subjects unless it is also paid by other foreign nationals. I believe that we might adopt a similar attitude. I will telegraph the Department any further information received concerning the views of the various diplomatic missions and will report if and when a note is received from the Foreign Office. I will appreciate receiving the Department's instructions when it has received and considered Nanking's despatch mentioned above. JOHNSON 893.5123/7: Telegram The Ambassador in China (Johnson) to the Secretary of State PEIPING, September 3, 1936-2 p. m. [Received September 3—9:48 a. m.] 430. Embassy's 401, August 11, 4 p. m., concerning Chinese income tax law. Rules for enforcement of provisional income tax regulations were adopted by the Executive Yuan on August 25 and published in the National Government Gazette. According to these rules, the regulations are to be effective October 1, but no mandate has been issued. According to press reports, collections from the public functionaries and on bank deposits and bonds will commence October 1, but collections on other categories will not commence until January 1, next. It is understood that exemption from the payment of the tax will be granted diplomatic officials of countries which accord similar treatment to Chinese diplomatic officials. This Embassy has received a note dated August 25 from the Foreign Office, transmitting copies of the regulations and requesting that American nationals be instructed to comply therewith. Similar notes have been received by the other diplomatic missions. French Embassy replied September 1 to the Foreign Office, pointing out that under article 40 of the Treaty of Tientsin of 1858 76 no obligation of this nature could be imposed upon French nationals in China. Japanese Embassy is understood to have instructed Japanese subjects to ignore the regulations. British Embassy is merely acknowledging the receipt of the note with the statement that the matter is being referred to the British Foreign Office. British Embassy believes that the British Foreign Office will take the position that the British Government cannot consent to the payment of the tax by British subjects unless it is also paid by other foreign nationals. I respectfully recommend that this Embassy reply to the Foreign Office, stating that the American Government cannot acquiesce in the 76 Signed June 27, 1858, British and Foreign State Papers, vol. LI, pp. 636, 650. 919456-54-46 payment of the tax by American nationals unless it is paid by other foreign nationals. The Department's telegraphic instructions will be appreciated. Atcheson" reported September 2, 9 a. m., that an American correspondent was informed by an official of the Ministry of Finance that the Chinese Government anticipated opposition by treaty powers and was merely placing the matter on record for future use in the event of favorable replies from diplomatic missions to the Foreign Office note of August 25. JOHNSON 893.5123/8: Telegram The Ambassador in China (Johnson) to the Secretary of State PEIPING, September 5, 1936-1 p. m. [Received September 5-6:30 a. m.] 436. Embassy's 430, September 3, 2 p. m. Following mandate dated September 2d was published in National Government Gazette September 3d: "October 1, 1936 is hereby designated as the date for the enforcement of the provisional income tax regulations. The collection of the income tax on salaries and emoluments of public service functionaries and on interest accrued on Government bonds and deposits, referred to in the regulations as income under classes B and C, respectively, shall commence on January 1, 1937". JOHNSON 893.5123/10: Telegram The Secretary of State to the Ambassador in China (Johnson) WASHINGTON, September 16, 1936-6 p. m. 224. Your 401, August 11, 4 p. m.; 430, September 3, 2 p. m.; 436, September 5, 1 p. m.; and 444, September 12, 3 p. m.,78 in regard to the Chinese income tax law. 1. The Department, in its instruction No. 405 of May 22, 1923,79 stated, in regard to taxation in China, that between the extremes presented by the French Treaty of 1858 (the provisions of which accrue to American nationals by virtue of the most-favored-nation clause in American treaties with China), and our treaty of 1903 80 an equitable medium might be found which would allow a reasonable exercise by China of the ordinary sovereign rights in fiscal matters, and at the same time prevent abuse of power through the imposition of undue "George Atcheson, Jr., Second Secretary of Embassy in China. 78 Telegram No. 444 not printed. "Foreign Relations, 1923, vol. 1, p. 582. 50 Signed at Shanghai, October 8, 1903, ibid., 1903, p. 91. burdens upon foreigners residing or doing business in China. Having in mind the concluding clause in the preceding sentence in relation to the character of the Chinese income tax, the Department feels that it would not be advisable or practicable to reply to the Foreign Office in the sense recommended in your telegram of September 3, 2 p. m. 2. In view of the character of the income tax, its high rates on average incomes, the difficulty of orderly and impartial administration, and considerations connected with the collection of the tax from American nationals, the Department at this time is disinclined to indicate approval, even by implication, of the income tax regulations in their present form or conditional acquiescence in their application to American nationals. 3. The Department desires therefore that you inform the Chinese Foreign Office, in reply to its note of August 25, enclosing copies of the provisional income tax regulations, that the regulations cannot be considered applicable to American nationals.81 HULL 893.5123/11: Telegram The Counselor of Embassy in China (Peck) to the Secretary of State NANKING, September 17, 1936-7 p. m. [Received September 17-5:35 p. m.] 270. 