for
public notice and comment on proposed projects.
The new commission will have no sovereign power of its own.
It can only offer its services to state and local bodies and
assist them in cooperative activities.
-
3 -
Let me illustrate how this new entity would provide valuable
assistance to border communities. If EI Paso should seek to
expand its wastewater treatment facility, it would likely
approach the Border Environment Cooperation commission for
assistance. The BECC would be able to provide EI Paso with
access to considerable expertise in planning, designing,
financing, constructing and operating the facility, and assessing
its economic benefits.
In addition, the BECC would serve as a conduit for improving
coordination among the various groups and jurisdictions on both
sides of the border that have an interest in the results of the
project. In this example, the BECC would encourage EI Paso to
include its sister city in Mexico, Ciudad Juarez, in the planning
process to help ensure that mutual concerns are addressed and,
where appropriate, economies of scale in design, construction,
and operations are considered.
Once the project is ready for formal review, it will go to
the Advisory Council for comment and then on to the Board of
Directors for certification. Each project would have to meet
local environmental requirements. The agreement provides that
project proposals with transboundary effects should have an
environmental assessment. The public would be able to comment on
all projects prior to board consideration. If the directors
certified that the project met appropriate engineering,
environmental and financial standards, the commission would try
to assemble a financing package from private, public and
international sources. The BECC will try to mobilize private
capital to the maximum extent possible.
Sources of Financing
We want to maximize private sector financing for these
projects, based on local user fees to help service debt, but we
recognize that continued funding from the Mexican and u.S.
governments will be necessary in many cases. We estimate that up
to $8 billion will be needed for border environmental
infrastructure projects over the next decade. We see this coming
from the following sources:
(1)
private financing, and as needed,
(2)
up to $2 billion from existing state and local
programs, including state revolving funds, municipal
revenue bonds, and the colonias program for projects on
the u.S. side of the border;
(3)
$2 billion in new funding from the World Bank and
Inter-American Development Bank, offered as loans to
Mexico;
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(4)
approximately $1.4 billion in u.s. and Mexican grants
(half from the United states);
(5)
some $2 billion in loans or guarantees for
environmental infrastructure projects from the NADBank.
NADBank Financing
Creation of the NADBank responds to the need for additional
financing -- both for border environmental projects and for those
anywhere in the nation in communities facing difficulties due to
NAFTA, and who seek credit support in order to undertake
adjustment. We do not expect many displacements as a result of
NAFTA, and few communities will face difficult adjustment. We
are nevertheless committed to providing all the help we can to
workers who are affected by NAFTA, and are extending a similar
commitment to support investment in affected communities, so that
they can have the confidence of knowing measures are in place to
assist them.
The financing structure of the NADBank would mirror that of
the multilateral development banks: this will enable us to
minimize budgetary resources by leveraging paid-in capital into
substantially larger loans and guarantees through borrowing in
the capital markets, backed by U.s. and Mexican callable capital.
Total capital of the NADBank will amount to $3 billion. The
United states and Mexico will provide equal shares of paid-in
capital for the NADBank -- $225 million each, provided over a
period of four years -- for a total of $450 million. Through
market borrowings, we believe we can leverage the paid-in capital
into $2 billion initially and perhaps eventually up to $3 billion
in financing via loans and guarantees. Market borrowings would
be limited to assure a AAA credit rating for the institution.
The paid-in amounts represent 15 percent of the total
capital, which we estimate to be appropriate for this kind of
activity. Callable capital would amount to $2.55 billion; as
with other multilateral development banks, we would not expect it
to be called.
The NADBank would have a six-member board of directors,
composed of three members from the U.s. and three from Mexico,
appointed by the respective Governments. The Board would elect a
Manager to conduct the business of the Bank.
To minimize any new staff requirements, we anticipate that
the NADBank could negotiate a management arrangement with a
multilateral development bank, possibly the Inter-American
Development Bank. It could then draw on the expertise of the
multilateral bank's staff for borrowing in the capital markets,
loan administration, and financial evaluation of the projects.
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The bulk of NADBank financing will be available to support
environmental infrastructure projects. NADBank loans and
guarantees will backstop any shortfall in private sector
financing to make certain projects can be completed.
Environmental projects financed by NADBank would require
certification by the Border Environment Cooperation Commission.
Ten percent of the U.S. and Mexican capital would be
reserved for NAFTA-related community adjustment and investment in
the U.S. and Mexico. Community adjustment and investment
financing on the U.S. side would be funneled through existing
government sponsored credit programs targetting special help for
those in U.S. communities particularly affected by NAFTA.
We expect that the program could generate at least $200
million in community adjustment financing through loans and
guarantees on the U.S. side. A special advisory and review
committee, including representatives of low-income communities
and other private representatives, would provide advice on loan
guidelines and community adjustment issues.
The cost to the United States for generating up to $3
billion in loans and guarantees is expected to be only $56
million annually over four years. That's significant leveraging.
While we expect loan charges and investments to defray
administrative costs for the financing facility, some small
additional costs -- perhaps $5 million a year for each country -would be incurred for operating expenses for the Border
Environment Cooperation Commission. The price is a small one to
help assure clean, safe water in the border area, and support for
communities affected by NAFTA even outside the border area.
Conclusion
Let me close by saying that we have put considerable effort
into developing an agreement with measures that address border
region environmental infrastructure problems. We have consulted
closely with the border states and cities, with key members of
Congress, and with national and local environmental groups. We
believe the agreement we have negotiated reflects their
interests, and offers a new model for international cooperation
at the local level. It is an important complement to the NAFTA
agreement.
We have a window of opportunity to help Americans and
Mexicans in the border region undertake joint environmental
commitments. Your support for the NAFTA package is essential to
turn that opportunity into reality.
Thank you.
SUMMARY OF 1'HE AGREEMENT EST ADLISmNG
THE BORDER ENVIRONMENT COOPERATION COMMISSION
AND THE NORm AMERICAN DEVEWPMENT BANK
The Governments of Mexico and the United states have agreed
on arrangements to assist communities on both sides of the border
in coordinating and carrying out environmental infrastructure
projects.
The new agreement furthers the goals of the North
American Free Trade Agreement and the North American Agreement on
Environmental Cooperation.
The governments will establish two institutions:
1)
a North American Development Bank (NADBank),
capitalized in equal shares by the united states and
Mexico, that will provide some $2 billion or more in
new financing to supplement existing sources of funds
and foster the expanded participation of private
capital; and
2)
a Border Environment cooperation commission (BECC) to
assist local communities and other sponsors in
developing and implementing environmental
infrastructure projects, and to certify projects for
NADBank financing.
The agreement provides up to 10 per cent of the NADBank
capital to be used for community adjustment and investment
programs in support of the purposes of the NAFTA.
The new agreement represents a significant additional
commitment by Mexico and the United states to implement effective
solutions to the environmental problems in the border region.
It
embodies the basic principles for coordinating and financing
environmental infrastructure projects set forth by the two
governments during their meeting on environmental cooperation in
August, 1993. The two new institutions will help marshall
resources from all sources, both public and private, to solve the
environmental problems of the border region. The agreement is
contingent on the entry into force of the North American Free
Trade Agreement.
BORDER ENVIRONMENT COOPERATION COMMISSION
The Border Environment Cooperation Commission (BECC) will
work with the affected states and local communities and nongovernmental organizations in developing effective solutions to
environmental problems in the border region.
The BECC will provide technical and financial planning
assistance for environmental infrastructure projects so as to
enhance the environment in the border region for the well-being
of the people. The BECC will not itself develop or manage
projects. Rather, it will assist, with their concurrence, states
and localities and private investors proposing environmental
infrastructure projects in:
o
coordinating environmental infrastructure projects;
o
preparing, developing, and implementing projects;
o
assessing their technical and financial feasibility;
o
evaluating social and economic benefits; and
o
arranging public and private financing for projects.
The BECC will certify projects to the NADBank and may do so
for other financial institutions that elect to use the
certification of the Commission. The BECC may certify any
project that meets the technical, environmental, and financial
criteria applied by it. To be eligible for certification,
projects shall observe the environmental laws for the place where
the project is to be located or carried out.
For a project with significant transboundary effects, an
environmental assessment shall be presented and the Board shall
determine, in consultation with affected states and localities,
that the project meets the necessary conditions to achieve a high
level of environmental protection for the affected area.
This Commission has no sovereign power.
It can only offer
its services to state and local bodies and assist them in
cooperative activities.
The BECC and the International Boundary and Water Commission
will cooperate with each other in planning, developing, and
carrying out border sanitation and other environmental
activities.
The BECC will have a binational Board of Directors and
decision-making procedures structured to ensure that the views of
affected states, local communities, and members of the public
will be fully taken into account.
o
Each country shall have five members on the Board of
Directors with environmental, engineering, economic or
financial expertise, as follows:
the senior environmental official (the Administrator of
the Environmental Protection Agency for the United
States and the Secretario de Desarollo Social for
Mexico);
the commissioner of the International Boundary and
Water Commission;
a representative from a border state;
a representative from a locality in the border region;
a member of the public who resides in the border
region.
o
The Commission will be required to consult with an Advisory
Council of 18 members--nine from each country--that will
include representatives of state or local governments or
community groups from each of the border states, and members
of the public, including nongovernmental organizations.
o
The Commission will establish procedures for public
participation, including written notice and opportunity to
comment on general guidelines and on applications for
certification of projects. The Commission's annual report
will be made available to the public.
The BECC can mobilize sources of financing for environmental
infrastructure projects from:
o
the North American Development Bank;
o
direct government support, such as grants, loans, and
guarantees from federal, state and local governments; or
o
the private sector.
The BECC will seek to mobilize private capital to the maximum
extent possible in order to leverage government financing.
Arrangements for servicing the debt will encourage reliance on
fees paid by those causing pollution and those benefitting from
the improved environment.
NORTH AMERICAN DEVELOPMENT BANK
The North American Development Bank (NADBa.~) will be
capitalized and governed by the two countries. Its purpose is to
finance projects certified by the Border Environment cooperation
commission. Based on its capitalization, it is envisaged that
the Bank will be able to make some $2 billion or more in loans
and guarantees, with an upper limit of $3 billion.
The Bank will use its own capital (contributed equally by
the United states and Mexico), funds raised by it in the
financial markets, and other available resources to:
1)
2)
finance public and private investment in environmental
infrastructure projects; and
encourage and supplement private investment in
environmental infrastructure projects.
The Bank will be governed by a six-member board, with an
equal number of representatives from each country. The Bank will
evaluate the financial feasibility of projects certified by the
BECC and provide financing as appropriate.
Initial paid-in capital will be $450 million, with callable
capital of $2.55 billion.
The united States and Mexico also have agreed that up to 10
per cent of the resources of the Bank will be made available, on
an equal basis, for community adjustment and investment programs
in both countries, which need not be in the border region. Each
government will develop criteria and procedures for directing
these resources through existing government programs.
The NADBank is intended to supplement existing sources of
financing.
It will support, not impair, the ability of
governments and investors to seek financing from other
institutions.
DEPARTMENT OF THE TREASURY
WASHINGTON
I
FACT SHEET ON THE U.S.IMEXICAN AGREEMENT ON
THE BORDER ENVIRONMENT COOPERATION COMMISSION (BECC) AND
THE NORTH AMERICAN DEVEW~ )lANK (NADBANK)
Final agreement has been reached with the Mexican Government on new binational
mechanisms to facilitate border environmental clean-up and to provide additional support for
community adjustment and investment related to NAFfA. This agreement, reached after months
of negotiations, ensures that the United States and Mexico will work together to address the
environmental problems that plague the border region between our two countries. Special
priority will be placed initially on wastewater treatment, water pollution, and municipal waste
problems. Two new organizations will be created:
(I)
A Border Environment Cooperation Commission to assist border states and local
communities in coordinating, designing, and financing environmental infrastructure
projects with cross-border impact. The degree of local and public participation will be
unprecedented, including strong representation on the Commission's Board of Directors
and Advisory Council, as well as public notification and comment on proposed projects.
(2)
A North American Development Bank (NADBank) to provide $2 - 3 billion in financing
for both border environmental projects and, more broadly within the U.S., for NAFfArelated community adjustment and investment. The U.S. and Mexico will each provide
$225 million in paid-in capital over a 4-year period to leverage financing. Ten percent
of the U. S. and the Mexican shares of the NADBank will be available for community
adjustment and investment. The U.S. shares should generate at least $200 million in
financing by complementing existing small and rural business assistance programs.
The binational agreement reflects an unprecedented degree of local involvement and
public comment for border projects. It will help to maximize private sector financing and
minimize the budget cost to the U.S. Government. The new accord underscores how NAFfA
has fostered a new level of cooperation on the environment between our two countries.
Border Enviropment Cooperation Commission
The Border Environment Cooperation Commission (BECC) will work with the affected
states and local communities and non-governmental organizations in developing effective
solutions to environmental problems in the border region. The BECC will certify projects to
the NADBank and other financial institutions. To be eligible, projects must observe the
environmental laws for the place where the project is to be located or carried out. For a project
with significant transboundary effects, an environmental assessment shall be presented and the
Board shall determine, in consultation with affected states and localities, that the project meets
the necessary conditions to achieve a high level of environmental protection for the affected area.
The BECC will have a binational Board of Directors and decision-making procedures
structured to ensure that the views of affected states, local communities, and members of the
public will be fully taken into account. Each country shall have five members on the Board of
Directors: the senior environmental official; the commissioner of the International Boundary and
2
Water Commission; a representative from a border state; a representative from a locality in the
border region; and a member of the public who resides in the border region. The Commission
will be required to consult with an Advisory Council of 18 members-nine from each countrythat will include representatives of state or local governments or community groups from each
of the border states, and members of the public, including nongovernmental organizations. The
Commission will establish procedures for public participation, including written notice and
opportunity to comment on general guidelines and on applications for certification of projects.
The BECC will seek to mobilize private capital to the maximum extent possible in order
to leverage government financing. Arrangements for servicing the debt will encourage reliance
on fees paid by those causing pollution. The BECC can mobilize sources of financing for
environmental infrastructure projects from the -North American Development Bank; direct
government support, such as grants, loans, and guarantees from federal, state and local
governments; and the private sector.
North American DeyeJopment Bank <NADBankl
The North American Development Bank (NADBank) will be capitaHU'.<i and governed
by the two countries. Its purpose is to finance projects certified by the Border Environment
Cooperation Commission, and provide support for community adjustment and investment. The
NADBank's capital shares ($450 million of paid-in capital and $2.55 billion of callable capital)
will be contributed equally by the United States and Mexico. It is envisaged that the Bank will
be able to make some $2 billion or more in loans and guarantees, with an upper limit of $3
billion. The Bank will be governed by a six-member board, with an equal number of
representatives from each country. The Bank will evaluate the financial feasibility of projects
certified by the BECC and provide financing as appropriate.
The United States and Mexico also have agreed that up to 10 per cent of the resources
of the Bank will be made available, on an equal basis, for community adjustment and investment
in both countries, which need not be in the border region. The United States will implement
the program by tapping into existing federal credit programs, such as the Small Business
Administration's Section 7(a) loan guarantee program and the Rural Development
Administration's Business and Industrial Loan Guarantee program. Pursuant to an agreement
with NADBank, a participating federal agency will issue and administer loans or guarantees on
behalf of the NADBank to borrowers meeting both that agency's lending criteria and additional
criteria reflecting the purposes of the community adjustment and investment window. The
NADBank will transfer money (up to $22.5 million of its paid-in capital) to participating federal
agencies to pay the subsidy costs and, if appropriate, other costs of this program.
The U. S. community adjustment window is designed to ensure broad public participation.
An Advisory Committee, that will include low income community representatives and nongovernment organizations, will be created to provide advice on critical issues and the program's
guidelines. Through appointment of an ombudsman, the program will establish procedures for
responding to the public and providing independent inspection of the operations of the window.
FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m. EDT
October 27, 1993
STATEMENT OF
SAMUEL Y. SESSIONS
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
Mr. Chairman and members of the Committee, I am pleased to
be here today to discuss the proposed bilateral tax treaty with
Mexico. The proposed income tax convention with Mexico is a new
convention. It will bring Mexico into the U.S. network of tax
treaties for the first time and will secure the United States a
place in the impressive network of bilateral tax treaties that
Mexico has negotiated with over a dozen countries since the
beginning of the Salinas administration. It will significantly
complement the existing agreement between the U.S. and Mexico on
the exchange of tax information, signed on November 9, 1989,
which is already being used by both countries to improve
compliance with domestic tax laws.
Like the other proposed treaties under consideration today,
the proposed treaty with Mexico limits the tax that may be
applied at source on cross-border payments of dividends,
interest, and royalties. At present, the limitations on the
rates applicable to dividends generally would affect only
dividends paid from a United States company. Under Mexico's
integrated corporate and personal tax on distributed profits,
there is no tax on dividends at the shareholder level.
More specifically, the treaty would limit to 5 percent the
rate of source country tax that may be imposed when a company
resident in one country pays a dividend to a company resident in
the other country, if the recipient is a 10 percent or more
shareholder (these are called "direct investment dividends").
The same 5 percent limit applies to the tax on the "dividend
equivalent amount" of branch profits. other dividends are
subject to a tax of not more than 15 percent at source during the
first five years that the dividend article is in_effect and to a
LB-463
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2 -
tax of 10 percent thereafter. The 10 percent rate was part of a
negotiated package that included the rates on other types of
investment income and on the treatment of the Mexican assets tax.
Therefore, although it is somewhat lower than the rate on
portfolio dividends in other u.s. treaties, it would not be
appropriate to draw any conclusions about future treaty policy
from this rate. Moreover, the limitation on benefits article is
detailed and comprehensive and, together with the fact that
Mexico has significant taxes of its own, should effectively
forestall abusive use of the treaty by residents of a third
country whose treaty with the u.s. (if one exists at all)
provides higher rates for portfolio dividends. Like the other
tax treaties under consideration today, this treaty reflects u.s.
policy with respect to dividends paid by u.s. investment entities
(RICs and REITs) .
Under a "most favored nation" clause, if the u.s. agrees in
a treaty with another country to impose a rate of less than 5
percent on direct investment dividends, that same rate would
apply to direct dividends paid by a U.s. company to a Mexican
company. Any treaty that triggers this MFN provision WOUld, of
course, be presented to the Senate for ratification, and the
Senate would have an opportunity at that point to consider the
prudence of extending a lower rate not only to the new treaty
partner but to Mexico as well.
The proposed treaty limits source tax on interest to a
maximum rate of 10 percent when the interest is paid on loans by
banks and insurance companies or on publicly traded securities.
In other cases, the maximum tax at source is 15 percent.
(However, the treaty retains the u.s. statutory rate on the
excess inclusion with respect to a residual interest in a real
estate mortgage investment conduit (REMIC) and permits Mexico to
retain its statutory tax in analogous cases.) After five years,
the 10 percent rate applicable to banks, insurance companies, and
publicly-traded debt will decline to 4.9 percent, and the general
15 percent rate will decline to 10 percent in the cases of
interest paid by banks and interest on certain sales of machinery
and equipment on credit. The rate will remain at 15 percent on
other interest. The rate applicable to the excess interest of
branches will be 10 percent for the first five years and then 4.9
percent.
The taxation of cross-border interest was one of the most
contentious issues in the negotiations. The 4.9 percent rate is
also part of the package of mutual compromises, referred to
above, on the withholding rates applicable to dividends,
interest, and royalties and on the treatment of Mexico's assets
tax. It reflects an inherent tension in balancing Mexico's
concerns about revenue loss with the interest of attracting u.s.
lenders, and the u.s. interest in making u.s. lenders competitive
in Mexico while advancing its preference for exemption of
-
3 -
interest at source. The 4.9 percent rate will permit a bank to
include interest earned on loans into Mexico with other foreign
source income from its active business for purposes of computing
the foreign tax credit limitation, rather than isolating the
Mexican source interest in the separate high withholding tax
category. We think the 4.9 percent is a reasonable result given
the particular issues in this case, but we do not view it as
precedential.
The treaty permits a maximum tax at source of 10 percent on
royalties. For this purpose royalties are defined to include
film rentals and equipment rentals. However, the leasing of
containers is exempt from tax at source under the article dealing
with international transportation income.
The treaty's provisions with respect to the taxation of
business profits and personal services income are similar to
those in other recent u.s. income tax treaties. The business
profits rules adopt some aspects of the U.N. Model treaty in
expanding the circumstances in Which there may be taxation of
business profits at source beyond the circumstances typical in
treaties between countries of comparable industrial development.
For example, a construction site or drilling rig is considered a
permanent establishment after 6 months, rather than a year, and
profits of a home office from sales of goods similar to those
sold through its permanent establishment may be attributed to
that permanent establishment.
The treatment of business profits and the package of
withholding rates reflect Mexico's status as a country that is
emerging as a developed country but that still is less developed
than the united States. Thus, as in u.s. treaties with other
such countries, the withholding rates are higher than those in
the u.s. model. Mexico agreed to lower rates to advance its
interest in attracting u.s. capital and technology but needed to
preserve a positive rate of tax on payments of interest and
royalties because of its revenue interest in source-based
taxation.
An important and unique feature of this treaty is that it
ensures that the Mexican assets tax will not nullify the treaty's
income tax benefits. In Mexico, the income tax is credited
against the asset tax liability. Thus, in the absence of special
rules, the treaty's reduction or elimination of income tax could
be offset by a higher asset tax. Special rules are provided in
the Protocol to prevent that result.
The treaty provides reciprocal recognition by Mexico and the
United states of each other's tax-exempt organizations, both for
purposes of exempting the organization from tax on its income and
for purposes of allowing deductions to persons contributing to
such organizations. Mexico's rules and regulations are closely
- 4 -
patterned on those of the united states, and close administrative
cooperation will permit monitoring the application of those
policies. These factors, along with the unique position of
Mexico as a neighboring country, supported the decision to
facilitate cross-border philanthropy. The United States
competent authority will remain integrally involved in the
administration of this provision and is given the right to deny
an exemption in a specific case where it would be inappropriate,
after conSUltation with the competent authority of Mexico.
Like all other recent U.s. tax treaties, this treaty contains provisions limiting its benefits to residents of the two
countries who meet certain standards. In this case, although to
a lesser extent than in the treaty with the Netherlands, those
standards are modified to take into account the economic flows
anticipated in the proposed free trade area. If the NAFTA is in
effect, for purposes of claiming a lowered treaty withholding
rate on a cross-border payment of dividends, interest, branch tax
or royalties, a Mexican or U.s. company may satisfy the ownership
and base erosion tests in the limitation on benefits provision by
taking into account ownership by, and payments to, residents of
Canada (or, in the future, any other NAFTA country), provided
that the maximum rate provided in the U.S.-Mexico treaty is not
more favorable than the comparable rate in a treaty between the
recipient's residence country and Canada. This provision is
referred to as giving "derivative benefits." Similarly, a
Mexican or U.S. company that is partly owned by a publicly traded
Canadian company may qualify for the lowered withholding rates in
the U.S.-Mexico treaty as well as for other treaty benefits.
We believe that the circumstances in which Canadian
ownership is relevant are administrable, reasonably limited, and
will be an important component of any future trade relationship.
The ability of a Canadian to obtain "derivative benefits" through
a Mexican company is circumscribed both by the requirement that
the company have a minimum level of Mexican and U.S. ownership
and by the base erosion limitations. Moreover, the Canadian
owners will not be able in any event to obtain, through the
derivative benefits provision, lower withholding rates than they
would have enjoyed under the U.S.-Canada treaty were they to
invest directly in the United states. With respect to expansion
of the publicly-traded test to give benefits to a company owned
in part by a publicly-traded Canadian company, the requirement
that the Canadian owner itself be publicly-traded embodies a
treaty shopping antidote: our more recent limitation on benefits
provisions typically contain a safe harbor for residents of a
treaty country that are themselves publicly-traded.
Like the treaty with the Netherlands, the Mexican treaty
builds upon the German treaty by providing for the possibility of
binding arbitration. The provision will only enter into force,
however, following an exchange of diplomatic notes that will
- 5 -
itself follow a period of experience with the German arbitration
provision and a determination that arbitration offers a
practical, workable back-up to the traditional competent
authority mechanism for international bilateral dispute
resolution. Also like the proposed treaty with the Netherlands
(and the pending protocol with Israel), the treaty with Mexico
acknowledges the possibility of treaty overrides and requires
competent authority consultation to restore the balance of treaty
benefits as appropriate •. We believe this provision is an
appropriate mechanism for dealing with overrides, should they
arise.
Like the other treaties before you today, the proposed
treaty with Mexico adheres to the arm's length standard for
transfer pricing. Mexico, in developing its treaty network, has
brought itself fully into an international context in which the
arm's length standard prevails. Thus, although we have never
before signed a tax treaty with Mexico, Mexico does have a vested
interest in adherence to this standard. As long as the arm's
length standard remains the international norm, it is in the
interest of Mexico, as well as the united States, to adhere to .
it. Failure to do so will result in unrelieved double taxation
and, in extreme cases, to avoidance of taxation.
The treaty contains the usual guarantees of nondiscrimination in taxation and of relief from double taxation. It also
includes the standard provisions for enforcing the provisions of
the treaty and of the domestic laws covered by the treaty.
On balance, the new treaty with Mexico represents a package
of concessions that is fair to both sides and should contribute
to strengthening both economies.
Text as Prepared for Delivery
For Immediate Release
October 27, 1993
REMARKS OF TREASURY SECRETARY LLOYD BENTSEN
NAFfA ENDORSEMENT ANNOUNCEMENTS
WASHINGTON, D.C.
Good afternoon. I'll keep my remarks brief. I'm not about to stand in the way of
anyone who wants to say something nice about NAFfA
A few weeks ago the president reasserted his strong support for NAFfA in a
ceremony in the East Room with Presidents Carter, Bush and Ford. He showed real
leadership in stepping out on NAFfA He knew there was organized opposition, but he
knew that he had to move the country aggressively into the 21st Century. He knows we
cannot afford to turn the clock back to our protectionist past. And he knows that with
the environmental side agreement and new North American Development Bank to help
finance environmental cleanup and community adjustment, NAFfA is an example of
leadership in protecting our environment.
There are leaders in this room today, leaders who share the president's vision.
They know that NAFfA is about growth, positive change and increased opportunities for
all Americans. NAFfA will create jobs, improve the environment, and better position
the United States to compete with the EC and Japan in the global marketplace.
Esteban Torres is a leader in his community and in Congress. He once
campaigned, I understand, on the slogan "from autoworker to ambassador -- the
American Dream." He has put this experience to work as a positive force with the
administration on NAFTA
We are also fortunate to be joined by leaders of the Latino community. Raul
Yzaguirre is the voice of La Raza fighting for communities around the country on behalf
of social and economic justice. Antonia Hernandez, as president of the Mexican
American Legal Defense and Education Fund, has been doing outstanding work
protecting the rights of Anerica's 16 million Hispanics. And Andy Hernandez is an old
friend. His organization, the Southwest Voter Research Institute, has been a progressive
voice for change in the region of the country I know so well.
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Justin Ward will also discuss the Natural Resources Defenlie Council's views
regarding NAFfA in light of some recent developments regarding the environmental
agreement with the Mexican government.
We all approach NAFfA from different perspectives but have reached the same
conclusion. NAFfA is about the future -- a future of growth and opportunity for all
Americans.
Let me now ask my friend Esteban Torres to say a few words.
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AD REFERENDUM TEXT 10/22/93
AGREEMENT BETWEEN THE
GOVERNMENT OF THE UNITED STATES OF AMERICA AND
THE GOVERNMENT OF THE UNITED MEXICAN STATES
CONCERNING THE ESTABLISHMENT OF A
BORDER ENVIRONMENT COOPERATION COMMISSION
AND A NORTH AMERICAN DEVELOPMENT BANK
2
The Government of the United states of America and the Government
of the united Mexican states (lithe Parties"):
Convinced of the importance of the conservation, protection and
enhancement of their environments and the essential role of
cooperation in these areas in achieving sustainable development
for the well-being of present and future generations;
Recognizing the bilateral nature of many transboundary
environmental issues, and that such issues can be most
effectively addressed jointly;
Acknowledging that the border region of the united states and
Mexico is experiencing environmental problems which must be
addressed in order to promote sustainable development;
Recognizing the need for environmental infrastructure in the
border region, especially in the areas of water pollution,
wastewater treatment, municipal solid waste, and related matters;
Affirming that, to the extent practicable, environmental
infrastructure projects should be financed by the private sector,
but that the urgency of the environmental problems in the border
region requires that the Parties be prepared to assist in
supporting these projects;
Affirming that, to the extent practicable, environmental
infrastructure projects in the border region should be operated
and maintained through user fees paid by polluters and those who
benefit from the projects, and should be subject to local or
private control;
Noting that the International Boundary and Water Commission,
established pursuant to the Treaty between the united states and
Mexico Relating to utilization of Waters of the Colorado and
Tijuana Rivers and of the Rio Grande, signed at Washington
February 3, 1944, plays an important role in efforts to preserve
the health and vitality of the river waters of the border region;
Recognizing that there is a need to establish a new organization
to strengthen cooperation among interested parties and to
facilitate the financing, construction, operation and maintenance
of environmental infrastructure projects in the border region;
Affirming the desirability of encouraging increased investment in
the environmental infrastructure in the border region, whether or
not such investment is made under the auspices of this Agreement;
3
convinced of the need to collaborate with states and localities,
non-governmental organizations, and other members of the public
in the effort to address environmental problems in the border
region;
seeking to assist community adjustment and investment in the
united states and Mexico;
Reaffirming the importance of the environmental goals and
objectives embodied in the Agreement on Cooperation for the
Protection and Improvement of the Environment in the Border Area,
signed at La Paz, Baja California Sur August 14, 1983; and
wishing to follow upon the goals and objectives of the North
American Free Trade Agreement, signed at Washington, ottawa, and
Mexico December 8, 11, 14, and 17, 1992, and the North American
Agreement on Environmental Cooperation, signed at Mexico,
Washington, and ottawa September 8, 9, 12, and 14, 1993;
Have agreed as follows:
INTRODUCTORY ARTICLE
The Parties agree to establish the Border Environment
Cooperation commission and the North American Development Bank,
which shall operate in accordance with the following provisions:
CHAPTER I
BORDER ENVIRONMENT COOPERATION COMMISSION
Article I
PURPOSE AND FUNCTIONS
section 1.
Purpose
(a) The purpose of the Commission shall be to help
preserve, protect and enhance the environment of the border
region 1n order to advance the well-being of the people of the
United States and Mexico.
(b) In carrying out this purpose, the Commission shall
cooperate as appropriate with the North American Development Bank
and other national and international institutions, and with
private sources supplying investment capital for environmental
infrastructure projects in the border region.
section 2.
Functions
In carrying out this purpose, the Commission may do any or
all of the following:
(i)
with their concurrence, assist states and
4
localities and other public entities and private
investors in:
(A) coordinating environmental
infrastructure projects in the border region;
(B) preparing, developing,
implementing, and overseeing environmental
infrastructure projects in the border region,
including the design, siting and other
technical aspects of such projects;
(C) analyzing the financial feasibility
or the environmental aspects, or both, of
environmental infrastructure projects in the
border region;
(D) evaluating social and economic
benefits of environmental infrastructure
projects in the border region;
(E) organizing, developing and
arranging public and private financing for
environmental infrastructure projects in the
border region; and
(ii) certify, in accordance with Article II, section 3
of this Chapter, applications for financing to be
submitted to the North American Development Bank, or to
other sources of financing that request such
certification, for environmental infrastructure
projects in the border region.
