Memorandum of Disapproval of Bill Extending Credit for Certain Taxes Imposed by the United Kingdom.

I AM WITHHOLDING my approval of H. R. 7643, "An Act to amend the Internal Revenue Code of 1939 and the Internal Revenue Code of 1954 with respect to foreign tax credit for United Kingdom income tax paid with respect to royalties and other like amounts." This bill would extend to firms with a permanent establishment in the United Kingdom that receive royalties there a credit for taxes imposed by the United Kingdom on the payor of the royalties. This provision would be retroactive to 1950.

Under the income tax convention with the United Kingdom royalties received by a United States licensor are not subject to tax in the United Kingdom if the recipient has no permanent establishment there. If it does have a permanent establishment, the royalty is subject to British taxation. The American recipient reports the net amount of royalties from British sources and receives no United States tax credit for the British tax paid. This treatment under United States law arises from two court decisions (Trico Products Corp., 46 BTA 346, affirmed 137 F. (2d) 424, cert. den. 320 U. S. 799, reh. den. 321 U. S. 801; Irving Air Chute Co. Inc., I T. C. 880, affirmed 143 F. (2d) 256, cert. den. 323 U. S. 773).

The combined effect of the United States income tax law and the income tax convention with the United Kingdom is to produce a different combination of British and United States taxes on the royalties paid some American recipients than on others. However, the United States tax law is not the cause of this difference in treatment. It is caused by the provisions in the convention itself. The appropriate way to correct the situation would be modification of the convention. The Treasury Department currently is conducting discussions on the convention with the British and will add this problem to the agenda.

The present status of royalty payments from the United Kingdom to the United States has been well known to interested parties at least since the convention was adopted in 1945. Many arrangements between licensees and licensors have reflected existing law and the burden of British tax may not rest on United States licensors in such cases. Consequently, to allow the British tax as a credit against the United States tax on a retroactive basis would give a windfall gain to some American licensors.

The proposed change would single out for special relief a small group of taxpayers whose need for relief has not been demonstrated. Tax relief should not be given in this way.

For these reasons, I am constrained to withhold my approval of the bill.

DWIGHT D. EISENHOWER