though it may own and hold investment securities within the meaning of section 3 (a) (3) of the act, it may be considered excepted from section 3 (a) (3) under section 3 (b) (1) as a company engaged in a business other than that of an investment company; namely, that of a lending agency with a special governmental purpose.

Mr. O'HARA. I think we must have in your program safeguards to assure world opinion that we are not seeking, in our investments, to assure stability of government nor to guarantee against instability of government. I am very much in favor of anything that will develop commerce and industry, especially of the Americas, but I do agree with Br. Brown that we should go slowly into the matter and examine it from all facets.

Secretary WAUGH. I agree with Mr. Brown that this should be studied very carefully, and I want to assure you that this has been studied very carefully by the Treasury and by the Department of State and the different branches of the Government for many, many months. This has not been presented in any precipitous manner, sir. Mr. HIESTAND. Mr. Chairman.

The CHAIRMAN. Mr. Hiestand.

Mr. HIESTAND. Mr. Waugh, as I understand it, the other banks only make loans and loans are only guaranteed by the nations involved. This company would make loans, guaranties, and supply equity capital without that guaranty.

I understand why the State Department should approve the other idea as between governments. Do I understand you to say the State Department approves this matter of a company federally supported and organized making loans to private industry in these other countries unguaranteed?

Secretary WAUGH. Let me see if I can clarify one initial statement that you made, sir. You said that the banks make loans.

Mr. HIESTAND. The Export-Import Bank and International. Secretary WAUGH. The Export-Import Bank does not require Government guaranties. Only the International Bank requires the Government guaranty.

Mr. HIESTAND. I should have said that. Mostly the Export-Import Bank's loans are either to governments or government-owned corporations?

Secretary WAUGH. Oh, no. They are to private industry.

Mr. HIESTAND. And are unguaranteed?

Secretary WAUGH. Yes, and General Edgerton will go into that in more detail.

Mr. HIESTAND. It is contemplated, then, probably, that the company will provide either loans or equity capital in other ways to private industry, rather than government-owned industries?

Secretary WAUGH. That is the whole purpose. Private capital does not want to go in where the Government has to guarantee it, because of the potential fear that the Government will have something to do with the management.

Mr. HIESTAND. With private capital involved in this case, it finances private capital of other countries, not necessarily our own?

Secretary WAUGH. Not necessarily, but legally we can do it with any of the countries that are members. That is the point Mr. Patman brought out.

Mr. HIESTAND. It is to be presumed that most of them would be used to support American private capital, rather than, say, Brazilian or Italian?

Secretary WAUGH. Not necessarily, sir. For example, if you were going to go into Brazil with a particular project, you might find some Brazilian capital that would take one-third; American capital, onethird; and the International Finance Corporation would supply onethird.

Mr. HIESTAND. State Department approves that?

Secretary WAUGH. Yes, sir. We think that is one way of getting private capital into these countries as opposed to government operations.

Mr. DAVIDSON. Will you yield?
Mr. HIESTAND. I am through.
Mr. DAVIDSON. Mr. Chairman?
The CHAIRMAN. Mr. Davidson.

Mr. DAVIDSON. Did I understand correctly there was something said here by you, Mr. Secretary, or someone else, to the effect that private capital could invest in this International Finance Corporation? Secretary WAUGH. No. Mr. Humphrey brought that out very carefully this morning.

Mr. DAVIDSON. There is no opportunity for that?

Secretary WAUGH. Not in the Corporation; no, sir.

Mr. PATMAN. Aren't you mistaken in leaving the inference like you did, they can buy securities and

Secretary WAUGH. I thought you were referring, Mr. Davidson, to the original capital.

Mr. DAVIDSON. In other words, you can't be a member unless you are a nation; is that right?

Secretary WAUGH. That is correct. If they sell bonds on the open market, anybody who wants to buy the bonds can buy the bonds.

Mr. DAVIDSON. Bonds of the International Finance Corporation? Secretary WAUGH. Yes, sir.

Mr. DAVIDSON. The money which people pay for those bonds will be used in the same fashion as the money contributed by the member countries; is that right?

Secretary WAUGH. That is correct.

Mr. DAVIDSON. For investment in foreign countries?

Mr. BROWN. Will you yield?

Mr. DAVIDSON. Yes.

Mr. BROWN. Who will back these bonds?