The Commission, with the concurrence of the united states
Environmental Protection Agency and the Mexican Secretaria de
Desarollo Social, may carry out these functions with respect to
an environmental infrastructure project outside the border region
upon finding that the project would remedy a transboundary
environmental or health problem.
Article II
OPERATIONS
section 1.
Use of resources
The resources and facilities of the Commission shall be used
exclusively to implement the purpose and functions enumerated in
Article I of this Chapter.
5
section 2.
Requests for assistance
(a) The Commission may seek and accept requests from states
and localities, other public entities and private investors for
assistance in carrying out the activities enumerated in Article I
of this Chapter.
(b) Upon receipt of a request for assistance pursuant to
paragraph (a) of this Section, the Commission may provide any and
all such assistance as it deems appropriate. In providing such
assistance, or in making certifications pursuant to section 3 of
this Article, the Commission shall give preference to
environmental infrastructure projects relating to water
pollution, wastewater treatment, municipal solid waste and
related matters.
(c) In providing such assistance, the Commission shall
consult with the Advisory Council established pursuant to Article
III, section 5 of this Chapter, and, as appropriate, with private
investors and national and international institutions,
particularly the North American Development Bank.
section 3.
Applications for certification
(a) The Commission may accept applications from states and
localities, other public entities and private investors for
certification of environmental infrastructure projects in the
border region with respect to which an applicant will be seeking
financial assistance from the North American Development Bank or
other sources of financing requesting such certification.
(b) The Commission may certify for such financing any
project that meets or agrees to meet the technical,
environmental, financial or other criteria applied, either
generally or specifically, by the Commission to that project.
be eligible for certification, a project shall observe or be
capable of observing the environmental and other laws of the
place where it is to be located or executed.
To
(c) For each project located in the border region and
having significant trans boundary environmental effects,
(1) an environmental assessment shall be presented as
part of the application process, and the Board of Directors
shall examine potential environmental benefits,
environmental risks, and costs, as well as available
alternatives and the environmental standards and objectives
of the affected area; and
6
(2) the Board of Directors, in consultation with
affected states and localities, shall determine that the
project meets the necessary conditions to achieve a high
level of environmental protection for the affected area.
(d) Upon certification of a project for financial
assistance from the North American Development Bank, the
Commission shall submit a proposal for such assistance to the
Bank for its consideration.
(e) Upon certification of a project for financial
assistance from another source of financing requesting such
certification, the Commission shall submit a proposal for such
assistance to that source for its consideration.
section 4.
Relationship with the public
The Commission shall establish procedures in English and
Spanish:
(1) ensuring, to the extent possible, public
availability of documentary information on all projects for
which a request for assistance or an application for
certification is made;
(2) for giving written notice of and providing members
of the public reasonable opportunity to comment on any
general guidelines which may be established by the
Commission for environmental infrastructure projects for
which it provides assistance, and on all applications for
certification received by the Commission; and
(3) whereby the Board of Directors could receive
complaints from groups affected by projects that the
Commission has assisted or certified and could obtain
independent assessments as to whether the terms of this
Chapter or the procedures established by the Board of
Directors pursuant to this Chapter have been observed.
section
s.
Reimbursement, fees and charges
(a) The Commission may arrange for reimbursement of the
costs of furnishing assistance on terms which the Commission
deems appropriate.
(b) The Commission may establish reasonable fees or other
charges for its assistance, including the processing of
applications for certification.
7
Article III
ORGANIZATION AND MANAGEMENT
section 1.
Location of offices
The Commission shall have its offices in the border region.
section 2.
structure of the Commission
The Commission shall have a Board of Directors, a General
Manager, a Deputy General Manager, an Advisory Council and such
other officers and staff to perform such duties as the Commission
may determine.
section 3.
Board of Directors
(a) All the powers of the Commission, including the power
to determine its general operational and structural policies,
shall be vested in the Board of Directors. The Board shall have
ten Directors:
(1) the united states Commissioner of the
International Boundary and water Commission, who shall serve
ex officio;
(2) the Mexican Commissioner of the International
Boundary and Water Commission, who shall serve ex officio;
(3) the Administrator of the Environmental Protection
Agency of the United states, or his/her delegate, who shall
serve ex officio;
(4) the Secretario de Desarollo Social of Mexico, or
his/her delegate, who shall serve ex officio;
(5) six additional directors having expertise in
environmental planning, economics, engineering, finance, or
related matters, consisting of-(i) a representative of one of the U.s. border
states, appointed by the united states in such manner
as it may determine;
(ii) a representative of one of the Mexican
border states, appointed by Mexico in such manner as it
may determine;
(iii) a representative of a u.s. locality in the
border region, appointed by the united States in such
manner as it may determine;
8
(iv) a representative of a Mexican locality in
the border region, appointed by Mexico in such manner
as it may determine;
(v) a member of the u.s. public who is a resident
of the border region, appointed by the united states in
such manner as it may determine; and
(vi) a member of the Mexican public who is a
resident of the border region, appointed by Mexico in
such manner as it may determine.
Each of the Parties, on an alternating basis, shall select
one of the directors as Chairperson of the Board of Directors for
a one-year term.
(b) The Board of Directors may delegate to the General
Manager authority to exercise any powers of the Board, except the
power to:
(i) certify environmental infrastructure projects in
accordance with Article II, section 3 of this Chapter;
(ii) apply, either generally or specifically,
technical, environmental, financial or other criteria
to an environmental infrastructure project;
(iii) determine the sa'lary and terms of contract of
service of the General Manager and the Deputy General
Manager; and
(iv) approve the annual program and budget and the
annual report of the Commission.
(c) The Board of Directors shall hold quarterly regular
sessions, and such other special sessions as may be called by the
Board or the General Manager. At all regular sessions, the Board
of Directors shall hold at least one public meeting. One public
meeting each year shall be designated the Annual Meeting of the
Board.
(d) A quorum for any meeting of the Board of Directors
shall be a majority of the directors appointed by each of the
Parties.
(e) All decisions of the Board of Directors shall require
the approval of a majority of the members appointed by each
Party. A written record of such decisions shall be made public
in English and Spanish.
9
(f~
The Board of Directors may adopt such rules and
regulat10ns as may be necessary or appropriate to conduct the
business of the Commission.
(g) Directors shall serve as such without compensation from
the Commission, but the Commission shall pay them reasonable
expenses incurred in attending meetings of the Board of
Directors.
section 4.
General Manager
(a) The Board of Directors shall appoint a General Manager
and a Deputy General Manager, neither of whom shall be a
Director. The General Manager and the Deputy General Manager
shall each be appointed for a term of three years and may be
reappointed. The General Manager and the Deputy General Manager
shall cease to hold office when the Board of Directors so decides
with respect to either officer. The offices of General Manager
and Deputy General Manager shall alternate between nationals of
the Parties. The General Manager and the Deputy General Manager
shall be nationals of different Parties at all times.
(b) The General Manager shall exercise all the powers
delegated to him or her by the Board of Directors. The General
Manager may participate in meetings of the Board, but shall not
vote at such meetings. The General Manager shall be chief of the
operating staff of the Commission and shall conduct, under the
direction of the Boardof Directors, the ordinary business of the
Commission. Subject to the general control of the Board of
Directors, the General Manager shall be responsible for the
organization, appointment and dismissal of the officers and staff
of the Commission.
(c) The General Manager, officers and staff of the
Commission, in the discharge of their offices, shall owe their
duty entirely to the Commission and to no other authority. The
Parties shall respect the international character of this duty
and shall refrain from all attempts to influence any of them in
the discharge of their duties.
(d) In appointing the officers and staff, the General
Manager shall, subject to the paramount importance of securing
the highest standards of efficiency and technical competence,
seek to achieve at each level a balanced proportion of nationals
of each Party.
(e) The General Manager shall submit to the Board of
Directors for its approval an annual program and budget for the
Commission. The Advisory Council established pursuant to section
5 of this Article shall receive at the same time as the Board of
Directors drafts of the annual program and budget and may make
comments to the Board on the same.
10
Section 5.
(a)
Advisory Council
The Advisory Council shall be composed of:
(i) at least one resident of each of the u.s. border
states, totalling not more than six such representatives,
who shall represent states or localities, or local community
groups, to be appointed by the United states in such manner
as it may determine;
(ii) one resident of each of the Mexican border
states, who shall represent states or localities, or local
community groups, to be appointed by Mexico in such manner
as it may determine;
(iii) three members of the public, including at least
one representative of a u.s. non-governmental organization,
appointed by the United states in such manner as it may
determine; and
(iv) three members of the public, including at least
one representative of a Mexican non-governmental
organization, appointed by Mexico in such manner as it may
determine.
(b) Council members shall be appointed for a term of two
years and may be reappointed. Each of the Parties shall select
from among the members it appoints a Co-Chairperson of the
Council. Council members shall serve as such without
compensation from the Commission, but the Commission shall pay
them reasonable expenses incurred in attending meetings of the
Council.
(c) The Council shall meet quarterly during the regular
sessions of the Board of Directors, and at such other times as
the Council, with the consent of a majority of the members
appointed by each of the Parties, or the Board shall determine.
(d) The Council may adopt such rules as may be necessary or
appropriate to conduct the business of the Council.
(e) The Council may provide advice to the Board of
Directors or the General Manager on any matter within the scope
of this Chapter, including certifications pursuant to Article II
of this Chapter, and on the implementation and further
elaboration of this Chapter, and may perform such other functions
as directed by the Board.
11
Section 6.
Relationship to the International Boundary
and water Commission
(a) The Commission may enter into arrangements with the
International Boundary and water Commission ("IBWC") regarding
facilities, personnel and services and arrangements for
reimbursement of administrative and other expenses paid by one
organization on behalf of the other.
(b) Nothing in this Chapter shall make the Commission
liable for the acts or obligations of the IBWC, or the IBWC
liable for the acts or obligations of the Commission.
(c) The Parties shall call upon the Commission and the IBWC
to cooperate, as appropriate, with each other in planning,
developing and carrying out border sanitation and other
environmental activities.
section 7.
Funding
Each Party shall contribute an equal share of the budget of
the Commission, subject to the availability of appropriated funds
in accordance with its domestic legal requirements. The
Commission shall establish an account or accounts to receive such
contributions from the Parties.
section 8.
Channel of communication
Each Party shall designate an appropriate authority with
which the Commission may communicate in connection with any
matter arising under this Chapter.
section 9.
Annual reports
(a) The Commission shall submit to the Parties an annual
report in English and Spanish on its operations. The report
shall be prepared by the General Manager and shall be approved by
the Board of Directors. The Advisory Council shall receive at
the same time as the Board of Directors drafts of the annual
report and may make comments to the Board on the same. The
annual report shall include an audited statement of the
Commission's accounts.
(b) Copies of the annual report prepared under this section
shall be made available to the public.
12
section 10.
Limitations on disclosure
(a) Notwithstanding any other provision of this Chapter,
the Commission, including its officers and staff, shall not make
public information with respect to which a Party has notified the
Commission that public disclosure would impede its law
enforcement.
(b) The Commission shall establish regulations to protect
from disclosure business or proprietary information and
information the disclosure of which would violate personal
privacy or the confidentiality of government decision-making.
(c) A party that requests assistance or submits an
application to the Commission may request that information
contained therein be designated confidential by the Commission,
and may request an advance determination from the Commission as
to whether such information is entitled to confidentiality
pursuant to sUbsection (b) above. If the Commission determines
that such information is not entitled to confidentiality pursuant
to sUbsection (b) above, the party may withdraw its request or
application prior to further action by the Commission. Upon such
withdrawal, the Commission shall not keep any copy of the
information and shall not make public that it received such a
request or application.
Article IV
STATUS, IMMUNITIES AND PRIVILEGES
section 1.
Scope of article
To enable the Commission to fulfill its purpose and the
functions with which it is entrusted, the status, immunities and
privileges set forth in this Article shall be accorded to the
Commission in the territories of each Party.
section 2.
Legal status
(a) The Commission shall possess juridical personality and,
in particular, full capacity:
(i)
to contract;
(ii)
to acquire and dispose of immovable and
movable property; and
(iii)
to institute legal proceedings.
(b) The Commission may exercise such other powers as shall
be necessary in furtherance of its purpose and functions,
consistent with the provisions of this Chapter.
13
Section 3.
Judicial proceedings
The Commission, its property and its assets, wherever
located, and by whomsoever held, shall enjoy the same immunity
from suit and every form of judicial process as is enjoyed by
foreign governments, except to the extent that the Commission may
expressly waive its immunity for the purposes of any proceedings
or by the terms of any contract.
Section 4.
Immunity of assets
Property and assets of the Commission, wheresoever located
and by whomsoever held, shall be considered public international
property and shall be immune from search, requisition,
confiscation, expropriation or any other form of taking or
foreclosure by executive or legislative action.
Section 5.
Inviolability of archives
The archives of the Commission shall be inviolable.
Section 6.
Freedom of assets from restrictions
To the extent necessary to carry out the purpose and
functions of the Commission and to conduct its operations in
accordance with this Chapter, all property and other assets of
the Commission shall be free from restrictions, regulations,
controls and moratoria of any nature, except as may otherwise be
provided in this Chapter.
section 7.
privilege for communications
The official communications of the Commission shall be
accorded by each Party the same treatment that it accords to the
official communications of the other Party.
section 8.
Personal immunities and privileges
(a) The directors, General Manager, Deputy General Manager,
officers and staff of the Commission shall have the following
privileges and immunities:
(i) immunity from legal process with respect to acts
performed by them in their official capacity except
when the Commission expressly waives this immunity;
14
(ii) when not local nationals, the same immunities from
immigration restrictions, alien registration
requirements and national service obligations and the
same facilities as regards exchange provisions as are
accorded by each Party to the representatives,
officials, and employees of comparable rank of the
other Party; and
(iii) the same privileges in respect of travelling
facilities as are accorded by each Party to
representatives, officials, and employees of comparable
rank of the other Party.
section 9.
Immunities from taxation
(a) The Commission, its property, other assets, income, and
the operations it carries out pursuant to this Chapter shall be
immune from all taxation and from all customs duties. The
Commission shall also be immune from any obligation relating to
the payment, withholding or collection of any tax or customs
duty.
(b) No tax shall be levied on or in respect of salaries and
emoluments paid by the Commission to officers or staff of the
Commission who are not local nationals.
section 10.
Implementation
Each Party, in accordance with its juridical system,
take such action as is necessary to make effective in its
territories the principles set forth in this Article, and
inform the Commission of the action which it has taken on
matter.
shall
own
shall
the
Article V
CONSULTATIONS
section 1.
principle of cooperation
The Parties shall at all times endeavor to agree on the
interpretation and application of this Chapter, and shall make
every effort to resolve any matter that might affect the
implementation of this Chapter.
section 2.
Consultations
Upon the written request of either Party or the Board of
Directors in English and Spanish, the Parties shall consult
regarding the interpretation or application of this Chapter.
These consultations shall take place within 30 days after a
written request for consultations.
15
Article VI
TERMINATION OF OPERATIONS
(a) The Parties, by mutual agreement, may terminate the
operations of the Commission. A Party may withdraw from the
Commission by delivering to the Commission at its principal
office a written notice of its intention to do so. such
withdrawal shall become finally effective on the date specified
in the notice but in no event less than six months after the
notice is delivered to the Commission. However, at any time
before the withdrawal becomes finally effective, the Party may
notify the Commission in writing of the cancellation of its
notice of intention to withdraw. The Commission shall terminate
its operations on the effective date of any notice of withdrawal
from the Commission.
(b) After such termination of operations the Commission
shall forthwith cease all activities, except those incident to
the conservation, preservation, and realization of its assets and
settlement of its obligations.
CHAPTER II
NORTH AMERICAN DEVELOPMENT BANK
Article I
PURPOSES AND FUNCTIONS
section 1.
Purposes
The purposes of the North American Development Bank shall
be:
(a) to provide financing for projects certified by the
Border Environment Cooperation Commission, as appropriate, and,
at the request of the Commission, to otherwise assist the
Commission in fulfilling its purposes and functions;
(b) to provide financing endorsed by the united States, as
appropriate, for community adjustment and investment in support
of the purposes of the North American Free Trade Agreement; and
(c) to provide financing endorsed by Mexico, as
appropriate, for community adjustment and investment in support
of the purposes of the North American Free Trade Agreement.
section 2.
Functions
To implement its purposes, the Bank shall utilize its own
capital, funds raised by it in financial markets, and other
available resources and shall fulfill the following functions:
16
(a) to promote the investment of public and private capital
contributing to its purposes;
(b) to encourage private investment in projects,
enterprises, and activities contributing to its purposes, and to
supplement private investment when private capital is not
available on reasonable terms and conditions; and
(c) to provide technical and other assistance for the
financing and, in coordination with the Commission, the
implementation of plans and projects.
In carrying out its functions, the Bank shall cooperate as
appropriate with national and international institutions and with
private sources supplying investment capital.
Article II
CAPITAL OF THE BANK
section 1.
Authorized capital
(a) The authorized capital stock of the Bank initially
shall be in the amount of $3,000,000,000 in united states dollars
and shall be divided into 300,000 shares having a par value of
$10,000 each, which shall be available for subscription by the
Parties in accordance with section 2 of this Article.
(b) The authorized capital stock shall be divided into
paid-in shares and callable shares. $450,000,000 shall be paid-in
shares, and $2,550,000,000 shall be callable for the purposes
specified in section 3(d) of this Article.
(c) The authorized capital stock may be increased when the
Board of the Bank by a unanimous vote deems it advisable, subject
to the domestic legal requirements of the Parties.
section 2.
subscription of shares
(a) Each Party shall subscribe to shares of the capital
stock of the Bank. The number of shares to be subscribed by the
Parties shall be those set forth in Annex A of this Agreement,
which specifies the obligation of each Party as to both paid-in
and callable capital.
(b) Shares of capital stock initially subscribed by the
Parties shall be issued at par. other shares shall be issued at
par unless the Board of the Bank decides in special circumstances
to issue them on other terms.
(c) The liability of the Parties on capital shares shall be
limited to the unpaid portion of their issue price.
17
(d) Shares of capital stock shall not be pledged or
encumbered in any manner, and they shall be transferable only to
the Bank.
section 3.
Payment of subscriptions
Payment of the subscriptions to the capital stock of the Bank
as set forth in Annex A shall be made as follows:
(a)
As soon as possible after this Agreement enters into
force pursuant to Article I of Chapter III, but no later than
thirty days thereafter, each Party shall deposit with the Bank an
Instrument of Subscription in which it agrees to pay in either
Party's currency to the Bank the amount of paid-in capital set
forth for it in Annex A, and to accept the obligations of
callable shares ("Unqualified Subscription"). Payment of the
paid-in capital shall be due according to a schedule to be
established by the Board of the Bank after entry into force of
this Agreement.
(b) Notwithstanding the provisions of paragraph (a) of this
Section regarding Unqualified Subscriptions, as an exceptional
case, a Party may deposit an Instrument of Subscription in which
it agrees that payment of all installments of paid-in capital,
and its obligations with respect to all callable shares, are
subject to subsequent budgetary legislation ("Qualified
Subscription"). In such an instrument, the Party shall undertake
to seek to obtain the necessary legislation to pay the full
amount of paid-in capital and to accept the full amount of
corresponding obligations for callable shares, by the payment
dates determined in accordance with paragraph (a) of this
section. Payment of an installment due after any such date shall
be made within sixty days after the requisite legislation has
been obtained.
(c) If any Party which has made a Qualified Subscription
has not obtained the legislation to make payment in full of any
installment (or to accept obligations in respect of callable
shares) by the dates determined in accordance with paragraph (a)
of this Section, then a Party which has paid the corresponding
installment on time and in full, may, after consultation with the
Board of the Bank, direct the Bank in writing to restrict
commitments against that installment. That restriction shall not
exceed the percentage which the unpaid portion of the
installment, due from the Party which has made the Qualified
Subscription, bears to the entire amount of the installment to be
paid by that Party, and shall be in effect only for the time that
unpaid portion remains unpaid.
18
(d) The callable portion of the subscription for capital
shares of the Bank shall be subject to call only when required to
meet the obligations of the Bank created under Article III,
section 2{b) and (c) of this Chapter on borrowings of funds for
inclusion in the Bank's capital resources or guarantees
chargeable to such resources. In the event of such a call,
payment shall be made in either Party's currency. Calls on
unpaid SUbscriptions shall be uniform in percentage on all
shares.
section 4.
capital resources
(a) As used in this Chapter, the term "capital resources"
of the Bank shall be deemed to include the following:
(l) authorized capital, including both paid-in and
callable shares, subscribed pursuant to sections 2 and 3 of
this Article;
(2) all funds raised by borrowings under the authority
of Article V, Section l(a) of this Chapter to which the
commitment set forth in section 3(d) of this Article is
applicable;
(3) all funds received in repayment of loans made with
the resources indicated in paragraphs (1) and (2) of this
section;
(4) all income derived from loans made from the
aforementioned funds or from guarantees to which the
commitment set forth in section 3(d) of this Article is
applicable; and
(5) all other income derived from any of the resources
mentioned above.
Article III
OPERATIONS
section 1.
Use of resources
The resources and facilities of the Bank shall be used
exclusively to implement the purposes and functions enumerated in
Article I of this Chapter.
section 2.
Methods of making or guaranteeing loans
Subject to the conditions stipulated in this Article, the
Bank may make or guarantee loans to either Party, or any agency
or political subdivision thereof, and to any entity in the
territory of a Party, in any of the following ways:
19
(a) by making or participating in direct loans with funds
corresponding to the unimpaired paid-in capital and to its
reserves and undistributed surplus;
(b) by making or participating in direct loans with funds
raised by the Bank in capital markets, or borrowed or acquired in
any other manner, for inclusion in the capital resources of the
Bank; and
(c) by guaranteeing in whole or in part loans made to, or
securities issued in connection with, projects.
section 3.
Grants
(a) Subject to the conditions stipulated in this Article,
the Bank shall make grants to the united states or any agency or
political subdivision thereof, and to any entity in the territory
of the united states for purposes specified in Article I, section
l{b) of this Chapter.
(b) Subject to the conditions stipulated in this Article,
the Bank shall make grants to Mexico or any agency or political
subdivision thereof, and to any entity in the territory of Mexico
for purposes specified in Article I, section l(C) of this
Chapter.
section 4.
Limitations on operations
(a) The total amount outstanding of loans and guarantees
made by the Bank in its operations shall not at any time exceed
the total amount of the unimpaired subscribed capital of the
Bank, plus the unimpaired reserves and surplus included in the
capital resources of the Bank, as defined in Article II, Section
4 of this Chapter, and other income of the capital resources
assigned by decision of the Board of the Bank to reserves not
available for loans or guarantees.
(b) The total amount of loans, guarantees and grants
provided for the purposes specified in Article I, section l(b) of
this Chapter, shall not exceed 10 percent of the sum of the
initial paid-in capital actually paid to the Bank by the united
States, and the initial amount of callable shares for which the
united states has an unqualified SUbscription.
The total amount of grants made pursuant to section 11 of
this Article, plus 15 percent of the total amount of loans and
guarantees made for the purposes specified in Article I, section
l(b) of this Chapter, shall not exceed 10 percent of the initial
paid-in capital actually paid to the Bank by the united states.
20
. (c)
The total amount of loans, guarantees and grants
for the purposes specified in Article I, section 1ec) of
th1s Chapter, shall not exceed 10 percent of the sum of the
initial paid-in capital actually paid to the Bank by Mexico, and
the amount of initial callable shares for which Mexico has an
unqualified subscription.
pr~v1ded
The total amount of grants made pursuant to section 11 of
this Article, plus 15 percent of the total amount of loans and
guarantees made for the purposes specified in Article I, section
l(c) of this Chapter, shall not exceed 10 percent of the initial
paid-in capital actually paid to the Bank by Mexico.
section 5.
Direct loan and grant financing
In making grants or in making direct loans or participating
in them, the Bank may provide financing in the currencies of the
Parties to meet the costs and expenses related to the purposes of
the grant or loan.
section 6.
Rules and conditions for making or
guaranteeing loans
(a)
The Bank may make or guarantee loans, subject to the
following rules and conditions:
(1)
in considering a request for a loan or a
guarantee, the Bank shall take into account the ability of
the borrower to obtain the loan from private sources of
financing on terms which, in the opinion of the Bank, are
reasonable for the borrower, taking into account all
pertinent factors;
(2)
in making or guaranteeing a loan, the Bank shall
pay due regard to prospects that the borrower and its
guarantor, if any, will be in a position to meet their
obligations under the loan contract;
(3)
in the opinion of the Bank, the rate of interest,
other charges and the schedule for repayment of principal
are appropriate for the purpose or project in question; and
(4)
in guaranteeing a loan made by other investors,
the Bank shall receive suitable compensation for its risk.
(b)
In addition to the rules and conditions set forth in
paragraph (a) of this Section, the following rules and conditions
shall apply to loans or guarantees made pursuant to a
certification from the Commission:
21
(1)
the applicant for the loan shall have submitted a
detailed proposal to the Bank, and the Commission shall have
presented a written report certifying the proposal;
(2)
in making or guaranteeing a loan to a project, the
Bank shall find that the project is economically/financially
sound, and pay due regard to the prospects that the project
will generate sufficient revenues, by user fees or
otherwise, to be self-sustaining, or that funds will be
available from other sources to meet debt servicing
obligations; and
(3)
loans made or guaranteed by the Bank shall be for
financing specific projects.
(c)
In addition to the rules and conditions set forth in
paragraph (a) of this Section, loans and guarantees made for the
purposes specified in Article I, Section l(b) of this Chapter
shall require an endorsement from the united states.
(d)
In addition to the rules and conditions set forth in
paragraph (a) of this section, loans and guarantees made for the
purposes specified in Article I, section l(c) of this Chapter
shall require an endorsement from Mexico.
section 7.
optional conditions for making or
guaranteeing loans
(a)
In the case of loans or guarantees of loans to
nongovernmental entities, the Bank may, when it deems it
advisable, require that the Party in whose territory the project
is to be carried out, or a public institution or a similar agency
of the Party acceptable to the Bank, guarantee the repayment of
the principal and the payment of interest and other charges on
the loan.
(b) The Bank may attach such other conditions to the making
of loans or guarantees as it deems appropriate.
section 8.
Use of loans made or guaranteed by the
Bank
(a)
The Bank shall impose no condition that the proceeds of
a loan shall be spent in the territory of either Party.
(b) The Bank shall take the necessary measures to ensure
that the proceeds of any loan made, guaranteed, or participated
in by the Bank are used only for the purposes for which the loan
was granted, with due attention to considerations of economy and
efficiency.
22
section 9.
Payment provisions for direct loans
Direct loan contracts made by the Bank in conformity with
sections 5 and 6 of this Article shall establish:
(a)
All the terms and conditions of each loan, including
among others, provision for payment of principal, interest and
other charges, maturities, and dates of payment; and
(b)
The currency or currencies in which payment shall be
made to the Bank.
section 10.
Guarantees
(a)
In making any guarantee pursuant to section 2(c) of
this Article, the Bank shall charge a guarantee fee, at a rate
determined by the Bank, payable periodically on the amount of the
loan outstanding.
(b)
Guarantee contracts concluded by the Bank shall provide
that the Bank may terminate its liability with respect to
interest if, upon default by the borrower and by the guarantor,
if any, the Bank offers to purchase, at par and interest accrued
to a date designated in the offer, the bonds or other obligations
guaranteed.
(c)
In issuing guarantees, the Bank shall have power to
determine any other terms and conditions.
section 11.
Rules and conditions for making grants
(a)
Notwithstanding Article VI, section 3 of this Chapter,
and subject to the limitations specified in Article II, Section
4(b) of this Chapter, the Bank shall make grants for the purposes
specified in Article I, Section lea) of this Chapter pursuant to
an endorsement by the united states.
(b)
Notwithstanding Article VI, section 3 of this Chapter,
and subject to the limitations specified in Article II, section
4(c) of this Chapter, the Bank shall make grants for the purposes
specified in Article I, section 2(C) of this Chapter pursuant to
an endorsement by Mexico.
section 12.
Relationship with other entities
(a)
The Bank may make arrangements with other entities,
including multilateral development banks, regarding facilities,
personnel and services and arrangements for reimbursement of
administrative expenses paid by either entity on behalf of the
other.
23
(b)
Nothing in this Agreement shall make the Bank liable
for the acts or obligations of an entity referred to in paragraph
(a) of this Section, or any such entity liable for the acts or
obligations of the Bank.
Article IV
CURRENCIES
Section 1.
Use of currencies
(a)
The Parties may not maintain or impose restrictions of
any kind upon the use by the Bank or by any recipient from the
Bank, for payments in any country, of the following:
(1)
currencies received by the Bank in payment of each
Party's subscription to shares of the Bank's capital;
(2)
currencies of the Parties purchased with the
resources referred to in (1) of this paragraph;
(3)
currencies obtained by borrowings, pursuant to the
provisions of Article V, Section l(a) of this Chapter, for
inclusion in the capital resources of the Bank;
(4)
currencies received by the Bank in payment on
account of principal, interest, or other charges in respect
of loans made from the funds referred to in (1), (2) or (3)
of this paragraph; and currencies received in payment of
commissions and fees on all guarantees made by the Bank; and
(5)
currencies received from the Bank pursuant to
Article V, section 4(c) of this Chapter, in distribution of
net profits.
(b) A Party's currency held by the Bank in its capital
resources, which is not covered by paragraph (a) of this section,
also may be used by the Bank or any recipient from the Bank for
payments in any country without restriction of any kind.
(c)
The Parties may not place any restrictions on the
holding and use by the Bank, for making amortization payments or
anticipating payment of, or repurchasing part or all of the
Bank's own obligations, of currencies received by the Bank in
repayment of direct loans made from borrowed funds included in
the capital resources of the Bank.
24
section 2.
Valuation of currencies
(a)
The amount of a currency other than the u.s. dollar
paid for purposes of Section 3(a), (b) or (d) of Article II of
this Chapter or section 3 of this Article to discharge a u.s.
dollar-denominated obligation shall be that amount which will
yield to the Bank the u.s. dollar amount of such obligation.
(b)
Whenever it shall become necessary under this Chapter
to value any currency in terms of another currency, such
valuation shall be determined by the Bank after consultation, if
necessary, with the International Monetary Fund.
section 3.
Methods of conserving currencies
The Bank shall accept from either Party promissory notes or
similar securities issued by the government of the Party, or by
the depository designated by such Party, in lieu of any part of
the currency of the Party representing the paid-in portion of its
subscription to the Bank's authorized capital, provided such
currency is not required by the Bank for the conduct of its
operations.
Such notes or securities shall be non-negotiable,
non-interest-bearing, and payable to the Bank at their par value
on demand.
On the same conditions, the Bank shall also accept
such notes or securities in lieu of any part of the subscription
of a Party with respect to which part the terms of the
subscription do not require payment in cash.
Article V
MISCELLANEOUS POWERS AND DISTRIBUTION OF PROFITS
section 1.
Miscellaneous powers of the Bank
In addition to the powers specified elsewhere in this
Chapter, the Bank shall have the power to:
(a)
borrow funds and in that connection to furnish such
collateral or other security therefor as the Bank shall
determine, provided that, before making a sale of its obligations
in the markets of a Party, the Bank shall have obtained the
approval of that country and of the Party in whose currency the
obligations are denominated.
