For the full text of Exec. Order 11766, see the Fed. Reg., Vol. 39, No. 21, Jan. 30, 1974, p. 3807. See also the Dept. of State Bulletin, Vol. LXX, No. 1808, Feb. 18, 1974, p. 179. On the same day the Dept. of Commerce announced the termination of foreign direct investment controls, and the Board of Governors of the Federal Reserve System announced the termination of the voluntary foreign credit restraint guidelines. See supra, pp. 527–528.

Trading

On January 22, 1974, the Securities and Exchange Commission announced that effective January 28, 1974, it was withdrawing its request that brokers and dealers refrain from effecting transactions in securities issued or guaranteed by the governments of Bulgaria, Hungary, and Romania.

In its January 22 statement, the Commission noted that on December 8, 1941, following the attack on Pearl Harbor, registered national securities exchanges suspended trading in securities issued or guaranteed by the Axis countries, including, among others, Germany, Italy, Japan, Bulgaria, Romania, and Hungary. Trading was restored in Italian securities in December 1947, in Japanese securities in November 1950, in West German securities in January 1954, and in Austrian securities in September 1957. But the Commission's nontrading request remained in effect with respect to Bulgaria, Hungary and Romania.

The Commission stated that it had received requests to permit resumption of trading in securities of the three countries, including their dollar bonds. Both the Department of State and the Foreign Bondholders Protective Council indicated they had no objection to such resumption. The Commission noted further that the United States had concluded claims agreements with each of these countries and that negotiations were proceeding with Romania and Hungary looking toward ultimate settlement of outstanding defaulted dollar denominated bonds issued or guaranteed by their governments.

The Commission said it had considered the fact that the bonds were in default as to payments of principal and interest but, "historically, the Commission [had] not usually considered this factor alone as a basis for barring trading in bond issues of foreign governments." The Commission further noted that its action was subject to the Johnson Act of 1948 (18 U.S.C. § 955) which prohibits trading in bonds issued after April 13, 1934, by foreign governments in default of obligations to the United States unless the foreign government is a member of both the International Monetary Fund and the International Bank for Reconstruction and Development. Of the three governments involved, Romania is a member of both organizations, and Bulgaria is not in

default on bonds issued after April 13, 1934. Thus the Commission stated that "it appears that, at this time, the Johnson Act may restrict trading in bonds issued by Hungary but not in those issued by Romania or Bulgaria.”

For the full text of the Commission's statement, see the Fed. Reg., Vol. 39, No. 22, Jan. 31, 1974, p. 3932.

U.S.-Egypt

Bilateral Agreements

On June 14, 1974, President Nixon and President Mohammed Anwar el-Sadat of Egypt signed an Agreement on Principles of Relations and Cooperation between Egypt and the United States (TIAS 7913; 25 UST 2359; entered into force June 14, 1974). Part IV of the Agreement establishes several Joint Working Groups, composed of governmental representatives, including a Joint Working Group on U.S. private investment in Egypt. Part IV (2) of the Agreement describes such Group as follows:

(2) A Joint Working Group to investigate and recommend measures designed to open the way for United States private investment in joint ventures in Egypt and to promote trade between the two countries. Investment opportunities would be guided by Egypt's needs for financial, technical, and material support to increase Egypt's economic growth. The United States regards with favor and supports the ventures of American enterprises in Egypt. It is noted that such ventures, currently being negotiated, are in the held of petrochemicals, transportation, food and agricultural machinery, land development, power, tourism, banking, and a host of other economic sectors. The estimated value of projects under serious consideration exceeds two billion dollars. American technology and capital combined with Egypt's absorptive capacity, skilled manpower and productive investment opportunities can contribute effectively to the strengthening and development of the Egyptian economy. The United States and Egypt will therefore negotiate immediately a new Investment Guarantee Agreement between them.

The two governments also agreed to "encourage the formation of a Joint Economic Council to include representatives from the private economic sector of both countries to coordinate and promote mutually beneficial cooperative economic arrangements."

See also Dept. of State Bulletin, Vol. LXXI, No. 1829, July 15, 1974, p. 93. See this Chapter, § 3, supra, p. 521; § 8, infra, pp. 570-571; Ch. 12, § 2, infra, p. 642.

U.S. Commercial Treaties

On January 21, 1974, Douglas F. Burns, Acting Assistant Legal Adviser for Economic Affairs, Department of State, wrote a memorandum concerning the functions of U.S. commercial treaties. Mr. Burns stated:

Historically, the commercial treaty has been the medium for securing rights and privileges for nationals of one country in the territory of another. In the absence of treaty commitments, the obligations owed by a country to nationals of another country are only those basic obligations imposed by the current state of international law, relating, in the main, to humanitarian matters.

Modern international practice in the fields of trade, navigation, consular rights, and the like has in many cases developed out of the provisions of bilateral commercial treaties. Today, reflecting the expansion of international economic activity in the post World War II period, the scope of bilateral commercial treaties has been considerably broadened; in the field of investment, for example, most obligations are treated in this fashion, although some multilateral efforts to regulate investment have been made, and we may expect that in this field, as in others, bilateralism will eventually give way to more pervasive multilateral regulation. The bilateral treaty will continue to be useful as a means of pushing beyond the "lowest common denominator" approach inherent in multilateral negotiation and of establishing new norms in the area of international commercial activity.

