Although in today’s world, it is said that might prevails over justice, when engaging in international negotiations, if one can truly use justice to contend with power, then even those who hold power cannot cover the eyes of the world with their hands and obliterate justice.
— V. K. Wellington Koo, “Private Comments on Chinese Diplomacy” (1911, 12)
Introduction
In 1936, the Nationalist government of China enacted the Provisional Income Tax Act, marking a significant attempt to assert fiscal authority over both domestic and foreign residents.Footnote 1 The Ministry of Foreign Affairs subsequently notified all foreign embassies in China, requesting their cooperation with the new tax regime. This legislative initiative occurred within a complex framework of international law where fourteen foreign powers maintained extraterritorial rights in China.Footnote 2 Because Chinese courts lacked jurisdiction over aliens from these countries, the implementation of the Act required not only diplomatic notification but also recognition and enforcement by foreign consular courts.Footnote 3 Prior to the introduction of the income tax in China, Western powers had invoked unequal treaty provisions or the principle of equal treatment between Chinese and foreign taxpayers, in conjunction with extraterritoriality, to refuse enforcement of China’s newly enacted stamp taxes, business taxes, and other fiscal legislation. Hence, Chinese diplomatic and financial officials needed to utilize international law to justify their new income tax.
While the sovereign right to tax aliens was widely recognized in the international legal scholarship of the early twentieth century, the practical implementation of such authority in non-Western contexts still remains largely unexplored (Westlake Reference Westlake1910, 219; Oppenheim and McNair Reference Oppenheim and McNair1928, 552–53; Albrecht Reference Albrecht1952, 145). Republican China thus serves as a crucial case study in understanding the limitations of fiscal sovereignty theory—namely, a nation’s fundamental right to exercise unrestricted taxation authority and the role of international tax law in legitimizing domestic legislation in the face of imperialism (Martha Reference Martha1989).
The taxation of foreign entities and individuals was crucial for ensuring fair competition in early twentieth-century China, where foreign and Chinese firms competed directly. Some scholars argue that foreign companies enjoyed decisive competitive advantages due to their superior capital, advanced technology, and privileges under unequal treaties, including exemption from Chinese governmental jurisdiction. Others contend that economic nationalism, China’s low labor costs, and local entrepreneurs’ intimate knowledge of domestic markets offset these inequalities (Cochran Reference Cochran1980, 4). Regardless of which view one accepts, exempting foreign entities from income tax while taxing Chinese nationals inevitably exacerbates competitive disparities and stifles the development of local businesses.
On the other hand, taxing foreign entities with substantial economic presence in China could potentially have augmented government revenue. Economic estimates indicate that foreign investment in China reached US $1.65 billion in 1914, subsequently expanding to US $3.3 billion by 1931 (Remer Reference Remer1933, 58–59).Footnote 4 Ruixue Jia’s (Reference Jia2014) research demonstrates that treaty port regions have consistently maintained a higher per capita gross domestic product compared to analogous non-port Chinese cities from 1900 to the present. Wolfgang Keller and Carol Shiue (Reference Keller and Shiue2021) further contend that foreign direct investment functioned as a primary mechanism for technological diffusion in China, evidenced by accelerated industrial growth in proximity to treaty ports where Western commercial presence was most pronounced. Moreover, the taxation structure created an additional challenge: Chinese residents within the concessions could circumvent tax obligations by claiming foreign citizenship in cases where aliens were granted tax exemptions, thereby reducing government revenue (Willoughby Reference Willoughby1927, 600).Footnote 5
The Provisional Income Tax Act’s significance stems from the diplomatic efforts of Chinese international lawyers as well as from the evolving political landscape. Several factors contributed to the Act’s distinctive importance compared to previous attempts to tax foreigners since the late nineteenth century. To begin with, the First World War precipitated the termination of extraterritoriality and concessions for Germany, Austria, and Hungary in China, effectively eliminating any legal basis for their nationals to claim exemption from the Act. Internationally, many established states had raised their income tax rates during the war, and with the dissolution of the Austro-Hungarian and Ottoman empires, emerging states also sought to consolidate their newly acquired sovereignty to tax. The allocation of income taxing rights and the avoidance of double taxation were thus repeatedly brought to the negotiating tables of international organizations (Avi-Yonah Reference Avi-Yonah2023; Mehrotra Reference Mehrotra2025). Second, the diplomatic endeavors of Chinese international lawyers culminated in the formal recognition of China’s fiscal sovereignty by Germany, Great Britain, and the United States by 1928. Third, the Nationalist government’s nominal unification of China in 1928 marked the end of the fragmented warlord period, establishing a central authority with the capacity to implement taxation reforms.
This article examines China’s negotiations with France, Germany, Great Britain, Japan, and the United States. These nations maintained substantial economic interests in China. C. F. Remer (Reference Remer1933, 76) indicates that, by 1931, foreign investments in China reached US $3.3 billion, with the following distribution: Britain (36.7 percent), Japan (35.1 percent), Russia (8.4 percent), the United States (6.1 percent), France (5.9 percent), and Germany (2.7 percent). Among these major investors, the Soviet Union promptly pledged assistance with income tax collection through diplomatic channels, while the other nations uniformly opposed compliance.Footnote 6 Each of these five nations represents a prototype of its relationship with Chinese fiscal sovereignty. Germany’s position was defined by its post-First World War relinquishment of extraterritoriality. The United States, operating within its Open-Door Policy framework, had formally acknowledged China’s fiscal sovereignty through treaty arrangements. British recognition manifested through the Foreign Secretary’s public diplomatic declaration of China’s taxation rights. France maintained its status as a treaty power, retaining extraterritoriality. Japan presented a unique case: despite its adversarial relationship with China, its own historical experience with extraterritoriality and difficulties in taxing foreigners within its borders created a complex dynamic.