(b)
invest funds not needed in its operations in such
obligations as it may determine;
(c)
guarantee securities in its portfolio for the purpose
of facilitating their sale; and
25
(d)
exercise such other powers as shall be necessary or
desirable in furtherance of its purposes and functions,
consistent with the provisions of this Chapter.
section 2.
Warning to be placed on securities
Every security issued or guaranteed by the Bank shall bear
on its face a conspicuous statement to the effect that it is not
an obligation of any government, unless it is in fact the
obligation of a particular government, in which case it shall so
state.
section 3.
Methods of meeting the losses of the
Bank
(a)
In cases of arrears or default on loans made,
participated in, or guaranteed by the Bank, the Bank shall take
such action as it deems appropriate. The Bank shall maintain
appropriate provisions against possible losses.
(b)
Losses arising in the Bank's operations shall be
charged first, to the provisions referred to in paragraph (a);
second, to net income; third, against its general reserve and
surpluses; and fourth, against the unimpaired paid-in capital.
(c)
Whenever necessary to meet contractual payments of
interest, other charges, or amortization on the Bank's borrowings
payable out of its capital resources, or to meet the Bank's
liabilities with respect to similar payments on loans guaranteed
by it chargeable to its capital resources, the Bank may call upon
both Parties to pay an appropriate amount of their callable
capital subscriptions, in accordance with Article II, section 3
of this Chapter. Moreover, if the Bank believes that a default
may be of long duration, it may call an additional part of such
subscriptions not to exceed in anyone year one per cent of the
total subscriptions of the Parties to the capital resources, for
the following purposes:
(1)
to redeem prior to maturity, or otherwise
discharge its liability on, all or part of the outstanding
principal of any loan guaranteed by it chargeable to its
capital resources in respect of which the debtor is in
default; and
(2)
to repurchase, or otherwise discharge its
liability on, all or part of its own outstanding obligations
payable out of its capital resources.
26
section 4.
Distribution or transfer of net profits and
surplus
(a)
The Board of the Bank may determine periodically what
part of the net profits and of the surplus of the capital
resources shall be distributed.
Such distributions may be made
only when the reserves have reached a level which the Board
considers adequate.
(b)
The distributions referred to in paragraph (a) of this
section shall be made from the capital resources in proportion to
the number of capital shares held by each Party.
(c)
Payments pursuant to paragraph (a) of this section
shall be made in such manner and in such currency or currencies
as the Board of the Bank shall determine.
If such payments are
made to a Party in currencies other than its own, the transfer of
such currencies and their use by the receiving country shall be
without restriction by either Party.
Article VI
ORGANIZATION AND MANAGEMENT
section 1.
structure of the Bank
The Bank shall have a Board, a Manager, and such other
officers and staff as may be considered necessary.
section 2.
Board of the Bank
(a)
All the powers of the Bank shall be vested in the
Board. Each Party shall appoint three representatives to the
Board of the Bank, who shall serve at the pleasure of the
appointing Party. Board members shall be persons of recognized
competence and experience.
Each Party, on an alternating basis,
shall select one of its representatives as Chairperson for a oneyear term.
(b)
Each Board member shall appoint an alternate who shall
have full power to act for him or her when he or she is not
present. Alternates may participate in meetings but may vote
only when they are acting in place of their principals. In
unusual circumstances, when neither a Board member nor his or her
alternate is able to attend a meeting, the Board member may
designate a temporary alternate.
(c)
Board members shall serve as such without compensation
from the Bank, but the Bank may pay them reasonable expenses
incurred in attending meetings of the Board of the Bank.
27
(d)
The Board of the Bank shall meet at the principal
office of the Bank as often as the business of the Bank may
require.
(e)
A quorum for any meeting of the Board of the Bank shall
require two representatives, alternates, or temporary alternates
from each Party.
(f)
The Board of the Bank may appoint such committees as
it deems advisable.
(g)
The Board of the Bank shall determine the basic
organization of the Bank, including the number and general
responsibilities of the chief administrative and professional
positions of the staff, and shall approve the budget of the Bank.
section 3.
Decision-making
All decisions of the Board of the Bank shall require the
assent of at least two representatives, alternates, or temporary
alternates of each Party.
section 4.
Manager and staff
(a)
The Board of the Bank shall elect a Manager of the Bank
who may serve pursuant to an agreement entered into pursuant to
Article III, section 12 of this Chapter. The Manager, under the
direction of the Board of the Bank, shall conduct the business of
the Bank and shall be chief of its staff. The Manager or his or
her designee shall be the legal representative of the Bank. The
term of office of the Manager shall be three years. The Manager
may be elected to successive terms. He or she shall cease to
hold office when the Board of the Bank so decides.
(b)
The Manager, officers and staff of the Bank, in the
discharge of their offices, shall owe their duty entirely to the
Bank and to no other authority. The Parties shall respect the
international character of this duty and shall refrain from all
attempts to influence any of them in the discharge of their
duties.
(c)
In appointing the officers and staff the Manager shall,
subject to the paramount importance of securing the highest
standards of efficiency and technical competence, seek to
aChieve, at each level, a balance in the number of nationals from
each Party.
28
(d)
The Bank, its officers and staff shall not interfere in
the political affairs of either Party, nor shall they be
influenced in their decisions by the political character of the
Party or Parties concerned. Only economic/financial
considerations shall be relevant to their decisions, and these
considerations shall be weighed impartially in order to achieve
the purposes and functions stated in Article I of this Chapter.
section 5.
Publication of reports and provision of
information.
(a)
The Bank shall publish an annual report containing an
audited statement of its accounts.
It shall also transmit
quarterly to the Parties a summary statement of its financial
position and a profit-and-loss statement showing the results of
its operations.
(b)
The Bank may also publish such other reports as it
deems desirable to inform the public of its activities and to
carry out its purposes and functions.
Article VII
SUSPENSION AND TERMINATION OF OPERATIONS
section 1.
suspension of operations
In an emergency the Board of the Bank may suspend operations
in respect of new loans and guarantees until such time as the
Board of the Bank may have an opportunity to consider the
situation and take pertinent measures.
section 2.
Termination of operations
(a)
The Parties, by mutual agreement, may terminate the
operations of the Bank. A Party may withdraw from the Bank by
delivering to the Bank at its principal office a written notice
of its intention to do so.
Such withdrawal shall become finally
effective on the date specified in the notice but in no event
less than six months after the notice is delivered to the Bank.
However, at any time before the withdrawal becomes finally
effective, the Party may notify the Bank in writing of the
cancellation of its notice of intention to withdraw. The Bank
shall terminate its operations on the effective date of any
notice of withdrawal from the Bank.
(b)
After such termination of operations the Bank shall
forthwith cease all activities, except those incident to the
conservation, preservation, and realization of its assets and
settlement of its obligations.
29
Section 3.
Liability of the Parties and payment of
claims
(a) The liability of the Parties arising from their
subscriptions to the capital stock of the Bank shall continue
until all direct and contingent obligations shall have been
discharged.
(b) All creditors holding direct claims shall be paid out
of the assets of the Bank and then out of payments to the Bank on
unpaid or callable subscriptions. Before making any payments to
creditors holding direct claims, the Board of the Bank shall make
such arrangements as are necessary, in its judgment, to ensure a
pro rata distribution among holders of direct and contingent
claims.
section 4.
Distribution of assets
(a) No distribution of assets shall be made to either Party
on account of their subscriptions to the capital stock of the
Bank until all liabilities to creditors chargeable to such
capital stock shall have been discharged or provided for.
Moreover, such distribution must be approved by a decision of the
Board of the Bank.
(b) Any distribution of the assets of the Bank to the
Parties shall be in proportion to payments on capital stock held
by each Party and shall be effected at such times and under such
conditions as the Bank shall deem fair and equitable. The shares
of assets distributed need not be uniform as to type of assets.
No Party shall be entitled to receive its share in such a
distribution of assets until it has settled all of its
obligations to the Bank.
(c) A Party receiving assets distributed pursuant to this
Article shall enjoy the same rights with respect to such assets
as the Bank enjoyed prior to their distribution.
Article VIII
STATUS, IMMUNITIES AND PRIVILEGES
section 1.
Scope of article
To enable the Bank to fulfill its purposes and the functions
with which it is entrusted, the status, immunities, and
privileges set forth in this Article shall be accorded to the
Bank in the territories of each Party.
section 2.
Legal status
The Bank shall possess juridical personality and, in
particular, full capacity:
30
(a)
to contract;
(b)
to acquire and dispose of immovable and movable
property; and
(c)
to institute legal proceedings.
section 3.
Judicial proceedings
Actions may be brought against the Bank only in a court of
competent jurisdiction in the territories of a Party in which the
Bank has an office, has appointed an agent for the purpose of
accepting service or notice of process, or has issued or
guaranteed securities.
No action shall be brought against the Bank by the Parties
or persons acting for or deriving claims from the Parties.
However, the Parties shall have recourse to such special
procedures to settle controversies between the Bank and its
Parties as may be prescribed in this Chapter, in the by-laws and
regulations of the Bank or in contracts entered into with the
Bank.
Property and assets of the Bank shall, wheresoever located
and by whomsoever held, be immune from all forms of seizure,
attachment or execution before the delivery of final judgment
against the Bank.
section 4.
Immunity of assets
Property and assets of the Bank, wheresoever located and by
whomsoever held, shall be considered public international
property and shall be immune from search, requisition,
confiscation, expropriation or any other form of taking or
foreclosure by executive or legislative action.
section 5.
Inviolability of archives
The archives of the Bank shall be inviolable.
section 6.
Freedom of assets from restrictions
To the extent necessary to carry out the purposes and
functions of the Bank and to conduct its operations in accordance
with this Chapter, all property and other assets of the Bank
shall be free from restrictions, regulations, controls and
moratoria of any nature, except as may otherwise be provided in
this Chapter.
31
Section 7.
privilege for communications
The official communications of the Bank shall be accorded by
each Party the same treatment that it accords to the official
communications of the other Party.
section 8.
Personal immunities and privileges
All Board members, alternates, officers, and staff of the
Bank shall have the following privileges and immunities:
(a)
immunity from legal process with respect to acts
performed by them in their official capacity, except when the
Bank waives this immunity;
(b) when not local nationals, the same immunities from
immigration restrictions, alien registration requirements and
national service obligations and the same facilities as regards
exchange provisions as are accorded by the Parties to the
representatives, officials, and employees of comparable rank of
the Inter-American Development Bank; and
(c)
the same privileges in respect of traveling facilities
as are accorded by the Parties to representatives, officials, and
employees of comparable rank of members of the Inter-American
Development Bank.
section 9.
Immunities from taxation
(a)
The Bank, its property, other assets, income, and the
operations it carries out pursuant to this Chapter shall be
immune from all taxation and from all customs duties. The Bank
shall also be immune from any obligation relating to the payment,
withholding or collection of any tax or customs duty.
(b)
No tax shall be levied on or in respect of any salaries
or emoluments paid by the Bank to Board members, alternates,
officials or staff of the Bank who are not local nationals.
(c)
No tax of any kind shall be levied on any obligation or
security issued by the Bank, including any dividend or interest
thereon, by whomsoever held:
(1) which discriminates against such obligation or
security solely because it is issued by the Bank; or
(2)
if the sole jurisdictional basis for such taxation
is the place or currency in which it is issued, made payable
or paid, or the location of any office or place of business
maintained by the Bank.
32
(d)
No tax of any kind shall be levied on any obligation or
security guaranteed by the Bank, including any dividend or
interest thereon, by whomsoever held:
(1)
which discriminates against such obligation or
security solely because it is guaranteed by the Bank; or
(2)
if the sole jurisdictional basis for such taxation
is the location of any office or place of business
maintained by the Bank.
section 10.
Implementation
Each Party, in accordance with its juridical system, shall
take such action as is necessary to make effective in its own
territories the principles set forth in this Article, and shall
inform the Bank of the action which it has taken on the matter.
Article IX
INTERPRETATION AND ARBITRATION
section 1.
Interpretation
The Parties shall at all times endeavor to agree on the
interpretation and application of this Chapter, and shall make
every effort to resolve any matter that might affect the
implementation of this Chapter.
section 2.
Arbitration
In the event the Parties are not able to reach agreement on
any question of interpretation of this Chapter within a
reasonable time, either Party may request in writing the
initiation of an arbitral proceeding. An arbitration panel shall
be established in accordance with the following procedures:
(1)
the panel shall be composed of three members;
(2)
panelists shall be selected from the financial
services roster established pursuant to Article 1414 of the
North American Free Trade Agreement;
(3)
the Parties shall endeavor to agree on the
chairperson of the panel within 15 days of the delivery of
the request for the initiation of the arbitral proceeding.
If the Parties are unable to agree on the chairperson within
this period, the Party chosen by lot shall select from the
financial services roster within five days as chairperson an
individual who is not a national of that Party; and
33
(4)
within 15 days of selection of the chairperson,
each disputing Party shall select a panelist from among the
roster members who are nationals of the other Party.
Article XI
GENERAL PROVISIONS
section 1.
Principal office
The principal office of the Bank shall be located in a place
to be mutually agreed by the Parties so as to facilitate the
operations of the Bank.
section 2.
Relations with other organizations
The Bank may enter into arrangements with other
organizations with respect to the exchange of information or for
other purposes consistent with this Chapter.
section 3.
Channel of communication
Each Party shall designate an official entity for purposes of
communication with the Bank on matters connected with this
Chapter.
section 4.
Depositories
Each Party shall designate its central bank to serve as a
depository in which the Bank may keep its holdings of such
Party's currency and other assets of the Bank. However, with the
agreement of the Bank, a Party may designate another institution
for such purpose.
section 5.
Commencement of operations
The Parties shall call the first meeting of the Board of the
Bank as soon as this Agreement enters into force under Article I
of Chapter III of this Agreement.
CHAPTER III
ENTRY INTO FORCE, AMENDMENT, DEFINTIONS
AND OTHER ARRANGEMENTS
Article I
ENTRY INTO FORCE
This Agreement shall enter into force on January 1, 1994,
immediately after entry into force of the North American Free
Trade Agreement, on an exchange of written notifications
certifying the completion of necessary legal procedures.
34
Article II
AMENDMENT
The Parties may agree on any modification of or addition to
this Agreement.
In particular, the Parties shall from time to
time consider whether to make such modifications of or additions
to this Agreement as would be necessary to:
expand the functions of the Commission to include other
kinds of environmental or other infrastructure
projects;
expand the geographic scope of the Commission;
give the Commission the capacity to raise capital so
that it might issue loans or guarantees for
environmental or other infrastructure projects; or
change the environmental preferences expressed in
Article II, Section 2(b) of Chapter I of this
Agreement.
When so agreed, and approved in accordance with the
applicable legal procedures of each Party, a modification or
addition shall constitute an integral part of this Agreement.
Article III
RELATION TO OTHER AGREEMENTS OR ARRANGEMENTS
(a)
Nothing in this Agreement shall prejudice other
agreements or arrangements between the Parties, including those
relating to conservation or the environment.
(b)
Nothing in this Agreement shall be construed to limit
the right of any public entity or private person of a Party to
seek investment capital or other sources of finance, or to
propose, construct or operate an environmental infrastructure
project in the border region without the assistance or
certification of the Commission.
Article IV
AUTHENTIC TEXTS
The English and Spanish texts of this Agreement are equally
authentic.
35
Article V
DEFINITIONS
For purposes of this Agreement, it shall be understood that:
"Bank" means the North American Development Bank
established pursuant to Part II of this Agreement;
"Board of Directors" means the Board established
pursuant to Article III, section 3, of Chapter I of
this Agreement;
"Board of the Bank" means the Board established
pursuant to Article VI, Section 2, of Chapter II of
this Agreement;
"Border region" means the area within 100 kilometers of
the international frontier between the United states
and Mexico;
"Commission" means the Border Environment Cooperation
Commission established pursuant to Part I of this
Agreement;
"Environmental infrastructure project" means a project
that will prevent, control or reduce environmental
pollutants or contaminants, improve the drinking water
supply, or protect flora and fauna so as to improve
human health, promote sustainable development, or
contribute to a higher quality of life;
"Mexico" means the united Mexican States;
"Mexican border states" means Baja California,
Chihuahua, Coahuila, Nuevo Leon, Sonora and Tamaulipas;
"National" means a natural person who is a citizen or
permanent resident of a Party, including:
1) with respect to Mexico, a national or a
citizen according to Articles 30 and 34,
respectively, of the Mexican Constitution; and
2)
with respect to the United States, "national
of the United states" as defined in the existing
provisions of the Immigration and Nationality Act.
"Non-governmental organization" means any scientific,
professional, business, non-profit or public interest
organization or association which is neither affiliated
with, nor under the direction of, a government;
36
"North American Development Bank" means the bank
established by the Parties pursuant to Chapter II of
this Agreement;
"United states" means the United states of America; and
"U.s. border states" means Arizona, California, New
Mexico and Texas.
37
DONE at
, this
day of
,1993, in duplicate, in the English and Spanish
languages, each text being equally authentic.
IN WITNESS WHEREOF the undersigned, being duly authorized by
their respective Governments, have signed this Agreement.
FOR THE GOVERNMENT OF THE
UNITED STATES OF AMERICA:
FOR THE GOVERNMENT OF THE
UNITED MEXICAN STATES:
38
ANNEX A
INITIAL SUBSCRIPTIONS TO THE AUTHORIZED CAPITAL STOCK
OF THE BANK
(In shares of U.S. $10,000 each)
Paid-in
Capital Shares
Callable
Shares
Total
Subscription
united states
22,500
127,500
150,000
Mexico
22,500
127,500
150.000
Total
45,000
255,000
300,000
•
«.~~ASfJ~}-'\",
UBLIC DEBT NEWS
Department of the Treasurv •
FOR IMMEDIATE RELEASE
October 27, 1993
Bureau of the Public Debt • Washington, DC 20239
iI
•
v~~.<,
....
~lJtIC p~
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenders for $11,013 million of 5-year notes, Series T-1998,
to be issued November 1, 1993 and to mature October 31, 1998
were accepted today (CUSIP: 912827M66).
The interest rate on the notes will be 4 3/4%. All
competitive tenders at yields lower than 4.81% were accepted in
full.
Tenders at 4.81% were allotted 84%. All noncompetitive and
sucessful competitive bidders were allotted securities at the yield
of 4.81%, with an equivalent price of 99.736. The median yield
was 4.80%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 4.74%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
26,336
28,626,886
13,014
27,231
32,382
43,795
856,555
15,011
6,927
25,450
9,242
596,635
45,506
$30,324,970
Accepted
26,336
10,287,038
13,014
27,231
32,380
18,785
326,435
15,011
6,927
25,450
9,242
180,030
45,506
$11,013,385
The $11,013 million of accepted tenders includes $532
million of noncompetitive tenders and $10,481 million of
competitive tenders from the public.
In addition, $1,250 million of
high yield to Federal Reserve Banks
international monetary authorities.
of tenders was also accepted at the
Reserve Banks for their own account
securities.
LB-465
.1\
"
............, !
tenders was awarded at the
as agents for foreign and
An additional $750 million
high yield from Federal
in exchange for maturing
Text as Prepared for Delivery
For Immediate Release
October 27, 1993
ADDRESS OF TREASURY SECRETARY LLOYD BENTSEN
AMERICAN BANKERS COUNCIL
WASHINGTON, D.C.
I want to discuss how this administration will approach key policy questions in the
financial services area, and what some of those policies are going to be.
President Clinton was elected to get this economy moving again, creating jobs,
improving our standard of living. As bankers, you recognize that to make that happen,
we must have an efficient economy. We recognize that too.
The administration's goal is to straighten out the bottlenecks that reduce the
efficiency of our economy. We have, for instance, outdated, inconsistent and sometimes
excessive restrictions on the financial services industry. This is far too important a part
of our economy to have its potential held back.
Before I deal with specifics, I'm going to lay down two rules for our approach.
First, we understand that government has the responsibility to involve itself in the
marketplace to the extent of protecting the interests of all consumers and communities.
Second, every action must ensure that our financial institutions remain safe and sound.
We have made important progress in beginning to put the economy back on track.
We're making headway on the deficit. Interest rates haven't been this low in 20 years.
Business investment is up. We are creating jobs.
One way to increase investment by American businesses -- both small and large -is to increase the flow of credit. We have taken administrative actions to do that,
focusing on the regulations that affect lending to our small businesses. That's because
they are so critical to job creation. The Credit Availability Program initiative is largely
in place. We are working hard now to implement it at the grass roots level. It is
important that we get the word out to every level of the system, particularly the
exammers.
There is no dearth of issues for us to look at from the national perspective.
There's everything from the future of the thrift industry, to fair trade and money
laundering, regulatory consolidation and interstate banking.
LB-466
2
We have seen some well-thought out proposals in recent years, from Capitol Hill,
from the administrations, from business and from the academics. However, I believe far
too much energy has been spent spinning too many wheels at once.
Therefore, we will take a deliberate approach that will produce more and better
results over time. We will focus on what we believe are achievable goals and pick our
targets carefully. We will build consensus, issue by issue. And we will listen seriously to
the concerns of those with a genuine public policy interest in an issue.
However, I want to offer a caution. Everyone involved must exercise some selfrestraint. This is a critical and complicated area. A smoothly functioning system will
help continue economic growth. Over-reaching and piling on can lead us to failure, and
our economy doesn't need that.
Let me mention three areas we're looking to improve the flow of credit and
strengthen the competitive position of our financial system. Two are well along in the
legislative process. The third -- fair trade -- can be shortly.
First, nothing highlights the importance of a strong financial industry more than
the thrift problem of the 1980s. When you must take time and huge financial resources
to restore health to an industry, it takes momentum from your economy. It takes
resources from other productive uses. I have urged the House and Senate to go to
conference on the RTC funding bill and get it to the president. We need to make
depositors whole and get these assets back out working for the economy. We must
quickly close this chapter in our history.
Secondly, the Community Development Financial Institutions measure has come
out of the Senate Banking Committee with an important program for our distressed
cities and poor rural areas. It also has a very sensible approach to reducing the
regulatory burden on our financial institutions. It doesn't go overboard. It's a balanced,
disciplined approach that has much to commend it. I hope the Senate passes it and the
House acts with the same sense of practicality and balance.
There is a third area where we can move with some dispatch. If our institutions
are to compete effectively at home, they must be free to compete on an equal basis
abroad. Look at it this way. If we'd been building and selling cars in Japan for the past
40 years, competition in the industry might look different. Likewise, financial institutions
need distribution outlets in the major markets.
3
We have some of the most open financial markets in the world. Foreign firms are
treated like they were American businesses. They are doing so well here they hold onequarter of all the banking assets in the United States. Similarly, our banks, securities
firms, insurance businesses and other lenders are major players in many international
markets. But too often the global playing field looks like the Rockies. Barriers -- both
formal and informal -- prevent U.S. firms from entering markets on an equal footing
with their competitors.
This administration is committed to improving opportunities abroad for U.S.
financial institutions. We are working to level the playing field through NAFfA, with
our bilateral negotiations with Japan, and through the Uruguay Round of GATT talks.
On that last point, let me say that we support the Fair Trade in Financial Services
legislation up on Capitol Hill.
Now many of you also know I'm very interested in NAFfA I think it's a great
deal. Without giving you a full-blown NAFfA speech, let me tell you there's a financial
services section there that can be a model for agreements in Latin America. The word
has to get out that NAFfA is a winner for the United States. It's going to give us
tremendous market access, and create jobs.
Beyond these issues, there are others we are looking at closely, such as regulatory
consolidation and interstate banking. Over the long-term, both of those hold the
prospect of removing more impediments to the flow of credit. We're also working on
the money-laundering problem.
We need your help on this. The industry has made some gains, and I want you to
know I have told our Office of Enforcement to review all of our money-laundering laws
and regulations. We want to be certain that we reduce the regulatory burden your
industry faces complying with the Bank Secrecy Act. A streamlined currency reporting
process can benefit us all by making law enforcement more efficient and effective.
The Enforcement Office has established a task force on this issue. They're
working to get the number of forms you have to fill out reduced by 30 percent, and to
simplify the existing forms and procedures. They started work last month, and we expect
them to have some draft recommendations later this year.
That's just one place to streamline things. There is no question in anyone's mind
that our regulatory structure is too overlapping and confusing. There are four federal
agencies supervising our banks and thrifts. We've all heard the stories. I saw one in a
newspaper recently about a bank in California with 22 employees. One day they had 26
examiners in there looking them over. The customers couldn't even get into the parking
lot. Surely there are more productive uses of the bank staffs time, and of the
government's resources.
4
We can further streamline the existing structure and create one that can make
more timely decisions. And, by eliminating duplicative regulatory agencies, we can help
reduce inconsistent interpretations of the same laws and rules. Furthermore, interagency turf battles can be avoided. Finally, financial institutions could reduce their
expenses and spend more time making sound loans than filling out papers in
quadruplicate.
We are interested in pursing a rational consolidation of regulatory functions. If
we go down that road, any new institution must remain responsive to the electorate with
regard to policy. Banking policy is such a vital component of economic policy, that those
who direct policy must be able to affect its implementation. I have asked Frank
Newman to discuss this with Congress next month.
Insofar as interstate banking is concerned, as our banking system has evolved over
the years, impediments to efficiency have crept in. One of our eventual aims is to
eliminate these and make it less expensive and cumbersome for banks to operate across
state lines.
The Washington area is a perfect case. Down the street from my office is a
branch of a banking organization that operates in a number of jurisdictions. People who
use this branch but have their account at a branch in Maryland or Virginia can walk up
and cash a check. They can draw hundreds of dollars out of the ATM machine, or
transfer thousands of dollars between accounts. But they can't make a deposit in that
branch and get a deposit slip showing the bank has accepted it.
I imagine people in Kansas City, or the New York area, or Chicago and Gary
have exactly the same problems. We are the only country in the industrialized world
with this kind of artificial restriction.
We currently have a de facto system of interstate banking. But it's a patchwork
system, and it's clumsy. Change will not happen overnight. A number of policy issues
must be worked through. And, more importantly, we need to concentrate our legislative
efforts on more immediate priorities just now. But we look forward to working with
Congress to develop freestanding interstate branch consolidation legislation in the near
future.
Our preference is to build upon what the marketplace has created rather than
reinventing the banking business. The basic approach would be to let banking
organizations convert multi-bank, multi-state operations into a single bank, multi-branch
operation.
But let me emphasize, this would continue to leave it entirely to the states to
decide if they don't want out-of-state banks doing business within their borders. It would
just end the necessity of having to maintain a separate subsidiary.
5
This approach can take some of the inefficiency out of our system. Consumers
get better access to services, and banks will have the opportunity to operate more
efficiently because of economies of scale, and because of the more efficient regulatory
policies we also intend to pursue. And, states retain the authority to determine many of
the key rules for banks in their markets, including where they can operate.
The dual banking system will continue to have its place in the nation's economy.
I believe we can do this with appropriate protections for consumers, and the proper
implementation of the Community Reinvestment Act and Fair Lending. At the same
time, community banks, can continue to playa very important role in the banking system.
Ultimately, permitting a true interstate banking system can translate into
increased lending, a safer and stronger banking system, and more competitive services
for all consumers in all communities.
We have no shortage of issues ahead of us. And we have a careful approach
calculated to free up the flow of credit and make our system operate efficiently. We will
focus on problems in a deliberate manner, and seek achievable goals.
For instance, early next year the regulators will present a new plan to make the
Community Reinvestment Act a much more effective tool in actually generating lending
services and investment in our communities, for all the people who live there, and for
the businesses that provide them with jobs and services. It will also include paperwork
reduction steps, keeping in mind the disproportionate burden paperwork requirements
have on community banks.
Let me close with this: We must change our banking system in a careful,
deliberate manner, to bring it into a new era. We're operating with laws and regulations
made for another time in America. We're paying a price for inefficiency. It touches
every American who pays a service charge nn a checking account, who borrows for a new
car or buys a new home. It affects how businesses invest to create jobs, and how our
economy grows. The Clinton Administration is committed to the careful steps that will
assure an efficient flow of credit, while protecting consumers and communities, and
ensuring the safety and security of our financial system.
Thank you.
-30-
RECORD TESTIMONY OF TREASURY SECRETARY LLOYD BENTSEN
BEFORE THE
SUBCOMMITTEE ON HEALTH AND THE ENVIRONMENT
AND
THE SUBCOMMITTEE ON COMMERCE, CONSUMER PROTECTION AND
COMPETITIVENESS
Thank you, Chairman Dingell, Chairwoman Collins and Chairman
Waxman for the opportunity to come before you today to discuss
the President's health reform plan.
As you know, this is an issue which holds great interest for
me, and one on which we worked closely with one another over the
years when I served in the Senate.
Reform of the health care system is one of the President's
highest priorities and an integral part of his economic strategy.
From the beginning, this administration has been dedicated
to raising the standard of living in this country for us and for
our children. Over the long term the only way to ensure higher
standards of living is to have faster wage growth.
Faster wage growth requires investment in plant and
equipment. But when this administration took office, the
country's debt and deficits were growing faster than the economy.
This was driving up interest rates and creating a climate that
was hostile to business planning and investment.
The first thing we had to do was get our deficit headed
down. Our budget plan and its $500 billion in deficit reduction
has provided the basis for economic growth and rising wages. As
soon as the critical elements of the plan emerged last winter,
interest rates began to fall and they have been falling ever
since. They're the lowest they've been in 20 years~ In
response, the interest sensitive sectors of our economy have
taken off and we are well on our way to a healthy and steady,
investment-led recovery.
An economic recovery by itself, however, will not ensure
higher standards of living. For too long now, rising health care
costs have been a drag on wages and profits -- not to mention
being a major contributor to the federal deficit. So now we turn
to health care reform. Let me assure you, from an economic
standpoint, failing to act is not an option.
LMB-467
2
When employers pay their workers more, but health care costs
rise also, workers' payslips don't go up as they should. The
average worker today would be earning at least $1,000 more a year
if health insurance costs had not risen faster than wages for the
last 15 years.
If nothing is done, 120 percent -- every bit and
more of projected wage increases in the coming decade -- will be
consumed by health care costs. Talk about going backwards!
As a nation, we spend 14 percent of GOP on health care. No
other developed country spends near that. Japan and Germany are
down around 9 percent. If nothing is done, health care will
consume more than 19 percent of GOP by the year 2000, while our
competitors remain under 10 percent.
Maybe spending all this money would be worth it, if we saw
good results. But other countries -have longer life expectancy
and lower rates of infant mortality. They spend less and they
cover everyone. We're spending more money and not providing all
Americans the security they need.
The Health security plan addresses the fundamental problems
with the current system. The current system costs too much, and
the real tragedy is that too many people have inadequate coverage
or lack coverage altogether. More than 37 million Americans have
no health coverage, and nearly 10 million are children. Another
22 million more are underinsured.
This lack of universal coverage is not a problem just for
the uninsured. Every time someone without insurance shows up at
the emergency room and is treated, every one of us who has
insurance foots the bill. Estimates show that many corporate
insurance premiums are 10 percent higher than they need be in
order to pay for uncompensated care.
Universal coverage is critical to getting costs under
control. I remember when Lawton Chiles was chairman of the
Budget Committee in the senate. He was convinced that it was
necessary to control health care costs first before extending
coverage to everyone. Lawton left the senate and became governor
of Florida. Within less than a year he was telling the Finance
Committee that he had changed his mind. Universal coverage was
absolutely necessary in order to control costs so that business
and people do not become the victims of cost shifting -- paying
higher premiums to cover the cost of care for those who have no
coverage.
