The Ambassador in China (Stuart) to the Secretary of State
[Received November 14.]
The Ambassador has the honor to refer to the Embassy’s despatch no. 980 of September 8, 1947 transmitting notes to the Ministry of Foreign Affairs from the American and British Embassies expressing concern over existing provisions of China’s revised Income Tax Law of April 16, 1946, and the Regulations for its enforcement. This matter has also been the subject of a number of despatches prepared in the American Consulate General, Shanghai, the most recent of which is despatch no. 1690 of September 19, 1947,4 entitled “Discriminatory Provisions and Detailed Rules Governing the Enforcement of the Income Tax Law”.
It will be recalled that in its note to the Ministry the Embassy brought the attention of the appropriate authorities in the Chinese Government to the claims that the provisions of the current law and its regulations seem unequal and discriminatory as between (1) companies having head offices abroad and doing business in China through branches, and (2) companies having head offices in and doing business in China.
A note from the Ministry of Foreign Affairs in response has now been received. In its response, a copy of which is enclosed, the Ministry of Foreign Affairs actually transmitted the text of a reply drafted in the Direct Tax Bureau of the Ministry of Finance, Nanking, the agency to which the Embassy’s note was transmitted for attention. [Page 1366] Identical notes have been sent to the other Embassies and Legations in Nanking which made representations in this matter along similar lines at the same time.
The Direct Tax Bureau points out that the basic reason for the above-mentioned differentiation in the Income Tax Law and its regulations between taxation of domestic firms and branches in China of foreign firms is that it was considered difficult to establish definitely the capital of a branch in China of a foreign-based company whereas the capital of a firm operating wholly within China may be much more readily verified, permitting the taxation of the latter on the basis of capital and income ratios. While the Ministry’s note in its critical sentences (in translation) is inexact in its references, its meaning is unquestionably as above, and to the effect that the law was not intended to be discriminatory as between foreign and domestic firms. The Embassy is inclined to accept this as a sincere statement of intention, but does not feel that this in any way justifies the provisions of existing law or current alleged discriminatory or unfair practices. One of the primary objections to the Income Tax Law would seem, in fact, to be administrative difficulties arising from the innocent or deliberate incompetence and inconsistency of concerned officials in Shanghai and elsewhere who apply the provisions of the law, combined with a currently most difficult fiscal and currency situation. The job of such officials is not of course easy; beyond this, however, their sincerity seems open to question. The Embassy has had charges of corruption in the Shanghai Direct Tax Bureau—justified or not—brought to its attention in anonymous communications.
The Department’s attention is called to the last sentence of the quoted portion (translation) of the note from the Ministry to the effect that “the competent authorities are now drafting a revised Income Tax Law and are considering a technical adjustment of the aforementioned provisions.” This statement on the part of tax officials would seem to constitute after all an admission, in the Chinese manner, that the terms of the current law are defective and that the complaints of numerous firms and of the Embassy as well as other foreign missions in China have borne fruit. It remains to be seen, however, whether the “adjustment” referred to will constitute a complicating or simplifying factor.
Direct Tax officials have promised that a copy of the draft law will be supplied the Embassy in the near future. It is understood that the new Income Tax Law will be much longer than the previous law as it will combine in one document both law and regulations. An effort will be made to translate the relevant portions of the draft law [Page 1367] as quickly as possible and to transmit them to the concerned American interests for comment.
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