Chinese diplomats advanced their position based on the protection theory, asserting that the obligation of foreign entities to pay taxes stemmed from their receipt of governmental protection within Chinese territory. Notably, this reliance on the protection theory, which had been eclipsed in American fiscal thought by the ability-to-pay principle by the 1930s, can be traced to the legal training of Wang Chung-hui, China’s lead negotiator, who had studied under prominent benefit theory proponents at Berkeley and Yale (L. Chen Reference Chen2019). However, this position encountered various forms of resistance from foreign powers. France justified its non-compliance through the interpretation of the nineteenth-century unequal treaties. Germany and the United Kingdom predicated their resistance on the principle of equality and fair treatment, maintaining that their tax compliance would be contingent upon universal participation by both Chinese nationals and other foreign entities to ensure competitive equity. Japan and the United States adopted more opaque stances, declining compliance without providing substantive legal justification.
Between 1935 and 1937, Nationalist China sought to resolve this predicament through international law, but these efforts ultimately proved unsuccessful. Despite the formal abolition of extraterritoriality in 1943, military conflicts severely constrained the Nationalist government’s ability to implement the Provisional Income Tax Act effectively with respect to foreign persons and entities. This chapter of Chinese fiscal policy concluded definitively in 1949 with the establishment of the People’s Republic of China, when the Chinese Communist Party adopted an isolationist approach, employing various means of persuasion and coercion to precipitate the departure of most foreign presence from China (Jia Reference Jia2014, 598–99; Garver Reference Garver2016, 43–47).
This article has three major findings. First, Chinese international lawyers had systematically endeavored to launch an international legal initiative to address the taxation of foreign nationals since 1900. Existing scholarship has emphasized the influence of Edwin Seligman’s ability-to-pay theory on Chinese tax reformers, most of whom served in the legislature or the Ministry of Finance (Lin Reference Lin2005, 5; Ke Reference Ke2017, 104; Xia Reference Xia2017, 52). Yet this article is the first to uncover the fiscal thought of Wang Chung-hui, the diplomat who led the income tax negotiations. As foreign minister, Wang drew not on Seligman but, rather, on the protection theory of taxation, which he had encountered during his studies at the University of California Berkeley and at Yale University.
Second, although the treaty powers ultimately declined to pay income tax, international law played a significant role in their decision-making process. Archival materials from Germany, Great Britain, and the United States indicate that their diplomatic apparatus had to substantively engage with, and respond to, China’s legal arguments. For example, German diplomatic archives show that, after the abolition of German extraterritoriality after the First World War, German businessmen in Shanghai confronted the practical question of whether they were legally obligated to pay Chinese income tax, and German officials acknowledged that, under the 1921 Sino-German Agreement, German nationals were indeed subject to the same tax obligations as Chinese nationals.Footnote 7 British official Frederick Leith-Ross, for his part, proposed establishing a foreign-staffed tax department within the Chinese government to administer collection from foreign residents. While ultimately unacceptable to China, it nonetheless reflected substantive engagement with the premise of Chinese fiscal sovereignty.
Third, although Chinese representatives leveraged international law to assert China’s right to tax, this article reveals that international law—particularly the doctrine of fiscal sovereignty—was imperial in character. While contemporary scholars have demonstrated that bilateral tax treaties and the Organisation for Economic Co-operation and Development’s Model Tax Treaties have disadvantaged the global South, this article traces these asymmetric legal frameworks to their early twentieth-century origins.Footnote 8 This analysis reinforces Antony Anghie’s (Reference Anghie2005) thesis that international law manifests the capacity of Western imperial powers to dominate non-Western polities. While scholars such as Arnulf Becker Lorca (Reference Becker Lorca2014, 4–5), Lauren Benton (Reference Benton2002, 2–4), and Mitra Sharafi (Reference Sharafi2014, 8–12) have highlighted the agency of the colonized by demonstrating how they utilized international law and the laws of the empires to argue against the powerful, China’s income tax negotiations show that the instrumentality of international law remains circumscribed by Western powers. Indeed, while Western powers formally acknowledged China’s sovereign right to taxation, they also established standards of equal treatment that proved insurmountable for an emergent and vulnerable state.
The Chinese experience with foreign taxation exemplifies a fundamental dilemma confronting developing countries. This article finds that the sovereignty to tax requires not only the formal recognition under international law (“control as such”) but also the practical capacity to enforce it (“control as applied”). While foreign direct investment serves as a crucial catalyst for modernization and development, these nations often lack sufficient institutional capacities to effectively tax foreign entities. This revenue deficiency subsequently impedes state-building initiatives. To make things worse, implementing taxation solely on domestic citizens and businesses initially exacerbates existing disparities between native and foreign businesses. This article thus moves beyond a general claim about the imperial character of international law to offer a structural account of how that imperialism operated in international tax law.
This article draws upon archival materials from the Ministry of Foreign Affairs of Republican China, the German Federal Foreign Office, the Sir Frederick Leith-Ross papers at the UK National Archives, and the US Diplomatic Papers published by the Department of State. The following section examines the efforts of Chinese international lawyers to secure Western recognition of fiscal sovereignty. The article then analyzes China’s income tax negotiations with Japan, France, Germany, Great Britain, and the United States before exploring the broader implications for international legal scholarship. It then concludes.