The Health Security plan addresses the coverage issue. It
will provide security to Americans and shift resources to more
productive uses. Many businesses will see their costs fall, and
others will be able to offer insurance for the first time.
3
Slower cost
real wages,
longer have
they change
growth will allow workers to enjoy faster growth in
and universal coverage will ensure that workers no
to fear losing their health insurance coverage if
jobs or want to start their own businesses.
To avoid major disruptions, the new system will be financed
primarily like the current system. Creating a broad, singlepayer program would have been too disruptive and transferred too
large a role to the federal government. The key to making this
plan effective is to build on the system of insuring individuals
through their employers. Most businesses already cover their
workers; even two-thirds of small businesses already provide
health insurance. Just as they do today, employer and individual
health insurance premiums will pay for the bulk of health
coverage.
Employers will be required to pay 80 percent of the average
premium. However, the plan limits the percentage of payroll that
would be devoted to health care premiums to 7.9 percent for large
firms, and provides discounts for small low-wage firms and
individuals of modest means. Unless they qualify for a
discounted premium, individuals will be asked to contribute the
balance of the total premium cost.
Additional federal support will be required to cover the
costs of these discounts, as well as the cost of the new Medicare
drug benefit and long-term care benefit. Revenues for these
outlays will come from slowing the growth in Medicare and
Medicaid, a 75-cent increase in the tax on a pack of cigarettes
an assessment on large companies that choose to establish
corporate alliances, and increased revenues as compensation
shifts from non-taxable health care benefits to taxable wages and
profits.
I
The Treasury Department has been responsible for estimating
the new sources of revenues for the program, so I would like to
talk to you for a minute about the major provisions.
First, however, there are three points I want to emphasize.
One, the president's plan is the only comprehensive proposal that
spells out exactly how it will be financed. Laying out the
specifics of the benefits package is the only fiscally
responsible thing to do. To put those numbers together, we
consulted with some of the nation's most respected actuaries and
health economists. I feel confident that we have approached the
estimating process in a very responsible way.
Second, we have protected both the private sector and the
public sector from cost overruns by insisting on accountability.
4
And third, this plan will be phased in, which allows
sufficient time to make adjustments should we find that
modifications are needed.
NOW,
as to some specifics.
As you know, our plan includes a proposal to increase the
tax on tobacco products. Specifically, the excise tax o~ .
cigarettes would be increased by 75 cents per pack -- ra1s1ng the
federal tax from the current level of 24 cents to just under a
dollar a pack. The administration also proposes to increase the
federal excise tax rates on all other tobacco products.
This will both promote better health -- not just among
adults but very importantly among our children. I am
particularly concerned about the dramatic increase in the use of
tobacco products by adolescents.
The increased tobacco taxes will provide much of the revenue
we need to fund this plan.
Although we know it will promote better health, I want to
elaborate briefly on this point. This is an entirely appropriate
way to finance health care for several reasons.
First, tobacco consumption is the leading preventable cause
of death and disease in the united states. As members of this
committee know, it accounts for about half a million deaths a
year and billions of dollars in health care costs.
Second, since the president's health care plan does not
generally allow differential health insurance premiums for
smokers and non-smokers, the fact of the matter is non-smokers
will bear some of the increased health costs of smokers.
Studies by the Department of Health and Human Services, as
well as the Canadian experience, demonstrate that raising tobacco
taxes can successfully discourage the use of tobacco products by
the young. This is particularly true for the proposed increase
in taxes on smokeless tobacco. Studies have shown that nearly 20
percent of high school students use this type of tobacco, and it
presently is taxed at a disproportionally low rate in comparison
to cigarettes.
In addition, the Clinton plan will support critical health
research with a payroll assessment on large employers who opt to
form their own health alliance. Employers who are in the
regional health alliances will also contribute to the cost of
medical education and research. It is a fair and straightforward
way to allow corporate alliance employers and employees to
contribute to the health research and specialized care from
which they also benefit.
5
Let me remind you, small expenditures in research have paid
dollars in dividends. This money, among other
th~ngs, w~ll go for added research into such areas as heart
disease, cancer, AIDS, Alzheimer's disease and others. It also
will be used for studies that give American health consumers
important information about the quality and cost of health care.
bi~lions ~f
I would also note that we anticipate that revenue impact of
the general reform proposals in the health plan would result in a
$23 billion increase in tax revenues. This results largely from
increased competition and greater cost consciousness and other
cost containment measures which are expected to lead over time to
lower health insurance costs. It is assumed that the lower peremployee costs of tax-preferred employer-provided health
insurance will lead employers to increase taxable wages, which in
turn will generate more income and payroll taxes, despite the
increased numbers of workers covered.
There are other tax provisions in the president's health
plan that will accomplish many of the goals of this committee.
For example, the individual income tax health insurance
deductions for self-employed taxpayers will be increased to 100
percent of the costs of the comprehensive benefit package. A
self-employed taxpayer could claim the full deduction once the
state of residence establishes a regional alliance. The 25
percent health insurance deduction for self-employed workers will
continue in force until the 100 percent deduction is applicable.
In addition, I know that many of you here are very
interested in making certain our rural residents, and those who
live in some urban areas, have adequate access to quality health
care. This plan provides for that. It encourages doctors and
nurses to locate in underserved areas. The plan's initiatives
work well with the expanded National Health Service Corps and
Community Health Center initiatives. It will have at least 3,000
primary care practitioners in rural areas by the end of the
decade, and increase the number of minority physicians, nurses
and other health professionals.
Specifically, we propose two tax incentives to encourage
adequate medical care in all areas· of the country. A physician
who works full-time for at least two years in an area designated
as being short of health professionals can receive a tax credit
of up to $1,000 per month for up to 60 months. Certified nursemidwives, nurse practitioners, and physician assistants who work
in health professional shortage areas can receive a tax credit up
to $500 per month for up to the same period. In addition, for
physicians who work in areas designated as being short of health
professionals, the section 179 expensing limit will be increased
by $10,000 for medical equipment.
6
There are other ways the tax system will be used to achieve
other objectives of the health plan. For example, it will expand
and improve long-term care options, stressing home and communitybased services and the improvement of private long-term care
insurance.
The plan proposes to modify the current tax treatment of
long-term care expenses and insurance. Qualified long-term care
expenses incurred by certain incapacitated individuals will be
treated as deductible medical expenses, and taxpayers will be
able to exclude up to $150 a day from taxable income for benefits
paid under qualified long-term care policies. In addition,
employers could deduct the premiums paid for these policies, and
employees will also be able to exclude the value of this
employer-provided coverage from taxable income.
But the non-tax aspects of the president's health plan on
long-term health insurance markets are equally important. Under
the plan, the Secretary of Health and Human Services has
regulatory authority to establish uniform standards for the
provision of private long-term care insurance. This authority
will be exercised in conSUltation with a newly-established
National Long-Term Care Insurance Advisory Council, appointed by
the HHS Secretary. Federal regulations will provide standardized
formats and terminology for long-term care insurance policies,
require insurers to provide customers with information on the
range of public and private long-term care coverage available,
and establish other requirements to promote consumer
understanding, make it easy to compare benefits, and regulate
sales practices, insurance coverage, premium rates and increases,
and conditions for payment of benefits.
CONCLUSION
The administration has offered a bold and comprehensive
plan. By holding down health care costs, it can make our
businesses more competitive and could lead to lower prices. It
also can, over the long run, create jobs.
But beyond that, it accomplishes everything many of us tried
to do in the last session, and much more. You may recall that
last year we worked together to fashion four bills that, taken
together, would have made important but incremental progress in
extending health coverage to low income families. I helped
develop those bills because at the time it was as far as I
thought we could go in achieving some reform of the health care
system. Things have changed.
I've been waiting a long time for a president willing to
take the lead on this issue. I'm proud to be a part of an
administration tackling this country's health care problem. It's
a problem that can cripple our economy if we don't act.
7
President Clinton is committed to universal coverage and
comprehensive benefits, with lifetime coverage, and coverage and
cost protections for every American. He is committed to choice
in health care.
Furthermore, President Clinton is intent on seeing that the
quality of health care improves. He wants to reduce the
paperwork burden for individuals and employers. He wants to make
everyone responsible for health care. And, he is intent on
financing the Health Security plan in a responsible manner. This
plan does all of that with minimal government intrusion.
These are important principles. There are a number of ideas
out there, but few meet all those tests -- particularly
universality, comprehensive benefits defined from the outset, and
responsible financing. Some would, for instance, attack the
problem by only changing insurance requirements, but that
approach leaves health care consumers without sufficient leverage
in the marketplace.
The president wants a bipartisan solution to this problem.
It is an American issue, not a partisan one. The president looks
forward to working with the members of this Committee, and others
in Congress, to enact a comprehensive and lasting reform of our
health care system.
Thank you.
-30-
Text as Prepared for Delivery
For Immediate Release
October 28, 1993
STATEMENT OF TREASURY SECRETARY LLOYD BENTSEN
BEFORE THE
SUBCOMMITIEE ON HEALTII AND THE ENVIRONMENT
AND
THE SUBCOMMlI'IEE ON COMMERCE, CONSUMER PROTECTION AND
COMPETITIVENESS
Thank you, Chairman Dingell, Chairwoman Collins and Chairman Waxman for the
opportunity to discuss the President's health reform plan. I have a longer statement for
the record which I'd like to summarize.
As you know, health care reform is an issue which holds great interest for me, and
one on which we worked closely with one another over the years when I served in the
Senate.
Reform of the health care system is one of the President's highest priorities and an
integral part of his economic strategy. With the first step, the deficit reduction plan, we
have renewed the basis for economic growth and rising wages in America.
But recovery by itself will not ensure a higher standard of living for Americans.
For too long now, rising health care costs have been a drag on wages and profits - not
to mention being a major contributor to the federal deficit So now we turn to health
care reform. Let me assure you, from an economic standpoint, failing to act is not an
option.
When employers pay their workers more, but health care costs also rise, workers'
paychecks don't go up as they should. The average worker today would be earning at
least $1,000 more a year if health insurance costs had not risen faster than wages for the
last 15 years. If nothing is done, 120 percent - every bit and more of projected wage
increases in the coming decade - will be consumed by health care costs. Talk about
going backwards!
This country spends 14 percent of its GDP on health care - 50 percent more than
our major competitors. If nothing is done, health care is projected to consume more
than 19 percent of GDP by the year 2000, while our competitors remain under 10
percent
LB-468
2
For all this extra spending, our health is no better than theirs. In many areas, it is
worse. We're spending more money and not offering Americans health security.
The president's Health Security plan addresses the fundamental problems with the
current system - the cost, and the real tragedy of Americans going without coverage.
More than 37 million Americans have no health coverage, and almost 10 million of them
are children. Another 22 million more Americans are underinsured.
This lack of universal coverage affects all of us. Every time someone without
insurance is treated at an emergency room, each of us with insurance foots the bill.
Estimates show that corporate premiums are 10 percent higher than they need be in
order to pay for uncompensated care.
Universal coverage is critical to getting costs under control. I remember when
Lawton Chiles was chairman of the Budget Committee in the Senate. He was convinced
it was necessary to control health care costs first before extending coverage to everyone.
He left the Senate and became governor of Florida. In less than a year he was telling
my committee that he had changed his mind. Universal coverage was absolutely
necessary in order to control costs so that businesses and people do not become the
victims of cost shifting - paying higher premiums to cover care for those who have no
coverage.
The Health Security plan addresses the coverage issue. It will provide security to
all Americans and shift resources to more productive uses. Many businesses will see
their costs fall, and others will be able to offer insurance for the first time. Slower cost
growth will let workers enjoy real pay raises, and universal coverage will ensure that
workers no longer have to fear losing their health insurance if they change jobs or want
to start their own business.
The key to making this plan effective is to build on the existing system of insuring
individuals. Just as they do today, employers and individuals will pay premiums to cover
the bulk of health coverage costs.
Additional federal support will be required to cover the costs of discounts to
businesses and individuals eligible for reduced premiums, as well as the cost of the new
drug benefit and long-term care benefit Funding for these subsidies and program
improvements will come largely from slowing the rate of growth in Medicare and
Medicaid, a 75-cent increase in the tax on a pack of cigarettes, and an assessment on
large companies that choose to establish corporate a11iances.
The Treasury Department has been responsible for estimating the new sources of
revenues for the program, so I would like to talk to you for a minute about the major
provisions.
3
First, however, there are three points I want to emphasize. One, the President's
plan is the only comprehensive proposal that spells out exactly how it will be financed.
Laying out the specifics of the benefit package and the details of the financing is the only
fiscally responsible thing to do. To put those numbers together, we consulted with the
nation's best actuaries and health care economists. I feel confident we have approached
the estimating process in a very responsible way.
Second, we have protected both the private sector and the public sector from cost
overruns by insisting on accountability.
And third, this plan will be phased in, which allows sufficient time to make
adjustments should we find that modifications are needed.
Now, let me offer two specifics on the tax side of the plan which would
accomplish the goals of this committee.
We propose increasing the excise tax on cigarettes by 75 cents, to 99 cents a pack.
We also propose raising the federal excise tax rates on all other tobacco products. This
will promote better health - not just among adults but very importantly among our
children. like many of you on this committee, I am very concerned about the increase
in the use of tobacco products among our youngest children.
And, the Clinton plan will provide the funds needed to continue federal support
of critical health research by assessing large employers who opt to form their own health
alliance.
In addition to those steps, we want to help the self-employed better afford their
contribution to health coverage. To do that, we propose increasing the health insurance
deduction for self-employed taxpayers to 100 percent of the cost of the comprehensive
benefit package.
In addition, we want to ensure that our rural residents, and those who live in
some urban areas, have adequate access to quality health care. This plan provides for
that. It encourages doctors and nurses to locate in underserved areas.
The administration has offered a bold and comprehensive plan. It can make our
businesses more competitive, and over the long term it can lead to job creation.
But beyond that, it accomplishes everything many of us tried to do in the last
session -- and more, much more. I've been waiting a long time for a president willing to
take the lead on this issue. I'm proud to be part of an administration tackling this
country's health care problem. It's a problem that can cripple our economy if we don't
act.
4
President Clinton is committed to universal coverage and comprehensive benefits,
with lifetime coverage. He is intent on seeing that the quality of health care improves,
and that consumers have a choice of plans. He wants to reduce the paperwork burden.
And, he is intent on financing the Health Security plan in a responsible manner, and
with minimal government regulation.
These are important principles. There are a number of ideas out there, but few
meet all those tests - particularly universality, comprehensive benefits defined from the
outset, and responsible financing.
The president wants a bipartisan solution to this problem. It is an American
issue, not a partisan one. The president looks forward to working with the members of
this Committee, and others in Congress, to pass a comprehensive and lasting reform of
our health care system.
Thank you.
-30-
contact:
Michelle smith (202) 622-2960
Barry Toiv
(202) 395-7254
FOR IMMEDIATE RELEASE
October 28, 1993
JOINT STATEMENT OF
LLOYD BENTSEN,
SECRETARY OF THE TREASURY,
~D
LEON E. P~ETTA,
DIRECTOR OF THE OFFICE OF ~AGEMENT ~D BUDGET,
ON
BUDGET RESULTS FOR FISCAL YEAR 1993
SUMMARY
The Administration is today releasing the September Monthly
Treasury Statement of Receipts and Outlays of the united states
Government.
The statement shows the actual financial totals for
the fiscal year ended September 30, 1993, as follows:
a deficit of $254.9 billion {4.0 percent of Gross
Domestic Product (GDP));
total receipts of $1,153.2 billion (18.3 percent of
GOP); and
total
GOP) .
outlays
of
$1,408.1
1
LB-469
billion
(22.4
percent
of
Table 1.
TOTAL RECEIPTS, OUTLAYS AND DEFICITS
(in billions of dollars)
1992 Actual ........... .
1993:
April Budget Estimate ..
Mid-Session Review
Estimate ..•.......
Actual . . . . . . . . . . . . . . . . .
Recei:gts
1,090.5
Outlays
1,380.8
Deficits
-290.3
1,145.7
1,467.6
-322.0
1,144.1
1,153.2
1,425.2
1,408.1
-281.1
-254.9
DEFICIT
The actual FY 1993 deficit, $254.9 billion, is $26.1 billion lower
than the deficit estimated in the Mid-Session Review (MSR). The
changes from the MSR deficit estimate reflect the impact of:
a $17.0 billion decrease in outlays;
and
a $9.1 billion increase in receipts.
RECEIPTS
Actual FY 1993 receipts were $1,153.2 billion, $9.1 billion higher
than the MSR estimate.
Higher-than-expected collections of
individual and corporation income taxes, social insurance taxes and
contributions, and deposits of earnings by the Federal Reserve
account for most of this increase relative to the MSR. Table 2
displays actual receipts and estimates from the budget and MSR by
source.
Changes in Recei:gts According to Source
Individual income taxes were $509.7 billion, $1.6 billion
higher than the MSR estimate. Higher-than-estimated withheld
taxes, partially offset by lower-than-expected estimated
payments of 1993 liability and higher-than- estimated refunds
of 1992 liability, were primarily responsible for the increase
in this source of receipts relative to the MSR.
Cor:goration income taxes were $117.5 billion, $5.8 billion
higher than the MSR estimate.
Estimated payments of 1993
liabili ty by corporations were higher than anticipated and
accounted for most of the increase in this source of receipts.
2
Social insurance taxes and contributions were $0.8 billion
higher than the MSR estimate of $427.5 billion. Lower-thanestimated refunds of social security and medicare payroll
taxes accounted for $0.3 billion of the increase in this
source of receipts. An unanticipated repayment of a loan to
the unemployment insurance trust fund accounted for most of
the remaining increase in this source of receipts relative to
the MSR estimate.
Miscellaneous receipts were $0.6 billion higher than the MSR
estimate, the net effect of higher-than-anticipated deposits
of earnings by the Federal Reserve System of $1.3 billion, and
lower-than-anticipated collections of other miscellaneous
receipts of $0.7 billion. Higher-than-expected asset values
on securities denominated in foreign currencies accounted for
most of the increase in deposits of earnings by the Federal
Reserve System.
other receipts, which include customs duties, excise taxes,
and estate and gift taxes, were $79.4 billion, $0.3 billion
above the MSR estimate.
OUTLAYS
Total outlays were $1,408.1 billion, $17.1 billion lower than the
MSR estimate. The major outlay cnanges since the MSR are described
below.
Table 3 displays actual outlays and estimates from the
April Budget and the MSR by agency and major program.
Department of Agriculture.
Actual outlays for the Department of
Agriculture were $63.1 billion, $3.6 billion lower than the MSR
estimate. Outlays for the Commodity Credit Corporation (CCC) were
$16.0 billion, $1.1 billion below the MSR.
CCC crop disaster
payments were $0.4 billion lower than anticipated. New subsidies
for export loan guarantees were $0.2 billion below the MSR
estimate, and net outlays for export loan guarantees made prior to
FY 1992 were $0.4 billion less than assumed.
Net outlays for the Rural Electrification Administration were $0.9
billion below the MSR estimate due largely to increases in
offsetting receipts resulting from refinancings of loans. Outlays
for P.L. 480 agricultural foreign assistance were $0.6 billion
below the MSR.
A portion of this difference ($0.2 billion) is due
to delays in new subsidies for Russia. The remaining difference is
due to lower grant and program outlays and lower receipts from old
loans.
Net outlays for the remaining 39 bureaus of the Department of
Agriculture were nearly $1.0 billion less than anticipated.
Outlays from the Federal Crop Insurance Corporation in response to
the Midwest flood were lower than expected.
In addition, higherthan-anticipated prepayments for Farmers Home Administration
3
housing loans resulted in lower net outlays.
Department of Energy. Actual outlays for the Department of Energy
were $16.8 billion, $0.7 billion lower than the MSR estimates. The
difference is due to slower-than-expected spending in atomic energy
defense activities because of rapid reductions in nuclear weapons
programs.
Department of Health and Human Services.
Actual outlays for the
Department of Health and Human Services were $581.1 billion, $2.3
billion lower than the MSR estimate.
Actual outlays for Supplemental Security Income (SSI) benefits were
$22.6 billion, $0.8 billion below the MSR estimate.
SSI benefits
for cases associated with the 1989 Zebley Supreme Court decision
were overestimated for FY 1993.
(That decision retroactively and
prospectively expanded childhood eligibility for SSI benefits).
Regular SSI payments were slightly higher than estimated.
Actual outlays of the Administration for Children and Families,
excluding Family Support Payments to States, were $12.2 billion,
$1.3 billion below the MSR estimate. According to HHS, some of this
difference may
be attributable to a delay in the Head Start
expansion in the Children and Families Services Programs.
Grants
for this program went out later than anticipated, reducing FY 1993
outlays. Other programs, such as child care, JOBS, and Foster Care
also had lower-than-expected outlay rates.
Actual outlays for the Medicaid program in FY 1993 were $75.8
billion, $0.8 billion (or 1%) higher than was estimated in the MSR.
In FY 1991 and FY 1992, MSR Medicaid estimates differed by 1.5% and
2.4%, respectively, from actual outlays.
State draws of Federal
funds for disproportionate share hospitals (DSH) , those that serve
a disproportionate number of Medicaid or other
low-income
individuals, accelerated in the last quarter of FY 1993, especially
in September.
The Federal portion of DSH payments in that month
was $1.45 billion, compared to $0.64 billion in July and $0.46
billion in August. DSH payments may have increased in September in
response to the publishing of Federal DSH allotments by HCFA on
August 13.
States drawing an unusually high proportion of their
DSH
allotment
in
September
included
California,
Missouri,
Pennsylvania, and west Virginia .
.!::::D:..::e:..tp~a~r!::...t..=.!!;m!.:::e~n.!.-'t=---~o~f~L::!.:a~b~o:..:!:r~.
Actua lout la ys f or the Department of Labor
were $44.7 billion, $0.7 billion lower than the MSR estimate. The
difference
is
largely
attributable
to
higher-than-expected
offsetting collections in the Pension Benefit Guaranty Corporation
(PBGC) .
Department of Transportation.
The Department of Transportation's
actual outlays were $34.5 billion, $1.5 billion below the MSR
proj ection.
Federal Highway Administration outlays were $1.1
4
billion lower than projected.
Highway spending was generally
slower than anticipated, with $0.2 billion resulting from lowerthan-anticipated obligations and the remaining $0.8 billion due to
s~o~er-than-e~pec~ed spendout from prior year obligations.
The
t1m1ng of obl1gat1ons and outlays for the Federal highway program
are at the control of state Highway Departments. Late enactment of
the Intermodal Surface Transportation Efficiency Act of 1992
(ISTEA), lack of familiarity with the new program structure, and
other changes in the Act are probably responsible for the lag in
spending.
Outlays for the Maritime Administration and the Coast Guard were
also below the MSR estimates. The Maritime Administration outlays
were lower because of lower-than-expected defaults on guaranteed
loans.
Environmental
Protection Agency.
Actual outlays
for
the
Environmental Protection Agency were $5.9 billion, $0.5 billion
below the MSR estimate.
Outlays for wastewater treatment
construction were $0.3 billion less than proj ected.
The wet
weather
in California and in the Midwest slowed planned
construction of wastewater facilities.
In addition, the state of
New York made a major change in its program that resulted in
reduced outlays. Outlays in several other EPA programs were also
lower than anticipated.
General Services Administration.
Actual outlays for the General
Services Administration were $0.7 billion, $0.6 billion below the
MSR estimate.
Outlays were lower because net income and
unobligated balances were higher than expected, and because of
delays in certain construction and repair and alteration projects.
Deoosit Insurance. Net offsetting collections exceeded outlays by
$28.0 billion, $2.0 billion more than the MSR estimate.
Net
outlays for the Bank Insurance Fund were $0.8 billion lower than
the MSR estimate because the number of bank resolutions in the
fourth quarter of FY 1993 was lower than expected. Outlays for the
FSLIC Resolution Fund were $0.9 billion lower than the MSR estimate
because of slightly higher liquidation collections and the shift of
approximately $0.7 billion in assistance agreement payments into FY
1994. outlays for other deposit insurance, including the National
Credit Union Administration, were $0.3 billion below the MSR.
Federal Emergency Management Agency.
Actual outlays for the
Federal Emergency Management Agency were $0.6 billion below the MSR
estimate because disaster relief outlays were lower than expected.
Unusually heavy disaster activity in the past year, including
Hurricanes Andrew and Iniki, the late winter blizzard in the
Northeast, and the flooding in the Midwest made disaster relief
outlay estimates subject to sUbstantial variance.
Postal
Service.
Actual
outlays
5
of
the
U.S.
Postal
Service
revolving fund were $0.8 billion below the MSR estimate.
This
decrease in outlays reflects the net impact of increased receipts,
lower-than-planned
capital
disbursements,
and
higher-thananticipated operating disbursements.
6
Table 2.--1993 BUDGET RECEIPTS BY SOURCE
(fiscal years; in millions of dollars)
1992
Actual
Individual income taxes ..
Corporation income taxes ..
Social insurance taxes and contributions
Employment taxes and contributions
On-budget
Off-budget ..
Subtotal, Employment taxes and contributions
Unemployment insurance
Other retirement contributions.
Subtotal, Social insurance taxes and contributions
Excise taxes ......
Estate and gift taxes ...
Customs duties.
Miscellaneous receipts ..
Total, Receipts
On-budget
Off-budget ..
475,964
100,270
1993
Estimate
Mid-Sess!21}
E3L!Qgg!
-
515,315
106,261
508,106
111,758
84,830
311,83Q
396,660
26,071
83,065
84,490
~Qb426
~l1J76
385,491
23,410
4,788
413,689
396,266
25,768·
1.>[82
426,815
45,569
11,143
17,359
26,452
1,090,453
788,027
302,426
~---
47,628
12,594
19,192
17,880
1,145,685
833,909
·311,776
Actual
Change
Budget Mid-Session
509,680
117,520
-5,635
11,259
1,574
5,762
85,005
515
158
673
788
23
1,485
175
104
279
485
23
787
429
-17
-390
359
7,490
7,332
158
515
-30
-152
622
9,078
8,974
104
~lL2~1
396,939
26,556
1,78~
~,~Q~
427,513
428,300
47,542
12,607
18,954
17,617
1,144,097
832,267
311,830
48,057
12,577
18,802
1~"~~2
1,153,175
841,241
311,934
Table 3.--1993 BUDGET OUTLAYS BY AGENCY
(fiscal years; in millions of dollars)
1993
--
_~ __ ~_~Ch~~ ___ ~ ~~
Budg~
Mid-S~ssion
Actual
Budget
Mid-Session
--
~
Estimate
--- - -
--
1992
Actljal
~~-
----
Q\:!tlClY§ byJy1~or Agency
Legislative branch and the Judiciary
Executive Office of the President.
Funds Appropriated to the President
International Security Assistance
Foreign Military Financing.
Economic Support Fund.
Other.
International development assistance
International monetary programs
Military sales programs
Other.
Subtotal, Funds Appropriated to the President
4,985
186
5,482
241
5,388
240
4,985
194
-497
-47
-403
-46
4,399
2,938
-134
4,029
-686
559
8
11,113
4,612
3,170
-185
4,009
11
172
40
11,829
4,612
3,170
-194
4,008
11
172
41
11,820
4,580 '
3,231
-489
3,856
336
-6
19
11,527
-32
61
-304
-153
325
-178
-21
-302
-32
61
-295
-152
325
-178
-22
-293
Agriculture
Commodity Credit Corporation
Foreign assistance - PL 480
Federal Crop Insurance Corporation.
Rural Electrification Administration
Farmers Home Administration.
Food and Nutrition Service
Forest Service ..............
Other
Subtotal, Agriculture
9,738
971
954
-934
3,552
32,096
3,293
6,76!j
56,436
17,134
1,230
867
-310
2,100
35,018
3,447
7,429
66,915
17,150
1,461
867
-310
2,136
34,877
3,279
66,705
16,043
880
461
-1,216
2,042
34,700
3,292
1i,941
63,143
-1,091
-350
-406
-906
-58
-318
-155
-488
-3,772
-1,107
-581
-406
-906
-94
-177
13
-304
-3,562
2,567
3,179
3,064
2,798
-381
-266
81,171
92,042
74,881
34,632
3,906
286,632
75,965
91,100
68,512
37,328
4,398
277,304
278,560
75,904
94,105
69,936
36,958
1.§73
278,576
-61
3,005
1,424
-370
-2,725
1,272
-61
3,009
1,424
-370
-3,98§
16
Defense-Civil ...
28,270
29,496
29,488
29,262
-234
-226
Education ....
Energy ......
26,047
15,439
30,907
17,522
30,770
17,471
30,414
16,801
-493
-721
-356
-670
. . .. . ........
.................
Commerce ................
.Defense-Military:
Military Personnel..
Operation and Maintenance ..
Procurement. ............
Research, Development, Test and Evaluation ..
Other .........................
Subtotal, Defense-Military
L245
75,965
91,096 .
68,512
37,328
~659
Table 3.-1993 BUDGET OUTLAYS BY AGENCY
(fiscal years; in millions of dollars)
1993
1992
Actual
Estimate
Mid-Session
Budget
Actual
Change
Budget
Mid-Session
Outlays by Major Agency
Health and Human Services - except Social Security:
Medicare ................................................................................... .
Medicaid .................................................................................... .
Public Health Service ........... ..................................................... .
Family Support Payments to States ................ .
Other Administration for Children and Families ........................ .
Supplemental Security Income ....... ......................................... .
Other ......................................................................................... .
Subtotal, Health and Human Services - except
Social Security .................................................................. .
132,256
67,827
17,447
15,103
12,145
19,445
-6,931
147,777
80,511
19,213
15,768
13,879
23,594
-7,953
146,344
75,000
18,825
15,768
13,502
23,443
-7,703
145,858
75,774
18,865
15,628
12,170
22,642
-8,163
-1,919
-4,737
-348
-140
-1,709
-952
-210
-486
774
40
-140
-1,332
-801
-460
257,293
292,788
285,179
282,774
-10,014
-2,405
Health and Human Services - Social Security ........................... .
281,418
298,943
298,256
298,349
-594
93
Subtotal, Health and Human Services ......... .............................. .
538,711
591,731
583,435
581,123
-10,608
-2,312
16,436
2,456
-352
3,090
2,839
24,470
17,704
1,245
-361
3,811
3,619
26,018
18,064
745
-353
3,160
3,145
24,760
17,990
1,073
-454
3,198
3,378
25,185
286
-172
-93
-613
-241
-833
-74
328
-101
38
233
425
6,555
9,802
7,544
10,554
7,144
10,502
6,728
10,197
-816
-357
-416
-305
4,281
41,294
-654
2,243
47,163
5,188
39,040
-789
3,372
46,812
4,671
39,448
-789
2,104
45,434
4,241
39,869
-1,508
2,136
44,738
-947
829
-719
-1,236
-2,074
-430
421
-719
32
-696
5,007
5,545
5,252
5,384
-161
132
Housing and Urban Development:
Housing payments ............................. .
Federal Housing Administration funds ..................................... .
Government National Mortgage Association ........................... .
Community development grants ............................................... .
Other ......................................................................................... .
Subtotal, Housing and Urban Development... .................... .
Interior .......... .
Justice ............... .
Labor:
Training and employment services ........................................... .
Unemployment trust fund ......... .... '"
Pension Benefit Guaranty Corporation .................................... .
Other. ................ .
Subtotal, Labor .............. '" .. .
State .......................................... .