1. The Minister of Finance 82 today discussed with me Chinese income tax enforcement. He asked me to convey to the American Government his earnest hope that the American Government would be generous in its attitude toward payment of this tax by American citizens in China. I told him the Embassy had not yet received the Department's instruction in regard to this subject. Kung said there was no reason in law or equity why foreigners in China should not pay that tax. Foreigners residing in other countries pay the local income tax and the Chinese rates are relatively low. He was especially anxious that American firms should deduct the income tax from salaries of Chinese employees in accordance with the law and that American banks should deduct the tax from income derived by Chinese from deposits in such banks. 2. Kung alluded to the moral obligations resting on foreigners to pay income tax in consideration of privileges attached to their residence. He said that although the United States was traditionally China's foremost friend apparently in the matter of this tax Great Britain had shown the way to other nations, since the new British Ambassador arrived in China broadly said British subjects would pay 81 See footnote 83, p. 632. 82 H. H. Kung. the tax if all other foreigners did so. Kung emphasized that unless the tax were actually collected from all other nationalities including Japanese no effort would be made to collect from Americans. 3. Sent to the Department and Peiping. PECK 893.5123/12: Telegram The Secretary of State to the Ambassador in China (Johnson) WASHINGTON, September 19, 1936-3 p. m. 226. Nanking's 270, September 17, 7 p. m. to Department; Department's 224, September 16, 6 p. m.; and your 453, September 18, 6 p. m.,83 in regard to the Chinese income tax law. In the event you feel that Kung's approach to Peck, as reported in Nanking's telegram under reference, calls for a reply, you are authorized to instruct Peck to call informally on Kung (at a convenient time after the delivery to the Foreign Office of your note of September 22) and make an oral reply in the sense of paragraph 2 of the Department's instruction above mentioned. Peck may add that our decision in regard to the tax was reached after careful and sympathetic consideration but that the Department would be prepared to give further consideration to the matter in the event that all other governments concerned should acquiesce in the imposition of an income tax on their respective nationals. With regard to the last sentence in paragraph 1 of Nanking's telegram, Peck should explain to Kung that American firms could not be expected to act as agencies of the Chinese Government in the collection of the tax from Chinese citizens. HULL 893.5123/13: Telegram The Counselor of Embassy in China (Peck) to the Secretary of State NANKING, September 23, 1936-9 a. m. [Received 3:30 p. m.] 276. Department's 226, September 19, 3 p. m., to Peiping and Peiping's September 21, 11 a. m. to Nanking. 1. Note to Foreign Office dated September 18 stating that the regulations governing income tax cannot be considered as applicable 83 The Ambassador in China in his telegram No. 453, September 18, 6 p. m., reported that the Embassy was addressing a note to the Chinese Foreign Office in compliance with paragraph 3 of the Department's No. 224, the note to be delivered September 22. to American nationals was delivered morning of 22nd and I called on the Minister of Finance September 22, 6 p. m. 2. I told Kung that the Ambassador had just sent to the Foreign Office a reply concerning income tax and I repeated its phraseology. I then said that I had been directed to deliver a reply to the oral message he asked me to transmit on September 17. Following this I gave in informal language the purport of the observations set down in the Department's September 19, 3 p. m. 3. There ensued a rather lengthy discussion the upshot of which was that Kung felt disappointed and hurt ** at the boldness of the Ambassador's reply which was a simple assertion that "the regulations cannot be considered as applicable to American nationals”. Kung again referred to the press item quoting an oral statement by the newly arrived British Ambassador (See my September 17, 7 p. m.) which, although conditioning payment of the income tax by British nationals on its payment by all other nationals, nevertheless gave him some moral support in initiating this new tax. Part of the China Press September 14 stated in effect that the British Ambassador informed a reporter that Great Britain was not opposed to the measure per se; that similar taxes were collected by other governments and that the British Government saw no reason for objecting to the tax if it were paid by citizens of other countries. Kung observed that the attitude of the American people toward China had always been characterized by fair play and generosity and he had not expected that in connection with the income tax the United States would evince a less friendly attitude than Great Britain. He remarked that he quite understood that the American Government might entertain objections to features of the income tax law itself such as its comparatively heavy incidence on incomes in very low brackets, which features were occasioned by standards of living peculiar to China, but having regretted the public impression which would be created by the statement made in the Embassy's notifications to the Foreign Office without explanation or qualification that the law could not be considered as applicable to American nationals. Kung said that he personally had endeavored to frame an equitable tax law which would not be oppressive in its rates or mode [of] collection and he stressed the urgent need of the Chinese Government for additional funds whereever [possible?] to carry out vital projects such as currency reform. He explained that tax declarations regarding incomes would be accepted at face value and demands for documentary evidence would be exceptional. 84 34 The Acting Secretary of State in his telegram No. 229, September 24, 6 p. m., to the Ambassador in China stated: "It is regretted that Kung felt disappointed and hurt at the tone of the Embassy's note." (893.5123/15.) |