APPENDIX 7 EXCHANGE OF CORRESPONDENCE BETWEEN SUBCOMME599 CHAIRMAN NIX AND COMMISSIONER DONALD C. ALEXANDER, IN 188x47 REVENUE SERVICE AND ASSISTANT COMMISSIONER BURKE W. Waasty, Ox QUESTION OF CORPORATE BRIBERY Mr. BURKE W. WILLSEY, Jay 7, 1975 Assistant to the Commissioner, Internal Revenue Serena onestment o DEAR MR. WILLSEY: I want to thank you for all of your doportion and the statement of Commissioner Donald C. Alexander on the #citer ei the payment of gratuities by American firms to foreign officials. We have rescheduled our hearings on the program of the Tetong! Reuse Service for 17 July, 1975, at 2:00 p.m., în room H-286 of the Capitol We would like to have 50 copies of Commissioner Alexander hours in advance of the hearing. In reference to the statement, we would like to know if the new ext mentioned in the June statement are matters of public wwww vend the Securities Exchange Commission. We would also like to dưễm wak matters have been closed in the last five years on a questelde forty krage (y) (y of a normal business deduction where gratuities to feien / vnch Hove sakoptous If at all possible we would like to know what numbers of epitatoka kako deca að signed to the problems brought to light by the Seemin de Sydrant Çem mission, among others. I want to commend the service on a job well done and as Coussinjer. A exander's testimony. The reassurance that your towerment thin, so die publie will be most helpful at this time. Hon. ROBERT N. C. NIX, Chairman, Subcommittee on International Nowson Policy, Committee on International Relations, House of Repivacaiariya. Washington. DEAR MR. NIX: In response to your recent request for information with regard to payments to Italian political parties and individuals by a foreign subsidiary of Exxon Corporation, we are providing you the following information which comes from a report released by the Committee on Foreign Relations, Subcommittee on Multinational Corporations on duty to, 1975 regarding foreign payments by a foreign subsidiary of Exxon Corporation. Included in this report is Exxon's report to its Board Audit Committee which discloses that Esso Standard Italiana, a subsidiary of Exxon Corporation, made payments to Italian political parties and individuals of $29 million over a 10-year period (1963-1972). These payments were recorded and identified on their books. The company president maintained these payments were necessary to do business in Italy. The report also indicates the Corporation made payments in excess of $25 million that were not recorded on their books. As indicated in the report, the methods used to generate funds for the unreported payments were secret overdrafts with banks, processing of "dummy invoices" and kickbacks on crude oil and other product purchases. Also, commissions were paid on sales that never took place. 65-363 - "$ - 15 This information has been disseminated to our agents in the field. They will evaluate any effect these transactions may have on U.S. tax. At this point, many questions need to be answered regarding the potential U.S. tax effects that may result from the methods used in generating the cash necessary to make the payments in question. The transactions outlined in the Subcommittee report are extremely voluminous and complex and will require an indepth review before the Service can determine any U.S. tax consequences. Hence, no definitive position has been taken by the Service on these transactions at this time. If we can be of any further service, please call on us. With kind regards, Sincerely, BURKE W. WILLSEY, Assistant to the Commissioner. ' JULY 28, 1975. Hon. DONALD C. ALEXANDER, Commissioner, Internal Revenue Service, DEAR COMMISSIONER: I would like to have an additional question answered on the policy of the Internal Revenue Service in regard to payments by American concerns to foreign agents, which payments are used as bribes either with the knowledge of the American company or in such a way that the American company insulates itself from knowledge of what is done with amounts that by their very size should alert the American company to inquire. The question is whether or not an American taxpayer may deduct amounts from their tax bill if they make payments abroad through a foreign sales agent to foreign public officials under circumstances where the taxpayer could know, or did know that such payments would be used in this way? Since the most common practice seems to be to work through a foreign agent abroad, it would seem that such payments would be deductible if the answer is yes and the only cases reachable by our tax laws would be those where a company official dealt directly with a foreign official. Please forward a copy of your reply to Mr. Thomas R. Kennedy, Room 606 Congressional Hotel, International Economic Policy Subcommittee, Committee on International Relations, U.S. House of Representatives, Washington, D.C. 20515. Chairman, Subcommittee on International Economic Policy, U.S. House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: This is in further response to your letters of July 28 and September 22, 1975, regarding payments by American concerns to foreign agents. I am sorry for not replying earlier to your letter of July 28. However, the question of whether or not an American taxpayer may deduct payments made through a foreign sales agent to foreign public officials depends on the facts and circumstances in each individual case. The law