International law and China’s pursuit of fiscal sovereignty
The existing historiography concerning the taxation of aliens in China makes cursory references to contemporaneous discussions of fiscal sovereignty among Chinese diplomats and a small cohort of Chinese scholars in the 1930s. Lin May-li (Reference Lin2005, 52–57) and Wei Wenxiang (Reference Wei2022) have not conducted a systematic examination of the history through the lens of international law. Their works, which primarily rely on Chinese archival sources, present the sporadic legal arguments advanced during negotiations as ineffective attempts that failed to elicit substantive responses from the treaty powers. Such scholarship has characterized these unsuccessful negotiations as manifestations of imperialist inequity, overlooking both the nuanced role of international law and the sustained legal advocacy of Chinese international lawyers since 1900 (Wei Reference Wei2022, 468).Footnote 9
The role of international law in tax matters is controversial. Scholars and practitioners have been debating whether the tax law of a sovereign state should be constrained by international law. Michael Graetz (Reference Graetz2001), David Rosenbloom (Reference Rosenbloom2000), Julie Roin (Reference Roin2000), Mitchell Kane (Reference Kane2004), and Tsilly Dagan (Reference Dagan2000), among others, maintain that states retain discretionary authority over their domestic tax legislation. Conversely, Reuven Avi-Yonah (Reference Avi-Yonah2007), Yariv Brauner (Reference Brauner2003), Paul McDaniel (Reference McDaniel2001), and Richard Vann (Reference Vann and Thuronyi1998), argue that international law exercises a degree of binding authority over domestic tax regulations. Rutsel Martha (Reference Martha1989, 1) further delineates three fundamental “functions of general international law in matters of taxation”: (1) legitimizing domestic tax legislation; (2) providing treaty grounds for international tax issues such as double taxation and tax avoidance; and (3) establishing international fiscal cooperation mechanisms.
While international law may have been viewed as optional or less significant by Western powers in the context of legitimizing the right to tax, it held particular significance for weaker states like China in the 1930s. V. K. Wellington Koo (Reference Koo1911, 11–12), then a doctoral candidate at Columbia University, articulated this perspective in his 1911 press publications, asserting that given China’s diminished national strength and lack of military capabilities, international law represented the nation’s primary diplomatic recourse. In his doctoral dissertation, Wellington Koo explicitly framed the taxation of aliens as an international law question. He argued that extraterritoriality did not impair China’s sovereign power of legislation, including the state’s right to impose taxes on foreign residents within its own territory. The only limitation, according to Wellington Koo (Reference Koo1912, 339–40), was procedural: if a foreigner “refuses to pay his tax, the Chinese authorities cannot compel him to do it except by entering a complaint in the proper consular court of his nation.” Wellington Koo’s interpretation that extraterritoriality did not confer exemption from tax obligations was subsequently adopted as the official position of China at the Special Conference on the Chinese Customs Tariff of 1925–26.
China’s fiscal sovereignty was undermined by unequal treaties in the nineteenth century. Some treaty provisions banned new types of taxes, while others prevented rate increases and set specific rates for individual taxes.Footnote 10 Furthermore, with the most favored nation clause, these provisions were extended to all treaty powers. Immanuel Hsü (Reference Hsü2000, 191–92) argues that the Qing government agreed on these terms “partly out of expediency and partly out of ignorance of international law and the concept of national sovereignty.” For example, the fixed tariff of 5 percent ad valorem was higher than the existing imperial tariff of 2–4 percent ad valorem. However, “[l]ittle did the Chinese realize that their assent to a fixed rate precluded a protective tariff in the future” (191–92).
From around 1900 onward, China’s international lawyers consciously leveraged treaty negotiations to secure Western recognition of Chinese fiscal sovereignty, thereby advancing the right to tax aliens. The US Open Door Policy and the First World War gave Chinese lawyers the opportunity to do so. The Open Door Policy aimed to recognize China’s sovereignty and ensure its territorial and administrative integrity. The US acquisition of the Philippines, Guam, and Hawaii in 1898 marked an expansion of the American Empire in Asia, strengthening America’s position to pursue commercial and political opportunities in China. However, this ambition was complicated by the established dominance of other major powers that maintained substantial spheres of interest within China. The first Open Door Policy note, circulated to the delegations of treaty powers in Beijing in 1899, advocated for equal commercial treatment within these spheres. The second note, issued in 1900, emerged in response to the chaos caused by the Boxer Uprising. This directive emphasized America’s commitment to protecting citizen interests while maintaining China’s territorial and administrative integrity (Moore Reference Moore2015, 25–28).
