I have incorporated in the note the various objections and suggestions
made by Mr. C. H. French, President of the American Chamber of Commerce
at Shanghai, Mr. Julean Arnold,57 and various American business men, and for
the information of the Department enclose memoranda and letters from the
individuals mentioned.58
Copies of Legation’s circular instruction No. 137 of August 13, 1931, to
American consular officers in China regarding the new Business Tax have
been forwarded to the Department.58
[Enclosure]
The American Minister (Johnson) to the Chinese Minister for Foreign Affairs
(C. T.
Wang)
Peiping, August 7, 1931.
No. 335
Excellency: I have the honor to acknowledge
the receipt of Your Excellency’s formal note of June 3, 1931,58 requesting that
American firms be instructed to pay the new business tax which Your
Excellency characterizes as non-discriminatory, beneficial to
commerce, and in conformity with the general principles of
taxation.
While I have not been officially apprised of the promulgation of the
new National Business Tax Law or of the regulations for its
enforcement; and while I have not received from Your Excellency the
text of the new law, it is my understanding that it was promulgated
by mandate of the National Government dated June 13, 1931.
The question of the payment of taxes by American citizens is, as Your
Excellency knows, even now a matter subject to negotiation and
agreement between our two countries in connection with the general
question of extraterritoriality, and until those negotiations have
been completed and an agreement reached and ratified, I am not in a
position to inform American citizens that they should comply with
the law which imposes a tax upon their several businesses.
Because of the important bearing that such a law has upon the welfare
of American citizens in China, and more particularly in view of the
current negotiations relating to the relinquishment of
extraterritorial rights, I have caused this law and the regulations
for its
[Page 1003]
enforcement to
be perused and compared with several of the provincial laws and
regulations presumably issued under its sanction and which have been
sent to me from time to time by the American consulates
concerned.
With specific reference to the national law of June 13, 1931, it
would appear that the name given to the tax in question does not
correctly describe what is in reality a business income tax levied
upon the capital or income of the several businesses classified in
the law.
The law calls for the imposition of a tax on income or capital
according to a system of schedules of graduated rates. Such a system
is extremely difficult of equitable application. Schedules of
uniform rates would be far more equitable. Under the present
provisions of the law a merchant doing a nation-wide business,
whether Chinese or foreign, lacks any assurance that the tax will be
uniformly administered either among the several provinces or in
relation to taxes on the same or similar lines of business.
As now written the national law is very vague as to classification of
businesses to be used as a basis for the assessment of taxes against
capital, gross income, and net profits. In consequence, the business
man is left in great uncertainty as to the category into which his
business is to be placed for purposes of taxation in the several
provinces. Each of these classifications should be carefully defined
in the law and the method of the application of the tax should in
each instance be clearly set forth. For instance, in the case of a
tax against net profits it is to be presumed that an audited
statement of profits would be required. The law should stipulate
what qualifications an auditor should have.
Your Excellency’s attention is also called to the ambiguity of
Article 8, from the language of which it is not clear whether it is
intended that no additional taxes of any nature whatsoever are to be
collected from firms paying the business tax or whether it is
proposed merely that no surtax is to be collected on the business
tax. The real intent of this Article is of the utmost importance and
is naturally of great interest to both Chinese and foreign firms. It
is accordingly most desirable that the wording of the Article be
amended so as to remove the existing ambiguity as to its
significance.
Whereas Article 9 of the law would appear to call for the setting up
of official agencies for the collection of this tax, my information
is that in Peiping and in Shanghai the local chambers of commerce
are to be entrusted with the task of such collection. There would
appear to be objection to such a method of collection because
chambers of commerce, although possibly possessing a quasi-official
status, are composed of members of the business community and there
would always exist among those liable for the payment of the tax a
feeling
[Page 1004]
that favoritism
might be shown by a chamber committee to certain firms.
A still more serious objection to the law as it now stands concerns
itself with the failure to provide non-administrative machinery for
the handling of complaints against over-assessment, and an
opportunity for appeal against decisions as rendered. Such machinery
should be of a nature to ensure against unreasonable delays and
against an unjust application of the law to firms amenable
thereto.
With reference to provincial legislation, a perusal of the laws and
regulations issued in the provinces of Hupeh and Liaoning indicates
that the great latitude accorded to the provinces in the
interpretation of the national law has resulted in a wide divergence
from what appears to have been the intent of that law.
For instance the law promulgated for the province of Liaoning
specifies rates of taxes greatly in excess of the limits set in the
schedules mentioned in the national law.
Penalties under the Liaoning regulations, as well as under the
regulations issued by the province of Hupeh, are to be
administratively and arbitrarily imposed, no provision being made
whereby the individual may have his liability passed upon by a
proper court of justice.
The Liaoning regulations further contain a very objectionable
provision for the payment, out of fines, of rewards to any one
discovering a tax delinquency.
In view of the considerations outlined above, I venture to suggest to
Your Excellency that this whole subject be given further careful
consideration to the end that an equitable, precise, and centrally
controlled system be evolved which, while meeting the revenue needs
of the provinces, will not be an undue burden on business.
I avail myself [etc.]
