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March 17, 2016
Threats, Leverage, and the Early Success of Reprisal Taxes
Joseph J. Thorndike

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Should the United States consider invoking section 891 to help counter the European Commission's state aid investigations? Some lawmakers think so, and even Treasury seems open to the idea.

On its face, the suggestion seems just a little bit crazy. Section 891 permits the president to double U.S. taxes on citizens and corporations of foreign countries that engage in discriminatory taxation against American companies. But the law -- on the books since 1934 -- has never been invoked. Even its fans, like Itai Grinberg of Georgetown University Law Center, acknowledge that it "feels like a provision from a bygone era."

True enough. But just because section 891 has never been invoked doesn't mean it hasn't worked. At least once, it seems to have done exactly what it was intended to do: cow a foreign nation into submission.

The Problem With France

In December 1933 American newspapers published a story on a long-simmering tax dispute between French authorities and American companies. "Huge French Levy Laid on Americans," blared a New York Times headline.1 "$122,650,000 Is Assessed on Firms by Double Taxation Despite Pact to End It."

As it happens, the story appeared on the same morning that Undersecretary of the Treasury Roswell Magill testified before the House Ways and Means Committee on the committee's effort to draft a new revenue law. Lawmakers asked Magill to comment on the newspaper report, and while Magill declined to say much of substance, the question itself was an early signal that Congress was paying attention.

The tax dispute had been brewing since 1926 when France first tried to apply an 1873 law to American companies doing business in the nation. Widely known as the "double taxation law," at least in American policy circles, the French law required any company or subsidiary of a company operating in France to pay normal income taxes, just like all French companies, but also to pay taxes on the profits earned by a parent company and all its subsidiaries around the world. As The New York Times explained, the provision was meant to discourage profit shifting by French subsidiaries of foreign companies.2

When French authorities decided to begin enforcing the law, they reached back to its origins when assessing taxes due. The result was a truly mammoth tax bill, at least for some companies. "The French have never collected anything on it, so if the companies have to pay it will represent a staggering amount in many cases," one newspaper reported.3

The assessments were not new in December 1933, but their public disclosure was. "The companies have been keeping the assessment secret because, apparently, they hoped the American government would intercede in their behalf," the Chicago Daily Tribune reported. The American Embassy in France declined to comment.4

The revelation of the French assessments came while American and French authorities were engaged in broader, often contentious, negotiation over bilateral trade policy. In fact, the disclosure had been orchestrated by "an irate importer" from the United States who objected to French policy on other trade issues, notably wine quotas.5

Behind the scenes, French and American officials had been trying to resolve the issue for years. In a bilateral agreement, signed by both nations in 1932, France had agreed to recede on the double tax law in exchange for various trade concessions (including the right to impose quotas on American goods). But while the U.S. Senate had promptly ratified the treaty, French lawmakers had declined to act.6

As a result, French tax authorities had moved ahead with efforts to levy taxes on American firms and their foreign subsidiaries doing business in France. The effort was not well received. The law required American companies to provide information on worldwide profits, and many U.S. firms simply refused. According to The New York Times, one company estimated that providing this information to French authorities would cost $70,000 (more than $1 million in today's dollars).

In response, French authorities had made their own estimates of the profits earned by U.S. companies. It was those estimates that produced the large assessment making headlines in 1933.

According to news reports, the U.S. Embassy in Paris repeatedly raised the double tax issue with the French foreign office. And so far, the taxes had remained more theoretical than real. "As far as is known here, no American concerns have ever paid the taxes assessed under the French legal provision," one newspaper reported. Also, a test case against Boston Blacking Co. (forerunner of the company known today as Bostik Inc.) had been making its way through the courts, holding out the prospect of legal relief.7

Still, as American lawmakers considered the situation, they were forced to contemplate their lack of leverage. The treaty with France promised to resolve the double tax question once and for all. But U.S. officials had no way to force the French to move ahead with ratification. Lawmakers in Paris were reportedly unhappy with the treaty's terms, viewing them as too favorable to the United States. More important, leaders of the French Parliament hoped that delaying ratification would give them a "bargaining point" in their broader negotiations with the United States over trade policy.8

American officials lacked any corresponding tool for gaining leverage. "There was no basis in our law for prevailing upon the French Government to forego this form of double taxation," one American official later recalled.9

So Congress decided to create one.

