893.512/1152: Telegram
The Minister in China ( Johnson ) to the Acting Secretary of State
456. 1. Reference Shanghai’s despatch No. 6852 of March 31, 1931, to the Legation and Shanghai Senior Consul’s circular No. 215–E–IV—of [Page 997] June 15, 1931,48 concerning application of Chinese rolled tobacco consolidated tax regulations to Chinese residents of International Settlement, copies of which were sent direct to the Department.
2. Agreement affects notes exchanged on March 19th and 24th, respectively, between Shanghai Senior Consul and the Director General of the consolidated tax administration of the Ministry of Finance provided in article 1, that the rolled tobacco consolidated tax regulations should be applied in the International Settlement “to the Chinese residents only”.
3. Agreement was expedient and necessary as cigarette manufacturers outside Settlement area, mostly foreign, were paying tax while manufacturers in the Settlement area, all of which though were Chinese, were not paying the tax. Tax immunity of Settlement residents thus resulted in discrimination in favor of Chinese residents as against foreign nonresidents.
4. Senior Consul’s circular number 215–E–IV of June 15, 1931 gives draft of letter which Senior Consul proposed with assent of his colleagues to send to the Chairman of Municipal Council pointing out that because agreement limited application of tax to Chinese residents only certain nonextraterritorial foreign residents of the Settlement were taking advantage of it to manufacture cigarettes within the Settlement exempt from taxation. Department will note that Senior Consul proposed to notify the Chairman of the Municipal Council that the consular body would interpose no objection to the municipal agent “Applying in his discretion to the local Chinese courts for legal process against nonextraterritorial foreigners residing in the International Settlement” guilty of offenses against the rolled tobacco consolidated tax regulations.
5. In other words, consular body at Shanghai proposed, without reference to either the Chinese or to the diplomatic body, to extend agreement to nonextraterritorial foreigners resident in the Settlement.
6. This proposal received the approval of the entire consular body at Shanghai with the exception of the German Consul General who objects on the ground that: (1) existing agreement is applicable only to Chinese residents; (2) agreement may not be modified by consular body without previous consent of diplomatic body including representatives of nations without extraterritorial privileges who should be given an opportunity to examine agreement to see whether its application to their nationals would not be contrary to their existing treaties or most-favored-nation clauses; (3) it is dangerous to permit the rolled tobacco consolidated tax regulations to be applied to “any foreigners in the Settlement”.
[Page 998]Next step will be for the Chinese to ask for the collection of the stamp tax from “non-Chinese in the Settlement,” as well as the forthcoming business tax.
7. German Consul General proposed that if it is desired to allow prosecution of the Russian involved in the present case, consular body should waive objection to such prosecution only on the ground that the offender is a national of a “nontreaty power” it being understood that the term “treaty power” includes all powers having treaties and conventions with China.
8. The powers having assented to the application of the rolled tobacco consolidated tax to Chinese residents of the International Settlement, failure [to apply?] tax to “nontreaty power” nationals or to nationals of “non-extraterritorial powers” (or even to nationals of “extraterritorial powers”) resident within the Settlement will obviously work to cause discrimination in favor of nationals of such powers as contrasted with Chinese within the Settlement or the nationals of extraterritorial powers outside the Settlement who are paying the tax.
9. Senior Consul’s circular relating as it does to questions of Settlement administration should have been referred only to the consuls of powers having extraterritorial treaties and therefore concerned with reference to administration of the Settlement.
10. Legation is of the opinion that extraterritorial powers are within their rights in seeking to devise a means whereby discrimination in the incidence of such taxation may be eliminated but believes that this should be done by modification of agreement through further exchange of notes with director of consolidated tax administration.
11. Department’s instructions are requested.