The Boxer Indemnity of 1901 prompted debate over China’s fiscal sovereignty. The Boxer Protocol obligated China to pay 450 million taels of fine silver (approximately 67.5 million British pounds or three hundred million US dollars at the time), plus 4 percent annual interest over thirty-nine years. To meet this obligation, the Qing government, during negotiations with the signatory powers, “express[ed] the hope that the neighboring nations will, with one accord, give their consent to the adoption of any measures which China may bring forward with a view to creating additional revenue, such as … the introduction of a stamp duty, already in universal operation throughout other countries.”Footnote 11
Although Chinese diplomats did not explicitly list the income tax among their examples of new revenue measures, discussions concerning its introduction had circulated in China since the 1870s. As early as 1878, Guo Songtao, the Qing minister to Great Britain, introduced the British system of personal income taxation to Chinese readers. Huang Zunxian, counselor to the Qing legation in Japan, offered a detailed exposition of Japan’s civil service income tax in his Treatise on Japan (Riben guozhi), published in 1887. According to Wei Wenxiang’s (Reference Wei2022) research, English-language newspapers circulating in China during the nineteenth century reported on British income tax collection and amendments, the 1894 debates in New York State over adopting an income tax, and the history of income taxation in the United States following the Civil War. In 1902, the prominent reformer Liang Qichao, in his essay “A Private Plan for Chinese Fiscal Reform,” enumerated ten taxes he considered most suitable for China, ranking the income tax first (quoted in Wei Reference Wei2022, 108–14). It is therefore reasonable to conclude that the phrase “creating additional revenue” employed during the 1901–3 negotiations encompassed the possibility of introducing an income tax.
William W. Rockhill, the US commissioner to China, believed that permitting China to finance the indemnity through new taxation best accorded with the Open Door Policy. In a dispatch to Secretary of State John Hay dated March 1901, Rockhill cautioned that a foreign loan, while expedient, would inevitably lead to some form of international financial control over China, thereby compromising its administrative integrity, which would be an outcome directly at odds with declared American policy. In other words, recognizing China’s fiscal sovereignty served to preserve China’s administrative integrity, a core objective of the Open Door Policy.Footnote 12 The 1903 Commercial Treaty between the United States and China was negotiated within the context of the Open Door Policy.Footnote 13 While the Chinese negotiating team underwent several changes, Lu Haihuan and Wu Tingfang emerged as the most influential representatives.Footnote 14 Wu is the first person of Chinese origin called to the English bar, having completed his legal studies at Lincoln’s Inn in London in 1877 (Pomerantz-Zhang Reference Pomerantz-Zhang1992, 33). The American delegation consisted of Edwin H. Conger, the minister to China, Consul General John Goodnow of Shanghai, and John F. Seaman, manager of Wisner & Company.
During the thirty-first, thirty-fourth, and fortieth negotiation sessions held between May and July 1903, the American delegation strongly advocated for the abolition of China’s internal likin (internal tariff) barriers to facilitate the flow of goods. Lu and Wu proposed that, as fiscal compensation for the elimination of likin, China should be granted the discretion to impose alternative taxes. The American representatives, while affirming their respect for Chinese sovereignty, indicated that they would not intervene as long as any new taxation system did not impede trade flows. Wu strategically leveraged this position to advocate for the explicit inclusion of relevant provisions in the treaty. After extensive communications between the negotiating teams and Washington, these discussions culminated in Article 4, paragraph 3, of the 1903 treaty, which explicitly stated: “Nothing in this article is intended to interfere with the inherent right of China to levy such other taxes as are not in conflict with its provisions.” This provision affirmed China’s taxation rights except “levy of likin and all other transit dues throughout the Empire.”Footnote 15
A legal analysis conducted by the US State Department two decades after the treaty’s conclusion confirmed that the American recognition of China’s fiscal sovereignty diverged markedly from the French position. In 1923, Secretary of State Charles Evans Hughes observed:
These treaty provisions, namely, those in Article IV of our Treaty with China of 1903, and those in Article XL of the French Treaty, appear to represent the two extremes in dealing with Chinese fiscal affairs. In the former it is declared that China shall be free to levy such taxes as are not in conflict with the provisions of that Treaty and in the latter it is declared that China shall not impose upon French nationals any obligation not expressed in the (Convention) Treaty.Footnote 16
Chinese diplomats had thus succeeded in 1903 in leveraging the Open Door Policy to carve out a new pathway within the unequal treaty system, one that preserved the possibility of introducing new forms of taxation.
Following the end of the First World War, China sought to strengthen its fiscal sovereignty by leveraging its position as one of the victorious powers. China joined the Entente Powers in 1917 by providing labor forces to support British and French military efforts. However, at the 1919 Paris Peace Conference, the Western powers refused to return Germany’s concessions and privileges in Shandong to China, instead transferring them to Japan (becoming known as the “Shandong problem”). Hence, China declined to sign the Treaty of Versailles, creating an avenue for pursuing bilateral treaty negotiations (Manela Reference Manela2007, 177–78).Footnote 17 In August 1920, following the conclusion of the Zhili-Anhui War, a new government was formed under the Zhili clique. The Ministry of Foreign Affairs came under the direction of W. William Yen (Yan Huiqing) and Wellington Koo (Gu Weijun), both of whom advocated for direct bilateral negotiations with Germany (Tang Reference Tang2019, 113). The ministry appointed Wang King-ky (Wang Jingqi) as its chief negotiator, seeking to establish a new bilateral treaty that would formally end the state of war, abolish unequal treaties, and establish a new relationship based on equality.Footnote 18 The German Reich was represented by its envoy in Beijing, Herbert von Borch.
While Chinese diplomatic archives contain no specific records of tax-related negotiations beyond customs duties, both parties reached a consensus on abolishing extraterritoriality and subjecting their nationals to local laws and courts. Building upon this principle of reciprocity, they incorporated provisions for national treatment in taxation matters. Article 3, paragraph 3, of the 1921 Sino-German Agreement stipulated: “The nationals of both countries shall observe the laws of their country of residence. The taxes and duties they are required to pay shall not exceed those paid by the nationals of the country of residence.” This treaty provision represented another significant affirmation of China’s fiscal sovereignty.