Legislative Remedy

The 1934 revenue act was on the drafting table when news reports of the French assessments first appeared. The legislation was designed to raise significant revenue, chiefly through the elimination of tax preferences but also through the use of a variety of rate hikes for both individuals and corporations. Among the items under consideration, at least initially, was a dramatic reduction in the foreign tax credit, which lawmakers and Treasury officials considered reasonable in the face of soaring federal deficits. (The reduction did not survive in the final version of the law.)

But even as Congress sought to raise more money from corporate taxpayers, lawmakers were also keen to protect the interests of American businesses operating overseas. In response to the French levies, Rep. Fred Vinson, D-Ky., proposed the adoption of "reprisal taxes" for nations that discriminated against American taxpayers.

As the House Ways and Means Committee explained in its report, Vinson's provision was designed to:

    prevent foreign countries from levying discriminatory taxes against American citizens and corporations. To accomplish this, an additional income tax is imposed upon citizens and corporations of a foreign country if the President finds that such foreign country is imposing discriminatory taxes against citizens or corporations of the United States. The additional tax is equal to 50 percent of the income tax which the foreign citizen of foreign corporation is required to pay. This additional tax is collected in the same manner as the ordinary tax. If the President finds that the foreign country has removed the discriminatory taxes against American citizens and corporations, he shall so proclaim and the additional tax will not apply to any taxable year beginning after the date of such proclamation.10

Vinson, who in later years would serve as Treasury secretary and chief justice of the Supreme Court, offered an impassioned defense of his provision during the floor debate. "My friends, there are nations throughout this world who are not particularly friendly to Uncle Sam in a business way," he said. "And when they get the opportunity to dig into the pocketbook of his citizens, whether individual or corporate, they have not hesitated to do so."11

Vinson suggested that his reprisal tax would serve as a deterrent against future discrimination, as well as a remedy for existing inequities. "This power can be used to protect American business from present discrimination and will probably help restrain foreign countries from further discriminatory levies," he said.12

The Ways and Means Committee offered no revenue estimate for the reprisal tax, nor did Treasury. Indeed, it was widely viewed as a threat, the existence of which might make its real-world application all but unnecessary. "Advocates of the impost said that it was intended principally to deter some governments from imposing excessive taxes against American branches abroad," reported The New York Times.13

When the legislation moved to the Senate, it won support from the business community, especially from the International Chamber of Commerce. Mitchell B. Carroll, who chaired the group's double taxation committee, urged senators to "take steps to protect our enterprises from the imposition of taxes by foreign countries which are either discriminatory or extraterritorial in character."14

Ultimately, the Senate agreed with both Carroll and the House. But along the way, senators made two key changes. First, they clarified that extraterritorial taxes, as well as discriminatory taxes, would trigger the penalty rates. They also decided to give the penalty some sharper teeth, providing for a 100 percent increase in applicable rates (up from 50 percent in the House bill), subject to a cap of 80 percent of the taxpayer's net income. "It appears that a 50-percent increase will be only an idle threat in some cases, due to the high taxes imposed by some foreign countries upon American citizens," explained one senator.15

The final version of the 1934 revenue act included the reprisal provisions as amended by the Senate. President Franklin D. Roosevelt signed the law on May 10, 1934, giving the United States new leverage in its confrontation with France over ratification of the 1932 treaty.

