The Secretary of State to the Minister in China ( Schurman )
Sir: The Department has received your despatch No. 1231 of December 14, 1922,94 with reference to the principles involved in a protest against the imposition of Famine Relief Surcharge Tax Stamps upon documents affecting the trade of the nationals of the Treaty Powers, and with particular reference to the collection of this tax through stamps affixed to likin receipts in Hunan, as reported by the Vice Consul in charge at Changsha. You refer to the special report of the Committee of the Diplomatic Body, as transmitted in your despatch No. 590 of April 26, 1922,94 and to the note sent by the Dean to the Chinese Foreign Office, as submitted in your despatch No. 618 of May 4, 1922;94 and state that, as no expression of opinion relating to the propriety of the Dean’s note has been received from the Department, you have assumed that your assent thereto met with the Department’s approval.
In the Dean’s note to the Foreign Office of April 26, 1922, it is stated:
“that the revenue collected by means of the proposed famine relief surcharge stamps would in fact amount to a tax imposed upon the commerce conducted by the nationals of the Treaty Powers and would consequently be in contravention of the treaties whereby the taxation of such commerce is strictly defined and limited.”
This statement would appear to be true only in part.
It may well be that the tax cannot legally be imposed on nationals of the Treaty Powers, but it is not believed that the single reason [Page 583] advanced, namely, that the revenue collected by means of stamps amounts to a tax on commerce, is of itself sufficient.
It appears from Article IV of the regulations published in the Chinese Government Gazette of March 13, 1922, that the stamps are to be affixed to four different kinds of documents. The Article reads:
“The said stamps shall be affixed to documents in accordance with the following regulations:
- —Stamps shall be affixed to freight receipts issued by all Government owned railways to an amount equal to 5% of the freight tariff.
- —Stamps shall be affixed to certificates authorizing the building of privately owned railways, and to certificates authorizing the creation of privately owned steamship lines to an amount .equal to 10% of the fee for the issuance of such certificates.
- —One ten cent stamp shall be affixed to each telegram sent from one part of the country to another.
- —A one cent stamp shall be affixed to each special delivery letter, and each registered letter sent through the Government posts.
“Famine Relief surcharge stamps shall not be required in any cases not covered by the above stipulations.”
It is, of course, generally known that under our treaties with China goods imported or exported, unless duty free, bear a fixed rate of duty and (except in the case of inland shipments for which transit passes have not been obtained by the shippers) are not subject to any charge in the nature of a tax or duty other than as prescribed by the tariff schedule. (Articles II and V, Treaty of 1844 (Malloy [Vol. I,] page[s] 197–198) and Articles XI and XII of the Japanese Treaty of 1896 (Customs Treaties,95 Vol. II, pages 1336-7). Therefore, the documents referred to under (a) of the regulations, in so far as they concern shipments of goods on which the import or export duty of 5% has been paid, and, in the case of inland shipments, where the transit pass privilege has been availed of (Rule 7 of the Tariff Schedule annexed to the Treaty concluded November 8, 1858, (Malloy, Vol. I, page 231)) cannot properly be subjected to the stamp requirement, since this would constitute an additional charge on the privilege of shipping merchandise, which would be in contravention of the above cited provisions of the treaties. These treaty provisions, however, apply only to goods which have been imported into China or which are being exported from China, and do not apply to native goods employed in commerce [Page 584] within China. It is not known to what extent American citizens or other foreigners engage in this latter class of trade, but the distinction is worthy of mention. In this connection reference may be made to the instruction which the Department addressed to the Legation at Peking May 4, 1914,96 in which it was stated that “The Department is of opinion that a stamp tax upon bills of lading, shipping companies’ receipts, consignees’ receipts and other documents relating to imported or exported goods is technically a contravention of the letter of the treaties, since the stamp duty will slightly increase the tariff duty.” The Department added that it did not believe that the Treaty Commissioners, when stipulating that the payment of import duties and commutation transit tax or half-duty should exempt the goods “from all further inland charges whatsoever”, and that “exports having paid transit tax should be exempt from all internal taxes, import duties [sic], likin, charges and exactions of every nature and kind whatsoever saving only export duties,” had in mind the levy of a stamp duty upon the shipping papers. It expressed the opinion that the commissioners had in mind only duties, under a variety of names, upon the goods themselves, and authorized the Legation to consent to the levy of a stamp tax on condition that other governments should also consent.