covering bribes to foreign officials is stated in Section 162 (c) (1) of the Internal Revenue Code of 1954. It reads as follows: "No deduction shall be allowed . . . for any payment made, directly or indirectly, to an official or employee of any government, or of any agency or instrumentality of any government, if the payment constitutes an illegal bribe or kickback or, if the payment is to an official or employee of a foreign government, the payment would be unlawful under the laws of the United States if such laws were applicable to such payment and to such official or employee". As a result, a deduction would be denied to an American taxpayer for a payment made directly or indirectly through an agent that was determined to be a kickback or bribe prohibited by the provisions of Section 162 (c) (1) mentioned In your letter of September 22 you asked for additional information relative to my testimony of July 17, 1975. We are enclosing a copy of my letter dated August 11, 1975, transmitting some of the information I promised you. In order to respond to the remaining two questions, it was necessary to request information from our field offices. We have now received that information and are in the process of organizing the material, which is voluminous, and expect to have the results to you by September 29. A copy of this letter is being sent to Mr. Kennedy. I trust this information will be helpful. Chairman, Subcommittee on International Economic Policy, Committee on International Relations, House of Representatives, Washington, D.C. DEAR MR. CHairman: During the hearings on July 17, 1975, several areas were covered that require the submission of additional information by the Service to complete the record. These include the following items: 1. Cases involving bribes or slush funds that have been taken to the courts or where actions have been initiated and the cases disposed of during the last three years. 2. An estimate of the tax dollars that would have been lost on disguised bribes or slush funds. 3. The proportion of developed countries that follow United States law relative to Section 162 (c) (1). Enclosed is our response to item 3 above. According to our study of the 21 developed countries, only one country (Belgium) specifically follows the United States law. In response to items 1 and 2, we cannot readily identify the cases involving bribes or slush funds or the tax dollars involved because we do not maintain statistical data on these issues. It will be necessary to analyze a substantial number of case files in the districts in order to determine if bribes or slush funds were issues raised during the examinations, or were the bases of investigations. In order to make an appropriate response to items 1 and 2, we have requested our field officials to make the necessary search of their files and provide us with the data. We will submit the information to you in about 30 days. With kind regards, Sincerely, Enclosure. DONALD C. ALEXANDER, Commissioner. The proportion of developed countries that follow United States law relative to Section 162 (c) (1). LIST OF DEVELOPED COUNTRIES (EXCLUDING THE SINO-SOVIET BLOC) Developed for purposes of administering the Income Tax Laws: Of the 21 listed developed countries, only one (Belgium) specifically follows the U.S. law. However, Italy and San Marino have criminal statutes, separate from the tax laws that make such payments a crime. A detailed analysis by country is as follows: (1) Australia-There are no specific provisions in Australian tax laws similar to IBS Code Section 182(e)(1). Section 51 of the Australian Income Assessment Act provide for the general deduction of expenditures incurred to produce taxable income. There are no indications in reference material to rulings or court cases that would prevent deduction under this section of expenditures similar to those covered by Section 162(e) (1), IBC. (2) Austria-No specific provision similar to Section 162(e) (1), IRC. (3) Belgium-Has law similar to the Section 162)e) (1), IRC. (4) Canada-No specific provision similar to Section 162 e) (1), IRC. Section 18/1)(a) of the Canadian law provides that a deduction may be allowed for ordinary and necessary business expenses if the payee is identified and the expense is considered a business expense. (5) Denmark-No specific provision similar to Section 162(e)(1), IRC. (6) France Illegal payments not specifically treated in French Tax Code. If nature of payment and payee are identified and payment is for the advancement of the payor's business, a deduction would be allowed. If payment is made without obligation or strings attached, it would be treated as a nondeductible gift. (7) Federal Republic of Germany-No specific provision similar to Section 162(c) (1), IRC. (8) Hong Kong-No specific provision similar to Section 162(e)(1), IRC. However, for a deduction to be allowed, the payor would be required to identify recipient and show a business purpose. In practice, a deduction is seldom allowed as the payor usually will not identify the recipient. (9) Italy-No specific provision similar to Section 162 (c) (1), IRC. However, under separate criminal laws such payments are illegal and upon conviction under the criminal law any claimed deduction would be disallowed for violation of the criminal laws. (10) Japan-No specific provision similar to Section 162 (c) (1), IRC. In case a situation of this nature is discovered during an audit, the