Although United States businessmen invest and do businessoften successfully-in countries with which we have no commercial treaties-for example, Canada, Mexico, Australia and Brazil-we believe that there are certain tangible benefits which flow from the existence of these treaties:

1. They establish fixed and public rules governing activities of concern to United States nationals and companies in foreign countries.

2. They lessen the possibility of arbitrary actions by foreign governments which could injure United States private economic interests.

3. Their existence is an encouragement to United States businessmen to invest in that country.

4. They establish legal rules in an area where international law norms are only now in the process of formulation.

5. They provide a firm basis for United States Government assistance to nationals injured by reason of non-observance of treaty provisions.

Dept. of State File L/EB.

U.S.-France

Tax Treaties

In Compagnie Financière de Suez, Etc. v. United States, 492 F.2d 798 (1974), decided by the U.S. Court of Claims on February 20, 1974, the Suez Canal Company sought a refund of taxes withheld from 1952 to 1956 at the source on interest and dividends, alleging that it was a French corporation, rather than an Egyptian corporation, and was therefore entitled to the benefit of the preferential 15% withholding rate under the Tax Convention between the United States and France (signed on July 25, 1939, and October 18, 1946), as modified and supplemented by the Supplementary Convention signed June 22, 1956 (TIAS 1982; 64 Stat. (3) B3; 7 Bevans 1178; entered into force October 17, 1949).

Article 6A of the Convention provides:

Dividends and interest derived, on or after January 1, 1952, from sources within one of the contracting states by a resident or corporation or other entity of the other state, not having a permanent establishment in the former state, shall be subject to tax by such former state at a rate not in excess of 15 percent of the gross amount of such dividends or interest. Such reduced rate of tax shall not apply to dividends or interest paid prior to the calendar year in which are exchanged the instruments of ratification of the present Convention if, for the taxable year in which such dividends or interest is received, penalty for fraud with respect to the taxes which are the subject of the present Convention has been imposed against the recipient of such dividends or interest.

After an extensive review of the facts, the Court of Claims held that the Suez Canal Company was not a French corporation or a "French enterprise" for purposes of the Convention. The Court said that the facts did not show that France, "through its sovereign authority, plainly granted the Company the powers under which it functioned." Further, "the Company was, in fact, created or organized in Egypt and is, therefore, an Egyptian corporation for the purpose in issue.” (at p. 809.)

In addition, the Court held that a Department of the Treasury Regulation, at 26 CFR 514.104(3), also precluded the Company from availing itself of Article 6A of the Convention. That Regulation provides, in part, that "an enterprise carried on wholly outside France by a French corporation is not a French enterprise within the meaning of the Convention." The Court said that Egypt was the primary source of the Company's income and that administrative functions conducted in Paris "were merely an adjunct to the basic profitmaking enterprise carried on in Egypt, wholly outside France." The Treasury

Regulation "was intended to prevent corporations that were incorporated in France and conducted all their profitmaking business outside of France, so as to be free of French taxation, from claiming tax benefits of treaties to which France was a signatory." (at p. 810.) The Court pointed out that during the years 1952 through 1956 France assessed tax only on income from what was considered domestic sources. Thus the plaintiff's income was not taxable in France and would be also free from U.S. taxation if the Convention could be invoked. The Treasury Regulation was designed to prevent this result. With respect to the Convention, the Court said:

[3] Ultimately this case also turns on the intent and purpose of the Convention as agreed upon by the signatories. The purpose and intention of the Tax Convention between the United States and France was to avoid double taxation and to alleviate the problems arising from it. The parties to a bilateral agreement are primarily concerned with removing an obstacle to the flow of trade and investment between their two countries.

Double taxation arises when the jurisdiction of the tax authority where income arises overlaps the jurisdiction of the tax authority where the taxpayer resides. The agreement attempts to avoid double taxation between the signatories through adjusting their respective tax jurisdictions either by one party reducing the tax on certain types of income or completely surrendering the right to tax it. The country of residence will mitigate its claim based on the tax paid to the source country where the first method is not practicable.

[4, 5] The fact that the Company is motivated in its actions by the desire to minimize its tax burden can in no way be taken to deprive it of a benefit to which it is clearly entitled by an applicable treaty. Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935); Johansson v. United States, 336 F.2d 809 (5 Ćir., 1964). In determining the applicability of the treaty, we recognize the necessity for liberal construction. Jordan v. Tashiro, 278 U.S. 123, 49 S.Ct. 47, 73 L.Ed. 214 (1928). However, at the core of this issue we are not dealing with a problem of construction but with the intent and purpose of the treaty. A treaty, being a pact between two sovereigns, must be construed broadly to accomplish the intent of the contracting parties. American Trust Co. v. Smyth, 247 F.2d 149 (9 Cir., 1957). "To say that we should give a broad and efficacious scope to a treaty does not mean that we must sweep within the Convention what are legally and traditionally recognized to be ... taxpayers not clearly within its protections; . . . "Maximov v. United States, 373 U.S. 49, 56, 83 S.Ct. 1054, 1058, 10 L.Ed.2d 184 (1963).

As stated in Maximov, supra, "[i]t appears from the relevant materials instructive as to the intent of the parties to the Conven