At the Washington Conference of 1921–22, Chinese international lawyers continued their efforts to safeguard China’s fiscal sovereignty. The primary goal of the conference was to rebalance treaty powers’ interests in the Far East following the First World War, particularly seeking a resolution to the Shandong problem that had emerged from the Treaty of Versailles. This conference represented the last significant push for the US Open Door Policy, with participating nations (the United States, Japan, France, the United Kingdom, Italy, Belgium, the Netherlands, and Portugal) pledging to “respect the sovereignty, the independence, and the territorial and administrative integrity of China.”Footnote 19
The Chinese delegation was led by three diplomats: Alfred Sao-ke Sze, Wellington Koo, and Wang Chung-hui. Wang, a distinguished international law scholar, studied at the University of California Berkeley, held a master of laws degree and a doctor of civil law degree from Yale Law School. This delegation sought explicit recognition from participating nations of China’s right to tax within the framework of the Open Door Policy. The Chinese delegation argued that “when nationals of one country enter the territory of another, they must observe that country’s laws and, consequently, pay its taxes.” However, they noted that “within the same territory, different nationalities could exempt themselves from such obligations, and citizens of the same country could evade responsibilities based merely on their place of residence…. We request that nations remove these obstacles to allow the unimpeded exercise of China’s taxing sovereignty.”Footnote 20
The delegation maintained that China’s fiscal stability, and, by extension, its commercial and industrial development, depended on its ability to levy new taxes uniformly on all residents. They emphasized that “the most urgent assistance required from the participating nations is the removal of these impediments to enable uniform taxation of both Chinese and foreign residents, whether within or outside the concessions.” However, the conference failed to reach a consensus on these taxation matters, and the final treaty text contained no provisions addressing fiscal sovereignty issues.Footnote 21 Article 2 of the Nine-Power Treaty Relating to Chinese Customs Tariff, signed at the Washington Conference, provided for convening a Special Conference with China within three months of the treaty’s implementation to discuss the abolition of likin and potential tariff increases. However, due to the Gold Franc Dispute between China and France, the treaty did not come into force until August 1925, with the Chinese government subsequently scheduling the Special Conference for October 26 of the same year (Yen Reference Yen1974, 156–57).
The conference proceedings were significantly influenced by rising Chinese nationalism in the preceding months. On May 30, 1925, a pivotal incident occurred when the Shanghai municipal police fired upon student protesters supporting the labor movement, resulting in forty to fifty casualties. The following month, tensions escalated further when Chinese demonstrators in Guangdong, showing solidarity with the May 30 incident, clashed with British and French military and naval forces. These events catalyzed nationwide protests against foreign interests in China. The resistance movement manifested through various forms of civil action: students initiated class boycotts, workers organized strikes, and merchants, particularly in Shanghai, suspended business operations in solidarity. Their demands centered on the abolition of unequal treaties and the restoration of sovereign rights that had been ceded to foreign powers. This groundswell of nationalist sentiment culminated in the establishment of the Nationalist government in Guangzhou on July 1, 1925, which adopted the rallying cry “Down with the Unequal Treaties!” (Yen Reference Yen1974, 156–57).
Within this surge of Chinese nationalism, Wang Chung-hui presented China’s legal position regarding its right to tax aliens at the 1925 Special Conference. Wang articulated an argument grounded in principles of sovereignty, asserting that every sovereign nation possesses the fundamental right to manage its internal affairs, including unrestricted taxation authority. He noted that, while China had established numerous commercial treaties with foreign powers, none explicitly provided tax exemptions for foreign nationals in China. Nevertheless, a problematic pattern had emerged whereby foreigners increasingly refused to pay taxes, citing various justifications ranging from settlement residence to the absence of explicit directives from their home governments. This practice extended to railway zones and, problematically, began influencing Chinese citizens to evade taxation in a similar manner (Willoughby Reference Willoughby1927, 599–601).Footnote 22
This situation, Wang explained, had forced the Chinese government to establish temporary tax collection stations—an inefficient and irregular arrangement that not only undermined China’s administrative authority but also impeded international commerce. To strengthen his argument, Wang cited an 1863 statement by John Russell, the British foreign secretary at the time, affirming that residence in British settlements, which remained Chinese territory, did not exempt Chinese subjects from their obligations to the state (Willoughby Reference Willoughby1927, 599–601).Footnote 23 The challenge became particularly acute as China attempted to implement modern taxation mechanisms, including stamp duties, income tax, and excise taxes on commodities such as wine and tobacco. These new revenue sources were increasingly crucial as traditional taxation methods proved insufficient for modern governmental needs, especially in light of plans to abolish the likin system (Willoughby Reference Willoughby1927, 599–601).Footnote 24
The Chinese government’s position, as articulated by Wang, was unequivocal: all residents within China’s borders, regardless of nationality or specific location of residence, must fulfill their tax obligations under Chinese law. This stance was predicated on “the principle in international law of equal treatment” and administrative integrity, aligning with the Washington Conference’s commitment to respect China’s territorial and administrative sovereignty (Willoughby Reference Willoughby1927, 599–601).Footnote 25 China thereby used international law to develop muscular internal administrative capacities, including wielding the Western technique of uniform, national, and direct income taxation. Thus, one can say that China used Western state-building techniques to gain recognition from, and ultimately challenge, Western states. Wang concluded with an appeal to foreign powers to acknowledge the legitimacy of China’s position, emphasizing that a uniform and equitable taxation system was fundamental to China’s fiscal stability and administrative efficacy (599–601).Footnote 26 This declaration represented a sophisticated articulation of China’s evolving approach to asserting its sovereign rights to tax within the international legal framework. However, despite the cogent arguments presented by Wang and the Chinese delegation, the Special Conference failed to produce any formal agreements regarding China’s taxation sovereignty.
