The Minister in China ( MacMurray ) to the Secretary of State

No. 963

Sir: I have the honor to refer to the Department’s telegraphic instruction No. 61 of February 15, 4 p.m., requesting my comments on some general policy throughout China with regard to the payment by American citizens of local municipal taxes such as police, fire protection, street maintenance, and similar taxes.

Municipalities in China may be divided into two main classes: (1) Those existing in delimited areas such as the International Settlement at Shanghai and the various foreign national concessions at Tientsin, Canton, Hankow, and certain other treaty ports; and (2) Chinese municipalities of various types and of different degrees of organic development, in which foreign nationals have no special rights except such as may be accorded them by the municipal regulations and toward which their obligations vary with respect to taxation from an almost complete immunity to a substantial sanction to pay the rates in force. Instances of the latter kind are the Chinese municipalities in Peking, Harbin, Tsingtao, Foochow, Changsha and the ex-German and ex-Russian Concessions at Tientsin and Hankow.

Until within recent years, the question of the payment of taxes by foreign nationals to Chinese municipalities was not an important one inasmuch as the Chinese had not themselves developed municipal government beyond very primitive beginnings and did not supply to any great extent municipal services for which the payment of rates could be justly demanded. Light and water, if supplied at all, were generally furnished by private companies; and they are, moreover, of a character which makes it possible for them to be sold to the user on the basis of the exact amounts consumed. The only well developed municipalities were those in the foreign settlements and concessions, in which it had become, both by custom and by judicial precedent, the settled procedure that American nationals were liable for the payment of the current municipal rates.

A change in this situation has, however, gradually taken place, in that there have now come to exist well developed Chinese municipalities rivalling in importance those of the foreign settlements and concessions. This change has occurred in two ways:—(1) through the taking over by the Chinese of municipalities developed under foreign control, such as those at Harbin, Tsingtao, and the ex-enemy concessions at Tientsin and Hankow, and (2) through the rapid growth of native Chinese municipalities in areas adjoining the foreign settlements, of which perhaps the best examples are those in the Native [Page 387] City and in Chapei, immediately adjacent to the Shanghai foreign settlements. This development, with regard to the first category, is now being accelerated by the present tendency toward the cancellation of the agreements relating to foreign concessions, as evidenced by the return of the Belgian Concession at Tientsin, by the very recent agreements between the British Government and the Chinese Nationalist Government concerning the British Concessions at Hankow and Kiukiang, and by the agitation for a readjustment of the status of the International Settlement at Shanghai.

In view of this altered state of affairs, it is obviously indefensible from any equitable standpoint, and unwise from the standpoint of expediency, to maintain vis-à-vis the Chinese authorities that American citizens must be exempt from the payment of municipal taxes when adequate municipal services are supplied. In the Legation’s despatch No. 773 of October 7, 1926,41 it was stated:

“The Legation appreciates that, with the growth of Chinese municipal governments, it will be both equitable and increasingly necessary from a practical standpoint, to give careful consideration, to the question whether we should not be liberally disposed to recognize the power of the Chinese to levy municipal taxes upon American citizens when adequate municipal rights are guaranteed them and appropriate municipal service is provided.”

In view, then, of the fact that we are confronted with a new set of conditions such as have been described above, the question arises as to the best method of dealing in practice with the matter of municipal taxation of American citizens in the various localities where this matter has become a practical issue. At the present moment, the question of the whole status of foreign concessions is in a state of flux; the arrangements which are being made with regard to certain of the British Concessions are substantially equivalent to a renunciation of their status as foreign concessions and to their rehabilitation as Chinese municipal entities. In this connection, there is enclosed herewith, for the information of the Department, the text of the “O’Malley-Chen Agreement” relating to the liquidation of the British Concession at Hankow.42 Particular attention is invited to Articles 4 and 13 of the Regulations appended to this Agreement, the first of which provides that the Consul of an extraterritorial foreigner shall provide a written guaranty that he will enforce the Municipal regulations against one of his nationals leasing land or buildings within the “Special Administrative District No. 3,” and the second of which provides that the Municipal Bureau shall collect “all taxes, dues, rates, fees and the like in accordance with the by-laws and such other Tariffs [Page 388] as are now in force. …” Article XV provides that the Bureau shall proceed against extraterritorial foreigners for default of taxes in the Consular Court of the national concerned.

