The Law governing Tax Exemption for Replacement Acquisition (i.e. Section II of the Law for the Reduction of Unemployment of June 1, 1933) is in the field of direct taxes. According to its provisions, the income tax, the corporation tax, and the trade tax for the tax periods ending after June 30, 1933, and before January 1, 1935, are reduced in that, when calculating taxable profits, certain expenditures may be deducted in full, contrary to the general principle.

Strictly speaking, this is not tax exemption but merely taking in consideration beforehand deductions for future depreciation. Normally, the expenditures for new equipment would have to be distributed over the years during which the new equipment in question is used. In order, however, to encourage entrepreneurs to renew extensively and immediately their equipment of machines and implements, they are allowed to write off in full the amount of the expenditures the same year in which such equipment is procured. In this way, the taxable profit for the year in which the equipment is acquired is reduced not only by the amount of the usual deductions for depreciation but by the full amount of the expenditures for the acquisition of such equipment. The profit of the concerns will be correspondingly higher or the loss correspondingly lower in the subsequent years during which the objects in question are used. In consequence, the measure of "tax exemption for replacement acquisition" means practically that the Reich, the States, and the associations of communes grant to entrepreneurs today a sort of loan subsidy for the acquisition of replacement equipment, which flows back to the Reich, States, and associations of communes, more or less, in that during the time in which the objects are utilized no more writing-off of any kind can be done.

Article VIII of the German-American Commercial Treaty of December 8, 1923, to which Mr. Gordon referred in his conversation with Herr Dieckhoff, does not apply to the above-mentioned taxes. By internal taxes, in the meaning of this treaty provision, obviously taxes on commodities are meant, i.e., taxes on the production, preparation, turnover, consumption of a commodity (consumption taxes, turnover tax). This would seem to be apparent from the whole content of Article VIII, which, in addition to internal taxes, deals with transit duties, charges for storage and the use of other facilities; moreover, in support of this interpretation is also the position of Article VIII in the treaty which follows immediately the article (Article VII) regulating commodity traffic in general, while the preceding provisions regulate the legal status of the citizens of either country.

However, even if one were to take internal taxes, mentioned above, as meaning also personal taxes-regardless of the fact that Article 1, paragraph 2, of the treaty contains an agreement concerning the taxation

of persons-there would nevertheless exist no violation of our obligations under the commercial treaty, neither in accordance with the one nor with the other of the agreements reached on the basis of treatment accorded residents, because the law governing tax exemption for replacement acquisition does not distinguish between German and foreign. citizenship in persons liable to taxation. The tax reduction provided for in the law can also be claimed by American citizens, if the conditions obtain.

In the law governing Tax Exemption for Replacement Acquisition there are no politico-commercial intentions whatever; it merely represents one of the measures of the Reich Government in the struggle against unemployment. From the intention directed towards a reduction in the number of unemployed there arose the urgent necessity of linking the tax concession with the condition of procuring finished products manufactured in Germany. In conformity with the purpose of the law it is immaterial whether or not the concern which manufactures the products is entirely or partly foreign-owned, or whether or not raw materials and auxiliary materials are imported from foreign countries. Through an increase of work an improvement in revenues of public budgets, a reduction of financial requirements for unemployment relief, and thereby an offset against the tax alleviation is achieved. At the same time, moreover, the additional employment of workmen in Germany, which is expected as a result of the execution of the law, will result in an increase of the purchasing power, which in turn will benefit the countries interested in exporting to Germany.

BERLIN, August 30, 1933.

862.504/350: Telegram

The Secretary of State to the Ambassador in Germany (Dodd) WASHINGTON, September 21, 1933-6 p.m. 114. Embassy's despatches No. 20, July 24, No. 120, September 1,1 and No. 130, September 7, 1933. Article 8, Treaty of 1923, provides in effect that merchandise of each contracting party within the territory of the other shall receive same treatment as native merchandise in respect to bounties.

By Section 2 of Law promulgated June 2, reduction in taxes is allowed purchasers in Germany on basis of their purchasing equipment of German manufacture. This amounts to a bounty in respect to merchandise of German manufacture. Reduction in taxes is not granted to purchasers in Germany on basis of their purchasing equipment manufactured in the Despatch No. 120 not printed.

United States. A bounty in respect to merchandise manufactured in the United States is withheld.

In granting bounty in respect to native merchandise and in withholding bounty in respect to merchandise manufactured in United States, German Government is discriminating against merchandise of American manufacture in respect to a bounty contrary to the terms of Article 8.

It is declared in the first sentence of Article 7 of the Treaty that there shall be freedom of commerce and navigation between the two countries. Freedom of commerce can not exist and purpose of Treaty can not be accomplished in the face of legislation having the design and effect of the law promulgated June 2.

Communicate foregoing to German Foreign Office and urge immediate and effective removal of discrimination against American trade.

HULL

862.504/363

The Ambassador in Germany (Dodd) to the Acting Secretary of State

No. 317

[Extract]

BERLIN, December 5, 1933. [Received December 14.]