British policy toward China underwent a significant transformation around 1926. Facing both its post-First World War decline in global influence and rising Chinese nationalism accompanied by strong anti-British sentiment, Britain’s diplomatic strategy in China shifted to a more nuanced approach. The Foreign Office formulated what it termed a policy of “patient and liberal conciliation.” The “patient” aspect indicated Britain’s willingness to gradually relinquish its special privileges through negotiations, timing concessions based on improvements in China’s domestic governance. The “liberal” component represented a historic departure from the gunboat diplomacy that had characterized British policy since the Opium War (Fung Reference Fung1991, 10). This new strategy balanced two primary objectives: accommodating and conciliating Chinese nationalism while protecting British lives, property, and key interests in China. When force became necessary, British authorities sought to ensure that its application was controlled and limited in a manner that supported, rather than undermined, their broader goal of conciliation with China. This strategic reorientation has been characterized by historians as the “imperial retreat” (10).
A milestone in this policy shift came on January 31, 1927. British Foreign Secretary Austen Chamberlain publicly acknowledged China’s right to tax in a speech in Birmingham, declaring: “As regards taxation, we are prepared to make British subjects liable to pay regular Chinese taxation, provided that it does not involve discrimination against British subjects or British goods” (Advocate of Peace through Justice 1927, 241). This statement marked a crucial recognition of Chinese fiscal sovereignty, albeit with conditions protecting British commercial interests. Through the persistent efforts of Chinese international lawyers outlined above, China’s right to tax was theoretically granted full recognition by the treaty powers by 1936, when the Provisional Income Tax Act was implemented. In addition, given that extraterritoriality was predicated on the presumed lack of “civilized” norms in Chinese law, Chinese legislators strategically positioned income tax as a Westernized alternative to likin in anticipation of greater compliance from Western powers. This perspective aligned with the Western economic thought of that time, particularly that of Columbia University economist Edwin R. A. Seligman, who advocated progressive direct taxation in the 1930s. Seligman argued that progressive direct taxation could foster not only economic prosperity but also democratic development and political cohesion. The influence of Seligman and his colleagues in international public finance reform was so substantial that historians designated them the Columbia School of Taxation (Mehrotra Reference Mehrotra, Elliot Brownlee, Ide and Fukagai2009, 30–32).
China was not an exception. Ma Yin-Chu, who studied for his doctoral degree with Seligman at Columbia, was the chairman of the Finance Committee of the Chinese legislature in the 1930s. In 1936, Ma told Clarence E. Gauss, the US consul general at Shanghai in 1936, that “the [Chinese] Government should depend for its main source of revenue upon the income tax.”Footnote 27 Kung Hsiang-Hsi, the finance minister of China, further claimed that “[i]ncome tax is based on the principles of universality and fairness. It has become common practice in various countries that all domestic and foreign residents within the borders should be uniformly taxed…. We believe that foreigners in China will also accept our excellent new tax system in the spirit of equality and reciprocity.”Footnote 28 Kung also emphasized that China’s income tax legislation was formulated with reference to the established practices of countries such as Britain, France, and the United States, implying that the law was Westernized and should be followed by all people residing in China.Footnote 29
This demonstrates the role of law in Republican China’s fiscal modernization. The taxation of foreigners was crucial to increasing government revenue; thus, to persuade foreigners to perform their tax obligations, tax legislation was designed to conform to international law’s requirements regarding fiscal sovereignty, with reference to European and American laws. As the following section will elaborate in detail, Chinese officials consistently referenced the treaties, documents, and diplomatic statements discussed in this section during their negotiations with treaty powers regarding the new income tax law. These materials formed the legal foundation for their arguments as they strategically employed international law principles to legitimize China’s claims to fiscal sovereignty.
The Reaction of Japan, France, Germany, Great Britain, and the United States to the Act
The Enforcement Rules of the Provisional Income Tax Act explicitly codified the income tax obligations of foreigners. Article III established a non-resident exemption principle whereby foreigners residing in China for less than one year were exempt from taxation on their foreign-source income.Footnote 30 Article IV introduced a reciprocity requirement, stipulating that these exemptions would only apply to nationals of countries that offered similar treatment to Chinese citizens.Footnote 31 Put differently, any foreigner residing in China for a year or longer, or deriving income from Chinese sources, was liable to taxation. The rules also addressed the complex issue of international business taxation. Article V established the principle of source-based taxation for foreign enterprises operating in China through branch offices or other business establishments. Such entities were required to calculate their taxable income based on profits derived from operations within Chinese territory, regardless of whether their branch capitals were segregated from the head office. Where income could not be computed on the basis of actual capital, Article IV of the Act prescribed a progressive rate structure: thirty per mille on income between one hundred dollars and one thousand dollars, rising through intermediate brackets to a maximum of two hundred per mille.Footnote 32 For domestic corporate structures, Article VI mandated separate tax computations for head offices and branches operating within China when their capitals were segregated, establishing a clear framework for domestic business taxation.Footnote 33
Following the Act’s promulgation in 1936, the Ministry of Finance requested the Ministry of Foreign Affairs to inform foreign nations of their nationals’ and subjects’ tax obligations under the new regulations. The Ministry of Finance’s position reflected a principle of reciprocity, noting that “Chinese citizens abroad have consistently fulfilled their income tax obligations to their host governments, establishing a reasonable expectation for reciprocal assistance in collecting income tax from foreign nationals in China” (Zhongyang Ribao 1936). The Ministry of Foreign Affairs’s response, however, expressed significant reservations about the initiative’s prospects. Its internal correspondence acknowledged that “historical attempts to impose various taxes on foreigners have consistently met with firm resistance…. Intelligence suggests that foreign nationals in Shanghai have already convened to organize opposition, foreshadowing inevitable conflicts in future income tax collection efforts.”Footnote 34 Nevertheless, the Ministry of Foreign Affairs proceeded to disseminate translated versions of the new tax legislation to foreign diplomatic missions in China, soliciting their cooperation in tax collection from their respective nationals. The formal notification anchored its justification in the protection theory of taxation, asserting that the tax obligations of foreign entities were derived from their receipt of governmental protections within Chinese territory.