deduction would be allowed only if the payee and business purpose is disclosed. If the payee is not identified, the payment would be disallowed. (11) Liechtenstein-No specific provision similar to Section 162 (c) (1), IRC. However, deductions are not allowed for illegal payments, including bribes. (12) Luxembourg-General law on direct taxation allows such deductions if recipient is named and acceptable justification for payment is given. (13) Monaco-Law prohibits Monaco government officials from receiving payments. Other payments treated the same as under French law. (14) Netherlands-No specific provision similar to Section 162 (c) (1), IRC. (15) New Zealand-No specific provision similar to Section 162 (c) (1), IRC. Section 111 of the New Zealand Lands and Income Tax Act provide for the general deduction of expenditures incurred to produce taxable income. Available reference material does not indicate any rulings or court cases that would prevent a deduction under this section for payments similar to Section 162 (c)(1) payments. (16) Norway-No specific provision similar to Section 162(c) (1), IRC. (17) Republic of South Africa-No specific provision similar to Section 162 (c) (1), IRC. Payment would be allowed as a deduction under Section 11(A) of the Income Tax Act, 1962, if it resulted in the production of income. Payment would not be allowed as a deduction under Section 23(g) of the Act if its purpose was to conserve assets or reduce expenses. Incidentally, South Africa taxes only income arising in South Africa. (18) San Marino-No specific provision similar to Section 162 (c) (1), IRC. However, has same law as Italy relative to criminal sanctions. (19) Sweden-No specific provision similar to Section 162 (c) (1). IRC. (20) Switzerland-No specific provisions similar to Section 162 (c) (1), IRC. Tax law does not specifically disallow deductions for illegal payments or bribes. but, in practice, deductions are not allowed for such payments. (21) United Kingdom-No specific provision similar to Section 162 (c) (1). IRC. However, tax authorities believe that expense would be allowable if made to a foreign government official and was ordinary and necessary, but not allowable to local government officials since such payments would automatically be considered unnecessary. COMMITTEE ON INTERNATIONAL RELATIONS, Hon. DONALD C. ALEXANDER, Commissioner, Internal Revenue Service, DEAR COMMISSIONER: On July 28, 1975, a letter signed by me was forwarded to your office in which I asked the following question. "The question is whether or not an American taxpayer may deduct amounts from their tax bill if they make payments abroad through a foreign sales agent to foreign public officials under circumstances where the taxpayer could know, or did know, that such payments would be used in this way." Our Subcommittee records do not show a reply, I am sure that such a reply has been sent. Would your office send a copy of the reply to Mr. Thomas R. Kennedy, Room 606 Congressional Hotel, International Economic Policy Subcommittee, Committee on International Relations, U.S. House of Representatives, Washington, D.C. 20515. On July 17th, 1975, during the course of our hearing when you appeared on behalf of the Internal Revenue Service, I requested material for inclusion in the hearing record on the activity of the Internal Revenue Service on the troublesome questions raised by the matter of bribery of foreign officials. Shortly thereafter I received assurances that I would have the material in three days. On the 30th of September at 2:00 p.m. in Room H-236 of the Capitol I would like to receive testimony from the Internal Revenue Service on the material I asked for and to have it included in the record. Our hearings will conclude soon and it is most important that we clear these matters up as soon as possible. Sincerely, ROBERT N. C. NIX, Chairman. Hon. ROBERT N. C. NIX, DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE, Washington, D.C., September 29, 1975. Chairman, Subcommittee on International Economic Policy, U.S. House of Representatives, Washington, D.C. DEAR MR. NIX: As stated in our letter of September 25, 1975, we have processed the material received from our field offices and we are now able to respond to your inquiry of July 21, 1975. The responses to your questions are based on analyses of corporate tax examinations which were conducted during the years 1972, 1973 and 1974. We have estimated the tax that would have been lost due to the improper deductions of disguised bribes or slush funds since the computations of additional tax in the Internal Revenue Agent's reports included adjustments for other tax issues. The following items are submitted to complete the record of the testimony in the hearings before the International Economic Policy Subcommittee on July 17, 1975. 1. Cases involving bribes or slush funds that have been taken to the courts or actions which have been initiated and the cases disposed of during the last three years: Total cases involving action by IRS-62. Total cases disposed of by IRS during last 3 years-21. Included in the 21 cases disposed of by IRS the criminal cases taken to court-7. 2. The total estimated additional tax that would have been lost based on disguised bribes and slush funds disallowed in the audits and investigations of corporations in the years 1972, 1973 and 1974 is $4,871,826. With kind regards, Sincerely, DONALD C. ALEXANDER, Commissioner. |