893.5123/9–847
The Ambassador in China (Stuart) to the
Secretary of State
No. 980
Nanking, September 8,
1947.
[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.
[Enclosure]
The American Embassy to the
Chinese Ministry for Foreign Affairs
No. 1095
The Embassy of the United States of America presents its compliments to
the Ministry of Foreign Affairs of the Republic of China and has the
honor to refer to the Revised Income Tax Law of China, promulgated and
enforced as of April 16, 1946, and to the Regulations for the
enforcement of that law promulgated and enforced July 3, 1946. It has
been brought to the attention of the Embassy that the provisions of this
Law and its Regulations may lead, in their application, to inequality or
discrimination as between companies having their head offices abroad and
doing business in China through branches, and companies having their
head offices in and doing business in China.
Under Article 4 of the above mentioned Regulations, a limited liability
company with its head office outside the territory of the Republic of
China and carrying on business in China through branches is liable to
income tax on its profits earned in China according to the rates laid
down in Article 6 of the Income Tax Law. On the other hand, a limited
liability company with its head office inside the territory of the
Republic of China is taxed according to the rates laid down in Article 5
of the Income Tax Law. The result of such provisions is that companies
having head offices in China are taxed at a rate determined by the ratio
of their income in a particular year to their capital, while branches in
China of companies having head offices abroad are taxed simply on their
net income, without reference to the capital investment involved.
Such a split in the application of the income tax to companies
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which in some cases may
differ only in the location of their head offices appears to the Embassy
to be in itself discriminatory. Also, while a Chinese company and a
branch in China of a foreign company might have identical organizational
structures as defined in Article 2, Category I (a) and be otherwise the same, and have identical income, they
would not pay the same tax; under the Income Tax Law itself two such
companies would fall into the same tax category, but because of the
Regulations the foreign company would be taxed as if it were a Category
I (b) company. Furthermore, it would appear that
in a highly inflationary situation such as exists in China today
companies taxed according to the ratio of profits to capital could
reduce the burden of their income tax by an upward adjustment of
declared capital, while those taxed according to their net income can
make no adjustment to reduce the burden, which makes the law appear also
discriminatory in effect.
The Sino-American Treaty of 1943 for the Relinquishment of
Extraterritorial Rights in China and the Regulation of Related
Matters2 provides that foreign nationals will be accorded
national treatment in matters relating to the levying of taxes or
requirements in connection therewith—i. e. foreign nationals taxable by
the Government of China will be taxed on the same basis as Chinese. This
provision is contained in the second sentence of Article V of the Treaty
which reads as follows:
“…3 Each of the two Governments will
endeavor to have accorded in territory under its jurisdiction to
nationals of the other country, in regard to all legal
proceedings, and to matters relating to the administration of
justice, and to the levying of taxes or requirements in
connection therewith, treatment not less favorable than that
accorded to its own nationals.”
It would appear that the collection of income tax in
accordance with present regulations is in contravention of assurances
given in the Treaty regarding taxation.
The Embassy understands that according to Chinese law, administrative
by-laws, rules, detailed rules, or measures cannot alter, modify, amend
or conflict with statutes. Article 4 of the Regulations for the
Enforcement of the Income Tax Law appears to conflict with the
provisions of the Law itself in that the Regulations provide for a
different basis of taxation for foreign as compared with Chinese
corporations, a distinction apparently not contemplated in the Income
Tax Law.
This matter has for some time caused concern among American
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and other foreign companies
doing business in China which are affected by the provisions of the
Income Tax Law and has been brought to the attention of the Embassy a
number of times by them and by the American Consulate General in
Shanghai. The Embassy is thus now obliged to seek from the Chinese
Government, on behalf of American businesses operating in China and on
behalf of the Government of the United States, either a clarifying and
explanatory statement which will serve to meet the seemingly valid
objections of numerous concerned groups to the current provisions of
Income Tax Regulations, or assurances that steps will be taken to revise
the provisions of the Law and its Regulations to which objections have
been raised.
Nanking, August 21, 1947.
