The latter part of Mr. Jacobs’ memorandum under the heading of “Remarks”
consists of his own comment on the phases of extraterritoriality
discussed. These expressions of his opinion were not, however,
communicated to Mr. Lockhart and Mr. Young.
[Enclosure]
Memorandum by the Consul at Shanghai (Jacobs)
On the afternoon of March 12, 1929, I was interviewed by Mr. Oliver
C. Lockhart and Mr. Arthur N. Young, of the Kemmerer Commission of
Financial Advisers to China, on certain phases of
extraterritoriality bearing on the question of the enforcement of
Chinese fiscal legislation. On their part the interview was carried
on almost entirely by Mr. Lockhart, since Mr. Young was suffering
from some eye trouble and had to leave before the interview was
over, in order to consult a physician.
Exemption of Foreigners From
Chinese Taxation:
The first phase of extraterritoriality on which information was
sought by the parties named was the question of the specific treaty
provisions which exempted foreigners in China from Chinese taxation.
On this point I stated that, so far as I knew, the only specific
provisions in any of the treaties were those to be found in Article
40 of the Sino-French Treaty of 1858,48 which, while
not being absolutely definite on the subject, does provide that
every obligation not specifically expressed in that treaty shall not
be enforcible against French citizens, and in Article 6 of the
Sino-Japanese Treaty of April 17, 1895,49 which provides for the temporary renting of
warehouses in the interior by Japanese subjects without the payment
of any taxes or exactions whatever.
Mr. Lockhart stated that his reason for desiring the above
information was that certain Chinese had told him there were no
specific provisions whatever in the treaties exempting foreigners
from Chinese taxation. I then explained to Mr. Lockhart that the
exemption of extraterritorial nationals in China from Chinese
taxation, aside [Page 556] from the
two specific provisions cited above, is based upon the system of
extraterritoriality under which such nationals are subject only to
the laws of their own countries administered by the judicial
officials of their own governments. In other words, the only legal
way to try to enforce a Chinese tax against an extraterritorial
national would be to prosecute such a national in his own court,
which would be compelled to dismiss the action unless the tax in
question had been made applicable to the national by law or treaty.
Hence, in general, extraterritorial nationals are exempt from
Chinese fiscal legislation.
Exemption of Chinese Citizens and
Firms in Treaty Ports, Settlements and Concessions From Chinese
Taxation:
The next phase of extraterritoriality which Mr. Lockhart brought up
for discussion was the immunity from Chinese taxation which Chinese
citizens and firms secured by living within the Treaty Ports,
Settlements and Concessions. He apparently desired information on
this subject in order to enable him to work out some scheme whereby
Chinese citizens residing in the areas named could be compelled to
pay the taxes prescribed in the laws of China.
I informed Mr. Lockhart that so far as I knew about the only places
remaining in China where such a condition could exist were Shanghai,
the International Settlement of Kulangsu at Amoy, the French and
Japanese Concessions at Hankow, and possibly certain of the foreign
concessions in Tientsin. Thereupon Mr. Lockhart asked my opinion as
to how Chinese fiscal legislation might be enforced against Chinese
residing in these areas. I told him that in my opinion this was a
matter which would have to be taken up by the Chinese Government and
the foreign authorities exercising control over the special areas
where such condition existed. I also stated that in my opinion the
more important extraterritorial powers exercising control in these
areas would probably be willing to negotiate with the Chinese
authorities on this subject if some scheme for enforcing Chinese
fiscal legislation therein could be worked out without the necessity
for bringing into these areas a special corps of Chinese tax
collectors and agents to use the high handed methods which are now
being used by such collectors and agents in the collection of
various forms of taxation now being levied in Chinese territory
illegally against foreigners and foreign merchandise, and legally
against Chinese. I laid particular emphasis upon this point and Mr.
Lockhart appeared to agree with me that the Chinese must maintain
civilized methods for the enforcement of their fiscal legislation
before they can hope to persuade the foreigners to permit the
functioning of tax collectors and agents within the Settlements and
Concessions.
[Page 557]
With regard to Shanghai, I pointed out to Mr. Lockhart that there was
a Chinese court functioning in the Settlement, namely, the
Provisional Court, in which the Chinese authorities might at any
time prosecute any Chinese who failed or refused to pay taxes
prescribed in the laws of China if the Diplomatic and Consular
Bodies could be persuaded that such laws are applicable to Chinese
living in the Settlement.
