Memorandum by the Chief of the Division of Far Eastern Affairs (Hornbeck)

Conversation: Dr. H. H. Kung, Chinese Minister of Finance;
Dr. C. T. Wang, Chinese Ambassador;
Mr. Hornbeck;
Mr. Hamilton.25
Present: Mr. P. W. Kuo and Dr. Clarence K. Young.26

During the course of and following a luncheon given by the Chinese Ambassador at his residence at Twin Oaks, the Chinese Minister of Finance, Dr. H. H. Kung, asked Mr. Hornbeck what our attitude was toward the Chinese income tax law. Mr. Hornbeck said that he would be glad to answer that question but that before doing so he would like to ask certain questions by way of making a setting for his answer. He asked how many foreigners there were in China. The Chinese Ambassador said that he thought there were about 300,000. There was some discussion as to whether this was not too high or too low a figure. Mr. Hornbeck said that for purposes of discussion he would assume a figure of 400,000. Mr. Hornbeck then asked how many Chinese paid the Chinese income tax. Dr. Kung replied that half of the Chinese who under the Chinese law should pay did pay. Mr. Hornbeck then said that he of course would not undertake to question these figures but that he would venture the remarks that on the basis of these figures: there was only one foreigner in China to every thousand Chinese; that the question whether the foreigners did pay or did not pay would therefore not seem to be of great practical importance; and that in his estimate there were probably at least a hundred Chinese who should under the law pay the tax but who did not for every foreigner who would be required to pay the tax if the law were applicable to foreigners. Mr. Hornbeck said that our [Page 682] official position with regard to the Chinese income tax law was briefly that American nationals were, under the treaties, not under legal obligation to pay the tax; that the American Government could not compel them to pay it; but that if Americans wished voluntarily and on their own initiative to make payment we would have no objection. Mr. Hamilton added that for a good many years the American Government has advised American nationals to pay municipal taxes, although such taxes were not legally applicable to American nationals, when such municipal taxes are equitably and uniformly collected and are used for municipal services. He said that the administration of an income tax law represents a new endeavor on the part of the Chinese Government; that there are tremendous difficulties incident to the successful administration of an income tax law; and that when the Chinese Government should have had more experience in administering the law and should have perfected the administration thereof to a point where the rates of taxes seemed equitable and where the taxes were uniformly collected, he thought that the American Government would also, as in the case of municipal taxes, advise American nationals to make payment.

Dr. Kung said that when he was in Europe he had conversations with British, German, French, and Italian governmental leaders; that these leaders intimated their willingness to have the nationals of their governments resident in China pay the Chinese income tax, provided that others did; but that they all raised the question as to what the attitude of the American Government was in this regard. He said that the British were very sympathetically disposed toward payment by British nationals of the Chinese income tax and that the British Government was concerned primarily with questions relating to the equitable administration of the law.

Mr. Hornbeck and Mr. Hamilton both said that as we understand it our position with regard to the Chinese income tax is essentially the same as the British position although the American Government has stated its position in terms different from the terms in which the British Government has expressed its position.

Dr. Kung said that his view with regard to the statement that the Chinese income tax law was not under the treaties legally applicable to American nationals in China was to the effect: that the American Government had an income tax law; that the Chinese Government under the treaties had the right to arrest American nationals in China; that if the Chinese Government should arrest an American national for non-payment of the Chinese income tax the Chinese Government would be obligated to turn that American over to the competent American judicial authorities in China for trial; that the American judicial [Page 683] authorities would, because the United States had an income tax law, consider that that American should pay the Chinese income tax. Dr. Kung added that the British took the position that their nationals should pay the income tax.

Mr. Hornbeck remarked, smiling, that, in the light of those statements, Dr. Kung might care to make a test case by beginning with an action in a British court against a British subject for non-payment of the Chinese income tax.

Mr. Hamilton said that he did not find himself going along with Dr. Kung’s line of reasoning, but that, if we were to admit for the sake of argument that the American judicial authorities in China would adopt the viewpoint advanced by Dr. Kung, would not the American judicial authorities turn to the provisions of the American income tax law, one of which, for instance, exempted a married man and his wife, without dependents, from payment of an income tax if their income were no greater than $2,500 per year. Mr. Hamilton said that this brought up one phase of the Chinese income tax law which made us very reluctant to advise American nationals to pay. Mr. Hamilton continued that foreigners in China were in a vulnerable and conspicuous position; that most of them lived in the treaty ports and at points where they could easily be located; that it would be very difficult for them to avoid payment of the tax; that their scale of living was, as Dr. Kung had mentioned in an earlier part of the conversation, quite different from the Chinese scale; and that the income tax rates prescribed by the Chinese law would so reach and affect the average foreigner in China as to make it very difficult for him to continue to live in China were he required to pay at the rates specified in the Chinese law. Mr. Hamilton wondered whether the Chinese authorities could not give consideration to working out some system whereunder foreigners in China would be subject to rates similar to those which they would have to pay in their own countries. Mr. Hamilton said that he realized that the Chinese Government naturally enacted its law primarily with China and the Chinese people in mind, but that some of our difficulties might be overcome were the Chinese to arrange for readjustment of the heavy incidence of the rates with due consideration of the peculiar position of foreigners in China.

Dr. Kung said that he had given some thought to the question of exempting from income tax payment persons engaged in missionary and philanthropic enterprise.

Mr. Hornbeck said that he did not think that the Chinese need worry greatly in regard to the American attitude in regard to the Chinese income tax law and that he thought that the whole matter would probably be satisfactorily taken care of within a few years.

S[tanley] K. H[ornbeck]
  1. Maxwell M. Hamilton, Assistant Chief of the Division of Far Eastern Affairs.
  2. Advisers to Dr. Kung.