The Secretary of State to the Japanese Ambassador (Hanihara)
The Secretary of State presents his compliments to His Excellency, the Japanese Ambassador, and, referring to his note of March 21, 1923, and to the reply of the Secretary of State of April 18, 1923, in regard to the exemption from income tax granted by this Government to citizens or corporations of foreign countries under the provisions of Section 213, Paragraph (b), Item 8 of the Revenue Act of 1921, has the honor to say that he is advised by the Secretary of the Treasury that the following are the pertinent provisions of the Japanese income tax law:
- Art. 1. Persons who are domiciled or reside for more than one year in the place where the present law is in operation shall pay an income tax.
- Art. 2. Persons who, though not coming under the foregoing article, come under any one of the following clauses, shall pay an income tax for each specified income only.
- Clause 1. When a person owns a property or business in the place where the present law is in operation.
The Japanese Minister of Foreign Affairs has given the following construction of the Japanese income tax law as applied to citizens of the United States nonresident in Japan and corporations organized in the United States:
A citizen of the United States or corporation organized in the United States whose income consists exclusively of earnings derived from the operation of a ship or ships documented under the laws of the United States, but who owns a branch office or other place of business in Japan, is regarded, in the light of the law, as coming within the provisions of Clause 1 of Article 2 of the Income Tax Law which speaks of conducting business in the place where the law in question is in operation. Such citizen or corporation when he owns no branch office or other place of business in Japan is regarded in the [Page 450] eye of the law as not conducting business where the law is in operation and no income tax is assessed.
Section 213(b) (8) of the Revenue Act of 1921 reads as follows:
That for the purpose of this title (except as otherwise provided in Section 233) the term “gross income”—…
(b) Does not include the following items, which shall be exempt from taxation under this title: …
(8) The income of a nonresident alien or foreign corporation which consists exclusively of earnings derived from the operation of a ship or ships documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States.
Since the Japanese law imposes a tax upon income consisting exclusively of earnings derived from the operation of ships documented under the laws of the United States, if the owner of the vessels, though not a resident of Japan, does business in Japan or has an office or place of business therein, it follows that Japan does not satisfy the equivalent exemption provision of Section 213(b) (8) and that the income of nonresident alien individuals or of foreign corporations from the operation of ships documented under the laws of Japan is not exempt from tax.