894.52/45
The Secretary of State to the Chargé in Japan (Dickover)
Sir: The receipt is acknowledged of the Embassy’s despatch No. 1884 of June 10, 1936, with regard to the question of properties in the former foreign settlements in Japan held under perpetual leasehold. The Department has noted with interest that, whereas informal conversations on this question were held in the summer and autumn of last year between the British Embassy and the Foreign Office, the British Embassy considers the present to be an inappropriate time to reopen the question.
The Department has also noted that the Embassy does not agree entirely with the view set forth on page 13 of the Department’s instruction No. 1018 of April 30, 1936, to the effect that an agreement might be made providing for the cancellation of the existing leaseholds and the substitution therefor of fee simple titles, the present leaseholders to have no exceptional privileges other than exemption from payment of any tax which might be regarded as a charge on the property. The Embassy observes that the objection to this suggested “solution of the problem would be that it would not greatly alter the present position of the municipalities vis-à-vis the leaseholders”. Preference is expressed by the Embassy for the plan put forward by the British Embassy, which is that the Japanese Government or the municipalities compensate the leaseholders, by payment [Page 977] of a lump sum, for the relinquishment in perpetuity of all claims to exemption from taxation of any kind.
The Department’s suggestion was based on the understanding that, by virtue of the Hague award in the House tax case, handed down on May 22, 1905, the Japanese authorities freely admitted the right of the leaseholders to exemption from taxes on the lands held under lease and the buildings erected on those lands, and the record of the cases available to the Department does not disclose any evidence of an intention on the part of the Japanese authorities to question the right of the leaseholders to such exemption. The record does, however, clearly indicate the determination of the Japanese authorities to refuse to admit that the leaseholders are entitled to any exemption other than exemption from taxes “imposed in respect of such property”, that is, leasehold lands and the buildings erected thereon and, as stated in the Department’s instruction of April 30, 1936, the position of the Japanese authorities appears to the Department to be reasonably warranted.
The Department feels, therefore, that inasmuch as the claim of the leaseholders to exemption from every form of municipal taxes or charges could not be supported equitably and probably never would be conceded by the Japanese Government, it would appear to be desirable if possible to obtain a formal confirmation by the Japanese Government of the right of the leaseholders to perpetual exemption from taxes or charges imposed in respect of leasehold lands and the buildings erected on those lands with the understanding that the leaseholders would be subject to all other municipal taxes and charges on a basis of equality with all other residents.
It is stated in the despatch under acknowledgment that the Japanese municipal authorities desire that the perpetual leaseholders be placed in exactly the same position as all other property holders in Japanese cities and be subject to imposition of the same taxes and levies. If the municipal authorities are now not willing to concede that the leaseholders are, by the terms of their leases and the Hague award herein mentioned, entitled to exemption from taxes respecting leasehold lands and houses, such a position would appear to represent not only a complete reversal of the position thus far held by the Japanese Government, but to involve a denial of a clear right to which the leaseholders are entitled. As it appears from your despatch to be certain that the Japanese Government and the municipal authorities will reject any plan involving the payment of any compensation to the leaseholders for the termination of the right above mentioned, it would appear that no useful purpose would be served by insistence on the acceptance of the British proposal, for the reason, as the Embassy [Page 978] recognizes, that that proposal appears to be wholly unacceptable to the Japanese Government.
If, as stated in the despatch under acknowledgment, it be the desire of the Japanese municipalities to have extinguished the right of the foreign leaseholders to exemption from taxes on leasehold properties, which in the view of the Department, is a question entirely separate from and independent of the question of the payment by the leaseholders of other municipal taxes, the initiative looking toward the conclusion of an agreement whereby such right would be terminated should properly come from the Japanese Government.
In view of the foregoing considerations, the Department is of the opinion that it would be desirable that its suggested solution of the difficulty be submitted to the Japanese Government, inasmuch as that plan appears to be in accord with the views heretofore expressed by the Japanese Government and would at least offer a basis for discussion toward possible settlement of the dispute. Unless you perceive definite objection to this course, it is requested that you inform the British Embassy that, in the view of your Government, a proposal along the lines of the suggestion under reference appears to offer the only reasonable possibility toward satisfactory adjustment of this vexatious question. You may also state to the British Embassy that your Government is now disposed to present the plan to the Japanese Government at as early a date as practicable and that it would be happy if the British Government, through the British Embassy at Tokyo, could see its way clear to advance an identical proposal. The Department will, of course, be glad to give appropriate consideration to any counter-suggestion or to any proposal toward amendment of its suggested solution which may be advanced by the British Government, but, in view of a report which appeared in the Japan Weekly Chronicle in its issue of July 16, 1936, indicating that some action affecting perpetual leaseholds is about to be taken by the Japanese Government, it desires that further effort be initiated as soon as practicable toward seeking some final solution of this question.
The Department will not suggest what would be a reasonable period within which the British Government should give word of arrival by it at a definite conclusion with regard to the position which it may decide to take but will expect that some indication in this regard will be given to you by the British Embassy.
Please report to the Department at your early convenience after discussions have been had with the British Embassy.
Very truly yours,