The invocation of the protection theory, rather than economic allegiance, as justification might sound outdated by the 1930s, but this was likely a reflection of the top Chinese diplomat’s legal training in the United States. Ajay Mehrotra (2013, 18–19; Reference Mehrotra2025, 16) has shown that Seligman opposed the benefit theory (the protection theory) as early as the late nineteenth century and developed a theoretical framework for ability-to-pay taxation. By the late 1920s, the ability-to-pay principle had become the dominant paradigm of the modern American fiscal state and had been translated into the concept of economic allegiance by Seligman in the League of Nations’s reports on international tax law. While Chinese students whom Seligman had advised did go on to serve in China’s Ministry of Finance and influenced the drafting of the income tax legislation, Wang Chung-hui, the diplomat leading negotiations at the Ministry of Foreign Affairs, had been exposed to the protection theory during his studies in the United States. In the spring semester of 1902 at Berkeley, he took a course in public finance taught by Carl C. Plehn, and during his time at Yale from 1902 to 1905, his prescribed courses included international law and sociology taught by William Graham Sumner (L. Chen Reference Chen2019, 748–50). Both Plehn and Sumner were significant figures in American fiscal history. In his classic public finance textbook, revised in 1901, Plehn presented the benefit theory and the faculty (ability-to-pay) theory side by side, and, in his practical recommendations on California state tax, he drew flexibly on both, arguing that certain tax bases should be justified by the benefit principle and others by the ability-to-pay principle. Sumner, in contrast, was a leading proponent of the benefit theory and opposed progressive income taxation. Mehrotra’s (Reference Mehrotra2013, 65, 218) monograph juxtaposes Sumner’s views with those of later Progressive Era economists such as Seligman and Richard Ely. Wang’s exposure to both frameworks equipped him to invoke these competing justifications strategically during the income tax negotiations.
Foreign responses to the diplomatic request to comply with the new income tax law were received between September and October 1936. From the archives of the Chinese Ministry of Foreign Affairs, it appears that the responses from Western countries were disappointing. Japan, France, Germany, Great Britain, and the United States all refused to acknowledge that their nationals and subjects should pay income tax to the Chinese government. The responses recorded in the Chinese archives seem arbitrary, but, upon further examination of British, American, and German archives, each country had its own considerations. This article does not utilize Japanese and French archives because the author was unable to find corresponding historical materials in Japan, and the author’s limited French language ability prevented the use of French primary source materials. This section will explore whether China had the authority to tax foreign citizens by comparing archives from different countries.
France and Japan
France and Japan rejected China’s newly implemented income tax. The French government asserted that French subjects were protected by extraterritoriality and cited clauses from two Sino-French treaties from the nineteenth century. One was Article 23 of the 1858 Sino-French Treaty of Tientsin, and the other was Article 7 of the 1858 Sino-French Treaty of Commerce.Footnote 35 Article 23 further stipulates: “Once French goods have paid duties at the treaty ports according to regulations, even if Chinese merchants bring them inland and pass-through customs, they shall only pay taxes according to current regulations, and no additional fees can be charged. The current tariff schedule serves as the standard, and there shall be no future increases.” Article 7 states: “For foreign goods sold inland or for French merchants purchasing goods from inland for export, only a 2.5% transit duty is to be paid, with no likin tax.”
German archival records reveal skepticism expressed among US and British diplomatic officials regarding France’s interpretation. American embassy counselor Willys Peck, in a conversation with German ambassador Oskar Trautmann, expressed doubts about the French position. Peck noted that, while taxation was not explicitly mentioned in most treaties, the French treaty contained a provision restricting additional “burdens” on French consulates and nationals. He questioned whether this provision could legitimately extend to taxation matters, suggesting that “this interpretation could conversely imply an inherent recognition of tax liability.”Footnote 36 Furthermore, “the British Ambassador in Hankow,” in discussions with the German ambassador Oskar Trautmann, raised temporal considerations about treaty interpretation, observing that “given the treaties’ age of nearly a century, one must consider whether they too are subject to evolution.”Footnote 37
Japan explicitly opposed China’s imposition of income tax. In its response to the Ministry of Foreign Affairs, Japan stated: “[T]he Japanese government finds it absolutely impossible to recognize your country’s levying of income tax on Japanese residents,” without providing any reasons.Footnote 38 This response was not surprising. Sino-Japanese relations were strained in the 1930s, with the Mukden incident having already occurred in 1931, revealing Japan’s aggressive intentions toward China. Japan’s experience had already undermined its faith in international law as an effective mechanism for taxing foreign nationals. Despite successfully abolishing extraterritoriality in 1899, Japan’s attempt to extend house taxation beyond the real property of its nationals to buildings constructed by foreigners on perpetual leases met with significant resistance. Although Japan proceeded with confidence in its legal position, bringing the case before the Permanent Court of Arbitration against Germany, France, and Great Britain, the court ultimately ruled against Japan (Howland Reference Howland2015).