Table 3.-1993 BUDGET OUTLAYS BY AGENCY
(fiscal years; In millions of dollars)
1993
1992
Actual
Estimate
Budget
Mid-Session
Actual
Change
Budget
Mid-Session
Outlays by Major Agency
Transportation:
Federal Highway Administration ................................................
Federal Transit Administration ...................................................
Federal Aviation Administration .................................................
Coast Guard ..............................................................................
Maritime Administration .............................................................
Other ..........................................................................................
Subtotal, Transportation .......................................................
15,511
3,614
8,155
3,518
456
1.254
32,510
18,025
3,662
8,813
3,855
875
1,234
36,464
17,716
3,515
8,772
3,840
875
1,237
35,955
16,656
3,457
8,800
3,575
737
1,232
34,457
-1,369
-205
-13
-280
-138
-2
-2,007
-1,060
-58
28
-265
-138
-5
-1,498
Treasury:
Exchange Stabilization Fund .....................................................
Interest on the public debt. ........................................................
IRS .............................................................................................
Other ..........................................................................................
Subtotal, Treasury ................................................................
-2,345
292,323
17,403
-14,416
292,964
-1,000
294,658
18,727
-10,722
301,663
-1,000
291,714
18,623
-10,454
298,883
-1,379
292,502
18,472
-10,884
298,711
-379
-2,156
-255
-162
-2,952
-379
788
-151
-430
-172
33,897
5,932
469
13,961
35,596
546
35,406
6,516
1,350
14,082
37,163
840
35,560
6,460
1,331
14,081
37,163
860
35,487
5,925
743
14,305
36,794
937
81
-591
-607
223
-369
97
-73
-535
-588
224
-369
77
367
-119
702
-853
674
-853
539
-747
-163
106
-135
106
3,666
8,469
-292
11,843
4,009
3,837
-903
6,944
-9,022
3,300
-924
-6,646
-9,834
2,362
-940
-8,412
-13,843
-1,475
-37
-15,356
-812
-938
-16
-1,766
1,406
-345
2,249
3,073
-186
2,879
3,857
-186
2,753
3,252
-372
2,452
179
-186
-427
-605
-186
-301
511
659
1,169
161
1,627
1,788
161
1,627
1,788
161
866
1,027
0
-761
-761
0
-761
-761
Department of Veterans Affairs ....................................................
Environmental Protection Agency................................................
General Services Administration ..................................................
National Aeronautics and Space Administration ..........................
Office of Personnel Management... ..............................................
Small Business Administration .....................................................
Other independent agencies:
District of Columbia ....................................................................
Export-Import Bank ....................................................................
Federal Deposit Insurance Corporation:
Bank insurance fund ................................................................
FSLlC resolution fund ..............................................................
Other FDiC ..............................................................................
Subtotal, Federal Deposit Insurance Corporation .................
Federal Emergency Management Agency ................................
National Credit Union Administration ........................................
National Science Foundation ....................................................
Postal Service:
On-budget. ..............................................................................
Off-budget. ..............................................................................
Subtotal, Postal Service .........................................................
Table 3.--1993 BUDGET OUTLAYS BY AGENCY
(fiscal years; in millions of dollars)
1993
- - - - ---Estimate
~l,lQg~
Mill-Session
~-
1992
--~------
Actl!~
Ou!@y§.~ Major Age!}9'
Railroad Retirement Board.
Resolution Trust Corporation ..
Tennessee Valley Authority
Other (net).
Subtotal, other independent agencies
4,843
-8,934
1,469
-119,662
309
-43
-654
179
-486
-696
323
-1
-405
-1
-486
-570
1,425,174
1,158,493
266,681
1,408,122
1,142,110
266,012
-59,517
-58,299
-1,218
-17,052
-16,383
-669
-281,077
-326,226
45,149
-254,948
-300,870
45,922
67,006
65,630
1,376
26,129
25,356
773
-117,111
Total, Outlays
On-budget
Off-budget
1,380,794
1,128,455
252,339
1,467,639
1,200,409
267,230
Deficit (-)
On-budget
Off-budget
-290,340
-340,428
50,087
-321,954
-366,500
44,546
NOTE· Detail may not add to totals due to rounding.
:£49~
Change
Budget
Mid-Session
-28,185
-6,416
-55,488
-26,788
-28,508
-6,415
-55,083
-26,787
:f,299
-119,092
-30,680
-6,101
-54,193
-23,637
Actu~
-46
-84
265
-1,057
-4,570
-28,494
-6,373
-54,834
-26,967
:l,f 99
-118,966
Undistributed offsetting receipts
Employer share, employee retirement (on-budget) ....
Employer share, employee retirement (off-budget)
Interest received by on-budget trust funds
Interest received by off-budget trust funds
Rents and royalties on the Outer Continental Shelf lands
Subtotal, undistributed offsetting receipts
-- ---
-46
-15,246
265
-1,039
-32,673
4,828
-19,069
1,364
12QQ
----~
4,782
-19,153
1,629
4,372
-10,631
4,828
-3,907
1,364
~All
22,042
18,648
--
-
~A29
-6,061
:l,Z{3~
Final Monthly Treasury Statement
of Receipts and Outlays
of the United States Government
For Fiscal Yp,lr 1993 Through September 30, 1993, and Other Periods
Highlight
This issue includes the final budget results for fiscal year 1993.
RECEIPTS, OUTLAYS, AND SURPLUS/DEFICIT
THROUGH SEPTEMBER 1993
1600
B
I
L
L
I
0
N
S
Contents
1400
1200
Summary, page 2
Receipts, page 6
1000
800
Outlays, page 7
Means of financing, page 20
600
Receipts/outlays by month, page 26
400
Federal trust funds/securities, page 28
Receipts by source/outlays by
function, page 29
Explanatory notes, page 30
Compiled and Published by
Department of the Treasury
financial Management Service
Introduction
of receipts are treated as deductions from gross receipts; revolving and management fund receipts. reimbursements and refunds of monies previously expended are
treated as deductions from gross outlays; and Interest on the public debt (PUblic
issues) is recognized on the accrual basis Major information sources include
accounting data reported by Federal entities. disbursing officers. and Federal
Reserve banks.
The Monthly Treasury Statement of Receipts and Outlays of the United States
Government (MTS) IS prepared by the FinanCial Management Service. Department of
the Treasury. and after approval by the Fiscal ASSistant Secretary of the Treasury. is
normally released on the 15th workday of the month following the reporting month.
The publication IS based on data provided by Federal entities. disbursing officers.
and Federal Reserve banks
Triad of Publications
The MTS is part of a triad of Treasury financial reports. The Daily Treasury
Statement is published each working day of the Federal Government. It provides
data on the cash and debt operations of the Treasury based upon reporting of the
Treasury account balances by Federal Reserve banks. The MTS is a report of
Government receipts and outlays. based on agency reporting. The U.S. Govemment
Annual Report is the official publication of the detailed receipts and outlays of the
Government. It is published annually in accordance with legislative mandates given
to the Secretary of the Treasury.
Audience
The MTS IS published to meet the needs of: Those responsible for or interested
In the cash posItIOn of the Treasury; Those who are responsible for or interested in
the Government's budget results; and individuals and businesses whose operations
depend upon or are related to the Government's financial operations.
Disclosure Statement
ThiS statement summarizes the financial activities of the Federal Government
and off-budget Federal entities conducted in accordance with the Budget of the U.S.
Government, I.e, receipts and outlays of funds. the surplus or deficit. and the means
of financing the deficit or disposing of the surplus. Information is presented on a
modified cash basIs: receipts are accounted for on the basiS of collections; refunds
Data Sources and Information
The Explanatory Notes section of this publication provides information concerning the flow of data into the MTS and sources of information relevant to the MTS.
Table 1. Summary of Receipts, Outlays, and the Deficit/Surplus of the U.S. Government, Fiscal Years 1992 and 1993,
by Month
[$ millions]
Period
FY 1992
October
November
December
January
February
March
April
May
June
July
August
September
Year-to-Date
FY 1993
October
November
December
January
February
March
April
May
June
July
August
September
Year-to-Date .......................... .
Outlays
Receipts
Deficit/Surplus (-)
78,065
73,095
103,636
104,031
62,747
72,127
138,351
62,184
120,878
79,050
78,101
118,189
114,659
117,779
106,170
119,699
111,927
122,839
123,748
108,957
117,096
122,197
102,843
'112,879
36,594
44,684
2,534
15,668
49,180
50,712
-14,603
46,773
-3,782
43,147
24,742
-5,310
21,090,453
21,380,794
2290,340
76,824
74,625
113,683
112,712
65,975
83,284
132,021
70,640
128,568
80,633
86,741
127,469
125,616
107,351
152,629
82,896
114,172
127,258
123,930
107,603
117,469
120,211
'109,819
119,168
48,792
32,726
38,947
-29,817
48,197
43,974
-8,091
36,963
-11,099
39,577
23,078
-8,300
1,153,175
1,408,122
254,948
'The outlays and the guaranteed loan financmg for the Small BUSiness Administration have
been Increased by $152 million ,n September 1992 and August 1993. respectively: and the outlays
and guaranteed loan finanCing have been correspondingly decreased in August 1993 and
September 1992. respectively: to correct agency reporting.
'The receipt, outlay and deficit figures differ from the FY 1994 Budget, released by the Office
of Management and Budget on April 8. 1993, by $58 million due mainly to revisions in data
following the release of the Final September Monthly Treasury Statement.
Note: The receipt and outlay figures for FY 1993 have been revised to reflect adjustments
made by the Jntemal Revenue Service to the earned Income credit.
2
Table 2. Summary of Budget and Off-Budget Results and Financing of the U.S. Government, September 1993 and
Other Periods
[$ millions)
Total on-budget and off-budget results:
Total receipts
On-budget outlays
Off-budget outlays
1,153,175
1,144,097
1,090,453
1,241,312
98,609
28,860
841,241
311,934
832,267
311,830
788,027
302,426
903,425
337,888
119,168
1,408,122
1,425,171
1,380,794
1,500,060
91,038
28,130
1,142,110
266,012
1,158,490
266,681
1,128,455
252,339
1,219,390
280,671
+8,300
-254,948
-281,074
-290,340
-258,748
+7,570
+730
-300,869
+45,922
-326,223
+45,149
-340,428
+50,087
-315,965
+57,217
-8,300
254,948
281,074
290,340
258,748
-9,346
-11,713
12,758
248,619
6,283
46
263,078
18,789
-793
310,698
-17,305
-3,053
265,244
...........
Total surplus (+) or deficit (-)
On-budget surplus (+) or deficit (-)
Off-budget surplus (+) or deficit (-)
.
..............
Total on-budget and off -budget financing
Means of financing:
Borrowing from the public .
Reduction of operating cash, increase (-)
By other means .
'These figures are based on the appendix tables In the Mid-SessIon RevIew of the FY 1994
Budget, released by the Office of Management and Budget In September 1993
Figure 1.
No Transacllons.
Note: Details may not add to totals due to rounding.
Monthly Receipts, Outlays, and Budget Deficit/Surplus of the U.S. Government, Fiscal Years 1992 and 1993
$ billions
Outlays
:
,,
"I , '
I,
I,
,
I
\
... , ..
J
I
I
I
I
,
I
- .... J
I
,
I,
,
...... -,
,_ .......'
I,
•
Receipts
Dec.
FY
92
Feb.
Apr.
Jun.
Budget
Estimates
Next Fiscal
Year (1994)'
127,469
On-budget receipts .
Off-budget receipts
Total outlays .
Prior
Fiscal Year
to Date
(1992)
Budget
Estimates
Full Fiscal
Year'
Current
Fiscal
Year to Date
This
Month
Classification
Aug.
Oct.
Dec.
FY
93
3
Feb.
Apr.
Jun.
Aug. Sep.
-6,496
Figure 2. Monthly Receipts of the U.S. Government, by Source, Fiscal Years 1992 and 1993
$ billions
1~r---------------------------------------------~
iTotal Receipts I
1
1
1
Oct. Dec. Feb. Apr.
FY
92
Jun.
Aug.
Oct.
Dec.
Feb.
Apr.
Jun.
Aug. Sep.
FY
93
Figure 3. Monthly Outlays of the U.S. Government, by Function, Fiscal Years 1992 and 1993
$ billions
1M-~--------------------------------------------'
1
1
1
Oct. Dec. Feb. Apr.
FY
92
Jun. Aug. Oct.
FY
93
4
Dec.
Feb. Apr.
Jun. Aug. Sep.
Table 3. Summary of Receipts and Outlays of the U.S. Government, September 1993 and Other Periods
[$ millions]
Classification
This Month
Current
Fiscal
Year to Date
Comparable
Prior Period
Budget
Estimates
Full Fiscal Year'
Budget Receipts
Individual income taxes
Corporation income taxes
Social insurance taxes and contributions:
Employment taxes and contributions (off-budget)
Employment taxes and contributions (on-budget)
Unemployment Insurance
Other retirement contributions
Excise taxes
Estate and gift taxes
Customs duties
Miscellaneous receipts
55,653
24,510
2509,680
117,520
475,964
100,270
508,106
111,758
28,860
8,048
413
447
4,385
1,049
1,646
2,456
311,934
85,005
26,556
4,805
48,057
12,577
18,802
18,239
302,426
83,065
23,410
4,788
45,569
11,143
17,359
26,459
311,830
84,830
26,071
4,782
47,542
12,607
18,954
17,617
.................................................
127,469
1,153,175
1,090,453
1,144,097
(On-budget) ......... ,', .... , ..... " .... " .... , .... , ....... , ..
98,609
841,241
788,027
832,267
.................................................
28,860
311,934
302,426
311,830
198
206
12
763
4,125
317
23,707
2,473
2,858
1,693
2,406
2,579
194
11,527
63,143
2,798
278,576
29,262
30,414
16,801
2,677
2,308
186
11,113
56,436
2,567
286,632
28,270
26,047
15,439
2,847
2,541
240
11,820
66,705
3,064
278,560
29,488
30,770
17,471
24,021
25,554
2,169
904
916
3,124
375
3,562
282,774
298,349
25,185
6,728
10,197
44,738
5,384
34,457
257,293
281,418
24,470
6,555
9,802
47,163
5,007
32,510
285,179
298,256
24,760
7,144
10,502
45,434
5,252
35,955
17,040
-934
2,997
600
243
1,230
3,077
110
292,502
26,209
35,487
5,925
743
14,305
36,794
3937
292,323
641
33,897
5,932
469
13,961
35,596
3546
291,714
7,169
35,560
6,460
1,331
14,081
37,163
860
-18
3,789
-19,153
8,522
-8,934
27,582
-19,069
13,008
-122
-5,823
-82,276
-37,386
-77,831
-39,280
-81,870
-37,224
119,168
1,408,122
1,380,794
1,425,171
91,038
1,142,110
1,128,455
1,158,490
Total Receipts
(Off-budget)
Budget Outlays
Legislative Branch
The Judiciary
....................
Executive Office of the President ....................
Funds Appropriated to the President
Department of Agriculture
Department of Commerce
Department of Defense-Military
Department of Defense-Civil
Department of Education
Department of Energy
Department of Health and Human Services, except Social
Security
Department of Health and Human Services, Social Security
Department of Housing and Urban Development
Department of the Interior
Department of Justice
Department of Labor
Department of State
Department of Transportation
Department of the Treasury:
Interest on the Public Debt
Other
................
Department of Veterans Affairs
Environmental Protection Agency
General Services Administration
............
National Aeronautics and Space Administration
Office of Personnel Management
Small Business Administration
Other independent agencies:
Resolution Trust Corporation
Other
Undistributed offsetting receipts:
Interest
Other
Total outlays
...................................................
(On-budget) "" ......... " " " " " " " " " " " " ... " .. " .. "
.................................................
28,130
266,012
252,339
266,681
....................................
+8,300
-254,948
-290,340
-281,074
(On-budget) .,." .. "" ............ , .. ", .. ", ... " .. ", .. " ..
+7,570
-300,869
-340,428
--326,223
.................................................
+730
+45,922
+50,087
+45,149
(Off-budget)
Surplus (+) or deficit (-)
(Off-budget)
'The outlays and the guaranteed loan finanClng for the Small Business Adm'n1strat1on have
been increased by $152 million in September 1992 and August 1993. respect,vely. and the outlays
and guaranteed loan financing have been correspond'ngly decreased ,n August 1993 and
September 1992. respectively; to correct agency reporting.
Note: Details may not add to totals due to round,ng
'These flgures are based on the appendix tables in the Mid·Session ReView of the FY 1994
Budget, released by the Office of Management and Budget in September 1993.
'Includes a decrease of $548 million to reflect adjustments made by the Internal Revenue
Service to the earned Income cred't
5
Table 4.
Receipts of the U.S. Government, September 1993 and Other Periods
[$ millions]
Current Fiscal Year to Date
This Month
Classification
Gross
Receipts
Individual income taxes:
Withheld
Presidential Election Campaign Fund
Other
Total-Individual income taxes
I
I .
Refunds
(Deduct)
Receipts
(oo)
'25,579
Corporation income taxes ..........•.......................•.
Social insurance taxes and contributions:
Employment taxes and contributions:
Federal Old-age and survivors ins. trust fund:
Federal Insurance Contributions Act taxes
Self-Employment Contributions Act taxes .............
...........
Deposits by States
...........
Other
..............
Total-FOASI trust fund
Federal disability insurance trust fund:
Federal Insurance Contributions Act taxes ...........
Self-Employment Contributions Act taxes ...
...........
Deposits by States
.....................
Other
57,571
I
Refunds
(Deduct)
Receipts
1,918
55,653
585,226
I.
Receipts
509,680
557,724
81,760
475,964
117,951
17,680
100,270
256,691
17,117
6
678
256,013
17,117
6
25,909
1,398
24,510
131,548
14,027
'23,577
'2,951
4
466
23,111
2,951
4
267,838
14,372
-9
466
267,372
14,372
-9
(oo)
(oo)
(oo)
(oo)
466
281,735
273,814
678
273,137
51
28,655
1,545
-1
27,516
1,845
1
73
27,443
1,845
1
26,532
466
26,065
282,202
'2,526
'320
51
2,475
320
28,706
1,545
-1
(oo)
(oo)
I (Deduct)
Refunds
75,546
117,520
(oo)
Gross
Receipts
-
408.352
30
149,342
2430,427
28
154,772
'31,991
.........................
Gross
Receipts
Prior Fiscal Year to Data
(oo)
(. 0)
(oo)
2,846
51
2,795
30,250
51
30,199
29,363
73
29,289
'6,790
'960
13
6,777
960
76,170
4,687
381
-2
13
76,157
4,687
381
-2
73,362
5,459
337
4
54
73,308
5,459
337
4
7,751
13
7,738
81,237
13
81,224
79,162
54
79,108
Railroad retirement accounts:
............
Rail industry pension fund
Railroad Social Security equivalent benefit ..
179
131
(oo)
179
131
2,378
1,414
11
2,367
1,414
2,453
1,508
5
2,449
1,508
Total-Employment taxes and contributions
37,438
531
36,908
397,480
542
396,939
386,300
809
385,491
385
34
6
385
28
20,966
5,437
64
89
17,605
5,755
136
61
147
(oo)
(oo)
20,966
5,561
64
89
17,605
5,608
136
61
413
26,680
26,556
23,557
147
23,410
Total-FDI trust fund
..................
Federal hospital insurance trust fund:
Federal Insurance Contributions Act taxes
Self-Employment Contributions Act taxes
Receipts from Railroad Retirement Board
DepoSits by States
Total-FHI trust fund
Unemployment insurance:
State taxes depoSited in Treasury .........
Federal Unemployment Tax Act taxes
Railroad unemployment taxes
Railroad debt repayment .............
(oo)
(oo)
6
124
124
Total-Unemployment insurance ..
419
Other retirement contributions:
Federal employees retirement - employee
contributions
Contributions for non-federal employees
438
9
438
9
4,709
96
4,709
96
4,683
105
4,683
105
Total-Other retirement contributions
447
447
4,805
4,805
4,788
4,788
Total-Social insurance taxes and
contributions ........................................
38,304
536
37,768
428,965
666
428,300
414,645
956
413,689
86
2,145
410
1,777
53
26,718
3,276
18,321
634
595
15
283
26,123
3,262
18,039
634
24,389
4,660
17,287
626
824
15
553
....................
2,231
410
1,777
53
23,565
4,645
16,733
626
.....................................
4,471
86
4,385
48,949
892
48,057
46,961
1,392
45,569
Estate and gift taxes .........................................
1,077
28
1,049
12,891
314
12,577
11,479
336
11,143
...............................................
1,720
74
1,646
19,613
811
18,802
18,135
775
17,359
Miscellaneous Receipts:
Deposits of eamings by Federal Reserve banks ..........
......................
All other
2,084
375
3
2,084
372
14,908
3,489
159
14,908
3,331
22,920
3,545
7
22,920
3,538
2,460
3
2,456
18,397
159
18,239
26,466
7
26.459
Excise taxes:
Miscellaneous excise taxes3
Airport and airway trust fund
Highway trust fund
Black lung disability trust fund
Total-Excise taxes
Customs duties
....................
.............
....................
Total -
Miscellaneous receipts ........................
Total -
........................................
On-budget ......................................
Off-budget ......................................
Total Total -
Receipts
131,512
4,044
92,415 1,153,175 1,193,360
102,907 1,090,453
102,135
3,526
98,609
933,138
91,898
841,241
890,183
102,156
788,027
29,378
518
28,860
312,452
518
311,934
303,177
751
302,426
'In accordance With the prOVlS1Of1S of the Soaal Secunty Act as amended. "Individual Income
Taxes Withheld have been decreased and "Federal Insurance Contributions Act Taxes"
correspondingly Increased by $179 million to correct esbmates for the quaner ending September
30. 1992 and by $2 mll11Of1 to correct est,mates for calendar year 1992 and prior. "Indiv,dual
Income Taxes Other' have been decreased and "Self Employment Contributions Ac1 Taxes"
correspondingly Increased by $571 m,lItor1 to correct estimates for calendar year 1990 and prior
127,469 1,245,590
'Includes a decrease of $548 million to reflect adJustments made by the Intemal Revenue
Service to the eamed income credit.
31ncJudes amounts for windfall profits tax pursuant to P.l. 96-223.
... No Transactions.
(•• ) Less than $500.000.
Note: Details may not add to totals due to rounding.
6
Table 5. Outlays of the U.S. Government, September 1993 and Other Periods
[$ millions]
This Month
Current Fiscal Year to Date
Prior Fiscal Year to Date
Gross IAPPlicable I Outlays
Outlays
Receipts
Gross IAPPlicablel 0 tl
Outlays
Receipts
u ays
Gross IAPPlicablel 0 tl
Receipts
u ays
Outlays
Classification
Legislative Branch:
Senate
House of Representatives
Joint items
Congressional Budget Office
Architect of the Capitol
Library of Congress
Government Printing Office:
Revolving fund (net)
General fund appropriations
General Accounting Office
United States Tax Court
Other Legislative Branch agencies
Proprietary receipts from the public
Intrabudgetary transactions
38
61
6
2
24
37
-13
The Judiciary:
Supreme Court of the United States
Courts of Appeals, District Courts. and other judicial
services
Other
.....................................
Executive Office of the President:
Compensation of the President and the White House
Office
Office of Management and Budget
Other
Total-Executive Office of the President
1
-9
8
43
2
2
Total-Legislative Branch ................................
Total-The Judiciary
(")
..............
Funds Appropriated to the President:
International Security Assistance:
Guaranty reserve fund
Foreign military financing grants
Economic support fund
Military assistance
Peacekeeping Operations
Other
Proprietary receipts from the public
Total-International Security Assistance
International Development Assistance:
Multilateral Assistance:
Contribution to the International Development
Association
International organizations and programs
Other
Total-Multilateral Assistance
Agency for International Development:
Functional development assistance program
Sub-Saharan Africa development assistance
Operating expenses
Payment to the Foreign Service retirement and
disability fund
Other
Proprietary receipts from the public
Intrabudgetary transactions
Total-Agency for International Development
Peace Corps
Overseas Private Investment Corporation
Other
Total-International Development Assistance
2
2
452
751
78
22
212
344
435
772
79
22
240
547
-9
8
43
2
2
-1
-13
-37
106
440
32
32
-37
106
440
32
32
-8
-19
25
114
427
30
29
-19
-16
198
2,435
2,406
2,704
2
24
24
27
11
9
8
29
1
11
8
7
27
434
761
79
22
232
547
25
114
427
30
29
-7
-16
2,677
27
(")
193
11
2,456
100
2,456
100
2,181
99
(' ')
2,181
99
206
(* *)
206
2,580
2,579
2,308
(* *)
2,308
4
4
4
4
4
4
40
55
99
40
55
99
36
54
96
36
54
96
12
12
194
194
186
186
860
4,580
3,231
206
4.580
3,231
1,058
4,399
2,938
132
31
45
748
652
310
4,399
2,938
132
31
45
-652
1,400
7,203
73
56
199
3
4
5
91
33
-18
56
199
3
4
5
-33
340
124
216
8,735
159
159
159
197
91
47
43
71
3
489
(")
654
("')
(")
28
36
760
28
36
-760
1,414
7,322
8,603
774
382
391
774
382
391
885
270
562
159
1,547
1,547
1,717
885
270
562
1,717
197
91
47
1,460
741
492
1,460
741
492
1,430
500
452
1,430
500
452
43
67
-489
43
755
50
1,294
43
704
-1,294
-1
41
604
45
840
41
560
-840
(")
-1
1,344
2,145
3,027
885
2,142
(")
(")
448
493
-44
3,490
33
9
5
10
1
33
-2
5
212
79
86
204
9
212
-125
77
196
195
78
285
14
196
-90
64
654
504
151
5,414
1,558
3,856
5,213
1,184
4,029
-93
336
336
-686
(")
21
1,247
257
13,162
7
291
12,440
299
779
-779
64
13,162
7
-13,239
19
11,527
26.167
21
1,247
(")
(")
(")
...........
453
762
78
22
222
344
193
11
-93
International Monetary Programs
Military Sales Programs:
Special defense acquisition fund
Foreign military sales trust fund
Kuwait civil reconstruction trust fund ."
Proprietary receipts from the public
Other
Total-Funds Appropriated to the President
201
38
60
6
2
23
37
2,169
1,407
7
193
(")
13,239
(")
19
763
27,931
16,404
-686
235
53
12,182
56
12,440
246
-12,182
8
15.054
11.113
8
Table 5.
Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
Classification
This Month
Current Fiscal Year to Date
Prior Fiscal Year to Date
Gross IAPPlicablel Outlays
Receipts
Outlays
Gross IAPPlic,able 1 Outlays
Outlays
Receipts
Gross IAPPlicablel
Outlays
Receipts
Outlays
Department 01 Agriculture:
Agncultural Research Service
Cooperative State Research Service
Extension Service
Ammal and Plant Health InspecllOn Service
Food Safety and Inspection Service
Agncultural Marketing Service
SOil Conservation Service:
Watershed and flood prevention operations
Conservation operations
Other
Agncultural Stabilization and Conservation Service:
Conservation programs
Other
Farmers Home Administration:
Credit accounts:
Agricultural credit insurance fund
Rural housing insurance fund
Other
Salanes and expenses
Other
43
34
48
54
37
72
43
34
48
54
37
733
445
404
489
508
706
733
445
404
489
508
705
686
426
404
448
468
711
24
55
8
24
55
8
236
580
83
236
580
83
201
555
79
201
555
79
41
74
41
74
1,899
767
1,899
767
1,864
764
1,864
764
-48
197
1,910
3,238
1
239
1,075
( )
650
78
3,199
5,086
( )
66
6
2,149
4,314
(' ')
650
78
72
48
472
..
(
)
97
275
( )
..
66
6
..
(
)
..
..
4
686
426
404
448
468
707
2,229
3,182
( )
969
1,904
( )
609
69
5,412
3,552
..
609
69
..
Total-Farmers Home Administration
593
372
221
7,191
5,149
2,042
8,964
Foreign assistance programs
Rural Development Administration:
Rural development insurance fund
Rural water and waste disposal grants
Other
Rural Electrification Administration
Federal Crop Insurance Corporation
Commodity Credit Corporation:
Pnce support and related programs
National Wool Act Program
438
37
401
917
37
880
971
76
26
7
779
104
27
49
26
7
-8
103
1,035
240
70
3,302
793
487
548
240
68
-1,216
461
1,163
184
51
3,370
1,241
-213
3
24,232
179
15,864
179
17,122
191
2,055
307
225
24
2,055
307
225
24
24,602
6,597
2,924
577
24,602
6,597
2,924
577
22,800
6,127
2,640
530
22,800
6,127
2,640
530
2,611
2,611
34,700
34,700
32,096
32,096
110
255
166
110
255
166
1,367
533
1,392
1 ,367
533
1,392
1 ,369
536
1,389
1,369
536
1,389
531
531
3,292
3,292
3,293
3,293
31
-126
573
34
1,154
540
-1,154
-150
592
30
1,310
562
-1,310
694
3
Food and Nutrition Service:
Food stamp program
State child nutrition programs
Women, infants and children programs ""
Other
Total-Food and Nutrition Service
Forest Service:
National forest system
Forest service permanent appropriations
Other
Total-Forest Service
Other
Proprietary receipts from the public '"
Intra budgetary transactions
Total-Department of Agriculture
Department
Economic
Bureau of
Promotion
....................
907
3
126
3
4,519
332
8,368
-150
.......................
of Commerce:
Development Administration
the Census
of Industry and Commerce
6,386
2,261
22
35
29
SCience and Technology:
National Oceamc and Atmospheric Administration
.............
Patent and Trademark Office
National Institute of Standards and Technology ....
..................
Other
Total-Science and Technology
................
Other
Propnetary receipts from the public
....................
Intra budgetary transactions
Offsetting govemmental receipts
Total-Department of Commerce
34
..
( )
787
1
.......................
4
9,547
191
7,575
63,143
75,845
19,409
56,436
21
35
29
175
346
321
19
156
346
321
165
302
297
40
125
302
297
187
9
33
1,675
53
252
89
26
1,612
56
183
81
26
57
1,649
53
252
33
1,585
56
183
81
82
1,987
1,932
26
1,905
85
....
139
-8
)
103
-116
( )
( )
)
85
-139
-8
( )
217
2,798
2,772
205
2,567
18
231
2,069
11
-10
103
10
..)
(
116
..
(
8
2
4,304
287
20,084
22
33
678
184
48
-934
954
83,227
253
350
484
4,125
192
9
33
19
11
971
317
3,015
..
(
..
