File No. 893.512/45.

Minister Reinsch to the Secretary of State.

No. 588.]

Sir: Referring to the telegram of July 20, in which the Legation brought to the attention of the Department the situation created by the Chinese authorities in imposing upon American goods certain inland charges considered to be irreconcilable with treaty stipulations, I have the honor to transmit herewith for the consideration of the Department an instruction on that general subject which the Legation addressed to the Consulate General at Shanghai under date of July 25 last, which but for a regrettable oversight would have been submitted to the Department at that time. In transmitting this instruction I have to report that the particular cases to which in refers have all, as is not infrequently the case with matters of dispute with the Chinese Government, come to an indeterminate conclusion—the [Page 217]particular causes of the complaint having disappeared but the Chinese authorities having conceded nothing.

Upon receipt of the Department’s telegraphic instruction of July 21, the Chargé d’Affaires took occasion to intimate informally both to the Minister for Foreign Affairs and to the Minister of Finance that the manifest effort of the Chinese Government to pare down to a minimum its obligations in the matter of inland taxation did not predispose our Government towards a feeling of confidence that it would, in the interests of its citizens, be justified in conceding such a liberal construction of treaty provisions as would be implied in the acceptance of the proposed stamp tax as applicable to its nationals. It should perhaps be added that neither of those Ministers showed any indication of concern at that intimation; and the Minister of Finance pointed out that, even if the nationals of the Treaty Powers were to ignore the tax, yet no doubt the Chinese parties to any contract potentially suable in Chinese courts would be sufficiently cautious to affix such stamps as might be necessary to insure the validity of the document under their national law; and (perhaps with a sound appreciation of the habit of mind which leads the Chinese to take no chances on anything) he seemed quite indifferent to the consideration that, in order to vindicate their contractual rights against foreigners, Chinese citizens would have to sue in consular courts which do not recognize the payment of a stamp tax as a condition of the validity of a contract.

Almost immediately after these informal representations the European war broke out; and in the midst of the preoccupations consequent upon it the various questions of inland taxation were for the time being lost sight of, both by the Chinese Government and by the Legation and the Consulates. On the resumption of more normal conditions, it appeared that the several causes of complaint in this matter had almost entirely ceased; and during the past six months or so the attention of the Legation has been drawn only infrequently and sporadically to cases of illegal taxation of that sort—either in the form of destination taxes (of the nature indicated under the fifth heading of the instruction of July 25 to Shanghai) or in the form of so-called boat-taxes which are in fact transit taxes levied upon the value of the cargo.

Whether the Chinese Government has been convinced of the illegality of its action, or has appreciated the inexpediency of trying to force a perverted construction of the treaties, or has desired to conciliate the United States and Great Britain for political reasons, or has realized the futility of exactions that throttle the trade from which they are derived, or (as is most likely) has yielded to the opposition of the Chinese merchants whose trade was threatened by such exactions—whatever the reason, it appears that for the time the various obnoxious laws of this character are in abeyance and there is a lull in the effort to evade the exemptions stipulated in the treaties.

I cannot, however, feel that this respite is permanent, but anticipate that, as has so often happened before, there will eventually be a renewal of the mistaken policy of trying to shift the burden of taxation onto the foreigners by one or more of the familiar, equivocations as to the meaning of the treaties. With a view to that probability, [Page 218]I beg to request an expression of the views of the Department on the several points discussed in the instruction of July 25 last to Shanghai, in order that the Legation may be in a position to instruct the various Consulates as to the attitude which they should adopt in the event of any of these questions arising in their districts. I reserve for future discussion, at a time when the issues involved may again become practical, certain recommendations as to a possible adjustment of the questions treated in the enclosed instruction to Shanghai, and of the related questions of Stamp Tax, Excise Tax, etc.

I have [etc.]

Paul S. Reinsch.
[Inclosure.]

Chargé MacMurray to Consul General Sammons.

C. No. 553.]

Sir: The Legation has received from your Consulate General the following despatches reporting upon questions of inland taxation [enumeration of despatches].