It is, of course, impossible at the present moment to foresee what arrangements may be made with regard to the other British Concessions in China; or, at what time or under what conditions the precedents now being established with regard to British Concessions may result in a general renunciation on the part of other Powers of their holdings of this kind throughout the whole of China. It may be expected, however, that any arrangements which may be made with regard to other Concessions will not be less liberal in their terms than those recently entered into with regard to the British Concession at Hankow. Obviously, American citizens who may reside or lease property in this area will be obliged to pay the same taxes as are paid by British residents; and this will hold true in the case of Americans who may reside in other areas which may be recovered by the Chinese from various foreign governments holding concessionary rights. It would seem, therefore, with respect to this class of municipalities, that it will not be necessary for the American Government to adopt any other policy than that of tacitly accepting, with respect to the taxation of its nationals, whatever arrangements are made applicable to the nationals of the Power surrendering any particular concession; and I do not feel that, in practice, there will be found any obstacle in the way of the collection of such taxes from American citizens, whatever may be the actual legal questions involved.

With regard to the existing Chinese municipalities comprised in the second category described above, I do not feel that the time has yet come to take steps to make legally binding upon American citizens resident therein the municipal rates which may be in effect. In certain instances, the regulations which have been framed are not of a character to insure any adequate participation by foreign nationals in the actual administration of the municipality or to guarantee them suitable municipal rights. An example of this is found at Harbin, the recent municipal regulations of which were discussed by the Legation in its despatch No. 773 of October 7, 1926, above referred to. In certain other of the smaller ports, the development of the municipal organization is too primitive, and the services rendered inadequate, to justify any general legal enforcement of municipal rates upon foreign nationals. There is, furthermore, the ever-present danger of the abuse of power on the part of those in authority; the ever-present risk that funds will be collected which are not devoted to municipal purposes, and that rates may continue to be exacted while municipal services are curtailed. I am, therefore, inclined to believe that, pending such time as the [Page 389] Chinese shall develop in these places municipal organizations meriting a fair degree of confidence, and in view of the fact that the whole status of foreign municipalities in China is in an indeterminate state in which it is now impossible to predict how rapid or how complete may be their amalgamation with the Chinese areas to which they are adjacent, it would be preferable to follow the policy adopted with regard to Harbin, namely, to instruct American nationals, when demands are made by the Chinese authorities for the payment of municipal taxes, that the American Government advises them to pay, as a voluntary contribution, the rates levied on Chinese and other foreign nationals, when such rates are reasonable and when appropriate municipal services are rendered in return.

In suggesting this course of action, I am, of course, aware that the present tendency in all parts of China to repudiate the treaties may at any time result in some abrupt change with respect to the immunities which American citizens have enjoyed in this particular. We may at any time be faced with a situation in which we shall be obliged in all cases to pay the current municipal rates in effect or, in the alternative, be cut off from essential municipal services such as light, water, police protection, etc., or perhaps even be forbidden further residence if unwilling to acknowledge an obligation to pay municipal taxes. That situation, however, though by no means unlikely to occur in the near future, has not as yet actually arisen. Meanwhile, I am of the opinion that it would be preferable not to run the risk of precipitating any drastic action in this respect on the part of the Chinese authorities by any attempt on our part to make Chinese municipal regulations binding in a legal sense upon American citizens generally throughout China.

I have [etc.]

J. V. A. MacMurray
  1. Post, p. 492.
  2. Great Britain, Cmd. 2869, China No. 3 (1927): Papers Respecting the Agreements Relative to the British Concessions at Hankow and Kiukiang.