Subject: Apparent Contravention of our Treaty of Friendship, Commerce and Consular Rights with Germany, by German Law of June 1, 1933, for the Decrease of Unemployment.

SIR: Referring to previous correspondence on the above subject, I have the honor to transmit herewith a copy of the Embassy's note No. 66 of September 23, 1933,5 sent to the Ministry of Foreign Affairs in compliance with the Department's telegraphic instruction No. 114 of September 21. 6 p.m., and, in copy and translation, Note Verbale No. III A 3508, dated November 23, 1933, from the Ministry of Foreign Affairs, written in response to the Embassy's note above referred to. . . .

As it appeared desirable to secure a consensus of opinion of the officers of the Embassy and Consulate General most in touch with this situation, before the departure of Consul General Messersmith on leave for the United States, a conversation was held at the Embassy on December 1 at which Messrs. Messersmith and Beitz of the Consulate General, the Acting Commercial Attaché, and various members of the Embassy staff were present. Mr. Messersmith states that it was his opinion that the law of June 1, 1933, introduced undoubted discrimination against the sale of American goods in Germany and that American trade is stil! "Not printed.

suffering from this discrimination. While urging that every possible effort should be made to further press this question of discrimination at the Foreign Office, Mr. Messersmith stated that he did not believe that any form of commercial retaliation should be resorted to at the present time. Apart from the usual risks with which such action would be fraught, Mr. Messersmith expressed the opinion that an obscure struggle for predominance is proceeding between the moderates and the extremists in the present German Government. The former realize the dangers and objections of tolerating discriminatory practices such as those introduced by the law of June 1, 1933, but that their hour has not yet come. The extremists, on the other hand, would be capable of resorting to combative measures with reckless alacrity. It was his opinion that the coming months would show which element was the stronger. Meantime, while keeping the question open by representations, our Government should avoid resorting to commercial retailiation. For the time being this point of view seems safe and conservative.

Respectfully yours,

For the Ambassador:

[Enclosure-Translation]

J. C. WHITE Counselor of Embassy

The German Foreign Office to the American Embassy No. III A 3508

NOTE VERBALE

Supplementing its note verbale No. III A 3113 of September 30, 1933, and in reply to note verbale No. 66 of September 23, 1933, from the Embassy, relative to the Law for the Reduction of Unemployment of June 1, 1933, the Foreign Office, on the strength of a re-examination of the matter in question, has the honor to inform the Embassy of the United States of America as follows:

The German Government cannot concur with the interpretation of the American Government that, under the provisions of Section 2 of the Law of June 1, 1933, a bounty is in effect allowed on certain German products. From the explanations, already given in the note verbale of August 30, 1933—III A 2622—appearing in sub-paragraph II, 1 of the "Explanatory Notes to the Law governing Tax Exemption for Replacement Acquisition", a copy of which is enclosed herewith, it is quite obvious that the reduction of the income tax, the corporation tax and the trade tax, which takes place in accordance with the above-mentioned law, cannot be interpreted as a bounty to firms on their expenditures for the acquisition or manufacture of machines, implements, etc.

Even if the tax reduction in question might essentially be interpreted in some way as tantamount to a bounty on merchandise of German production, objections thereto based on Article VIII of the GermanAmerican Commercial Treaty could nevertheless not be deduced. For the bounties and drawbacks in the meaning of this agreement refer exclusively to internal taxes (consumption taxes, turnover tax), to transmit duties and to certain charges which have been paid on merchandise of American origin or on non-American merchandise imported by American citizens. Hence, there is no connection between Article VIII, above referred to, and the Law governing Tax Exemption for Replacement Acquisition (Ersatzbeschaffungen).

Neither can the German Government regard as valid the citation of the general principle concerning freedom of commerce stipulated in the beginning of Article VII of the German-American Commercial Treaty. The term freedom of commerce derives its concrete significance from the various treaty provisions governing traffic in commodities and those governing the legal status of the citizens of both countries. But Section 2 of the Law of June 1, 1933, violates none of the agreements in the German-American Commercial Treaty. It must be pointed out, furthermore, that the law affects only a limited field and that even there it does not hinder American trade from entering into competition with German industry on the German market. The question whether American machines, implements, etc., can hold their own against the German supply is, after all, a question of prices and before declaring that it is impossible that they should do so all factors must be taken into account that have to be considered in connection with price formation. At any rate, the principle of freedom of commerce does not mean a guarantee of profitable sales in interstate commerce, in so far as this depends upon government measures on the part of the importing country-and that is what its application in the foregoing connection would amount to.

To its regret, the German Government is therefore not in a position to give consideration to the representations made in the note verbale of September 23 against the Law governing Tax Exemption for Replacement Acquisition.

BERLIN, November 23, 1933.

GERMAN DISCRIMINATION AGAINST AMERICAN AND OTHER FOREIGN SHIPPING COMPANIES

800.8810/1117

The German Embassy to the Department of State

According to information received by this Embassy from representatives of the Hamburg-American Line and the North German Lloyd, and