Foreign Relations of the United States Diplomatic Papers, 1934, The Far East, Volume III

811.512394 Shipping/38

The Japanese Chargé (Fujii) to the Acting Secretary of State

No. 158

Washington, August 20, 1934.

Sir: Under instructions from my Government, I have the honor to request you to be good enough to give your earnest consideration to the attached Memorandum in which the Japanese Government states in detail their view on a question of taxation imposed by the Treasury Department of the United States upon Japanese shipping companies. The matter has already been informally taken up by Dr. Stanley K. Hornbeck, Chief of the Division of Far Eastern Affairs, upon my request.

Accept [etc.]

K. Fujii

[Enclosure]

The Japanese Embassy to the Department of State

Memorandum

1. Issues have been pending between the United States Government and the three Japanese shipping companies, namely, the Nippon Yusen Kaisha, the Osaka Shosen Kaisha, and the Toyo Kisen Kaisha, with regard to Profit Taxes for 1917–1920.

While the Toyo Kisen Kaisha had to pay additional taxes for the year 1917, the company expected that it would be entitled to a reimbursement for the taxes already paid, when the two succeeding years were added to that year for consideration. Contrary to that expectation, however, the Department of the Treasury of the United States in the latter part of last February sent a note to that company notifying it of its obligation to pay $70,000 as additional taxes for 1918 and 1919. This caused a move on the part of that company to apply to the Department of the Treasury for a reexamination of the situation. Nevertheless, on April 22nd of this year, the Department of the Treasury went so far as to detain the Soyo Maru of that company in the port of Los Angeles on the ground that that company had failed to meet its obligations to pay the additional taxes for 1917–1919.

Similar steps were taken by the Department of the Treasury with regard to the other two companies. On June 11, 1934, the Nippon Yusen Kaisha was notified by the Department of the Treasury of its obligation to pay additional taxes for 1918–1920 amounting to approximately $1,329,500. On the same day, the Osaka Shosen Kaisha received from the Department of the Treasury a note in which the sum of about $805,000 was announced as a total payment to be made by that company for the additional taxes for the years 1918–1919.

2. In 1927, five accountants authorized by the United States Government, came over to Japan in agreement with the Treasury authorities and, after five months of investigation of the accounts and the records of those three companies, made a report which was submitted to the Department of the Treasury in March, 1928. A perusal of the report, however, supplies no justification of the additional taxation of such enormous sums. Such taxation was never thought of, by any stretch of imagination, by those companies which, quite on the contrary, expected to get reimbursement of considerably large amounts for the total sum paid by them for the years 1917–1920, which expectation is fully justified by the report. The Nippon Yusen Kaisha had paid a sum of $4,400,000 as profits taxes for 1917–1920; the Osaka Shosen Kaisha, $1,500,000 for 1917–1920; and the Toyo Kisen Kaisha, $990,000 for 1917–1919. In 1929, on the basis of the report, the United States Government reimbursed the Nippon Yusen Kaisha the amount of about $595,000 (amount of principal $359,000, amount of interest $236,000) for the profit tax for 1917. The Osaka Shosen Kaisha was imposed an additional profit tax for 1917 amounting to nearly $36,400, which was paid with interest amounting to about $6,700. The Toyo Kisen Kaisha paid $250,000 plus $130,000 as interest for 1917. As shown above, the matter is settled for 1917. It is understood that all of those three companies are to get reimbursements of large amounts for the remaining years, but the matter is still unsettled due to a delay in consideration by the United States Government. It seems to us that the additional taxation, wholly unexpected by those companies, was mainly caused by the attitude taken by the Department of the Treasury toward the following points, which differs from that taken by us. They are the subsidy given to those shipping companies by the Japanese Government, and the charter rate and the amortization allowance of those ships which those companies were ordered by the Japanese Government in compliance with the earnest request of the American Government to tender to the United States Shipping Board for the purpose of facilitating the united operation of the allied and associated countries.

3. On February 12, 1918, the American Embassy in Tokyo sent to the Japanese Government a memorandum³³ in which the Embassy asked our Government to place Japanese ships with an aggregate tonnage of about 600,000 at the disposal of the American Government in order to facilitate the united operation of the allied and associated countries. Although Japan, like all of the other allied countries, was then having great trouble with the scarcity of ships which had forced her to take governmental control of the ships, the Japanese Government decided to place ships aggregating 150,000 tons at the disposal of the American Government for six months for the sole reason of promoting the strategic cooperation of the allied and associated countries and on February 28 sent a note to that effect to the American Embassy.³⁴ The American Government expressed its gratitude for this action on the part of our Government.³⁵

According to this diplomatic understanding, the Japanese Government ordered those three shipping companies to tender some ships to the American Government and, furthermore, to reach an agreement with that Government on all matters pertaining to the operation of those ships.