Still, not all Americans welcomed the new penalty taxes. "Resort to tax reprisals as a means of securing redress for grievances real or fancied, is likely to fortify foreign governments in their determination to discriminate against American concerns," complained The Washington Post while the bill was under consideration. "Such action creates an atmosphere inconducive to the successful negotiation of agreements providing for a constructive solution of the international problems presented by double taxation."16

Indeed, the Post even offered a halfhearted defense of the French law. "No doubt France, like the United States, loses revenue justly due her because of intercompany accounting practices designed to reduce the amount of taxable income shown by the branch establishment," the editors wrote. But arbitrary assessments were still not the answer. Nor, for that matter, were American efforts to strong-arm the French into submission. Neither approach "is calculated to solve the difficult tax problems presented by the international ramifications of business," the paper argued.17

The Post suggested that the right approach was through bilateral and multilateral agreements. France's failure to ratify the 1932 treaty was a problem, but the paper urged American lawmakers to keep working for cooperative agreements, citing in particular a recent draft agreement from the League of Nations that tried to deal with double taxation in a systematic way. "Congress should be endeavoring to secure adherence to some comprehensive agreement of this sort instead of antagonizing other nations by its habitual method of threatening other countries," the editors wrote.18

An Effective Threat

Two months after passage of the reprisal taxes, French lawmakers adjourned for their summer break without taking action on the pending treaty. The hopes of American business leaders were "dashed," according to news reports, and U.S. diplomats worried that the delay would further raise tensions between the two nations. Meanwhile, some American companies floated the possibility that they might withdraw from the French market entirely.

But while the French Parliament was playing chicken, other national leaders were striking a conciliatory tone, offering strong indications that the pending tax assessments might be left uncollected as a gesture of goodwill.

Eventually, the cooler heads in Paris prevailed. In December the French parliament acted to ratify the treaty, abolishing double taxation and granting palpable relief to American business leaders. The International Chamber of Commerce, in particular, hailed ratification in a special message to its members, noting that the contingent liabilities imposed by French law had been a "cause of real anxiety" for American businesses.


The early history of section 891 seems to bear out the suggestion that it might prove useful in 2016. Conceived as a threat, it served to bolster American leverage in a contest with a recalcitrant trading partner. It's hard to tell exactly what role the reprisal taxes played in the evolution of French thinking, but the correlation between enactment of the law and ratification of the treaty is notable. Certainly, contemporary observers believed that the former was responsible for the latter.

Much has changed in 80 years, but the basic outline of the situation confronting American political leaders in 1934 was not entirely dissimilar to that facing today's officials. In suggesting that Treasury consider invoking section 891, Grinberg correctly suggests that the provision was always viewed principally as a negotiating tool. If the United States uses section 891 to threaten the European Commission, that would be consistent with the provision's history.

Still, it's hard to ignore the warnings offered by the editors of The Washington Post during that long-ago showdown with France. Then, as now, European leaders were trying to cope with aggressive tax avoidance by foreign companies, including American ones. "It is well known that various ingenious bookkeeping devices may be employed by foreign concerns to manipulate inter-branch profits and escape taxes entirely," the paper observed. That didn't justify double taxation on the French model, but it did suggest that the moral questions were a bit murkier than often described.

Ultimately, the question in 2016 is the same as the one in 1934: not whether threats can work -- because they can -- but whether threats create bigger problems down the road. In 1934 things turned out well for the United States. And they might again, should section 891 continue its turn in the limelight.

But threats are never without risk.


1 The New York Times, Dec. 15, 1933, at 5.

2 Id. For more on the operation of the French law, see Mitchell B. Carroll, "Tax Inducements to Foreign Trade," 11 Law & Contemp. Probs 760 (1946).

3 "France Levies Huge Tax on U.S. Firms," Chicago Daily Tribune, Dec. 15, 1933, at 31.

4 Id.

5 The New York Times, supra note 1.

6 Id.

7 "Reprisal Levies Aimed at France Put Into Tax Bill," The New York Times, Jan. 27, 1934, at 1.

8 James M. Minifie, "France Fails to End Taxes on U.S. Firms," New York Herald Tribune, July 7, 1934, at 2.

9 Id.

10 House Ways and Means Committee, Revenue Act of 1934, Feb. 12, 1934, H. Rept. 73-704, at 26.

11 Congressional Record, vol. 78 (1934), at 2607.

12 Id.

13 The New York Times, supra note 7.

14 Hearings before the Senate Finance Committee, Revenue Act of 1934, 73d Cong., 2d session (1934), at 220.

15 Congressional Record, vol. 78 (1934), at 9318.

16 "International Tax Reprisals," The Washington Post (1923-1954), Feb. 1, 1934, at 8.

17 Id.

18 Id.