As to the other documents mentioned in Article IV of the regulations quoted above, namely, those under (b), (c) and (d), it is believed that a different situation exists, and that if the stamp requirement as to these documents is to be declared illegal, the illegality must be based upon some treaty provision other than those concerning the duty leviable upon imported or exported goods. Obviously, the requirement under (b) that certificates authorizing the building of privately owned railroads and the creation of steamship lines shall bear stamps can not be considered a tax upon commerce. The requirement under (c) that a stamp shall be affixed to each telegram sent and under (d) that special delivery and registered letters sent through the Government posts shall each bear a one cent stamp might, by a rather strained construction of the law, be regarded as an indirect tax upon commerce when the telegrams or letters pertain wholly to commercial matters; but to lay down the general proposition that such form of taxation is contrary to the treaty provisions regarding import and export duties and transit charges is, it is believed, bordering on the extreme.
The right of a government to lay taxes upon its nationals and upon the person and property of aliens coming within its domain is a fundamental attribute of sovereignty, the exercise of which, within reasonable limitations, can not properly be questioned in the [Page 585] absence of a specific undertaking on the part of the government to forego the right. There appear to be no specific provisions in any of our treaties with China under which exemption from the form of tax provided for under (b), (c) and (d) above could be claimed for nationals of this Government. In fact by Article IV of the Treaty of 1903 between this Government and China, (Malloy, Vol. I, page 261), which has to do with the abolition of likin, the right of China to impose forms of taxation other than those specified in the article was specifically recognized. The provision reads:
“Nothing in this article is intended to interfere with the inherent right of China to levy such other taxes as are not in conflict with its provisions.”
It is realized that Article IV has not been brought into operation because of the failure of China to take steps to abolish the likin system, but this stipulation was apparently not in the nature of a quid pro quo arrangement or of a concession by this Government to China, but was merely the formal recognition by this Government of an existing right, the reasons for which are explained in the exchange of notes which took place at the time of the signing of the Treaty. The note which the American Commissioners addressed to the Chinese Commissioners in reply to one from the latter reads as follows:
“In framing this Treaty we have endeavored to recognize the right of China as a sovereign state to levy such taxes as are not in conflict with the provisions of this Treaty which is intended to extend the commercial relations between, and promote the best interests of, the people of the two countries. With this end in view, we inserted at your request in Article IV the clause ‘Nothing in this Article is intended to interfere with the inherent right of China to levy such other taxes as are not in conflict with its provisions.’ We, with Your Excellencies, appreciate the fact that this clause is comprehensive and conserves to the fullest extent the sovereign rights of China except as specified in this Treaty.” (MacMurray’s China Treaties,97 Volume I, page 451; also despatch from Peking, March 10, 1914, 893.512/31.98)
It would seem, therefore, that this Government is not in a position to claim exemption for its nationals from payment of the stamp tax provided for under paragraphs (b), (c) and (d) of the regulations, unless it can do so by virtue of provisions in a treaty between China and some other power and of the favored nation provisions in the Treaty of 1903 (Article III) and earlier treaties. Apparently the broadest treaty provisions regarding the exemption of [Page 586] foreigners from “obligations” in China are those contained in Article XL of the Treaty of 1858 between China and France (Customs Treaties, Vol. I, page 622). This Article reads:
“Art. XL.—If the Government of His Majesty the Emperor of the French shall consider it desirable to modify any of the clauses of the present Treaty it shall be at liberty to open negotiations to this effect with the Chinese Government after an interval of ten years from the date of the exchange of the ratifications. It is also understood that no obligation not expressed in the present convention shall be imposed on the Consuls or Consular Agents, nor on their nationals, but, as is stipulated, French subjects shall enjoy all the rights, privileges, immunities, and guarantees whatsoever which have been or shall be accorded by the Chinese Government to other powers.”
While this provision is not entirely free from ambiguity, it is understood that it has been invoked in the past as a complete exemption of French citizens from all forms of taxation in China not agreed upon in the Treaty, and that it could be, and probably has been relied upon by the Diplomatic Body in opposing the stamp tax here in question, although the Dean’s note of April 26, 1922, does not so indicate. It goes without saying that whatever rights may be claimed under this Article by the French Government for its nationals will also accrue to American nationals by virtue of the favored nation treatment to which they are entitled.