Table 5. Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
This Month
Classification
Gross IApplicable
Outlays
Receipts
Department of Defense-Military:
Military personnel'
Department of the Army
Department of the Navy
Department of the Air Force
I
Outlays
Current Fiscal Year to Date
Prior Fiscal Year to Date
Gross !APPlicabl;! 0 tI
Outlays
Receipts
u ays
Gross IAPPlicablel Outla s
Outlays
Receipts
y
2,417
2,235
1,644
2,417
2,235
1,644
28,476
27,278
20,150
28,476
27,278
20,150
31,937
28,226
21,007
31,937
28,226
21,007
6,296
6,296
75,904
75,904
81,171
81,171
2,517
3,205
1,823
1,481
2,517
3,205
1,823
1,481
23,879
27,002
24,482
18,742
23,879
27,002
24,482
18,742
26,397
27,165
23,462
15,019
26,397
27,165
23,462
15,019
9,027
9,027
94,105
94,105
92,042
92,042
935
2,300
1,832
415
935
2,300
1,832
415
11,271
29,991
24,915
3,760
11,271
29,991
24,915
3,760
12,858
31,976
26,774
3,272
12,858
31,976
26,774
3,272
5,482
5,482
69,936
69,936
74,881
74,881
552
690
905
929
552
690
905
929
6,218
8,944
12,338
9,458
6,218
8,944
12,338
9,458
5,978
7,826
11,998
8,829
5,978
7,826
11,998
8,829
3,077
3,077
36,958
36,958
34,632
34,632
Military construction:
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies
139
94
103
198
139
94
103
198
1,097
926
1,169
1,639
1,097
926
1,169
1,639
832
1,090
1,163
1,177
832
1,090
1,163
1,177
Total-Military construction
534
534
4,831
4,831
4,262
4,262
125
80
103
8
125
80
103
4
1,354
880
964
85
1,354
880
964
57
1,550
787
904
42
1,550
787
904
30
158
109
195
96
~738
~4,860
~11
~172
5
(")
(")
2
44
32
131
Total-Military personnel
Operation and maintenance:
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies
Total-Operation and maintenance
Procurement
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies
Total-Procurement
Research, development, test, and evaluation:
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies
Total-Research, development, test and evaluation
Family housing:
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies
RevolVing and management funds:
Department of the Army
Department of the Navy
Defense agencies:
Defense business operations fund
Other
Trust funds
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies
Proprietary receipts from the public:
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies
Intrabudgetary transactions:
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies:
Defense cooperation account
Voluntary separation incentive fund
Other
Offsetting governmental receipts:
Department of the Army
Defense agencies
Defense cooperation account
Total-Department of Defense-Military .............
4
158
109
~738
~11
(")
(")
2
5
3
5
44
(")
44
~41
41
55
~55
~104
104
50
~50
~64
~64
~537
~537
~104
~104
(")
(")
~16
~16
4
23,581
~125
9
~91
~91
~3
~3
~4,860
~176
3,160
53
3
3,160
51
(")
(")
(")
(")
(")
20
27
24
5
131
47
38
20
39
~1
~22
~38
~232
~222
~34
26
~38
218
212
289
206
~205
~218
~212
~289
~206
~22
~23
~23
~330
~330
~527
~527
~2
~2
~949
~949
~99
~99
279,412
12
195
96
232
205
222
34
~4
23,707
28
24
~24
16
~16
38
~38
4,910
~4,910
836
278,576
5,925
286,632
292,557
Table 5.
Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions)
Classification
Department of Defense-Civil
Corps of Engineers
Construction. general
Operation and maintenance, general
Other
Proprietary receipts from the public
This Month
Current Fiscal Year to Date
Prior Fiscal Year to Date
Gross jAPPlicablej Outlays
Outlays
Receipts
Gross jAPPlic.ablel Outlays
Receipts
Outlays
Gross jAPPlicablej
Outlays
Receipts
Outlays
325
Total-Corps of Engineers
Military retirement:
Payment to military retirement fund
Retired pay
Military retirement fund
Intrabudgetary transactions
Education benefits
Other
Proprietary receipts from the public ....
Total-Department of Defense-Civil
Department of Education:
Office of Elementary and Secondary Education:
Compensatory education for the disadvantaged
Impact aid
School improvement programs
Chicago litigation settlement
...........
Indian education
Total-Office of Elementary and Secondary
...........
Education ..
190
3,354
3,752
12,273
12,273
(* *)
(* *)
25,708
-12,273
145
69
4
9
25,708
-12,273
145
65
-9
11,169
-2
24,492
-11,169
129
100
204
29,262
28,471
999
1,078
1,466
10
10
314
3,544
...........
...................
1,182
1,070
1,500
190
999
1,078
1,466
-190
104
-267
488
-10
104
-267
488
2,148
2,148
7
6
7
5
-1
186
1,182
1,070
1,500
-186
186
3,565
5
10
11,169
-2
24,492
-11,169
129
95
-10
201
28,270
2,473
29,465
377
1
121
377
1
121
3
3
6,615
432
2,017
15
100
6,615
432
2,017
15
100
6,159
795
1,502
13
69
6,159
795
1,502
13
69
502
502
9,180
9,180
8,537
8,537
2,485
12
Office of Bilingual Education and Minority Languages
.............................
Affairs
Office of Special Education and Rehabilitative Services:
................
Special education
Rehabilitation services and disability research ............
Special institutions for persons with disabilities ..........
Office of Vocational and Adult Education ..................
16
16
125
125
198
198
196
153
8
148
196
153
8
148
2,564
1,984
151
1,190
2,564
1,984
151
1,190
2,243
1,992
107
1,079
2,243
1,992
107
1,079
Office of Postsecondary Education:
...........
College housing loans
Student financial assistance
Federal family education loans
Higher education
Howard University
Other
2
-2
680
924
119
18
4
18
7,678
5,555
1,042
264
20
60
-42
7,678
5,555
1,042
264
20
19
7,071
3,254
718
191
26
59
680
924
119
18
4
-40
7,071
3,254
718
191
26
2
1,744
14,578
60
14,518
11,280
59
11,221
413
353
64
413
353
-64
370
368
5
39
57
-5
69
370
368
-69
7
2,858
30,538
124
30,414
26,175
128
26,047
. ..............
............
Total-Office of Postsecondary Education
1,745
Office of Educational Research and Improvement
..............
Departmental management
.................
Proprietary receipts from the public
39
57
........................
2,865
..............
'1,130
1,130
11,049
11,049
'10,606
10,606
135
217
-813
39
56
45
25
'-139
1,436
2,850
204
411
521
444
262
3
1,436
2,850
204
411
521
444
262
(* *)
135
217
-813
39
56
45
25
-139
3
r *)
1,263
2,895
120
404
468
312
323
'_5
3
1,263
2,895
120
404
468
312
323
-8
-434
(* *)
-435
6,131
3
6,128
5,780
3
5,777
Power Marketing Administration ................
Departmental administration .................................
Proprietary receipts from the public
Intrabudgetary transactions
Offsetting govemmental receipts
504
'-230
86
2,469
121
1,360
1,109
121
-1,310
-296
1,959
'362
1,284
675
362
-1,712
-268
'-78
418
-230
731
2
78
Total-Department of Energy ............................
971
-722
1,693
19,473
16,801
18,438
Total-Department of Education
Department of Energy:
Atomic energy defense activities
Energy programs:
General science and research activities
Energy supply, Rand D activities
...........
Uranium supply and enrichment activities
Fossil energy research and development
..............
Energy conservation
Strategic petroleum reserve
Nuclear waste disposal fund
..................
...............
Other
Total-Energy programs
............
'-731
2
10
1,310
-296
2,672
'1,712
-268
2,999
15,439
Table 5. Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
Classification
Department of Health and Human Services. except Social
Security:
Public Health Service
Food and Drug Administration
Health Resources and Services Administration
Indian Health Service
Centers for Disease Control
National Institutes of Health
Substance Abuse and Mental Health Services
Administration
Agency for Health Care Policy and Research
Assistant secretary for health
Total-Public Health Service
Health Care FinanCing Administration:
Grants to States for Medicaid
Payments to health care trust funds
Federal hospital insurance trust fund:
Benefit payments
Administrative expenses and construction
Total-FHI trust fund
Federal supplementary medical insurance trust fund:
Benefit payments
Administrative expenses and construction
Total-FSMI trust fund
Other
Total-Health Care Financing Administration
Social Security Admlmstration:
Payments to Social Security trust funds
Special benefits for disabled coal miners
Supplemental security Income program
Total-Social Security Administration
Administration for children and families:
Family support payments to States
Low income home energy assistance
Refugee and entrant assistance
Commumty Services Block Grant
Payments to States for afdc work programs
Interim aSSistance to States for legalization
Payments to States for child care assistance
Social services block grant
Children and families services programs
Payments to States for foster care and adoption
assistance
Other
Total-Administration for children and families
Administration on aging
Office of the Secretary
Proprietary receipts from the public
This Month
Current Fiscal Year to Date
Prior Fiscal Year to Date
Gross jApplicable j
Outlays
Outlays
Receipts
Gross IAPPlicabli 0 tI
Outlays
Receipts
u ays
Gross JAPPlic.ablej Outla s
Outlays
Receipts
y
57
293
196
164
812
56
293
196
164
812
738
2.467
1,735
1.412
9,543
185
28
43
2,667
88
221
1,779
18,869
7,069
3,735
7,069
3,735
7,707
85
(")
4
4
752
2,333
1,558
1,198
8,376
733
2.467
1,735
1.412
9,543
756
2,333
1,558
1,198
8,376
2,667
88
221
2,864
113
254
18,865
17.452
75,774
44,721
75,774
44,721
67.827
39,390
67,827
39,390
7,707
85
90,738
866
90.738
866
80,784
1 ,187
80,784
1,187
7,792
7,792
91,604
91,604
81,971
81,971
4.490
136
4,490
136
52,409
1,845
52,409
1,845
48,627
1.658
48,627
1,658
4,626
4,626
54,254
54,254
50,285
50,285
4
4
98
98
-108
-108
23,226
23,226
266.452
266,452
239,366
239,366
69
62
1,902
69
62
1,902
6,236
801
22,642
6,236
801
22,642
6,127
829
19.445
6,127
829
19,445
2,033
2,033
29,679
29,679
26,401
26,401
1,095
24
47
59
66
182
48
189
72
1,095
24
47
59
66
182
48
189
72
15,628
1,068
361
423
736
318
411
2,785
3,432
15,628
1,068
361
423
736
318
411
2,785
3,432
15,103
1,142
381
442
594
501
15,103
1,142
381
442
594
501
2,708
3,870
2,708
3,870
271
271
2,636
(")
2,636
('0)
2,505
( )
2,505
(")
2,054
2,054
27,798
27,798
27,248
27,248
40
104
40
104
-1,479
567
223
567
223
-16,089
166
185
28
43
1,779
(")
1,479
11
4
16,089
2,864
113
254
4
..
13,944
17.447
166
-13,944
Table 5.
Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
Classification
Department of Health and Human Services, except Social
Security:-Continued
Intrabudgetary transactions'
Payments for health insurance for the aged:
Federal supplementary medical insurance trust fund
Payments for tax and other credits:
Federal hospital insurance trust fund
Total-Department of Health and Human Services,
except Social Security ................................
Department of Health and Human Services, Social
Security (off-budget):
Federal old-age and survivors insurance trust fund:
...........
Benefit payments
Administrative expenses and construction
Payment to railroad retirement account
Total-FOASI trust fund
Federal disability insurance trust fund:
Benefit payments
Administrative expenses and construction
Payment to railroad retirement account
Total-FDI trust fund
Proprietary receipts from the public
Intra budgetary transactions2
This Month
Current Fiscal Year to Date
Prior Fiscal Year to Dlte
Gross /APPliClble/ 0 tI
Outlays
Receipts
u IYs
Gross /APPlic.able / Outlays
Outlays
Receipts
Gross /APPlicablel
Outllys
Outlays
Receipts
-3,722
-3,722
-44,227
-44,227
-38,684
-38,684
-13
-13
-495
-495
-706
-706
24,021
298,867
282,774
271,242
22,382
234
22,382
234
264,582
2,026
3,353
264,582
2,026
3,353
251,317
1,824
3,148
251,317
1,824
3,148
22,616
22,616
269,960
269,960
256,290
256,290
2,928
82
2,928
82
33,626
932
83
33,626
932
83
30,394
843
58
30,394
843
58
3,010
3,010
34,641
34,641
31,295
31,295
-6
-65
-6,246
-6
-6,246
-6,166
25,501
1,480
6
16,094
6
13,949
..
(
)
257,293
..
( )
............
...........
-65
Total-Department of Health and Human Services,
Social Security(off-budget) ..............................
25,560
6
25,554
298,356
6
298,349
281,419
(* *)
281,418
7
12
-5
82
76
6
49
70
-21
1.055
-3
42
5
10
56
10
27
276
1
858
258
4
1.040
59
15
-62
42
5
10
56
10
27
276
1
858
258
4
7.607
777
345
55
97
663
24
714
2.583
19
10.808
2.532
27
6.534
660
1,073
117
345
55
97
663
24
714
2.583
19
10.808
2,532
27
9.098
1.123
39
54
77
652
13
744
2.101
21
10.742
1.510
19
6,642
638
2.456
485
39
54
77
652
13
744
2.101
20
10.742
1.510
19
2.607
1.111
1,496
26.334
7.271
19,063
26.244
7.352
18,892
5
5
186
35
151
175
37
138
269
11
269
11
2,453
116
2,453
116
2.162
37
286
285
2.755
35
2.720
2.375
Department of Housing and Urban Development:
Housing programs:
.............
Public enterprise funds
Credit accounts:
Federal housing administration fund
Housing for the elderly or handicapped fund
Other
Rent supplement payments
Homeownership assistance
Rental housing assistance
Rental housing development grants
Low-rent public housing
Public housing grants
College housing grants
Lower income housing assistance
Section 8 contract renewals
Other
Total-Housing programs
Public and Indian HOUSing programs:
Low-rent public housing-Loans and other expenses
Payments for operation of low-income housing
prOJects
.............
Community Partnerships Against Crime
Total-Public and Indian Housing programs
Government Nallonal Mortgage Association:
Management and liquidating functions fund
Guarantees of mortgage-backed securities
Total-Government National Mortgage Association
..
..
(
)
..
..
..
(
)
..
)
(
..
-6,166
..
(
)
..
)
(
2.162
37
37
2,338
..)
(
111
67
44
1.153
4
1.604
-4
-450
2.010
5
2.357
-4
-347
111
67
44
1.154
1.608
-454
2.010
2.362
-352
(
)
)
(
12
(
)
(
)
Table 5. Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
This Month
Current Fiscal Year to Date
Gross !APPlicable! Outlays
Outlays
Receipts
Gross !APPlicable! 0 tl
Outlays
Receipts
u ays
Prior Fiscal Year to Date
Classification
Department of Housing and Urban Development:Continued
Community Planning and Development:
Community Development Grants
Other
Total-Community Planning and Development
Management and Administration
Other
Proprietary receipts from the public
Department of the Interior:
Land and minerals management:
Bureau of Land Management:
Management of lands and resources
Fire protection
Other
Minerals Management Service
Office of Surface Mining Reclamation and
Enforcement
Total-Land and minerals management
Water and science:
Bureau of Reclamation:
Construction program
Operation and maintenance
Other
Geological Survey
Bureau of Mines
Total-Water and science
Fish and wildlife and parks:
United States Fish and Wildlife Service
National Park Service
Total-Fish and wildlife and parks
Bureau of Indian Affairs:
Operation of Indian programs
Indian tribal funds
Other
Total-Bureau of Indian Affairs
Territorial and international affairs
Departmental offices
Proprietary receipts from the public
Intrabudgetary transactions
Offsetting governmental receipts
Total-Department of the Interior
............
Total-Department of Justice
269
58
3,198
526
131
3,198
395
3,090
366
98
3,090
268
341
14
327
3,724
131
3,593
3,457
98
3,358
522
37
296
522
37
-296
461
35
28
39
6
-28
262
461
35
-262
1,221
2,169
34,526
9,341
25,185
34,581
10,111
24,470
65
21
184
52
536
120
407
676
536
120
407
676
531
139
492
630
3,390
65
21
184
52
31
31
304
304
293
293
352
2,042
2,042
2,086
2,086
39
28
63
61
21
23
288
284
494
620
203
153
30
288
284
341
620
173
280
251
585
588
202
127
3
39
28
40
61
18
32
280
251
458
588
171
211
26
185
1,889
183
1,706
1,907
159
1,748
133
173
133
173
1,239
1,522
1,239
1,522
1,083
1,350
1,083
1,350
306
306
2,761
2,761
2,433
2,433
160
34
-3
160
34
-4
1,401
287
256
19
1,401
287
237
1,135
395
371
18
1,135
395
353
191
190
1,944
19
1,924
1,901
18
1,883
87
6
87
6
-192
-30
317
116
317
116
-2,009
-129
359
102
1,926
(' .)
...........................
Department of Labor:
Employment and Training Administration:
Training and employment services
Community Service Employment for Older Americans
Federal unemployment benefits and allowances
State unemployment insurance and employment service
operations
Payments to the unemployment trust fund
Advances to the unemployment trust fund and other
funds
531
139
492
630
352
192
Department of Justice:
Legal activities
Federal Bureau of Investigation
Drug Enforcement Administration
Immigration and Naturalization Service
Federal Prison System
Office of Justice Programs
Other
Intra budgetary transactions
Offsetting governmental receipts
Outla s
y
14
-30
.......................
I
269
72
39
6
Total-Department of Housing and Urban
Development .............................................
Gross !APPlic.able
Outlays
ReceIpts
2,009
-129
(")
4
359
102
-1,926
-127
-4
2,108
6,555
75
481
2,884
1,832
758
1,376
2,125
785
573
-50
-481
556
9,802
-127
(")
(")
2,212
6,728
8,662
98
2,884
1,832
758
1,376
2,200
785
573
-50
515
2,786
1,975
792
1,551
2,136
810
863
-200
-515
613
10,197
10,358
219
904
8,941
9
2,786
1,975
792
1,551
2,234
810
863
-200
55
250
196
70
165
236
61
-5
-3
-55
64
916
10,810
394
34
2
394
34
2
4,241
389
131
4,241
389
131
4,281
398
84
4,281
398
84
13
13
23
7,532
23
7,532
-38
1,293
-38
1,293
1,334
1,334
4,994
4,994
490
490
1,123
250
196
70
165
245
61
-5
-3
980
13
Table 5.
Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
Current Fiscal Year to Date
This Month
Classification
Gross !APPlicable! Outlays
Outlays
Receipts
Department of Labor:-Continued
Unemployment trust fund:
Federal·State unemployment Insurance:
State unemployment benefits
State administrative expenses
Federal administrative expenses
Veterans employment and training
Railroad unemployment insurance
Other
Gross !APPlic.able
Outlays
Receipts
I Outlays
Prior Fiscal Year to Date
Gross !APPlicable!
Outlays
Receipts
Outlays
2,589
281
15
18
5
2
2,589
281
15
18
5
2
35,977
3,413
213
176
70
21
35,977
3,413
213
176
70
21
37,503
3,308
201
173
86
24
37,503
3,308
201
173
86
24
2,910
2,910
39,869
39,869
41,294
41,294
7
7
76
76
77
77
Total-Employment and Training Administration
4,694
4,694
57,256
57,256
47,879
47,879
Pension Benefit Guaranty Corporation
Employment Standards Administration:
Salanes and expenses
.............
Special benefits
Black lung disability trust fund
Other
Occupational Safety and Health Administration
Bureau of Labor Statistics
Other
Proprietary receipts from the public
Intrabudgetary transactions
68
-227
821
-1,508
783
25
-331
417
8
24
38
46
-73
-1,497
229
216
978
120
280
286
463
230
218
967
117
303
238
473
-13,506
229
216
978
120
280
286
463
-76
-13,506
-2,542
3,124
47,143
44,738
48,665
311
53
311
53
2,287
485
2,287
485
2,029
383
2,029
383
32
-28
32
-28
273
412
63
273
412
63
276
381
47
276
381
47
Total-Administration of Foreign Affairs
368
368
3,521
3,521
3,116
3,116
Intemational organizations and Conferences
Migration and refugee assistance
Intemational narcotics control ..
Other
Proprietary receipts from the public
Intrabudgetary transactions
5
55
14
8
5
55
14
8
1,376
672
133
79
1,336
671
134
68
-75
-75
-396
1,376
672
133
79
(' ')
-396
1,336
671
134
68
( )
-318
375
375
5,385
5,384
5,007
1,927
27
20
1,927
27
20
16,259
150
248
16,259
150
248
15,182
147
183
15,182
147
183
1,974
1,974
16,656
16,656
15,511
15,511
National Highway Traffic Safety Administration
20
20
242
242
242
242
Federal Railroad Administration:
Grants to National Railroad Passenger Corporation
............
Other
26
(
)
26
465
367
14
465
353
508
419
19
508
400
26
(
)
26
832
14
818
927
19
908
Total-Unemployment trust fund
Other
Total-Department of Labor
...........
.............................
Department of State:
Administration of Foreign Affairs:
Salaries and expenses ..
Acquisition and maintenance of buildings abroad
Payment to Foreign Service retirement and disability
fund
Foreign Service retirement and disability fund
Other
Total-Department of State ..............................
Department of Transportation:
Federal Highway Administration:
Highway trust fund:
Federal-aid highways
Other
Other programs
Total-Federal Highway Administration
Total-Federal Railroad Administration
3294
25
-331
417
8
24
38
46
73
-1,497
3,492
368
2,329
76
2,405
..
(
..
..
14
)
(* *)
1,438
64
1,501
..
(
)
-318
(* *)
-654
230
218
967
117
303
238
473
-64
-2,542
47,163
..
5,007
Table 5.
Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
This Month
Classification
Gross
Outlays
Department of Transportation:-Continued
Federal Transit Administration
Formula grants
Discretionary grants
Other
Total-Federal Transit Administration
Federal Aviation Administration:
Operations
Airport and airway trust fund:
Grants-in-aid for airports
Facilities and equipment
Research, engineering and development
Operations
Total-Airport and airway trust fund
IApplicable I Outlays
Receipts
Current Fiscal Year to Date
Prior Fiscal Year to Date
Gross IAPPlicablel 0 tl
Outlays
Receipts
u ays
Gross IAPPlicable I Outla s
Outlays
Receipts
y
55
116
102
55
116
102
1,191
1,298
968
1,191
1,298
968
1,868
1,268
478
1,868
1,268
478
273
273
3,457
3,457
3,614
3,614
171
171
2,212
2,212
2,277
2,277
221
292
31
190
221
292
31
190
1,931
2,166
212
2,279
1,931
2,166
212
2,279
1,672
1,885
214
2,110
1,672
1,885
214
2,110
734
734
6,589
6,589
5,881
5,881
r ')
(")
(")
(")
2
-2
(")
3
-3
Total-Federal AViation Administration
905
(")
905
8,802
2
8,800
8,158
3
8,155
Coast Guard:
Operating expenses
Acquisition, construction, and improvements
Retired pay
Other
225
45
48
15
(")
225
45
48
14
2,514
311
505
252
6
2,514
311
505
246
2,407
345
461
313
7
2,407
345
461
306
333
(")
332
3,581
6
3,575
3,525
7
3,518
86
-1
23
4
1
1 ,475
332
738
15
13
601
14
29
456
270
-29
125
737
316
-13
-6
-125
1,057
283
23
63
-5
-1
-2
-23
136
-136
52
3.562
35.371
914
34.457
33.318
808
32.510
-128
44
-129
44
-1,367
292
12
-1,379
292
-2,331
258
15
-2,345
258
20
20
43
504
43
504
220
2,328
519
660
220
2,328
519
660
225
2,328
792
250
225
2,328
792
250
568
568
3,728
3,728
3,594
3,594
-110
-110
(")
(")
2
2
41
13
182
-2
212
45
41
13
182
-2
212
45
376
197
1,774
-29
10
305
376
197
1,774
-29
10
305
336
271
1,938
-35
108
254
336
271
1,938
-35
108
254
125
408
146
125
408
146
1,674
3,862
1,226
1,674
3,862
1,226
1,654
3,517
1,065
1,654
3,517
1,065
39
7
381
20
39
7
381
20
48,781
650
2,127
151
(")
8,781
650
2,127
151
7,262
491
3,253
166
6
7,262
491
3,253
160
1,126
1,126
18,472
(")
18,472
17,409
6
17,403
Other
Total-Coast Guard
Maritime Administration
Other
Proprietary receipts from the public
Intrabudgetary transactions
Offsetting governmental receipts
Total-Department of Transportation ...................
Department of the Treasury:
Departmental offices:
Exchange stabilization fund
ather
Financial Management Service:
Salaries and expenses
Payment to the Resolution Funding Corporation
Claims, JUdgements, and relief acts
Other
Total-Financial Management Service
Federal Financing Bank
Bureau of Alcohol, Tobacco and Firearms:
Salaries and expenses
Internal revenue collections for Puerto Rico
United States Customs Service
Bureau of Engraving and Printing
United States Mint
Bureau of the Public Debt
Internal Revenue Service:
Processing tax returns and assistance
Tax law enforcement
Information systems
Payment where earned income credit exceeds liability
for tax
Health insurance supplement to earned income credit
Refunding internal revenue collections, interest
Other
Total-Internal Revenue Service
-2
3,614
15
-6
Table 5.
Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
This Month
Classification
Gross IAPPlicablel Outlays
Outlays
Receipts
Department of the Treasury:-Continued
United States Secret Service
Comptroller of the Currency
Office of Thnft Supervison
46
43
17
Interest on the public debt:
Public Issues (accrual basis)
Special issues (cash basis)
Total-Interest on the public debt ..
Prior Fiscal Year to Date
Current Fiscal Year to Date
Gross IAPPlic.able
Receipts
Outlays
I
Gross
Outlays
Outlays
205,880
86,622
210,887
81,437
210,887
81,437
17,040
292,502
292,502
292,323
292,323
57
733
57
-2,804
-14,550
-733
52
55
5
-956
-2,016
-55
16,787
253
17,040
5
398
197
3,574
292,964
14,296
437
13,567
759
250
13,567
509
1,054
298
28
17,012
854
103
968
1,257
413
16,412
746
126
1,127
20
-56
15
1,329
26
133
22
20,456
21,432
16,106
302,855
4,145
298,711
Department of Veterans Affairs:
Veterans Health Administration:
..............................
Medical care
..................................
Other
1,215
62
20
1,215
42
14,296
694
258
159
12
3
1,421
52
6
1,480
843
5487
17,012
854
103
100
2
8
8
1,127
20
127
15
1,771
22,068
Total-Veterans Benefits Administration ...............
..............................
Construction
Departmental administration .................................
Proprietary receipts from the public:
................................
National service life
..........................
United States government life
..............................
Other
Intrabudgetary transactions ..................................
Total-Department of Veterans Affairs
.................
Environmental Protection Agency:
Program and research operations ......... .................
..................
Abatement. control, and compliance
............................
Water infrastructure financing
. ............
Hazardous substance superfund ......
............................
Other
Proprietary receipts from the public .........................
.........................
Intrabudgetary transactions
Offsetting governmental receipts ....... ....................
1,898
47
15
128
..
(
)
47
15
..32
66
69
270
159
62
211
-51
59
3
24
................
245
-393
(
875
1,271
2,130
1,418
690
25
66
69
270
159
62
-25
..
..
-250
(
(
..
(
(
General Services Administration:
Real property activities
......................
Personal property activities
............... ............
Information Resources Management Service .. ............
Federal property resources activities
.............
General activities
..............
Propnetary receipts from the publiC .........................
393
38,553
241
)
)
(
..
)
)
5803
)
26
600
6,134
573
33
57
22
69
2
211
-51
59
3
24
-2
2
243
754
16
..
(
2,997
3,238
1,613
-32
-28
)
183
621
901
622
901
)
..
(
426
545
459
)
..
-62
..
)
62
626
Total-General Services Administration
3
(
...............
Total-Environmental Protection Agency
43
41
40
..
(
2,273
-18,694
639
914
182
1,941
..
35,487
37,257
1,065
965
2,421
1,303
620
9
875
1,271
2,130
1,418
672
-182
-250
-9
209
5,925
6,139
314
40
51
18
74
11
573
33
57
22
69
-11
11
743
497
662
248
-31
16,412
746
126
1,329
26
-49
22
19,491
)
639
914
421
-421
(
..
-54
18
182
306
1,009
444
..
)
( )
748
-748
-54
3,360
33,897
(
)
-803
-28
3,066
-17
296,539
1,020
-14,550
497
-35
670
17,126
2,804
357
253
52
-2,273
-18,694
-670
.....................
956
100
2
11
8
Outlays
205,880
86,622
16,787
253
202
53
44
1,421
52
6
I
497
322
236
511
369
208
-2,016
Veterans Benefits Administration:
Public enterprise funds:
Guaranty and indemnity fund ...........................
.......................
Loan guaranty revolving fund
....................................
Other.
Compensation and pensions ..............................
Readjustment benefits .....................................
Post-Vietnam era veterans education account ...........
Insurance funds:
National service life ....................................
United States government life ..........................
Veterans special life .....................................
....................................
Other
Applicable
Receipts
511
-29
11
46
37
14
6
3
Other
Propnetary receipts from the public .........
.................
Intrabudgetary transactions
......................
Offsetting governmental receipts
Total-Department of the Treasury
I
7
17
184
-234
1,065
958
2,421
1,303
603
-184
-234
208
5,932
27
314
40
51
18
74
-27
27
469
Table 5. Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
This Month
Current Fiscal Year to Date
Prior Fiscal Year to Date
Gross IAPPlicable I Outlays
Outlays
Receipts
Gross IAPPlicablel
Outlays
Receipts
Outlays
Gross IAPPlic.ablel Outla's
Oullays
Receipts
)
Classification
National Aeronautics and Space Administration:
Research and development
Space flight, control, and data communications
Construction of facilities
Research and program management
Other
Total-National Aeronautics and Space
Administration .................................... " ......
559
458
76
136
559
458
76
136
7,086
5,025
557
1,622
16
7,086
5,025
557
1,622
16
6,579
5,118
463
1,788
14
6,579
5,118
463
1,788
14
1,230
1,230
14,305
14,305
13,961
13,961
371
19,793
2,940
1,214
110
1
26
371
19,793
2,940
-242
-15
3,777
19,793
34,906
-886
-1,087
127
3,344
19,101
33,668
13,874
1,220
8
158
3,344
19,101
33,668
-389
-1,132
26
3,777
19,793
34,906
14,624
1,315
8
127
-19,793
-4
-19,793
-43
-19,793
-43
-19,101
-54
Office of Personnel Management:
Government payment for annuitants, employees health
and life insurance benefits
....................
Payment to civil service retirement and disability fund
Civil service retirement and disability fund
Employees health benefits fund
Employees life insurance fund
Retired employees health benefits fund
Other
Intrabudgetary transactions:
Civil service retirement and disability fund:
General fund contributions
Other
-19,793
-4
Total-Office of Personnel Management ...............
4,659
1,582
3,077
54,714
17,920
36,794
52,218
16,623
35,596
249
186
1
-228
58
38
2
191
148
726
486
15
-228
(
..)
624
66
26
221
1,163
6403
87
225
800
515
17
(")
1,350
6552
41
221
(")
363
-111
70
224
208
98
110
2,164
1,227
937
1,878
1,333
546
20
31
20
31
208
246
319
208
246
319
194
210
327
-2
19
104
14
97
3
-2
19
7
11
698
-159
218
-747
94
691
1
209
1,996
128
2,115
51
691
-324
209
-119
78
152
4
96
516
5
117
-364
-1
-22
7.421
52
6,041
3
17,255
995
3,679
-9,834
-943
2,362
3
19,254
12
11,073
15,588
304
2,605
3,666
-292
8.469
73
224
31
24
-13
3
41
49
27
46
224
31
24
-13
3
41
49
735
2,276
268
303
64
41
389
269
330
405
2,276
268
303
64
41
389
269
307
902
287
283
71
40
329
226
374
)
-67
902
287
283
71
40
329
225
9
5
-22
9
373
89
46
-367
(")
6
89
42
280
312
4
513
425
2
-233
-114
2
Sma" Business Administration:
Public enterprise funds:
Business loan fund
Disaster loan fund
Other
Other
Total-Sma" Business Administration ..................
