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

No. 1090

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.


The Chinese Ministry for Foreign Affairs to the American Embassy

No. T’iao–36/21032

The Ministry of Foreign Affairs presents its compliments to the American Embassy and has the honor to refer to the Ministry’s third person note no. T’iao–36/18033 of August 30, 1947. With regards to the Embassy’s request that the competent authorities be approached to consider a revision of the Regulations for the Enforcement of the Income Tax Law which is considered by the Embassy as appearing unfair and unjust and to which objection is raised, it was referred to the competent authorities for consideration and a reply has now been received as follows:

In connection with the levy of income tax on profit-seeking enterprises under the Income Tax Law, as the amount of capital of companies of a character of limited liability is comparatively certain and as the definite establishment of the amount of capital of unlimited liability companies or of other organizations of sole proprietorship or of partnership is comparatively difficult, and with a view to facilitating the levy and the payment of tax, Articles 5 and 6 of the Law separately provide two different tax rates for purposes of computation and levy. However, these rates do not differ from each other (in the degree to which they burden the taxpayer.) With respect to profit-seeking enterprises whose head offices or general headquarters are established abroad but whose sub-offices or branches are in China, the Law only provides the levy of tax in so far as the sub-offices or branches in China are concerned. As the head office, sub-offices or branches of such profit-seeking enterprises are set up separately in China and abroad, it would be difficult to verify the amount of capital of the sub-offices or branches concerned in China, and it would be easy for disputes to arise. For this reason, it has been laid down that, no matter what type of organization a firm has, the tax rate (i. e., the rate provided in Article 6 of the Income Tax Law) as applicable to companies of unlimited liability or other organizations of sole proprietorship or of partnership is followed without exception for purposes of computation and levy. The original aim of the establishment of the law is not to differentiate treatment. Besides, both Chinese and foreign interests have such profit-seeking enterprises and the law is enacted not exclusively to apply to foreign interests.

[Page 1368]

The provisions of the law with regard to this have basically nothing to do with the Company Law, and do not contravene the spirit of the commercial treaties concluded between China and the various nations.

The competent authorities are now drafting a revised Income Tax Law and are considering a technical adjustment of the aforementioned provisions.

The Embassy’s attention to the above is requested.

Ministry of Foreign Affairs of the Republic of China
  1. Not printed.