These treaty provisions, namely, those in Article IV of our Treaty with China of 1903, and those in Article XL of the French Treaty, appear to represent the two extremes in dealing with Chinese fiscal affairs. In the former it is declared that China shall be free to levy such taxes as are not in conflict with the provisions of that Treaty and in the latter it is declared that China shall not impose upon French nationals any obligation not expressed in the (Convention) Treaty.
It is hoped that the above observations may be of value to the Legation in the consideration of questions of taxation as they affect foreign interests. Apart from the possible legal sanction for foreigners, whether rightly or wrongly, to claim exemption from all forms of taxation in China, the Department suggests that, between the two extremes presented by the French Treaty of 1858 and our own treaty of 1903, 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 burdens or vexatious restrictions upon foreigners residing or doing business in China. On this point, you are referred to the Legation’s despatch No. 149, of March 10, 1915 , in which the portion beginning with [Page 587] paragraph 3, page 4,99 appears to be pertinent. In this connection, however, you should not fail to bear in mind the principle, as set forth in the Department’s instruction, No. 90, of May 4, 1914, that this Government can consent to the collection from American citizens of only such taxes as the other foreign governments may consent to as affecting their own nationals.
With reference to the particular question of inland taxation, which formed the subject of Vice Consul Meinhardt’s despatch of December 8, 1922,1 the Chinese Government has made with the Powers an arrangement of a special character which provides for the commutation of all such taxes by the flat payment of an amount equal to one half of the import or export tariff. Although there is no compulsion upon the foreign merchant to take out a “transit pass” for this purpose, and, although he is at liberty, in the alternative, to pay likin, the manifest purpose of the arrangement is to free the foreign merchant from the annoyances and inequities of the native system of inland taxation, leaving the Chinese authorities in unrestrained control of this branch of taxation. If they choose to increase this tax, there would appear to be no reasonable ground for protest on behalf of foreign merchants, either as to the amount of increase, or as to the method of its collection. Neither would the use of stamps to collect such an increase appear to afford any basis for such action. The contention that the stamp tax in this connection is not likin, but a new and different tax, does not appear to the Department to be tenable.
The memorandum of the Chinese Secretary under date of October 3, 1922,1 enclosed with your despatch under consideration, appears to take note of this aspect of the question; for, after quoting the Chinese Foreign Office to the effect that it had issued instructions to the Peking Octroi stations to exempt from this tax such goods as were covered by transit passes, but not so to exempt native merchandise, or foreign merchandise not covered by inward transit passes, it states: “The Chinese Government thus unequivocally accepted the position of the Legation that the additional surtax to which the Legation had not consented was improper and should be rescinded”. It is evident, however, that the Foreign Office in its note of December 23, 1920,1 expressly reserved the right, which it claimed, to levy such a tax upon foreign merchandise not proceeding under an inland transit pass. On page 3, the same memorandum of the Chinese Secretary, in referring to the deliberations of the Special Committee of the Diplomatic Body appointed to examine into this subject, [Page 588] states “this was held to be an additional tax on foreign commerce not authorized by treaties and in contravention thereof, especially since, as frequently developed, these additional taxes could not be avoided by means of transit passes.” It would, therefore, appear, at least by inference, that the Special Committee of the Diplomatic Body did not regard stamp taxes on likin as coming within the same category as other taxes and charges from which the foreign merchant had not by treaty an alternative which would permit him to commute inland charges.
In view of these considerations, the Department is of the opinion that there is no proper ground for protesting against the imposition of the Famine Belief Surcharge Stamps upon likin receipts. Unless, however, the matter seems to be of sufficient actual importance, it is not suggested that you should at this time take occasion to define more explicitly to the Dean the Department’s views upon this point, but should await the occurrence of some opportunity favorable to a further discussion of the issues involved.
The Legation may desire to communicate the substance of the Department’s opinion on this subject to the Vice Consul in charge at Changsha in connection with his despatch No. 343 of December 8, 1922, a copy of which appears to have been sent to the Legation.
I am [etc.]
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- China, Imperial Maritime Customs III, Miscellaneous series no. 30: Treaties, Conventions, etc., “between China and Foreign States (Shanghai, 1908).↩
- Foreign Relations, 1914, p. 122.↩
- John V. A. MacMurray (ed.), Treaties and Agreements with and concerning China, 1894–1919 (New York, Oxford University Press, 1921).↩
- Foreign Relations, 1914, p. 119.↩
- Foreign Relations, 1914, p. 121 (3d par.).↩
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