The Ambassador in China (Stuart) to the Secretary of State
[Received September 18.]
The Ambassador has the honor to forward a copy of a self-explanatory third person note dated August 21, 1947 from the Embassy to the Ministry of Foreign Affairs concerning certain provisions of the Income Tax Law—and the Regulations for the Enforcement of the Income Tax Law—which the Embassy considers discriminatory against foreign business having head offices abroad with branches in China and subject to the income tax. There is also enclosed a copy of a similar note on the same subject dated August 18, 1947, despatched to the Ministry of Foreign Affairs by the British Embassy, Nanking.1 Notes on this subject have recently also been sent to the Ministry by the Netherlands Embassy and the Swiss Legation.
For a number of months the Embassy has received strong objections on the part of American business groups in Shanghai and elsewhere to the discriminatory nature of the tax law. The American Chamber of Commerce made representations on this subject to the Consulate General in Shanghai, as reported in the Consulate General’s despatch no. 210 dated May 9, 1947 to the Embassy, a copy of which was sent the Department.1
In discussing the discriminatory and conflicting provisions of the Income Tax Law and Regulations with officials of the Direct Tax Bureau of the Ministry of Finance, the officials have pointed out the difficulties of fairly and equitably determining for tax purposes the capital of branches of foreign companies doing business in China. They have stated their inability to see any discrimination in the law. While, however, there may be a few Chinese firms with head offices abroad and branches in China, making them subject to the same treatment as foreign firms, their number is considered proportionately so small as to make the administration of the law, in effect, discriminatory.[Page 1363]
In the most recent conversation on this subject with tax officials, an officer of the Embassy was informed that in January 1948 a revised Income Tax Law would be promulgated and that this law would combine the two categories—1A and 1B—to which objection is presently raised. It was stated that this new law, by effecting such a merger, would eliminate the problem at issue. It is to be hoped that this adjustment will be forthcoming, and the Embassy will attempt to remind tax officials from time to time of its expectations in the matter.
Despite these reported forthcoming adjustments, the Embassy considered it advisable to despatch the enclosed note to the Ministry of Foreign Affairs. As soon as a response from the Ministry is received the Department will be informed. It would be appreciated if copies of this despatch and of its enclosures might be made available to the Commerce and Treasury Departments.