811.512394Shipping/20

The Acting Secretary of State to the Japanese Ambassador (Matsudaira)

Excellency: I have the honor to refer to Your Excellency’s note No. 72 dated June 18, 1925, regarding the establishment by the United States and Japan of reciprocal exemption from taxation of income derived from the operation of merchant vessels, in which you set forth the methods proposed by your Government for adoption by both countries in putting into effect the arrangement for reciprocal exemption. You state that the Japanese law is intended to be put into force not only in Japan proper but in Japanese possessions and territories as well and express the hope that this Government will see its way to adopt the same principle.

I beg to state that the Treasury Department, to which a copy of the Embassy’s note was referred, has advised this Department that there is no authority in law whereby it can adopt the methods proposed by the Japanese Government in putting into effect the reciprocal exemption from taxation which exists by reason of the Japanese Law No. 6, promulgated on July 18, 1924, and Section 213(b) (8) of the Revenue Act of 1924.

The Treasury Department refers to the translation in the Embassy’s note of August 4, 1924, of a portion of the Japanese law which reads:

“Additional Rule:
“This law shall be in force from the date of its promulgation.”

and states that the equivalent exemption provisions of Section 213 (b) (8) of the Revenue Act of 1924, were satisfied on the date of the promulgation of the Japanese law. The income, therefore, from sources within the United States received by a non-resident alien individual or a foreign corporation which consists of earnings [Page 459] derived on and after July 18, 1924, from the operation of a ship or ships documented under the laws of Japan is exempt from Federal income tax. Such earnings derived prior to July 18, 1924, are subject to Federal income tax.

With respect to the Embassy’s statement that the Japanese law is intended to be put into force not only in Japan proper but in its possessions and territories as well and that the Japanese Government is desirous that this Government see its way to adopt the same principle in the practical application of its law bearing upon this subject, the Treasury Department invites attention to the fact that the Revenue Act of 1924 is not in force in all the possessions of the United States. It adds that Section 2 (a) (5) of the Act provides that:

“When used in this Act—

“(5) The term ‘United States’ when used in a geographical sense includes only the States, the Territories of Alaska and Hawaii, and the District of Columbia.”

Section 260 provides:

“Any individual who is a citizen of any possession of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States, shall be subject to taxation under this title only as to income derived from sources within the United States, and in such case the tax shall be computed and paid in the same manner and subject to the same conditions as in the case of other persons who are taxable only as to income derived from such sources.

“Nothing in this section shall be construed to alter or amend the provisions of the Act entitled ‘An Act making appropriations for the naval service for the fiscal year ending June 30, 1922, and for other purposes,’ approved July 12, 1921, relating to the imposition of income taxes in the Virgin Islands of the United States.”

The Act referred to in Section 260 provides that income tax laws then or thereafter in force in the United States shall apply to the Virgin Islands, but that the taxes shall be paid into the treasury of the Virgin Islands. Accordingly, income from sources in the Virgin Islands received by a non-resident alien individual or a foreign corporation is taxed there under the provisions of the Revenue Act of 1924, but it is not taxed in the United States.

Section 261 provides:

“In Porto Rico and the Philippine Islands the income tax shall be levied, assessed, collected, and paid as provided by law prior to the enactment of this Act.

“The Porto Rican or the Philippine Legislature shall have power by due enactment to amend, alter, modify, or repeal the income tax laws in force in Porto Rico or the Philippine Islands, respectively.”

[Page 460]

The Treasury Department further states that, inasmuch as the Revenue Act of 1924 is not in effect in Porto Rico and the Philippine Islands, and the legislatures of those Islands have been given power to make their own income tax laws, the Federal government has no jurisdiction over the administration of such laws in those possessions, and no authority to extend the exemption provisions of the Revenue Act of 1924 to the taxes imposed by the laws of Porto Rico and the Philippine Islands. The liability to or exemption from any tax imposed by Porto Rico or the Philippine Islands is a matter wholly within the jurisdiction of the local governments of those possessions. A ruling by the Treasury Department that the law of a foreign country satisfies the equivalent exemption provision of Section 213(b) (8) of the Revenue Act of 1924 has no force and effect in Porto Rico and the Philippine Islands as it does not relate to the tax imposed by the laws of those possessions.

In view of the foregoing provisions any income received by a nonresident alien individual or a foreign corporation from sources within those possessions of the United States (other than the Virgin Islands) which are not included in the term “United States” as defined in Section 2, is not subject to the tax imposed by the Revenue Act of 1924. The exemption from taxation accorded by Section 213(b) (8) to the income of non-resident alien individuals and foreign corporations derived from the operation of ships documented under the laws of a foreign country, applies only to such income as is derived from sources within the “United States” as that term is defined in Section 2, and from sources within the Virgin Islands. The practical effect of these provisions as applied in the case of Japan is that the income of a nonresident alien individual or a foreign corporation from sources within the possessions of the United States (other than the Virgin Islands) is not subject to the tax imposed by the Revenue Act of 1924, and such income from sources within the United States and the Virgin Islands, derived on and after July 18, 1924, exclusively from the operation of ships documented under the laws of Japan is exempt from the tax imposed by the Revenue Act of 1924.

While the Treasury Department is of the opinion that the effect of the provisions of the Revenue Act of 1924, appears to be substantially what is desired by the Japanese Government, I shall be glad to receive a statement from Your Excellency to that effect so that the Treasury Department may be advised accordingly.

Accept [etc.]

Joseph C. Grew