893.5034 Registration/2–1546: Telegram
The Secretary of State to the Embassy in China
372. Dept feels that previous representations by Embassy have made abundantly clear to Chinese Govt concern felt regarding adverse effect on American business interests of retention of articles 7 and 292 as presently recommended to Supreme National Defense Council by Legislative Yuan. (ReEmb 301 Feb 15 received Dept Feb 21.) Dept feels therefore that no useful purpose will be served by further representations at this time but that current commercial treaty negotiations should be permitted to bring into focus points at issue as set off against stipulations in National Advisory Council’s policy statement of Jan 15, specifically numbered paragraph 2 and sections a, c, d, e and f thereof. (Ourtel 103, Jan 17.17) However Dept concurs Embassy’s position (last para Embtel 347, Feb 22) concerning emphasis on Articles 7 and 292 to detriment more fundamental rights American business covered in commercial treaty such as Article 3 para 3 and Article 4 para 2.[Page 1305]
Chinese fear of dominance of foreign companies (Embtel 347 Feb 22) understandable in view experience under extraterritoriality. Encouragement of inflow of foreign capital, however, should hasten Chinese industrialization rather than cause national economy to suffer. Inflow foreign capital of prime importance early industrialization of US. Dept understands that no US state has “doing business” requirement but may be cases in laws of other countries. Dept will investigate further as to extent of requirement.
Following are general rules as to federal taxation applicable to US corporations doing business abroad. US corporations subject to normal income tax, surtax and excess profits tax on entire income, including that from abroad, but may credit against such tax any income tax paid to foreign country on income derived therefrom. In addition, if corporation does practically all business abroad it is exempt from excess profits tax and if practically all such business is in foreign country of this hemisphere corporation also exempt from surtax. All US corporations other than insurance companies subject to capital stock tax on entire capital. CTAC18 wholly owned by nationals and residents of the United States and China exempt from capital stock tax and from normal income tax, surtax and excess profits tax if income distributed is not less than tax exemption. However, deduction for normal tax, surtax and excess profits tax purposes of 85 percent of dividends received by US corporations from another US corporation denied in case of dividends received from CTAC. Dept not in position to generalize as to state corporation taxes, which are less important than federal.