As a result, a contract was concluded in Tokyo on this matter between the United States Shipping Board and those companies. It is our hope that the American Government understands that this contract is quite different from an ordinary charter contract made for usual business transactions.

Whereas the rate then prevailing in Tokyo of ships fitted for an ocean voyage, such as those tendered to the United States Shipping Board, was ¥40 per ton a month, the rate paid by the American Government was only about ¥18 causing a total loss of nearly ¥1,980,000 to those companies. Furthermore, those companies were obliged to assume a great burden in maintaining the crews of those ships with the payment of the allowance (of ¥2,754,000 for the total sum of the allowance, the United States Shipping Board paid the amount of $583,000, that is, ¥1,246,000 at the exchange rate at that time, and the owners of those ships paid the rest amounting to ¥1,508,000). The Japanese Government, desiring to relieve the owners of such a tremendous sacrifice, paid an amount of $10,000,000 for them. If this charter contract were of an ordinary character such as those made for ordinary business transactions by the free will, it would be quite natural that the owners and the Government should bear these sacrifices and sufferings. And even if this contract might be more or less of an ordinary character, the fact that both the ships and their crews were placed under the complete command and control of the United States Shipping Board, and that the sphere of voyage and the object of transportation for those ships were entirely up to the American Government, renders it quite reasonable to regard this contract as a lease contract. And, therefore, the profits ensuing from this contract should be looked upon as the rents, which cannot be the object of the taxation.

4. Furthermore, the Department of the Treasury seems to have imposed additional taxes on the subsidies given by the Japanese Government to those three companies, evidently interpreting these subsidies as business profits of the transportation. However, such subsidies which are given with an eye to maintaining shipping services, are always accompanied by various obligations on the part of the shipping companies and so should not be looked upon as the business profits of an ordinary character. Besides, they are not “income or profit received from sources within the United States” as provided in the Tax Law of the United States. For these reasons they cannot be objects of taxation by the American Government. It is still more unreasonable to consider the whole amount of the subsidies as taxable income, while they involve services in other parts of the world.

5. With regard to amortization, the Department of the Treasury made a decision not to make any allowance for amortization for those ships the building of which was completed after the armistice day of the World War (November 11, 1918), in other words, not to allow the amount of redemption to be deducted, as an expense, from the amount of income. The extraordinarily high price of a ship then prevailing had necessitated amortization for the cost of a ship. The shipping companies in Japan were obliged to build or to obtain high priced ships to make up for the loss of those ships which had been tendered to the Government of the United States. It is easily understood, from the viewpoint of business management, that the amortization of such high-priced ships cannot be made out of profits which would be produced in the future. Furthermore, the decision of the American Government that no allowance should be made for the amortization for the ships which had already been under construction or for which building contracts had been awarded on Armistice Day is extremely severe in the light of the fact that it was very hard to predict the time of the Armistice. It is still more severe and discriminatory against the Japanese companies that amortization is allowed for those establishments within the United States and for those American ships which are under the same conditions as are those Japanese ships.

6. In short, the point that the Japanese Government want to insist upon most emphatically is, under what circumstances and with what object we lent those ships to the United States Government. Since this action of our Government despite great sacrifice and hardship was taken entirely in accordance with the diplomatic agreement between the Governments of the United States and Japan, both a member of the Allies, and quite in justice to the Emergency of the World War, and since the purpose of this action was solely to facilitate the united operations of the allied countries, the Japanese Government earnestly wish the United States Government to take up the matter again and give it friendly consideration so that the whole of the charter rates of those ships and the subsidies granted by the Government may be exempted from income taxation and, so that the amortization for the ships which were under construction or for which building contracts were made on the day of the Armistice may be admitted.

In view of the intricate nature of this problem and of the possible long duration necessary for the negotiation between the two countries geographically so widely separated, it would be very much appreciated if the United States Government would agree to extend, until this matter is settled, the time limit of ninety days set by the Department of the Treasury for the payment of the additional taxes. And lastly, it is the earnest hope of our Government that the United States Government will kindly refrain from repeating such an action as was taken against the Soyo Maru of the Toyo Kisen Kaisha.

33. See telegraphic instructions of February 9, 1918, 7 p.m., to the Ambassador in Japan, Foreign Relations, 1918, supp. 1, vol. i, p. 628.
34. See telegram of February 28, 1918, midnight, from the Ambassador in Japan, ibid., p. 636.
35. See telegraphic instruction of March 2, 1918, 7 p.m., to the Ambassador in Japan, ibid., p. 637.