Other independent agencies:
Action
Board for International Broadcasting
Corporation for Public Broadcasting
District of Columbia:
Federal payment
Other
Equal Employment Opportunity Commission
Export-Import Bank of the United States
Federal Communications Commission ............
Federal Deposit Insurance Corporation:
Bank insurance fund
Savings association insurance fund
FSLlC resolution fund
Affordable housing and bank enterprise
Federal Emergency Management Agency:
Public enterprise funds
Disaster relief
Emergency management planning and assistance
Other
Federal Trade Commission
Interstate Commerce Commission
Legal Services Corporation
National Archives and Records Administration
National Credit Union Administration:
Credit union share insurance fund
Central liquidity facility
Other
-13
5
9
1.456
125
..
(
(")
(")
17
)
(")
698
1
218
1,375
133
15,510
2.402
8
160
1
2,121
39
..)
(
(")
..
(
)
-5
14,262
2,352
8
(' ')
158
-19,101
-54
194
210
327
325
(
..
Table 5.
Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
Classification
Other independent agencies:-Continued
National Endowment for the Arts
National Endowment for the Humanities
National Labor Relations Board
National SCience Foundation
Nuclear Regulatory Commission
Panama Canal Commission
Postal Service
Public enterpnse funds (off-budget)
Payment to the Postal Service fund
Railroad Retirement Board
Federal Windfall subsidy
Federal payments to the railroad retirement accounts
Regional rail transportation protective account
Rail Industry pension fund:
Advances from FOASDI fund
OASDI certifications
Administrative expenses
Interest on refunds of taxes
Supplemental annuity pension fund
Other
Intrabudgetary transactions:
Social Security equivalent benefit account
Payments from other funds to the railroad
retirement trust funds
Other
This Month
Current Fiscal Year to Date
Prior Fiscal Year to Date
Gross (APPlicablel Outlays
Outlays
Receipts
Gross !APPlic.abI1 Outlays
Outlays
Receipts
Gross !APPlicable!
Receipts
Outlays
Outlays
17
17
17
246
40
41
7,038
289
58
289
58
305
247
305
247
(
(
(
)
(")
-1,069
1,069
71
5
2,901
10
-1,041
1,041
70
2
2,829
9
-1,041
1,041
70
2
2,829
9
3,171
48,957
161
....
-90
90
5
23
(
(
)
)
)
..
..
)
)
..
48,069
659
511
247
1
399
399
4,691
4,691
4,571
4,571
-3,435
193
-3,435
193
-3,206
15
-3,206
15
676
4,782
4,782
4,843
4,843
12,599
99
395
8,371
1,088
1,613
31,752
41,750
117
378
5,579
1,052
1,085
50,684
1,142
-19,153
99
395
1,629
1,088
472
4,110
2
153
-8,934
117
378
1,469
1,050
932
103,234
113,865
-10,631
144,967
126,319
18,648
..
(
..
(
)
)
1,270
-19
44
650
114
415
1,288
586
-18
-19
44
-336
114
-170
11,437
7,666
3,772
986
..
(
)
Undistributed ollsetting receipts:
Other interest
Total-Employer share. employee retirement
48,091
489
509
247
Resolution Trust Corporation
Securities and Exchange Commission
Smithsonian Institution
Tennessee Valley Authority
United States Information Agency
Other
Employer share, employee retirement:
Legislative Branch
United States Tax Court:
Tax court ludges survivors annuity fund
Department of Defense-Civil:
Military retirement fund
Department of Health and Human Services, except
Social Security:
Federal hospital insurance trust fund:
Federal employer contributions
Postal Service employer contributions
Payments for military service credits
Department of Health and Human Services, Social
Secunty (off-budget):
Federal old-age and survivors insurance trust fund:
Federal employer contributions
Payments for military service credits
Federal disability insurance trust fund:
Federal employer contributions
Payments for military service credits
Department of State:
Foreign Service retirement and disability fund
Office of Personnel Management:
CIVil service retirement and disability fund
Independent agencies
Court of veterans appeals retirement fund
507
542
170
162
155
2,249
50
3
-1,069
1,069
71
5
2,901
10
-90
90
5
676
....................
48,728
511
3,868
Total-Railroad Retirement Board
Total-Other independent agencies
866
161
115
45
23
..
170
162
155
2,249
539
512
174
169
171
2,452
488
519
r ')
(
174
169
171
2,452
-19
-23
17
17
17
246
-75
-4
6,742
..)
(
..
(
..
(
)
)
..
(
)
..
)
(
..
(
..
(
)
(")
)
(")
-1,125
-1,125
-13,179
-13,179
-16,314
-16,314
-205
-205
-1,914
-380
-81
-1,914
-380
-81
-1,800
-438
-86
-1,800
-438
-86
-494
-494
-5,489
-307
-5,489
-307
-5,181
-327
-5,181
-327
-53
-53
-587
-33
-587
-33
-558
-35
-558
-35
-13
-13
-111
-111
-95
-95
-3,701
-3,701
-12,520
-12,520
-11,947
-11,947
..
)
(")
5,591
-5,591
-36,782
-36,782
..
(
18
)
-34,601
..
(
)
-34,601
(
Table 5.
Outlays of the U.S. Government, September 1993 and Other Periods-Continued
[$ millions]
This Month
Current Fiscal Year to Date
Prior Fiscal Year to Date
Gross [APPlicable [
Outlays
Outlays
Receipts
Gross [APPlicable [ Outla s
Outlays
Receipts
Y
Gross [APPlicable [ Outla s
Receipts
y
Outlays
Classification
Undistributed offsetting receipts:-Continued
Interest received by trust funds
The Judiciary:
Judicial survivors annuity fund
Department of Defense-Civil
Corps of Engineers
Military retirement fund
Education benefits fund
Soldiers' and airmen's home permanent fund
Other
Department of Health and Human Services, except
Social Security:
Federal hospital insurance trust fund
Federal supplementary medical Insurance trust fund
Department of Health and Human Services, Social
Security (off-budget):
Federal old-age and survivors insurance trust fund
Federal disability insurance trust fund
Department of Labor:
Unemployment trust fund
Department of State'
Foreign Service retirement and disability fund
Department of Transportation:
Highway trust fund
Airport and airway trust fund
Oil spill liability trust fund
Department of Veterans Affairs
National service life Insurance fund
United States government life Insurance Fund
Environmental Protection Agency
National Aeronautics and Space Administration
Office of Personnel Management:
Civil service retirement and disability fund
Independent agencies
Railroad Retirement Board
Other
Other
18
-18
-17
-17
23
-9,831
-57
-22
-23
-9,831
-57
-22
-30
-9,017
-64
-6
--30
-9,017
-64
-6
)
(")
(. ")
(" ")
(" ")
-12
-11
-12
-11
-10,581
-1,888
-10,581
-1,888
-10,054
-1,716
-10,054
-1,716
-41
-7
-41
-7
-25,822
-966
-25,822
-966
-22,557
-1,080
-22,557
-1,080
-11
-11
-2,546
-2,546
-3,649
-3,649
(" ")
(" ")
-546
-546
-514
-514
-13
-7
-13
-7
(" ")
(" ")
-1,560
-1,040
-40
-1,560
-1,040
-40
-1,655
-1,273
-41
-1,655
-1,273
-41
-1,085
-11
-24
-1
-1,071
-12
-33
-1
-1,071
-12
-33
-1
-1
58
-1
58
r .)
(
r .)
..-1)
(
-1
-1
(" ")
(" ")
(" ")
(" ")
r ")
(" ")
-1,085
-11
-24
-1
-28
-28
-25,155
-25,155
-23,721
-23,721
-39
-4
-3
-39
-4
-3
-889
-17
-154
-889
-17
-154
-1,054
-5
-260
-1,054
-5
-260
-122
-82,276
-82,276
-77,831
-122
Total-Interest received by trust funds
233
Rents and royalties on the outer continental shelf lands
................
..-1
-233
2,785
-77,831
2,498
-2,498
-5,712
233
-114,612
2,498
-117,111
Total outlays .................................................
136,319
17,151
119,168 1,623,506
215,384 1,408,122 1,607,719
226,925
1,380,794
Total on-budget
...........................................
104,316
13,277
91,038 1,309,397
167,287 1,142,110 1,307,310
178,855
1,128,455
Total off-budget
...........................................
32,004
3,874
Total-Undistributed offsetting receipts
-116,877
-2,785
-5,945
314,110
28,130
2,785 -119,662
48,097
266,012
300,409
48,070
252,339
................................
+8,300
-254,948
-290,340
Total on-budget
...........................................
+7,570
-300,869
-340,428
Total off-budget
...........................................
+730
+45,922
+50,087
Total surplus (+) or deficit
MEMORANDUM
Receipts offset against outlays
[$ millions]
Current
Fiscal Year
to Date
Proprietary receipts
Receipts from off-budget federal entities
Intrabudgetary transactions
Governmental receipts
Total receipts offset against outlays
Comparable Period
Prior Fiscal Year
44,560
40,844
233,920
1,953
280,432
217,045
6,707
264,596
'Outlays for the Medical Care Cost Recovery Fund (MCCR) have been decreased and the
proprietary receipts have been correspondingly decreased In December 1992 to accurately reflect
an annual transfer of excess receipts to the general fund of the Treasury previously recorded as
outlays from the MCCR Fund Instead of a reduction In unavailable receipts of the MCCR Fund
6The outlays and the guaranteed loan finanCing for the Small Bustness Administration have
been Increased by $152 million ,n September 1992 and August 1993, respectively; and the outlays
and guaranteed loan finanCing have been correspondingly decreased In August 1993 and
September 1992, respectively, to correct agency reporting.
No Transactions
(" ") Less than $500.000
Note' Details may not add to totals due to rounding
'The speCial fund receipts for the Uranrum Supply and Enrichment ActiVities, Departmental
Admlnrnrstratlon, and the Federal Energy Regulatory Commission have been decreased by $1,313
million, $101 million, and $141 million respectively In FY 1992 and by $849 million, $262 million,
and $159 million, respectively In FY 1993 The corresponding program outlays were reduced to
reflect a reduction In funds approprrated to these accounts.
'Includes FICA and SECA tax credits, non-contributory military service credits, speCial benefits
for the aged, and credit for un negotiated OASI benefit checks
'Includes a decrease In net outlays of $20 million for amortization
'Includes a decrease of $548 million to reflect adjustments made by the Internal Revenue
ServIce to the earned Income credit
19
Table 6.
Means of Financing the Deficit or Disposition of Surplus by the U.S. Government, September 1993 and Other Periods
[$ millions]
Net Transactions
(-) denotes net reduction of either
liability or asset accounts
Assets and Liabilities
Directly Related to
Budget Off-budget Activity
Beginning of
Fiscal Year to Date
This Month
This Year
I
Account Balances
Current Fiscal Year
Prior Year
This Year
I
Close of
This month
This Month
..
Liability accounts:
BorrOWing from the pubhc
Public debt secUrities, Issued under general Financing authorities:
ObligatIOns of the United States, issued by:
UOIted States Treasury
Federal FinanCing Bank
Total, public debt securities
Plus premium on public debt securities
Less discount on public debt securities
Total public debt securities net of Premium and
....... , .... .
discount
Agency secUrities, issued under special financing authOrities (see
Schedule B. for other Agency borrowing, see Schedule C)
Net federal securities held as investments of government
accounts
346,868
399,317
4,049,621
15,000
4,388,247
15,000
8,242
346,868
399,317
4,064,621
4,403,247
4,396,489
15,000
4,411,489
-7
15
340
4,580
209
-3,832
1,032
81,818
1,380
86,382
1,373
86,397
8,219
342,629
403,358
3,983,837
4,318,247
4,326,466
218
6,652
280
18,030
24.464
24,682
8,437
349,281
403,638
4,001,867
4,342,711
4,351,149
17,769
100,260
97,431
1,016,453
1,098,944
1,116,713
-14
-402
4,491
13,178
12,789
12,776
17,783
100,663
92,940
1,003,275
1,086,155
1,103,938
Total federal securities
Deduct:
Federal securities held as investments of government accounts
............ .
(see Schedule D)
Less discount on federal securities held as investments of
government accounts
8,242
-9,346
248,619
310,698
2,998,592
3,256,556
3,247,211
Accrued interest payable to the public
Allocations of special drawing rights
Deposit funds
Miscellaneous liability accounts (includes checks Outstanding etc,) ..... .
8,963
53
58
1,575
-394
-267
-422
785
2,186
514
-1,732
-1,494
44,212
7,216
6,422
2,143
34,856
6,896
5,942
1,352
43,819
6,950
6,000
2,928
Total liability accounts." .. , .. , .. , .. ,." .. , .. , .. , ........ , .. , .. , ......... .
1,304
248,321
310,172
3,058,585
3,305,603
3,306,907
9,314
2,399
11,713
-7,297
1,014
16,658
646
24,586
34,203
7,975
32,818
17,289
35,217
-6,283
17,305
58,789
40,793
52,506
70
-2,908
2,000
1,389
12,111
-10,018
9,133
-8,018
9,203
-8,018
70
-908
1,389
2,093
1,115
1,185
287
-108
2
12,063
-828
-10,133
-25
1,879
-336
-13
19,699
6,692
-15,381
-73
31,762
5,577
-25.406
-100
31,762
5,864
-25,514
-98
-194
1,257
-858
-1,167
284
90
-13
2,333
672
9,770
12,116
12,103
)
(00)
-2,281
-1,428
r 0)
18,654
23,842
24,694
22,414
9,490
-6,286
38,019
94,494
78,718
88,208
Net activity, guaranteed loan financing
Net activity, direct loan financing
Miscellaneous asset accounts
-855
769
237
2-4,728
3,780
957
2-1,743
3,052
-19,234
-1,743
3,052
-1,585
-5,616
6,063
-864
-6,471
6,832
-627
Total asset accounts
",.".".,."."."."., .. , .. "., .. , ............ , .. .
9,641
-6,276
20,094
94,218
78,301
87,942
Excess of liabilities (+) or assets (-) .................................. ..
-8,337
+254,597
+290,078
+2,964,368
+3,227,302
+3,218,965
37
351
263
314
351
-8,300
+254,948
+290,340
+3,227,616
+3,219,315
Total borrowing from the public
Asset accounts (deduct)
Cash and monetary assets:
US Treasury operating cash:'
Federal Reserve account
Tax and loan note accounts
Balance
Special drawing rights:
Total holdings
SDR certificates issued to Federal Reserve banks
Balance
Reserve position on the U.S quota in the IMF;
U.S. subscription to International Monetary Fund:
Direct quota payments
Maintenance of value adjustments
Letter of credit issued to IMF
Dollar deposits with the IMF
Receivable/Payable (-) for interim maintenance of value
adjustments
Balance
Loans to International Monetary Fund
Other cash and monetary assets
Total cash and monetary assets
Transactions not applied to current year's surplus or deficit (see
Schedule a for Details)
Total budget and off-budget federal entities (financing of deficit (+)
or disposition of surplus (-» ........................................... .
..
(
'MalOr sources of InformatIon used to determIne Treasurys operating cash Income include the
Dally Balance Wires from Federal Reserve BankS. reporting from the Bureau of PubliC Debt,
electronIC transfers through the Treasury F,nanc,al Communicat,on System and reconciling wires
from Internal Revenue Centers Operating cash IS presented on a modified cash baSIS; depoSits
are reflected as receIved and WIthdrawals are reflected as processed
+2,964,368
'The outlays and the guaranteed loan financing for the Small Business AdmiOistrabon have
been Increased by $152 million in September 1992 and August 1993, respectively; and the outlays
and guaranteed loan financing have been correspondingly decreased in August 1993 and
September 1992, respectively; to correc1 agency reporting.
. No TransactIOnS.
(. 0) Less than $500,000
Note: Details may not add to totals due to rounding
20
Table 6.
Schedule A-Analysis of Change in Excess of Liabilities of the U.S. Government, September 1993 and
Other Periods
[$ millions]
Fiscal Year to Date
Classification
This Month
I
This Year
...
Excess of liabilities beginning of period:
Based on composition of unified budget in preceding period
Adjustments during current fiscal year for changes in composition
of unified budget:
Reclassification of the Disaster Assistance Liquidating Account,
FEMA. to a budgetary status
Revisions by federal agencies to the prior budget results
Reclassification of Thrift Savings Plan Clearing Accounts to a
non-budgetary status
Reclassification of Deposit in Transit Differences (Suspense)
Clearing Accounts to a budgetary status
Excess of liabilities beginning of period (current basis)
Budget surplus (-) or deficit:
Based on composition of unified budget in prior fiscal yr
Changes in composition of unified budget
Total surplus (-) or deficit (Table 2)
3,227,266
2,964,066
36
128
Prior Year
2,673,445
(")
716
(")
174
129
3,227,302
2,964,368
2,674,290
-8,300
254,948
290,340
-8,300
254,948
290,340
Total-on-budget (Table 2)
-7,570
300,869
340,428
Total-off -budget (Table 2)
-730
-45,922
-50,087
-37
-351
-263
(")
(")
(")
-37
-351
-263
3,218,965
3,218,965
2,964,368
Transactions not applied to current year's surplus or deficit:
Seigniorage
Profit on sale of gold
Total-transactions not applied to current year's Surplus or
deficit
Excess of liabilities close of period .................... , ............. .
Table 6. Schedule B-Securities isued by Federal Agencies Under Special Financing Authorities, September 1993 and
Other Periods
[$ millions]
Net Transactions
(-) denotes net reduction of either
Liability accounts
Account Balances
Current Fiscal Year
Classification
Fiscal Year to Date
Beginning of
This Month
This Year
I Prior Year
This Year
I This Month
Close of
This month
..
Agency securities, issued under special financing authontles:
Obligations of the United States, issued by:
Export-Import Bank of the United States
Federal Deposit Insurance Corporation:
Bank insurance fund
FSlIC resolution fund
Obligations guaranteed by the United States, issued by:
Department of Defense
Family housing mortgages
Department of Housing and Urban Development:
Federal Housing Administration
Department of the Interior:
Bureau of Land Management
Department of Transportation:
Coast Guard:
Family housing mortgages
Obligations not guaranteed by the United States, issued by:
Legislative Branch:
Architect of the Capitol
Department of Defense:
Homeowners assistance mortgages
Independent agencies
National Archives and Records Administration
Postal Service
Farm Credit System Financial Assistance Corporation
Tennessee Valley Authority
-2
(")
(")
(")
-888
-194
-4,987
93
1,137
93
1,830
93
943
(")
(")
(")
7
7
7
59
-88
-35
301
154
213
13
13
13
(")
(")
(")
162
175
176
302
302
302
14
13
-1
-1
-220
Total, agency securities .......................................... .
No Transactions
(- .) Less than $500.000
Note. Details may not add to totals due to rounding.
21
1,261
-215
1,261
5,660
5,512
16,015
21,890
1,261
21,675
218
6,652
280
18,030
24,464
24,682
Table 6.
Schedule C (Memorandum)-Federal Agency Borrowing Financed Through the Issue of Public Debt Securities,
September 1993 and Other Periods
[$ millions]
Account Balances
Current Fiscal Year
Transactions
Classification
Beginning of
Fiscal Year to Date
This Month
J Prior Year
This Year
Borrowing from the Treasury:
Funds Appropriated to the President:
International Security Assistance:
Guaranty reserve fund
Agency for International Development:
Housing and other credit guaranty programs
Overseas Private Investment Corporation
Department of Agriculture:
Foreign assistance programs ..
Commodity Credit Corporation
Farmers Home Administration:
Agriculture credit insurance fund
Self-help housing land development fund
Rural housing insurance fund ...... .
Rural Development Administration:
Rural development insurance fund .. .
Rural development loan fund ........................... .
Federal Crop Insurance Corporation:
Federal crop insurance corporation fund ..... .
Rural Electrification Administration:
Rural communication development fund ........ .
Rural electrification and telephone revolving fund
Rural Telephone Bank .......... .
Department of Commerce:
Federal ship financing fund, NOAA
Department of Education:
Guaranteed student loans
College housing and academic facilities fund ..
College housing loans
Department of Energy:
Isotope production and distribution fund
Bonneville power administration fund ...
Department of Housing and Urban Development:
Housing programs:
Federal Housing Administration ............ .
Housing for the ederly and handicapped ............ .
Public and Indian housing:
Low-rent public housing
Department of the Interior:
Bureau of Reclamation Loans
Bureau of Mines, Helium Fund
Bureau of Indian Affairs:
Revolving funds for loans
Department of Justice:
Federal prison industries, incorporated
Department of State:
Repatriation loans
Department of Transportation:
Federal Railroad Administration:
Railroad rehabilitation and improvement
financing funds ....................... .
Settlements of railroad litigation
Amtrak corridor improvement loans
Regional rail reorganization program
Federal Aviation Administration:
Aircraft purchase loan guarantee program
Department of the Treasury:
Federal Financing Bank revolving fund
Department of Veterans Affairs:
Loan guaranty revolving fund
Guaranty and indemnity fund
Direct loan revolving fund
Vocational rehabilitation revolving fund
Environmental ProtectIOn Agency:
Abatement. contrOl. and compliance loan program
Small Business Administration:
Business loan and revolving fund
-28
348
4
8
23
2,315
-79
This Year
-5
I
Close of
This month
This Month
376
348
oJ
125
125
(" oJ
4
125
8
123
7,464
70
-4,512
70
17,282
171
22,431
193
24,745
-6,464
5,526
5,850
131
245
1
921
-1,821
1,989
2,779
5,771
1
2,910
25
135
-491
1,545
(" oJ
1,655
4
1,680
113
113
113
25
8,099
802
25
8,099
802
5
(0
1
(0
oJ
194
40
40
4
25
7,905
763
-2
-4
2
-32
2,090
156
524
2,058
156
524
2,058
154
460
-1
-63
-63
2,090
19
-70
-44
4
426
9
234
9
1,906
13
2,376
13
2,332
185
-7,323
1,316
8,774
8,959
8,959
60
50
50
100
110
3
2
2
252
4
252
252
8
15
17
20
20
20
10
-1
9
2
(0
oJ
8
(0
-1
8
-39
2
(0
oJ
713
22
5
5
oJ
8
8
-39
-39
2
2
2
39
39
39
oJ
(00)
oJ
-1
(" oJ
-35,093
-29,812
149,422
113,616
114,329
-61
43
-1,730
1
921
40
921
40
1,730
1
860
83
1
860
83
2
2
9
12
216
3,203
(0
3
11
2,987
3,192
(" oJ
1
11
11
(0
1
Table 6.
Schedule C (Memorandum)-Federal Agency Borrowing Financed Through the Issue of Public Debt Securities
September 1993 and Other Periods-Continued
'
[$ millions]
Account Balances
Current Fiscal Year
Transactions
Classification
Fiscal Year to Date
Beginning of
This Month
I Prior Year
This Year
Borrowing for the Treasury.-Contlnued
Other Independent agencies:
Export-Import of the United States
Federal Emergency Management Agency
NatIOnal Insurance development fund
Pennsylvania Avenue Development Corporation:
Land aquisition and development fund
Railroad Retirement Board:
Railroad retirement account
Social Security equivalent benefit account
Smithsonian Institution:
John F. Kennedy Center parking facilities
Tennessee Valley Authority
Total agency borrowing from the Treasury
financed through public debt securities issued
Borrowing from the Federal Financing Bank:
Funds Appropriated to the President:
Foreign military sales
Department of Agriculture:
Rural Electrification Administration
Farmers Home Administration:
Agriculture credit Insurance fund
Rural housing Insurance fund
Rural development Insurance fund
Department of Defense
Department of the Navy
Defense agencies
Department of Education:
Student Loan Marketing Association
Department of Health and Human Services,
Except Social Security'
Medical facilities guarantee and loan fund
Department of HouSing and Urban Development:
Low rent housing loans and other expenses
Community Development Grants
Department of Interior:
Territorial and International affairs
Department of Transportation:
Federal Railroad Administration
Department of the Treasury'
FinanCial Management Service
General Services Administration:
Federal buildings fund
National Aeronautics and Space Administration:
Space flight, control and data communications
Small BUSiness Administration:
BUSiness loan and Investment fund
Independent agencies
Export-Import Bank of the United States
Federal Deposit Insurance Corporation:
Bank insurance fund
National Credit Union Administration
Pennsylvania Avenue Development Corporation
Postal Service
Resolution Trust Corporation
Tennessee Valley AuthOrity
Washington Metropolitan Transit Authority
Total borrowing from the Federal Financing Bank
j
This Month
91
298
88
88
295
386
12
24
-134
18
30
42
3
7
73
76
76
20
138
2,128
2,670
2,128
2,458
2,128
2,690
20
150
20
150
20
150
231
..................
This Year
Close of
This month
6,334
-23,214
-45,586
206,410
176,863
183,196
-47
-261
-256
4,344
4,131
4,083
-243
-490
-519
22,742
22,496
22,252
-3,950
-410
-5,510
-2,205
12,858
26,446
3,675
8,908
26,036
3,675
8,908
26,036
3,675
-48
-48
1,624
-48
1,624
-96
1,624
-96
-30
-30
4,820
4,790
4,790
-39
-18
124
85
85
-52
-43
-50
-30
1,853
174
1,801
133
1,801
131
-28
-2
51
23
23
-2
-2
19
17
17
-95
125
125
30
30
737
72
699
1,419
1 ,436
-2
(")
17
-33
-8
-112
-159
782
678
670
-458
-1,898
-3,569
7,692
6,252
5,795
-10,160
10,160
78
9,903
46,536
9,592
177
144
10,182
29,088
7,486
177
150
9,732
31,688
6,325
177
164,427
129,079
129,332
6
-450
2,600
-1,161
72
-172
-14,848
-3,267
1,864
-114
45
1,703
-16,346
-4,730
252
-35,095
-29,812
................
No Transactions
(- .) Less than $500,000
Note Details may not add to totals due to rounding
Note ThiS table Includes lending by the Federal FinanCing Bank accomplished by the purchase
of agency financial assets, by the acqUisition of agency debt SeCUrities, and by direct loans on
behalf of an agency The Federal FinanCing Bank borrows from Treasury and Issues ItS own
securities and In turn may loan these funds to agencies In heu of agencies borroWing directly
through Treasury or Issuing their own secuntles
23
Table 6.
Schedule D-Investments of Federal Government Accounts in Federal Securities, September 1993 and
Other Periods
[$ millions]
Securities Held as Investments
Current Fiscal Year
Net Purchases or Sales (-)
Classification
Beginning of
Fiscal Vear to Date
This Month
I Prior Year
This Year
This Year
I This Month
Close of
This month
Federal funds:
Department of Agriculture
Department of Commerce
Department of Defense-Military:
Defense cooperation account
Department of Energy
Department of Housing and Urban Development:
Housing programs:
Federal housing administration fund:
Public debt securities
Govemment National Mortgage Association:
Management and liquidating functions fund:
Public debt securities
Agency securities
Guarantees of mortgage-backed securities:
Public debt securities
Agency securities
. . . . . . . . . ..
Other
Department of the Interior:
Public debt securities ..
Department of Labor ...
Department of Transportation ..............
Department of the Treasury
. . . . . .. . . . . . .
Department of Veterans Affairs:
Canteen service revolving fund
Guaranty and indemnity fund
Veterans reopened insurance fund ...
Servicemen's group life insurance fund
Independent agencies:
Export-Import Bank of the United States
Federal Deposit Insurance Corporation:
Bank insurance fund
Savings association insurance fund .
FSLlC resolution fund:
Public debt securities
Federal Emergency Management Agency:
National flood insurance fund
National Credit Union Administration
Postal Service
Tennessee Valley Authority
............
Other
Other ...............
-2
-1
5
8
3
10
10
102
-2,023
568
-5,575
489
2,032
3,513
9
3,979
9
4,081
-267
-644
-790
5,858
5.481
5,214
r .)
2
-40
3
-5
6
60
9
20
9
20
19
49
522
-61
-54
371
-11
27
2,699
62
245
3,202
1
142
3,221
1
191
-245
210
2
-25
175
1,110
100
2,311
1,146
5,114
10
955
2,333
15,480
781
3,462
2,753
16,381
879
5,799
2,508
16,590
881
5,773
-2
-5
43
40
38
-4
-4
9
-48
-6
-385
6
7
509
198
522
154
518
150
-365
-12
-2
88
441
76
307
-339
943
-1,443
292
4,664
340
4,018
1,282
4,325
1,283
78
-517
379
1,319
724
801
-471
372
-1,653
1,213
88
306
160
232
1,340
-640
14
24
543
2,392
4,679
2,239
765
2,410
71
2,752
6,366
3.452
778
2,710
71
2,764
3,027
3,452
853
2,715
-3,393
1,950
-102
1,726
-16
56,611
123
61,955
21
58,562
21
-3,393
1,849
1,710
56,734
61,976
58,583
1
4
27
4
4
26
1
4
27
..20
..
193
6
212
12
212
5
..............
13
-3,340
75
6
Total public debt securities
Total agency securities
Total Federal funds
-5
2
-3
.............................................
Trust funds:
LegiSlative Branch:
Library of Congress
United States Tax Court
Other
The Judiciary:
Judicial retirement funds
Department of Agriculture
Department of Commerce
Department of Defense-Military:
Voluntary separation incentive fund
Other
Department of Defense-Civil:
Military retirement fund
Other
-3
.............
..
(
)
-8
..
(
)
....
(
(
)
)
19
-1
..
(
)
..
(
)
1
(
(
)
)
..
(
)
..
(
)
-20
-1
844
-9
152
160
865
152
844
151
-1,206
-456
8,937
115
11,698
103
87,753
1,098
97,896
1,668
96,690
1,213
24
Table 6. Schedule D-Investments of Federal Government Accounts in Federal Securities, September 1993 and
Other Periods-Continued
[$ millions)
Securities Held as Investments
Current Fiscal Year
Net Purchases or Sales (-)
Classification
Fiscal Year to Date
Beginning of
This Month
I Prior Year
This Year
This Year
I This Month
Close of
This month
Trust Funds-Continued
Department of Health and Human Services, except Social Security:
Federal hospital insurance trust fund:
Public debt securities
................
Federal supplementary medical insurance trust fund ......
Other
.............
. ..........
Department of Health and Human Services, Social Security:
Federal old-age and survivors insurance trust fund:
PubliC debt securities . . . . . . . . . . . . . .
Federal disability Insurance trust fund
Department of the Interior:
PubliC debt securities
..............
Department of Justice
................
Department of Labor:
Unemployment trust fund
..............
Other
. . . . . . . . . . . . . ..
Department of State:
Foreign Service retirement and disability fund
Other
..................
Department of Transportation:
Highway trust fund
............
. ................
Airport and airway trust fund
..............
Other
Department of the Treasury
Department of Veterans Affairs:
General post fund, national homes
National service life insurance:
Public debt securities
.........................
United States government life Insurance Fund ..........
Veterans special life insurance fund
Environmental Protection Agency
...........
National Aeronautics and Space Administration
Office of Personnel Management
Civil service retirement and disability fund:
Public debt securities
...........
Employees health benefits fund
.....................
Employees life insurance fund
.....................
Retired employees health benefits fund .......................
Independent agencies
Harry S. Truman memorial scholarship trust fund
Japan-United States Friendship Commission
Railroad Retirement Board
...............
Other
.. . . . .. . . . .. .
.............. .............