Secretary WAUGH. The plan is, of course, for them to stand on their own feet.

Mr. BROWN. Don't you think you will have trouble selling such bonds?

Secretary WAUGH. It depends on the operation of the company, sir, and the manner in which it is operated.

Mr. PATMAN. $100 million is a pretty good capital.

Mr. HIESTAND. It is assumed it is profitable.

Mr. DAVIDSON. If the public or banking fraternity can buy bonds issued by the International Finance Corporation, this is a way in which to get private capital into foreign countries for investment; is that right?

Secretary WAUGH. Exactly, and the investors do not have to be limited to this country alone. As I said to Mr. O'Hara, anyone can buy the bonds.

Mr. DAVIDSON. The dividends which accrue to these bonds will all be tax exempt?

Secretary WAUGH. The interest on the bonds, I assume, will be tax exempt.

Mr. DAVIDSON. Interest, dividends.

Secretary WAUGH. My professional counsel tells me they will not be tax exempt. I am getting out of my field a little.

Mr. DAVIDSON. I am reading from section 9:

IMMUNITIES FROM TAXATION

The Corporation, its assets, property, income, and its operations and transactions authorized by this agreement shall be immune from all taxation and from all customs duties. The Corporation shall also be immune from liability for collection or payment of any tax or duty.

Is that correct?

Secretary WAUGH. That applies to the Corporation's income and assets, but not, Mr. Robinson says, to the income that an individual gets on its bonds.

Mr. DAVIDSON. That will not be subject to taxation?
Secretary WAUGH. No, sir; it will be taxable.

Mr. MULTER. Is it intended that the interest payable or earned on bonds and securities sold by the Corporation, that interest and earnings shall not be taxable or shall be taxable?

Secretary WAUGH. Shall be taxable.

Mr. PATMAN. Earned by the individuals or earned by the corporation owning the securities?

Mr. DAVIDSON. I am a little confused about that. On subdivision (c)-I am referring now to bonds issued by the Corporation to individuals of the banking fraternity. On page 21, subdivisions (c) of section 9, it says:

No taxation of any kind shall be levied on any obligation or security issued by the Corporation (including any dividend or interest thereon) by whomsoever held

and then it goes on to say—

which discriminates against such obligation or security solely because it is issued by the Corporation.

Mr. MULTER. You must read those limitations or the whole thing together. If you read all of (c) together and all of (d) together, then you will see the inference is clear that they are not to be taxed solely because this Corporation issues them.

In other words, there shall be no discrimination against them within a country. We can't get a higher tax on this in the United States because it is issued by Corporation. I think that inference is clear. The language in subdivision (a) is too broad, and they may be able to contend that they do get tax exception because it says, “Its assets, property, income, its operations and transactions"-its operations and transactions are to borrow money and to sell securities. If the security is going to be sold it is the same as a municipal bond. The Government can't tax a municipal bond because it is exempt. Otherwise we would be taxing the operation of a municipality. We may

need clarification. If it is the intent that the income from obligations sold by this Corporation shall be taxable

Secretary WAUGH. The mere fact this is brought up makes me feel we should have a legal opinion which we should file with you in this connection. I don't want to pass on the legal aspects. We will see that you get a legal opinion.

(The opinion referred to above is as follows:)

Under section 9 (a) of the proposed articles of agreement for the IFC, the Corporation, its assets, property, and income, are immune from all taxation. This immunity is the same as that granted to the International Bank for Reconstruction and Development, and, in substance, to other international organizations by the International Organizations Immunities Act of 1945. It clearly is necessary that such organizations have immunity of this kind in order to carry out their functions throughout their member countries.

On the other hand, inteerst received by national and residents of the United States from debentures or other obligations issued or guaranteed by the IFC will be fully taxable in accordance with United States tax laws. Such interest may not be subjected, however, to discriminatory taxation, nor may interest payable by the Corporation be taxed by the United States on the basis that the Corporation is located here. Accordingly, interest paid by the Corporation to persons who are neither nationals nor residents of the United States will be free from taxation under our laws. Such provisions, which are also embodied in the articles of agreement of the International Bank, are likewise necessary to a proper functioning of international organizations of this kind. (The text of the provisions in question is as follows :)

SECTION 9. IMMUNITIES FROM TAXATION

(a) The Corporation, its assets, property, income, and its operations and transactions authorized by this agreement, shall be immune from all taxation and from all customs duties. The Corporation shall also be immune from liability for the collection or payment of any tax or duty.