Of the questions involving matters of inland taxation which are presented for consideration by this series of despatches, it may be convenient to dispose first of the simple question of the increase in likin taxes leviable by the Chinese authorities. Subject always of course to the proviso that such charges must not be so levied as to discriminate against foreign goods in general or against the products of any particular nationality, or impair the value of the treaty arrangements for exemption certificates and transit passes, the Legation concurs with the view of the Consulate General that the determination of the amount of likin leviable upon goods properly subject thereto rests with the Chinese authorities, and that the foreign powers can therefore at the most point out the injury to trade resulting from too heavy a taxation of this sort.

There remain a number of questions, raised by the cases you report, affecting the rights of the Treaty Powers in respect to inland taxation. These questions may be conveniently analyzed under the following headings:

1. The levy of likin within open ports, outside of the foreign settlements or concessions.

In reply to the inquiry on this point contained in your No. 147, I have to inform you that the Legation has not abandoned the contention that the whole of any opened port, and not merely a restricted area of it, is open to foreign trade with all the privileges conferred by the treaties. It nevertheless appears to be the fact that in spite of this contention the Chinese Government has continuously acted upon the contrary view and has succeeded in collecting likin in the region beyond a restricted area in each of the open ports. Under these circumstances it would seem advisable, in any case which presents such a possibility, to rely upon some other principle than that which has been so long and so successfully maintained by the Chinese Government and is therefore unlikely to be conceded by it.

2. The levying of likin by private organizations to which the authorities have farmed out the collection of such taxes.

It seems doubtful whether this circumstance would in itself give cause for a valid and tenable protest, inasmuch as the treaties Contain no restriction upon the power of the Chinese Government to delegate its authority in the matter of the collection of taxes. It would appear, however, that such a method of collecting likin taxes might constitute an important consideration tending to establish, in any particular case, the existence of an element of discrimination.

3. The specific discrimination against certain products in the tariff of likin charges levied under the conditions above indicated.

In the view of this Legation, the mere fact of specifying, in any tariff of charges, goods of any nationality, manufacture or brand would in itself constitute a discrimination—even though the actual charge should not exceed that [Page 219]levied upon other like products—in that it would constitute the assertion of a right to impose special taxation at discretion upon the products of the particular nationality, manufacture or brand.

It may also be contended, though perhaps with somewhat less force, that a likin tax, where leviable at all, must be assessed upon a uniform ad valorem rate, or upon a specific commutation of such a rate; and that the levying of a higher proportionate assessment upon any particular trade would constitute a discrimination warranting a protest in behalf of the trade affected.

4. The levy of likin upon goods being transported under cover of transit passes.

It is not believed that the Chinese Government, in a case in which the facts were undisputed, would attempt to justify such absolute and flagrant violations of the treaty right to the protection of transit passes during the time the goods were actually in transit.

5. The levy of consumption taxes (also called destination taxes, Loti Shut or Loti Chuan) on transit-pass goods upon the surrender of the transit pass at destination.

In reply to the inquiry contained in your No. 147, I have to advise you that the Legation adheres to the view that goods covered by transit pass are properly subject to no further inland taxation, either in transit or after arrival at their destination, whether in foreign or Chinese hands. In this matter, however, as in the cases indicated in the first heading above, the contrary practice has long prevailed in spite of the contention of our Government. The British, moreover, upon whose Tientsin Treaty of 1858 the claim to the exemption of transit-pass goods from all inland charges whatsoever was originally based, have conceded the Chinese claim to a right of further taxation after the goods have completed the transit and have passed into Chinese hands. It is therefore to be feared that protests against the levy of consumption or destination taxes will in all probability continue to be futile.

6. The imposition of a special consumption or destination tax (Loti Chuan) specifically upon foreign goods brought into the interior under transit pass, which tax is moreover calculated upon the basis of the Tung Chuan, which is understood to be a single tax levied in commutation of the likin and consumption taxes payable upon goods brought into the interior without the protection of the transit pass.

Quite apart from the general question of the legality of destination taxes or other inland charges upon goods covered by transit pass, the Loti Chuan Regulations put into force in Chekiang during October last and understood to have been extended to Anhwei and Kiangsu on the 1st instant, are particularly repugnant to the provisions of the treaties, in that—

a.
They seek to establish a form of taxation which is not general in its application but is specifically imposed upon foreign goods covered by transit passes, thereby discriminating against such goods as have sought to avail themselves of the protection of the treaties; and that
b.
Whereas the treaty arrangements for covering goods by transit passes were designed to relieve them from the incidence of transit taxes in any form, the levying upon them of a so-called destination tax—which is in fact calculated on the basis of the inland taxes that would otherwise have been chargeable upon them—is in effect to subject them to a portion, at least, of the very charges for complete exemption from which they have already paid the 2½ per cent ad valorem stipulated by the treaties.

