893.4061 Motion Pictures/348

The Ambassador in China (Gauss) to the Secretary of State

No. 1982

Sir: With reference to the Department’s telegrams, no. 1604, November 9, 4 p.m. and no. 1842, December 22, 11 p.m.,2 and to my message no. 2501 of December 28, 3 p.m., 1943, on the subject of remittance to the United States of current earnings of American motion picture companies in China, I have the honor to report that this matter has been taken up informally with the Minister of Finance, who has undertaken to have it studied with a view to determining whether the desired exchange facilities may be made available to the companies.

Prior to the receipt of the Department’s telegram of November 9th, no approach had been made to the Embassy on this matter by the film companies’ representatives. Incidentally, none of these representatives is an American citizen.

Upon receipt of your telegram no. 1604, the Embassy approached the film companies for precise, detailed information. Such information has been slow in forthcoming and, in fact, is now not entirely satisfactory.

It appears that in May 1942, the Stabilization Board of China, in considering applications for the remittance of profits by the film companies’ representatives, laid down the following rules:

  • “1. Film distributors may remit not more than 50% of their net earnings abroad. By net earnings is meant that part of the distributor’s share after deduction of all expenses in Chinese National Currency have been accounted for.
  • “2. This rule would apply to all their net earnings dating retroactively as of December 1941.
  • “3 In order to enjoy the privileges/granted under this rule, film distributors must submit to the Board:
    A statement of business showing the name of the film, the place and date pnd the number of days on exhibition, and the distributor’s share of the receipts from each film, with the necessary supporting documents.
    A general statement of their expenses in Chinese National Currency.
    Convincing evidence proving that they have on deposit with their banks at least 50% of their net earnings.”

Under these rules the film company representatives have been able currently to remit 50% of their net earnings; but there remains a backlog of unremitted earnings (the 50% not permitted to be remitted) now amounting—to November 30, 1943—to about $12,200,000 Chinese currency (about $610,000 U. S. at the official rate of exchange).

The film companies desire facilities to remit this backlog of earnings and facilities in future for remittances in full.

In our study of this matter, two questions arose: (1) whether the “net earnings” represent net profit; that is, whether income and war excess profits taxes, if payable, have been deducted; and (2) whether it is true, as alleged in some quarters, that the 50% remittances made currently by the film companies do not already represent profits much in excess of those enjoyed by the companies prior to the outbreak of the Pacific war. The prices of cinema tickets have risen some 50 to 60 times their pre-war base, yet the exchange rate for the U. S. dollar has remained at 20 to 1 since July 1941.

On the question of “net earnings” and “net profits” after the deduction of taxes, the film companies (who correspond with the Embassy through their Film Board of Trade originally organized in Shanghai), were not forthright. They discussed the heavy taxation on cinema tickets (citing as an example Kunming, where a ticket of a face value of $58 CN brought the net value—after deduction of business tax, amusement and public welfare taxes, revenue stamps, air defense tax, etc.—for distribution between the theater and the film company down to $34.43). They avoided the question of Chinese Government income tax and excess profits tax on their companies as such, saying simply that they had not paid such taxes and had not been called upon by the Chinese Government to do so.

On the question of excessive profits—which may be brought up by the Chinese side in opposition to the extension of more satisfactory exchange facilities—they have also been somewhat evasive; due partly at least to the fact that these distributors’ representatives are not informed as to the profits made by their companies in China in the period before the outbreak of the Pacific war.

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The Embassy felt that the question of income and war excess profits taxes on the companies themselves had a definite bearing on the matter as submitted to the Ministry of Finance. It is considered that the companies will be subjected to such taxes, and as a result the total of accumulated balances awaiting remittance will be substantially reduced.

It was finally developed that the companies realize that they are likely to be subject to income and excess profits taxes, at least from the date of the coming into force of the Sino-American treaty on extraterritoriality.3 But steps had not yet been taken to determine the amount of such taxes. The company representatives in China had, some months ago, submitted information to their American principals outlining two forms of possible registration of the companies with the Chinese Government, one involving a tax on capitalization and the other, a tax on earnings and profits. They had not yet been instructed regarding such registration as required by Chinese law, nor had they received from their principals the necessary documents to permit them to effect registration.

Notwithstanding the unsatisfactory situation thus revealed, the Embassy decided to take an early opportunity to present the matter informally to the Ministry of Finance. There are no other American interests having exchange requirements—other than occasional small applications from Americans leaving China—and China at this time is luxuriating in a situation under which its American exchange requirements are small while very heavy remittances are coming monthly from the United States. It seemed desirable, therefore, to bring up the matter of the film companies at this time. The excuse of non-availability of American exchange cannot be made.

During a call on the Minister of Finance, Dr. H. H. Kung, on December 29th, I found an opportunity to mention the matter to him. He undertook to have it studied to ascertain whether it may be possible to extend to the film companies the facilities they desire. He indicated, however, that the matter would have to be scrutinized most closely. He doubtless had in mind the matter of taxation of the American companies. I have confirmed my conversation with Dr. Kung by informal letter,4 a copy of which is enclosed for the information of the Department.

Respectfully yours,

C. E. Gauss
  1. Telegram No. 1842 not printed.
  2. Signed at Washington January 11, 1943, Department of State Treaty Series No. 984, or 57 Stat. 767.
  3. Not printed.