The Vice President of the Standard Oil Company of New York (Cole) to the Secretary of State

Sir: While your department is no doubt fully informed with regard to the interior taxation question in China, we are taking the liberty of placing you in possession of advices of our Shanghai management of the more recent activities of the provincial authorities.

Certain Provinces which have been deprived of likin on foreign imports have instituted local taxation approximating the amount paid for Customs transit passes and give in exchange passes which actually exempt shipments from further taxation within that province. The best example of this is at Kiukiang where the equivalent of the transit pass is collected by the Provincial Authorities and complete immunity from further taxation is accorded. During the past few months the Provincial Authorities in Kiangsu have been negotiating with us for the payment of a Provincial tax which would exempt our cargo from further impositions and relieve us of the necessity of taking out Customs transit passes. Chekiang [Page 580] Province has also had a Provincial system of taxation, which under certain conditions enables us to ship without transit pass. Even where such a course has made a possible saving to the Company, we have not been active in trying to conclude arrangements with the Provincial Authorities along these lines as it does not seem entirely fair to deliberately evade treaty provisions and deprive the Central Government of legitimate revenue.

The fact that some of the Provincial Governments are awake to the possibilities of obtaining increased revenue in this way without encountering official protest leads us to believe that such arrangements will be extended to other Provinces unless the general scheme of taxation is altered. It should be particularly noted that the taxation substituted for the transit pass is not termed “likin”. On the other hand the only tax which the Chinese Government has agreed to abolish to compensate for the increased Customs revenue is termed “likin” in the Treaties of 1903.93 Unless this term is more fully defined it is obvious that the Provincial Authorities, if not the Central Government, will substitute other forms of taxation which will defeat the purpose of permitting an increase in Customs import duty. The generally accepted definition of the term “likin” is transit duties whereas the Provincial taxation takes the form of consumption taxes levied in various ways.

In addition to the proposals received from Provincial Governments, a Chinese, representing himself as an agent of the Peking Government, has recently put before us a scheme for national taxation of foreign kerosene imports. This scheme has also been put up to the Asiatic Petroleum Co. The plan calls for the collection of a 2 percent ad valorem tax in addition to transit pass, to be paid in lieu of all further interior taxation. The importer has the alternative of paying the equivalent of the transit pass duty to the Tax Office instead of to the Customs, making a total payment of 4½ percent ad valorem on cargo not covered by transit pass. The plan would be effective in all provinces except Kwanghai [Kwangsi?], Kwangtung, Kueichow, Yunnan and the Manchurian provinces. The natural reaction to such proposal is to ignore it for the following reasons:—

The operation of the plan would be based on a private agreement between the importers concerned and a department of the Chinese Government and regardless of the attitude adopted by the officials of the foreign government concerned. It is doubtful whether or not any real assistance could be given to enforce the terms of the agreement in the face of efforts to raise the rates or against additional levies which might be imposed by provincial authorities or other departments of the Government.
The authority of the Central Government to enforce the terms of such an agreement in the provinces is certainly open to question.
Any formal recognition given to such agreement by the governments of the nationals concerned would certainly tend to undermine the treaty provisions on the subject.

On the other hand, as pointed out above, there seems to be an awakening on the part of the provincial governments to the possibilities of obtaining a greater share of the duties now levied, and also of increasing the amount of such duties. Such demands coming from the provincial authorities cannot be ignored, and it seems wise to take advantage of any opportunity offered to direct and control the amounts and forms of the additional duties.

If there is any possibility of the Central Government instituting nation-wide tax on foreign imports to be paid in lieu of existing internal revenue and/or Customs’ surtax, we believe that an agreement as to the proportion of such collections which will be allocated to the Provincial Governments is necessary to the success of the proposal. This suggestion applies equally to the proposed increase in Customs import duties imposed in lieu of internal taxation.

Yours very truly,

Standard Oil Company of New York,
H. E. Cole
, Vice President