Concretely, the result of the Chekiang Regulations is to impose, on goods availing themselves of treaty protection, 2½ per cent plus Loti Chuan equivalent to one-half of the T’ung Chuan, as against the T’ung Chuan which would otherwise have been levied on them. So there would be a higher rate upon treaty-protected goods in any case in which the T’ung Chuan should be calculated at less than 5 per cent. Furthermore, it appears that goods paying T’ung Chuan may be reshipped to another inland port without further charge, whereas goods under transit pass, and therefore paying Loti Chuan, must pay that tax a second time in the case of such reshipment. So that in such cases the goods presumed to be protected by treaty pay the equivalent of full T’ung Chuan in addition to the 2½ per cent already paid for the transit tax, making a net difference of 2½ per cent ad valorem to the disadvantage of the treaty-protected goods.

It is understood that in practice the amount of the T’ung Chuan is at present so adjusted as not actually to impose a heavier taxation upon transit-pass goods as delivered at their original destination in the interior. But even [Page 220]in the absence of such concrete discrimination in cases of that sort, the Regulations are objectionable in that, by imposing a special tax upon transit-pass goods, as such, they destroy the safeguard against excessive internal taxation which the option of using a transit pass was designed to secure.

7. The imposition of an increased likin tax specifically upon foreign goods arriving at an open port under exemption certificate, upon their reshipment into the interior.

As in the cases indicated under the 4th heading above, it is believed that the Chinese Government would not undertake, in any case indisputably involving no complication with other more contentious questions, to defend so manifest a subversion of the rights granted by the treaties in respect to the shipment of imports to open ports under exemption certificates.

With reference to the action thus far taken by the Legation on the several instances of illegal inland taxation recently reported by you, it is to be noted that, with the exception of the Minhang Barrier case and the Nantao Bund case (the former involving the detention of the Standard Oil Company’s cargoes under the conditions indicated in the 4th and 5th headings above, and the latter involving the seizure of one of its cargoes under the circumstances indicated in the 1st, 2d and 3d headings), none of these cases are so presented as to afford a basis or warrant for claim for indemnification; and it is the understanding of the Legation that they were brought to its attention not with that purpose but with the object of forming a basis of protest to the Central Government against the various abuses in the matter of inland taxation which have quite recently attained such disquieting proportions in the Provinces of Chekiang, Kiangsu and Anhwei.

Those abuses seem in fact to have become within the past month or so exceptionally flagrant and persistent. It seems clear, moreover, that they are countenanced if not in fact abetted by the Peking Government, as evidenced by the terms of the Chekiang Loti Chuan Regulations and by the Presidential Orders of June 29 and July 8 commending the Governor General of Chekiang for his administration of taxation in his Province. The Legation shares with the British and other Legations, and with other unofficial observers, the conviction that in these three provinces the Government is now making a studied and tenacious effort to determine the bare minimum to which it can pare down its treaty obligations in the matter of inland taxation. And so far as can be ascertained, the Chekiang Loti Chuan Regulations form the crux of this problem. The Legation, therefore, concurrently with the third protest made by the British Legation, on July 7 addressed to the Wai Chiao Pu a note (of which a copy is enclosed) asking for their cancellation. In order to profit by the effect of substantial identity with the views embodied in the British protests, the note urged against the Regulations only the general objections indicated in the 5th heading above; but the Legation is seeking a suitable occasion to urge upon the attention of the Minister for Foreign Affairs and the Minister of Finance the particular objections outlined under the 6th heading.

In conclusion, I take occasion to express appreciation of the manner in which this complicated set of cases has been dealt with and has been presented by the Consulate General and to assure you of the Legation’s cooperation for the protection of the privileges to which we believe American citizens to be entitled as a matter of treaty right.

I am [etc.]

J. V. A. MacMurray.