811.512394Shipping/4

The Secretary of State to the Japanese Ambassador (Hanihara)

The Secretary of State presents his compliments to the Japanese Ambassador, and has the honor to refer to the Ambassador’s note No. 48 of May 27, 1924,3 in which three questions were set forth regarding the establishment of reciprocity between the United States and Japan, concerning the payment of income tax on earnings derived from the operation of merchant vessels documented under the laws of the respective countries. The questions were stated as follows:

“1. Should Japan, by way of legislation, exempt from taxation 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 subjects of Japan and to corporations organized in Japan, would America allow ipso jure an equivalent exemption to Japan in accordance with the provision of Section 213 (b) (8) of the Revenue Act of 1921?

“Or what kind of measure would be necessary for America to allow Japan an equivalent exemption?

“2. Assuming that the said legislation of Japan intends ‘to exempt from taxation 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 his or its country,’ does the said provision of the American statute have the same meaning?

“Or if the American provision have a broader meaning than that of Japan, would America still allow Japan an equivalent exemption?

“3. Supposing that Japan and Great Britain allow an equivalent exemption to America in the same manner, does the said provision of the American statute exempt from taxation the income of a Japanese subject or Japanese corporation which consists of earnings derived from the operation of a ship or ships documented under the laws of Great Britain?”

The Secretary of State begs to inform the Ambassador of the receipt of a letter from the Treasury Department,4 containing the following answers to the three inquiries just quoted:

“If Japan, by way of legislation, should provide for the exemption from tax of ‘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 subjects of Japan and to corporations organized in Japan’, Japan would ipso jure satisfy the equivalent exemption provision of Section 213 (b) (8) of the Revenue Act of 1924.

“The provision in Section 213(b) (8) has a broader meaning than that set forth in the first part of the second inquiry of the Japanese Embassy. For example: A nonresident alien individual who is a citizen [Page 452] of a country which does not satisfy the equivalent exemption provision of Section 213(b) (8) or a corporation organized under the laws of such foreign country, would be exempt from tax on the earnings derived exclusively 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 not residing in such country and to corporations organized in the United States. If Japan so words her exemption provision that no tax is imposed on the income derived from the operation of ships documented under the laws of the United States by citizens of the United States nonresident in Japan or by corporations organized in the United States the equivalent exemption provision of Section 213(b) (8) will be satisfied and the income of a nonresident alien individual or a foreign corporation from sources in the United States which consists exclusively of the earnings of a ship or ships documented under the laws of Japan will be exempt from Federal income tax. It is deemed advisable to point out that the exemption granted by the Japanese law to United States corporations must be absolute, that is, the exemption must apply to all United States corporations even though such corporations have a branch office, a place of business or an agent in Japan.

“In answer to the third inquiry it may be stated that if a Japanese subject nonresident as to the United States or a Japanese corporation owns a ship documented under the laws of a country which satisfies the equivalent exemption provision of Section 213(b) (8), the income from sources in the United States which consists exclusively of earnings derived from the operation of such ship would be exempt from income tax.”

The Treasury Department observes that inasmuch as the Revenue Act of 1924 has been enacted since the date of the inquiry of the Japanese Ambassador and contains the same provision5 regarding the exemption from tax of earnings derived from the operation of ships, the replies to the questions submitted are made under the Revenue Act of 1924.

  1. Not printed.
  2. Dated June 18, 1924; not printed.
  3. 43 Stat. 253, 267.