84
542
-3
5,432
4,734
39
11,320
2,293
120
120,647
18,534
621
125,995
22,726
662
126,078
23,268
659
4,038
-151
48,986
-2,681
50,967
-187
306,524
12,918
351,472
10,388
355,510
10,237
-29
-111
-152
95
336
214
111
184
-1,352
-7
1,473
1
-12,436
-1
35,133
52
37,959
60
36,607
53
254
38
662
38
578
5,999
6,408
("")
(" ")
(" ")
6,662
38
-1,141
-414
3
6
1,042
-2,419
276
26
1,573
-103
169
55
20,962
15,090
1,399
184
23,145
13,085
1,672
203
22,004
12,672
1,675
209
5
2
34
39
39
-62
-2
-7
23
356
-10
56
1,021
160
-14
49
557
(" ")
(. ")
("")
11 ,310
134
1,406
4,456
16
11 ,728
127
1,469
5,454
16
11,666
125
1,462
5,477
16
20,993
191
9
27,275
801
1,084
25,881
424
1,141
(" ")
(" ")
("")
284,430
5,993
12,604
1
290,712
6,604
13,680
1
311 ,705
6,794
13,688
1
48
17
12,010
124
52
17
11,961
125
4
5
-4
(" ")
("")
("")
-49
(" ")
433
20
1,094
16
47
17
11,527
104
................ ..............
21,163
98,412
95,722
959,719
1,036,968
1,058,131
.................................................
21,163
98,412
95,722
959,719
1,036,968
1,058,131
Grand total .. , .. , ... "., ................. , ...................................
17,769
100,260
97,431
1,016,453
1,098,944
1,116,713
Total public debt securities
Total trust funds
Note: Investments are in public debt secunties unless otherwise noted
Note: Details may not add to totals due to rounding.
No Transactions
(•• ) Less than $500,000
25
Table 7.
Receipts and Outlays of the U.S. Government by Month, Fiscal Year 1993
[$ millions)
Classification
Comparable
Period
Prior
F.Y.
April
May
June
July
Aug.
Sept.
Fiscal
Year
To
Date
27.772
12,724
56.041
17.795
17,805
2.376
56,445
24.949
37,483
2,695
39,440
1.943
55,653
24,510
509,680
117.520
475,964
100.270
31,623
2,259
369
3.342
822
1,347
1,633
32,980
240
432
4.514
977
1,598
2.045
45,164
3,581
431
4,168
1,898
1,544
1.399
33,062
8,849
365
3.502
1,009
1.419
2,252
37,738
301
366
4,565
900
1,642
1,662
30,156
1)09
419
4,214
944
1.761
1,252
31,447
4.810
400
4,295
1,150
1.828
1,429
36,908
413
447
4,385
1,049
1,646
2,456
396,939
26.556
4.805
48,057
12,577
18,802
18.239
385.491
23.410
4.788
45.569
11.143
17.359
26,459
......
......
......
Oct.
Nov.
Dec.
Jan.
Feb.
37.285
2.096
33.094
1.478
51.168
22,950
73.704
3,212
23)89
792
28.135
1,034
426
3.670
1.027
1,666
1.485
30,264
2,270
366
4.082
954
1.503
613
31,252
245
421
4.014
959
1.539
1,135
28.209
844
363
3,307
888
1.310
876
March
Receipts:
Individual Income taxes
Corporation Income taxes
Social Insurance taxes and
contributions
Employment taxes and
contributIOns
Unemployment insurance
Other retirement contributions
Excise taxes ..
Estate and gift taxes
Customs duties .
Miscellaneous receipts .
...........
76,824
74.625 113,683 112,712
65,975
83,284 132,021
70,640 128,568
80,633
86,741 127,469 1,153,175
(On-budget) .............. , .. ", .. ',
55,048
51,211
89,586
90,124
40,875
57,090
96,312
44,518
98,661
57,147
62,060
98,609
841,241
(Off-budget) , ... , ....... "", ...... ,
24,096
35,709
26,122
28,860
311,934
Total-Receipts this year
21,776
23,414
22,589
25,100
26,194
29,906
23,486
24,681
Totai-Recelpts prior year
78,065
73,095 103.636 104.031
62.747
72.127 138.351
62.184 120.878
79.050
78.101 118.189
(On blldl?et)
57.213
50.799
80.146
79,877
38.980
45.562 103,326
36,807
91,396
55,947
55,318
92.657
788.027
(O~T
20.852
22.296
23.490
24. 155
23.766
26.564
35,025
25.377
29.482
23. 103
22,784
25.532
302.426
204
135
18
211
162
22
193
183
14
221
222
21
195
157
12
196
172
14
233
314
21
159
289
12
187
195
13
202
259
23
206
284
13
198
206
12
2,406
2,579
194
2,677
2,308
186
334
3.393
521
414
137
245
285
391
459
486
441
216
7,322
7,203
629
270
260
-27
218
74
368
168
242
483
283
-27
396
-315
275
234
238
86
459
-285
336
-707
151
396
3,856
349
4.029
-119
1,653
5,397
290
2,277
3.347
285
3.344
3.301
228
1,263
3,253
231
1.022
3.367
202
4,019
4,144
94
1,977
4.195
321
1,264
3,812
165
327
4,102
184
-297
3,828
254
-115
3,537
228
191
3,935
317
16,924
46,219
2.798
10,709
45.727
2,567
9,210
6,526
5,698
3.613
7.265
5,327
9,118
8,140
6,974
4,385
6,986
5,027
5.656
7,154
5,736
6,192
7,657
6,179
8,682
8,888
5,551
3,541
7,369
5,630
6,449
10,310
7,917
9,159
7,386
4,708
3,b02
7,395
5,706
6,296
9,027
5,482
75,904
94,105
69.936
81,171
92,042
74.881
3.002
393
219
2,752
427
218
3,337
500
264
2.636
333
263
2,930
251
275
3.418
400
284
2,958
373
296
2,755
410
263
4,493
401
299
2.648
388
291
2,952
422
271
3,077
534
312
36,958
4,831
3.255
34,632
4,262
3.271
905
-30
32
109
-3
238
676
-3
-59
559
-2
-1.250
93
-652
n
-59
-47
-6.023
287
129
-483
(")
(' ')
(")
(")
(")
-91
-298
-2
562
-220
-151
35
-125
-539
-4,745
-40
-1.628
3,117
-5,240
-1.504
25.954
19.947
28,947
18.938
22.003
24,392
26,036
19.703
23,695
24,902
20,352
23,707
278,576
286,632
2.493
2,334
1,714
2,506
2,675
1,391
2.509
2.664
1,549
2.438
2,903
780
2.459
2,714
1.266
2.432
3.167
1.542
2,471
2,268
1,434
2,200
1,839
1,101
2,434
2,328
1,618
2,356
1,474
1,349
2,490
3,190
1,364
2,473
2,858
1,693
29,262
30,414
16.801
28,270
26,047
15,439
1.438
1,476
1,573
1,348
1,546
1,633
1,806
1,407
1.785
1.509
1.566
1,779
18,865
17.447
6,215
7.299
5,592
6.555
6,320
8,117
5.981
6.171
6,003
7,423
6,272
8.539
6.651
8,321
6,098
7,102
6,706
8,559
6.220
8,249
6,648
7,476
7,069
7,792
75,774
91,604
67.827
81,971
4.851
3,247
4.691
3,773
3,270
386
4,985
7,723
3.483
3,680
529
1,874
3,811
3.746
2.049
4,745
4,069
2,025
4,808
3.638
5,038
3,960
3.721
582
5,120
3,760
1,923
5.150
3.673
5,268
4.745
3.708
329
4,626
3,738
2,033
54.254
44.820
29,679
50,285
39,282
26,401
2.178
-4.271
2,132
-4.269
2,507
-9,901
2,536
-796
2,626
-5.079
2,394
-5,428
2,213
-5.050
2,521
-5,009
1.939
-5.087
2.297
-4,966
2,402
-5.097
2,054
-5,070
27.798
-60.020
27,248
-53,169
21.530
2.771
-1.523
21.508
2.638
-5
43,838
5.145
-21
267
465
-1.515
22.230
2.840
-9
22.406
2,880
-16
22.430
2,994
-1,535
22.381
2,910
-12
25,731
2,994
-7
22.538
3.029
-1.528
22,485
2,966
-9
22,616
3,010
-71
269.960
34.641
-6.252
256,290
31.295
-6,167
blldget)
i,090,453
Outlays
.......
Legislative Branch
The Judiciary
Executive Office of the President ... ...
Funds Appropriated to the President:
International Security Assistance
International Development
......
ASSistance
.. ....
Other. . . . . . . .... .. " .
...
Department of Agriculture:
Foreign aSSistance, special export
programs and Commodity Credit
Corporation . . . . . . . . . . . . . . . . . . . . . ,
Other . . . . . . . .
Department of Commerce .
Department of Defense:
Military:
....
Military personnel ...
Operation and maintenance
. . . . . ..
Procurement .....
Research, development. test, and
........
evaluation
Military construction
.. ...
Family housing .... ....... . ....
Revolving and management
funds
...
Defense cooperation account
Other
Total Military ..
Civil
Department of Education .
Department of Energy .
Department of Health and Human
Services. except SOCial Security:
Public Health Service
Health Care Financing Administration:
Grants to States for Medicaid
Federal hospital ins. trust fund
Federal supp. med. ins. trust
fund
Other
Social Security Administration
Administration for children and
families
Other
Department of Health and Human
Services. Social Secunty:
Federal old-age and survivors ins
trust fund
Federal disability inS trust fund
Other
n
26
Table 7"
Receipts and Outlays of the U"S" Government by Month, Fiscal Year 1993-Continued
[$ millions]
Classification
Oct_
Nov_
Dec_
Jan.
Feb.
March
April
May
June
July
Aug.
Sept.
Fiscal
Year
To
Date
Comparable
Period
Prior
F.Y.
Outlays-Continued
Department of Housing and Urban
Development
Department of the Interior
Department of Justice
Department of Labor:
Unemployment trust fund
Other
Department of State
Department of Transportation
Highway trust fund
Other
Department of the Treasury:
Interest on the public debt
Other
Department of Veterans Affairs:
Compensation and pensions
National service hfe
United States government life
Other
Environmental Protection Agency
General Services Administration
National Aeronautics and Space
Administration
Office of Personnel Management
Small BUSiness Administration
Independent agencies:
Fed. Deposit Ins. Corp.:
Bank insurance funds
Savings association fund
FSLlC resolution fund
Postal Service:
PubliC enterprise funds (offbudget)
Payment to the Postal Service
fund
Resolution Trust Corporation
Tennessee Valley Authority
Other Independent agencies
Undistributed offsetting receipts:
Employer share, employee
retirement
Interest received by trust funds
Rents and royalties on outer
continental shelf lands
Other
2.591
698
1,215
2.053
500
913
2.232
447
849
1.786
517
794
1.764
477
677
1.982
518
880
2.290
590
975
1.716
469
705
2,231
535
731
2,138
566
853
2,233
507
689
2,169
904
916
25,185
6,728
10,197
24.470
6,555
9,802
3,041
626
900
3,119
-288
365
3.459
410
529
3,584
521
371
3,519
277
247
4,001
212
405
3,381
747
329
3,127
457
658
3,261
596
382
3,164
664
481
3,303
432
344
2,910
215
375
39,869
4,869
5,384
41,294
5,870
5,007
1,479
1,449
1,486
1,485
1,320
1,640
1,061
1,297
852
1,303
1,165
1,670
878
1,770
1,188
1,271
1,586
1,505
1,655
1,534
1,785
1,515
1,954
1,608
16,409
18,048
15,329
17,181
17,978
131
22,506
-909
51,678
534
18,062
573
16,813
3,994
18,007
2,066
17,970
1,290
23,576
248
51,977
-344
17,920
98
18,975
-538
17,040
-934
292,502
6,209
292.323
641
2,623
37
1
1,400
439
165
79
27
1
1,610
511
-478
2,694
51
2
1,377
510
734
80
65
2
1,470
437
-662
1.422
55
1
1.751
383
383
1,441
91
2
1,929
581
468
2,800
69
1
1,437
518
-604
100
70
2
610
399
259
1,462
63
2
1,333
553
509
2,741
74
2
1,457
482
-551
147
65
1
1,842
512
277
1.421
68
2
1,505
600
243
17,012
735
20
17,720
5,925
743
16,412
908
26
16,551
5,932
469
1,098
3,090
113
1,317
2,586
95
1,266
2,986
44
1,092
3,330
-1
1,008
2,886
41
1,344
3,180
154
1,249
3,294
33
1,080
2,761
103
1,154
3,348
30
1,247
3,121
72
1,222
3,136
144
1,230
3,077
110
14,305
36,794
937
13,961
35,596
546
97
-87
232
1
339
-848
-3
30
-514
-26
-102
-3,035
-389
779
-397
-6
123
-381
-6
-12
-96
-2
129
-200
21
129
-981
-6
-180
-3,347
-526
1,235
-364
-1
-22
-9,834
-943
2,362
3,666
-292
8,469
-452
327
349
-677
-10
-504
-1,138
-315
-757
826
45
3,171
866
659
-622
72
1,416
-967
140
1,711
30
-2,698
217
1,292
-1,880
206
1,443
-1,986
133
-1,644
30
-2,192
210
1,485
-625
155
1,248
-18
-336
1.341
161
-19,153
1,629
14,281
511
-8,934
1,469
13,101
-2,580 -2,558
-5,206 -35,365
-3,067
-55
-2,788
-606
-5,591
-122
-34,601
-82,276
-36,782
-77,831
-233
-2,785
-2,498
(" ")
69
-2,578
271
2,326
-3,628
307
1,195
-1,392
115
1,345
30
-566
140
1,125
-2,498
-443
-2,511 -2,522
-4,952 -34,461
-2,624
9
-2,564
-530
-2,560
-143
-2,737
-403
-261
-36
-245
-427
-198
1
-506
-27
-399
("")
("")
("")
(" ")
(" ")
-12
-442
(" ")
(" ")
(" ")
."
..
....
n
Totals this year:
Total outlays
.........................
(On-budget)
........................
(Off-budget)
........................
(On-budget)
.....
........................
(Off-budget)
........................
Total-surplus (+) or deficit (-)
Total borrowing from the public
rolal-OlUlal'l prIOr rear
....
125,616 107,351 152,629
103,775
21,841
82,896 114,172 127,258 123,930 107,603 117,469 120,211 109,819 119,168 1,408,122
83,432 116,568
84,921
89,716 103,021 101,757
83,208 103,475
96,246
84,952
23,919
-2,025
24,456
24,395
23,964
24,867
36,061
24,237
22,174
13,994
91,038 1,142,110
28,130
266,012
-48,792 -32,726 -38,947 +29,817 -48,197 -43,974
+8,091 -36,963 +11,099 -39,577 -23,078
+8,300 -254,948
-48,727 -32,221 -26,982
-5,445 -38,690
+7,570 -300,869
-65
-1,552
+5,202 -48,842 -45,931
-505 -11,965 +24,614
61,969
21,078
-8,355
+644
30,689
-4,813 -39,099 -22,893
+1,957 +13,535
+1,727 +15,912
-478
-186
+730
+45,922
37,727
30,832
1,055
54,301
-9,346
248,619
5,464
24,757
114.659 117.779 106.170 119.699 111.927 111.1139 113.748 1011.957 I I 7,()96 112.197 IOl.1!43 112,879
(" ")
......
......
......
......
......
......
310,698
1.31W. 794
iOlI-hlldgel)
94.669
95.4116
95.472
97.1J9
1111.704
99,1194 IOUIJ
86.170 102.2811
99.906
N.052
86,864
1.128.4.15
iO//-h/«j~el)
19.990
12.294
10.699
22.561
]J,112
12.945
11.687
14.1108
1:;,291
13. 79:;
26,015
:;5_'.339
+ J. 78:; -43.147 -:;4,741
+5,310
- 290.340
-~')3.734
+5,794
-340.4:'S
-1.O()8
-4114
+.IO.(),F
TO/(J/,,/IIpflll (+) or dc/inl (-)
[In or I'car
iOlI·h/«j~el )
(Q//-h/l{j~el)
-36.594 -44.6114
-2.534 -15.668 -49.180 -50.711 + 14.603 -46.773
-37,457 -44,687 -15.326 -IU62 -49.714 -54,3Jl
+1162
21.0J5
+3 +12.792
+1.594
+544
No transactIons
(•• ) Less than $500,000.
Note Details may not add to totals due to rounding
27
+614 -49.463 -10.1191 -43. 959
+3.fJ/9 +13.989
+l.{)I)() +14.674
+NIl
Table 8. Trust Fund Impact on Budget Results and Investment Holdings as of September 30, 1993
[$ millions]
This Month
Fiscal Year to Date
Securities held as Investments
Current Fiscal Year
Classification
Beginning of
Receipts
Outlays
Excess
Receipts
Outlays
Excess
This Year _[ This Month
Trust receipts. outlays. and investments
held:
Airport
Black lung disability
Federal disability Insurance
Federal employees lite and health
Federal employees retirement
Federal hospital insurance
Federal old-age and survivors insurance
Federal supplementary medical insurance
Highways
MIlitary advances
Railroad retirement
Military retirement
Unemployment
Veterans life insurance
All other trust
417
396
2.863
24.029
8.038
26.663
5.007
1.790
779
349
1.066
1.650
33
488
734
417
3.010
-249
2.978
7.792
22.616
4.626
2.086
1.247
653
2.148
2.910
109
1.071
-317
-20
-147
249
21.052
246
4.048
381
-297
-468
-303
-1.082
-1.260
-77
-583
63.301
95.297
319.325
60.799
19.599
13.239
8.001
35.284
42.235
1,490
6.856
6.589
978
34.641
-1.639
35.329
91.604
269.960
54.254
17.959
13.162
7.677
25.708
39.869
1.092
4.026
-2.288
2
-2.576
1.639
27.972
3.693
49.364
6.545
1.639
78
325
9.576
2.365
399
2.830
73,568
30.943
52,147
30.943
21,421
Less: Intertund transactions
702,771
218.824
601,209
218.824
101,562
Trust fund receipts and outlays on the basis
ot Tables 4 & 5
42.625
21.204
21.421
483.947
382.385
101.562
700,545 1,057,055
1.030
1.030
-356,510
699.515 1.056.025
-356.510
4.302
979
32.065
Close of
This Month
15.090
13.085
12.672
12.918
18.598
290.626
120.647
306.524
18.534
20.962
10.388
20.284
297.337
125.995
351,472
22.726
23.145
10.237
20.484
318.583
126.078
355.510
23.268
22.004
11.527
87.753
35.133
12.850
8.556
12.010
97.896
37.959
13.324
11.347
11.961
96.690
36.607
13.253
10.784
959,719
1,036,968
1,058,131
Total trust fund receipts and outlays
and investments held from Table 6-
0
..........................................
Total Federal fund receipts and outlays
Less: Intertund transactions
87,589
388
100,709
388
-13,120
Federal fund receipts and outlays on the
basIs of Table 4 & 5
87.201
100.321
-13.120
2.357
2.357
127,469
119,168
Less offsetting proprietary receipts
Net budget receipts & outlays
...............
30.287
1,153,175 1,408,122
8,300
such as Federal payments and contnbutions, and interest and profits on investments In Federal
secuntles They have no net effect on overall budget receipts and outlays since the receipts side of
IS
offset against bugdet outlays. In
-254,948
Note: Details may not add to totals due to rounding
No transactions.
Note Intertund receipts and outlays are transactions between Federal funds and tnust funds
such transacttons
30.287
thiS
table, Interfund receipts are shown as an
ad,ustment to arrive at total receipts and outlays of trust funds respectively.
28
Table 9. Summary of Receipts by Source, and Outlays by Function of the U.S. Government, September 1993
and Other Periods
[$ millions]
Classification
This Month
Fiscal Year
To Date
Comparable Period
Prior Fiscal Year
55.653
24.510
509.680
117.520
475.964
100.270
36.908
413
4.385
1.049
1.646
2,456
396.939
26.556
4.805
48.057
12.577
18.802
18.239
385,491
23,410
4.788
45.569
11.143
17.359
26,459
127,469
1,153,175
1,090,453
24.903
1.556
1.388
-276
1.907
205
3.003
3.760
1.168
4.326
9.080
11.074
15.696
25.623
3.010
1,415
1.712
15.440
-5.823
290.590
17.175
17.055
4,445
20.088
20.257
-23.532
35.238
10.395
48.872
99.249
130.552
207.933
304.585
35.715
14.983
13.039
198.870
-37.386
298.350
16.107
16,409
4,499
20.025
15.205
10.118
33.333
6.838
45.250
89,497
119.024
196.891
287.585
34.133
14,426
12.945
199,439
-39.280
119,168
1,408,122
1,380,794
RECEIPTS
Individual income taxes
Corporation income taxes
Social Insurance taxes and contributions:
Employment taxes and contributions
Unemployment insurance
Other retirement contributions
Excise taxes
Estate and gift taxes
Customs
Miscellaneous
Total ........................................................ .
447
NET OUTLAYS
NallOnal defense
International affairs
General science. space. and technology
Energy
Natural resources and environment
Agriculture
Commerce and housing credit
Transportation
Community and Regional Development
........... .
Education. training. employment and social services
Health
Medicare
Income security
Social Security
Veterans benefits and services
Administration of justice
General government
Interest
Undistributed offsetting receipts
Total ........................................................ .
Note Details may not add to totals due to rounding
29
Explanatory Notes
1. Flow of Data Into Monthly Treasury Statement
The Monthly Treasury Statement (MTS) is assembled from data in the
central accounting system. The major sources of data include monthly
accounting reports by Federal entities and disbursing officers, and daily
reports from the Federal Reserve banks. These reports detail accounting
transactions affecting receipts and outlays of the Federal Government
and off-budget Federal entities, and their related effect on the assets and
liabilities of the U.S. Government. Information is presented in the MTS on
a modified cash basis.
the employee and credits for whatever purpose the money was withheld.
Outlays are stated net of offsetting collections (including receipts of
revolving and management funds) and of refunds. Interest on the public
debt (public issues) is recognized on the accrual basis. Federal credit
programs subject to the Federal Credit Reform Act of 1990 use the cash
basis of accounting and are divided into two components. The portion of
the credit activities that involve a cost to the Government (mainly
subsidies) is included within the budget program accounts. The remaining
portion of the credit activities are in non-budget financing accounts.
Outlays of off-budget Federal entities are excluded by law from budget
totals. However, they are shown separately and combined with the onbudget outlays to display total Federal outlays.
2. Notes on Receipts
Receipts included in the report are classified into the following major
categories: (1) budget receipts and (2) offsetting collections (also called
applicable receipts). Budget receipts are collections from the public that
result from the exercise of the Government's sovereign or governmental
powers, excluding receipts offset against outlays. These collections, also
called governmental receipts, consist mainly of tax receipts (including
social insurance taxes), receipts from court fines, certain licenses, and
deposits of earnings by the Federal Reserve System. Refunds of receipts
are treated as deductions from gross receipts.
Offsetting collections are from other Government accounts or the
public that are of a business-type or market-oriented nature. They are
classified into two major categories: (1) offsetting collections credited to
appropriations or fund accounts, and (2) offsetting receipts (i.e., amounts
deposited in receipt accounts). Collections credited to appropriation or
fund accounts normally can be used without appropriation action by
Congress. These occur in two instances: (1) when authorized by law,
amounts collected for materials or services are treated as reimbursements to appropriations and (2) in the three types of revolving funds
(public enterprise, intragovernmental, and trust); collections are netted
against spending, and outlays are reported as the net amount.
Offsetting receipts in receipt accounts cannot be used without being
appropriated. They are subdivided into two categories: (1) proprietary
receipts-these collections are from the public and they are offset against
outlays by agency and by function, and (2) intragovernmental fundsthese are payments into receipt accounts from Governmental appropriation or funds accounts. They finance operations within and between
Government agencies and are credited with collections from other
Government accounts. The transactions may be intrabudgetary when the
payment and receipt both occur within the budget or from receipts from
off-budget Federal entities in those cases where payment is made by a
Federal entity whose budget authority and outlays are excluded from the
budget totals.
Intrabudgetary transactions are subdivided into three categories:
(1) interfund transactions, where the payments are from one fund group
(either Federal funds or trust funds) to a receipt account in the other fund
group; (2) Federal intrafund transactions, where the payments and
receipts both occur within the Federal fund group; and (3) trust intrafund
transactions, where the payments and receipts both occur within the trust
fund group.
Offsetting receipts are generally deducted from budget authority and
outlays by function, by subfunction, or by agency. There are four types of
receipts, however, that are deducted from budget totals as undistributed
offsetting receipts. They are: (1) agencies' payments (including payments
by off-budget Federal entities) as employers into employees retirement
funds, (2) interest received by trust funds, (3) rents and royalties on the
Outer Continental Shelf lands, and (4) other interest (i.e., interest collected
on Outer Continental Shelf money in deposit funds when such money is
transferred into the budget).
4. Processing
The data on payments and collections are reported by account symbol
into the central accounting system. In turn, the data are extracted from
this system for use in the preparation of the MTS.
There are two major checks which are conducted to assure the
consistency of the data reported:
1. Verification of payment data. The monthly payment activity reported by
Federal entities on their Statements of Transactions is compared to the
payment activity of Federal entities as reported by disbursing officers.
2. Verification of collection data. Reported collections appearing on
Statements of Transactions are compared to deposits as reported by
Federal Reserve banks.
5. Other Sources of Information About Federal Government
Financial Activities
• A Glossary of Terms Used in the Federal Budget Process, March
1981 (Available from the U.S. General Accounting Office, Gaithersburg,
Md. 20760). This glossary provides a basic reference document of
standardized definitions of terms used by the Federal Government in the
budgetmaking process.
• Daily Treasury Statement (Available from GPO, Washington, D.C.
20402, on a subscription basis only). The Daily Treasury Statement is
published each working day of the Federal Government and provides data
on the cash and debt operations of the Treasury.
• Monthly Statement of the Public Debt of the United States
(Available from GPO, Washington, D.C. 20402 on a subscription basis
only). This publication provides detailed information concerning the public
debt.
• Treasury Bulletin (Available from GPO, Washington, D.C. 20402, by
subscription or single copy). Quarterly. Contains a mix of narrative, tables,
and charts on Treasury issues, Federal financial operations, international
statistiCS, and special reports.
• Budget of the United States Government, Fiscal Year 19 _
(Available from GPO, Washington, D.C. 20402). This publication is a
single volume which provides budget information and contains:
-Appendix, The Budget of the United States Government, FY 19_
-The United States Budget in Brief, FY 19 _
-Special Analyses
-Historical Tables
-Management of the United States Government
-Major Policy Initiatives
3. Notes on Outlays
Outlays are generally accounted for on the basis of checks issued,
electronic funds transferred, or cash payments made. Certain outlays do
not require issuance of cash or checks. An example is charges made
against appropriations for that part of employees' salaries withheld for
taxes or savings bond allotments - these are counted as payments to
• United States Government Annual Report and Appendix (Available
from Financial Management Service, U.S. Department of the Treasury,
Washington, D.C. 20227). This annual report represents budgetary
results at the summary level. The appendix presents the individual receipt
and appropriation accounts at the detail level.
30
Scheduled Release
The release date for the October 1993 Statement will be 2:00 pm EST November 22, 1993.
For sale by the Superintendent of Documents, U.S. Government Printing
Office, Washington, D.C. 20402 (202) 783-3238. The subscription price is
$27.00 per year (domestic), $33.73 per year (foreign).
No single copies are sOld.
FOP.. IMMEDIATE RELEASE
October 28, 1993
Treasury: Michelle Smith
(202) 622-2960
Office of Management and Budget: Barry Toiv
(202) 395-7254
JOINT STATEi\;IENT BY TREASURY SECRETARY LLOYD BENTSEN
AND OFFICE OF MANAGElVIENT AND BUDGET DIRECTOR LEON PANETTA
ON FISCAL YEAR 1993 BUDGET RESULTS
We are pleased to announce that the final figure for the Fiscal Year 1993 budget
deficit is $254.9 billion, which is $26.1 billion lower than the Administration's estimate less
than two months ago (in the Mid-Session Review). Moreover, the tinal 1993 deficit is $67
billion less than the estimate for 1993 in last April's budget.
The final 1993 deficit is also $35.4 billion below the record 1992 deticit of $290.3
billion. The 1993 deticit has declined significantly, after increasing for three consecutive
years since 1989. Indeed during those three years, the deticit nearly doubled from its 1989
level of $152.5 billion.
The Administration is encouraged by these tigures. And the reconciliation bill that
Congress passed and that the President signed in August has put us on the right path toward
lower deficits in the future.
In addition, this week the Administration are sending to the Congress proposals for an
additional $33 billion in spending cuts over the next tive years, (including $22 billion in
reduced spending that results from our proposed Federal procurement reform).
Why is the tinal deficit so much lower than what was forecast in April? Even after
factoring out the proposed stimulus package, which added $11 billion to the April deficit
forecast, the deficit has dropped by the enormous sum of $56 billion since the April budget
estimate.
Lower interest rates are responsible, either directly or indirectly for about $19 billion
or one-third of this $56 billion reduction. Long-term interest rates are at record lows, in
part because of the announcement of the Administration's economic and fiscal policies in
February and their enactment in August.
.
More specifically, lower interest rates (and other favorable economic conditions) have
reduced Federal deposit insurance spending for banks and thrifts by $16 billion. Lower
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interest rates have made banks and thrifts more profitable, which has reduced the number of
bank failures and the rate at which the Office of Thrift Supervision turns thrifts over to the
Resolution Trust Corporation. With fewer failures, federal spending is lower. In addition,
lower interest rates have raised sales prices for former bank and thrift assets sold by the
federal government.
In addition, net interest expenditures of the federal government are $3 billion lower as
a direct result of lower interest rates.
Together, these interest-rate-induced reductions lowered the deficit by $19 billion in
1993. Almost all of this $19 billion decline was retlected in the Mid-Session Review
estimates.
Unlike the decreases resulting from lower interest rates, another cause of the decline
in the final 1993 deficit (relative to the April budget estimate) was not related to any policy
change, but rather was caused by an unfortunate timing shift. The April budget had assumed
that the Resolution Trust Corporation (RTC) would receive additional funding through
legislation by late spring. Since such legislation was not enacted, the RTC was able to close
fewer thrifts in Fiscal Year 1993. This lowered RTC spending for 1993 by $15 billion but
raised estimates of spending over the next several years.
The Final Figures For Fiscal Year 1993
The drop of $26 billion in the 1993 deficit between the Mid-Session review estimates
and the final figures today comes from two broad sources for which the Administration does
not seek to claim credit. Nonetheless, we are very happy to report these reductions.
The first source is a $9 billion increase in revenues relative to the estimates in the
Mid-Session review, about two-thirds of which show up in the corporate receipts figures.
The corporate receipt increase is due primarily to higher-than-forecast corporate profits. The
level of corporate profits was found to be statistically higher when the GDP data were
recalibrated in the annual revision to the National Income and Product Accounts in August.
This recalibration occurred too late to be retlected in the Mid-Session Review.
The second source of the lower final deficit is a $17.1 billion decline in spending
relative to the Mid-Session Review estimates. This decline, almost none of which is caused
by changes in policy, was spread among a wide variety of federal programs, such as those
for agriculture and transportation.
In conclusion, the Administration is very heartened that the 1993 deficit is $35 billion
lower than last year's figure and is certainly pleased that it is $56 billion lower than the
comparable estimate made in April. The deficit is still far too high, but with the legislation
that was enacted in August and the further spending cuts we have proposed this week, we
look forward to continued declines in the deficit in the future.
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@FedFRASER