(c) No taxation of any kind shall be levied on any obligation or security issued by the Corporation (including any dividend or interest thereon) by whomsoever held

(i) which discriminates against such obligation or security solely because it is issued by the Corporation; or

(ii) if the sole jurisdictional basis for such taxation is the place or currency in which it is issued, made payable or paid, or the location of any office or place of business maintained by the Corporation.

(d) No taxation of any kind shall be levied on any obligation or security guaranteed by the Corporation (including any dividend or interest thereon) by whomsoever held

(i) which discriminates against such obligation or security solely because it is guaranteed by the Corporation; or

(ii) if the sole jurisdictional basis for such taxation is the location of any office or place of business maintained by the Corporation.

Mr. DAVIDSON. I think it may require a little tightening.

Mr. MULTER. I was going to suggest that for purposes of clarification, you might tell me if this statement is not correct: The money that this Corporation will use for its operations will come first from its capital invested by the various participating countries?

Secretary WAUGH. Yes, sir.

Mr. MULTER. That money will be used for operating expenses and for lending. In addition to that, the Corporation may borrow, sell its own bonds or debentures or notes, and get money with which it can make loans; and the third source will be to sell the securities it receives when it makes a loan. If it makes a loan in any particular place, it gets a mortgage or a bond. This company then can sell that bond to the public or to whoever will buy it, and in that way it gets additional funds with which to operate?

Secretary WAUGH. That is correct.

Mr. MULTER. You have three sources from which you get your operating capital.

I believe it is intended-as a matter of fact, it says in one place, I believe, that "guaranty securities, in which it has invested"-the third category-in other words, when you take a security, a mortgage, or a bond from one of the borrowers, in order to sell that, you have a right to guarantee its payment, under subdivision (iii) of section 6 on page 8. Now, when you get over to page 9, section 8 of the same article, you refer to a warning placed on the securities, and then we have this inconsistency. It says:

Every security issue or guaranteed by the Corporation shall bear on its face a conspicuous statement to the effect that it is not an obligation of the bank or, unless expressly stated on the security, of any government.

I gather the import of the last part of it. You may make some loans where a government is willing to guarantee it. Therefore you have a security guaranteed by a government. The fore part of that section I think is inconsistent. You have the right to guarantee securities in order to sell them, and then you say:

Every security issued or guaranteed shall bear on its face a conspicuous statement to the effect that it is not an obligation of the bank,

If the bank guarantees it, it must be its obligation.

Secretary WAUGH. They bring out the point you are trying to make here--this is the bank and not the corporation as such. I still think that your point could well be clarified, because I think any difference that comes up in an easy reading of this should be such that there wouldn't be any question about it. I have got it marked here and will submit a statement.

(The data referred to follows:)

The IFC is authorized under article III, section 6 (iii), of the proposed articles of agreement to guarantee securities in which it has invested in order to facilitate their sales. Section 8 of the same article provides:

"SECTION 8. WARNING TO BE PLACED ON SECURITIES

"Every security issued or guaranteed by the corporation shall bear on its face a conspicuous statement to the effect that it is not an obligation of the bank or, unless expressly stated on the security, of any government.”

The word "bank" refers to the International Bank for Reconstruction and Development. The IFC will be closely affiliated with the International Bank, but the bank will not be liable in any way for the obligations of the IFC. To avoid any possibility of confusion or mistake on the part of purchasers of securities, it was deemed desirable to require a conspicuous indication on securities issued or guaranteed by the IFC that they are not obligations of the bank. The remainder of the section is designed to preclude the possibility that purchasers of securities of the IFC might believe they were obligations of members of the corporation. This part of the section is substantially identical with a provision in the articles of agreement of the bank.

Mr. PATMAN. May I refer him to page 21 in that same connection, subsection (d)? It says:

No taxation of any kind shall be levied on any obligation or security guaranteed by the Corporation (including any dividend or interest thereon) by whomsoever held.

Isn't that very plain that if the Corporation sells securities from the XYZ company, a foreign company, it guarantees these securities; then, if Mr. "X" over here in the United States, an American citizen, buys one, he doesn't have to pay any tax of any kind?