Incorporation of Chinese Capital
Under the Laws of Extraterritorial Powers:
The third phase of extraterritoriality discussed was the practice of
Chinese to invest their capital in corporations operating in China
under the laws of some extraterritorial power, thereby securing the
privileges and immunities which that system afforded. Mr. Lockhart
stated that a considerable amount of Chinese capital was invested in
companies operating under the British-Hongkong Ordinances and the
United States-China Trade Act,50 as well as
under charters issued under the laws of a number of smaller
extraterritorial powers. I informed Mr. Lockhart that it was
possible, under the China Trade Act, for Chinese capital to invest
in an American corporation but that at least 51% of the stock must
be American owned before protection might be afforded by American
diplomatic and consular officers in China. Mr. Lockhart stated that
the Chinese authorities felt that this evasion of Chinese capital
from the payment of Chinese taxes through investment in foreign
concerns operating in China was a phase of extraterritoriality which
should be abolished. I informed Mr. Lockhart that as far as the
China Trade Act was concerned, the only way this practice could be
stopped would be by the addition of an amendment prohibiting the
incorporation of any but American capital under the Act.
Taxation of Foreigners:
The fourth phase of extraterritoriality discussed was the question of
making Chinese fiscal legislation applicable to extraterritorial
nationals residing anywhere in China (Treaty Ports, Concessions,
Settlements or Interior). In this connection, I stated that the
Extraterritoriality Commission in Subsection 5 of Recommendation IV
of its report recommended that—
“Pending the abolition of extraterritoriality, the nationals
of the powers concerned should be required to pay such taxes
as may be prescribed in laws and regulations duly
promulgated by the competent authorities of the Chinese
Government and recognized by the powers concerned as
applicable to their nationals.”
In addition, I pointed out that the American
Government had already advised its nationals in China that they
might pay, as voluntary [Page 558]
contributions, such local municipal taxes as were devoted to
municipal purposes so long as there was no discrimination as between
foreigners and Chinese, and that all the powers represented in
Shanghai had agreed to the payment by their nationals of motor car
license fees on foreign owned motor cars operating on Chinese roads
outside the International Settlement and French Concession of
Shanghai.
As regards the enforcement, however, of such taxes against Americans
and other extraterritorial nationals, I pointed out that the
enforcement of payment could only be effected by bringing action in
the United States Court for China, in the case of Americans, and in
the court of the nationality concerned in the case of other
extraterritorial nationals. I expressed doubt, however, as to the
efficacy of such a course, since I do not believe that the American
or other extraterritoriality courts can apply the Chinese laws
prescribing these taxes.
Remarks:
The phases of extraterritoriality which Mr. Lockhart and Mr. Young
have discussed with me constitute, in my opinion, the gravest abuses
of the extraterritoriality system which should have been remedied
many years ago. Their continuance constitutes one of the weightiest
arguments which the Chinese have for the abolition of the
extraterritorial rights now enjoyed by the nationals of certain
foreign powers in China. It is beyond comprehension that either the
Chinese or foreign plenipotentiaries who negotiated the Sino-Foreign
treaties of the 1840’s and 50’s ever contemplated the extension of
the extraterritorial system to give immunity to citizens and
subjects of China from the operation of the laws of their own
country. It is almost beyond comprehension that these negotiators
ever contemplated the complete immunity of foreigners under the
extraterritorial system from all forms of Chinese taxation in cases
where these foreigners enjoy the benefits of Chinese municipal
government such as police protection, roads, light and water.
Although I am strongly of the opinion that the day has not yet
arrived when the entire extraterritorial system should be abolished,
I am equally fixed in my belief that the American Government should
disassociate itself from any continued support of those elements
among the foreigners resident in China who desire to extend to
Chinese citizens immunity from the operation of Chinese laws, fiscal
or otherwise.
With regard to the exemption of Chinese living in Settlements and
Concessions from Chinese taxation, the only places where the
American Government is concerned are Shanghai and Amoy, since the
representatives of American Government in nowise participate in the
municipal governments of the Concessions at Hankow and Tientsin. [Page 559] With regard to the
International Settlement of Shanghai, it is my opinion that every
Chinese residing therein should be subject to every law of the
Republic of China, fiscal or otherwise, so long as the Chinese
authorities content themselves with the enforcement of that law
through the medium of the police of the Settlement and the
Provisional Court, or such authorities as may from time to time be
substituted for those authorities.
With regard to the matter of permitting Chinese capital to
incorporate under the laws of the extraterritorial powers, this
abuse should be ended. To do so will require not only an Act of
Congress amending the existing China Trade Act, but also some treaty
arrangement between China and the United States denying the right of
American corporations incorporated under the various State laws to
operate in China if the capital of such corporation is partially or
entirely Chinese owned.
With regard to the enforcement of Chinese taxation against American
citizens and firms in China, the provision contained in
Recommendation IV of the Extraterritoriality Commission should be
put into effect. To make this effective in China it will be
necessary to secure an Act of Congress in general terms providing
that all Chinese fiscal laws after due enactment and promulgation in
some orderly manner shall be made applicable to all American
citizens and firms in China after approval by the Minister and the
Department of State and under such terms or modification as they may
think necessary in each and every case.
