File No. 893.512/45.
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,
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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.
[Inclosure.]
Chargé MacMurray
to Consul General Sammons.
C. No. 553.]
American Legation,
Peking,
July 25, 1914.
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
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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
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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.]