This adverse judicial decision fundamentally altered Japan’s perspective on international law. As Owada Hisashi (Reference Owada and Ando1999, 355–58) argues, Japan’s initial approach to revising unequal treaties had been characterized by strict adherence to Western international legal principles. However, the legal setback catalyzed a profound shift toward skepticism, fostering a perception that international law exhibited inherent bias against Japanese interests in favor of Euro-American interests. Consequently, Japan’s conception of international law transformed from viewing it as universal principles of natural justice bridging East and West to regarding it merely as technical instruments subject to manipulation for state interests. Owada further contends that the judicial defeat, combined with Japan’s subsequent experiences at the Paris Peace Conference and the Washington Naval Conference, deepened its disillusionment with international legal frameworks. This cumulative disenchantment contributed significantly to Japan’s eventual rejection of international law and to the political transformations that culminated in the Second World War (Becker Lorca Reference Becker Lorca2014, 171–74).
Germany
Germany’s case is significant because its unequal treaties with China were relinquished after the First World War. Namely, German citizens in China could not claim extraterritorial rights to be exempt from local jurisdiction. In the Chinese records, the German embassy replied that “the Chinese government had previously guaranteed non-discriminatory treatment for German citizens and hoped to continue acting in accordance with this principle.” Because other treaty powers were not paying the new tax, China should not compel German citizens to do so to ensure equal treatment.Footnote 39 On April 16, 1937, the foreign minister Wang Chung-hui and Trautmann, the German ambassador, met to discuss the income tax issue. Trautmann pointed out that Germany, as a friend of China, was the first to relinquish extraterritoriality and that, if China were to prioritize imposing tax obligations on German citizens, other countries would be less willing to give up extraterritoriality. In response, Wang cited treaty provisions. Article 3 of the 1921 Sino-German Agreement clearly stipulated that “[t]he nationals of both countries shall observe the laws of their country of residence. The taxes and duties they are required to pay shall not exceed those paid by the nationals of the country of residence.” Regarding extraterritoriality, its purpose was to exempt foreigners from Chinese jurisdiction in civil and criminal cases; taxation did not involve the courts and, therefore, was unrelated. Hence, German nationals, along with those of other countries, were liable for income tax. Trautmann responded by stating that, to his understanding, the citizens of Britain, America, France, Japan, and other countries had all refused to pay and that imposing new taxes on German citizens would create unfair competition. Germany would only be willing to proceed after Chinese nationals and other foreign residents also paid taxes fairly.Footnote 40
In response, Wang again invoked the protection theory as a legal basis for taxing foreign residents. Wang told Trautmann, “regardless of nationality, if one is a resident in a certain place, and receives protection from the local government and enjoys various rights, one should have the obligation to pay taxes.” In other words, the legitimate source of taxation authority comes from a kind of fee for the protection of rights that the taxpayer receives.Footnote 41 German archival records present a largely concordant account of this diplomatic meeting. In his telegram to Berlin, Trautmann referenced the Chinese foreign minister’s concerns regarding German claims of treaty violations. However, his diplomatic correspondence omitted any mention of the protection theory advanced by the Chinese delegation.Footnote 42 The German Federal Foreign Office archives reveal more nuanced decision-making processes and demonstrate that German-Chinese negotiations were characterized by internal complexities rather than unified positions. On March 10, 1937, a German businessman in Shanghai, H. Ganter, wrote to the German consul general in Shanghai, reporting that Chinese income tax authorities had required nationals of all countries to register for the purpose of paying income tax and had threatened severe penalties for non-compliance: “Since I am subject to Chinese law here, I am obligated to obey the law.” However, in late 1936, German diplomatic officials had advised German nationals to contact the consulate first if approached by Chinese authorities. Ganter therefore posed the following questions: “1. Should I pay the tax to the Chinese authorities? 2. If I fail to comply with this Chinese law and the Chinese authorities impose penalties on me, will the German Reich provide me with legal assistance and compensation?”Footnote 43
On March 16, Hermann Kriebel, the German consul general in Shanghai, sent a telegram to Trautmann to discuss Ganter’s letter. Kriebel wrote: “The sender’s letter seems to me only to be an example of a serious concern existing today in the circles of local German businesspeople.” He observed that issuing a definitive response would immediately produce one of two equally undesirable outcomes: if the consulate informed German taxpayers that it could not assume responsibility for the consequences of their evading the tax authorities’ demands for payment, it was almost certain that some cautious or anxious individuals, as well as persons or firms maintaining good relations with Chinese official agencies, would voluntarily pay the tax, thereby establishing a precedent. If, on the other hand, the consulate maintained its earlier advice and suggested that firms simply ignore the demands for tax payment, it would be nearly impossible to avoid claims for compensation once the Chinese tax authorities imposed a penalty on a foreign national for the first time.Footnote 44
On the same day, Trautmann replied directly to Ganter and the German Chamber of Commerce in Shanghai. Trautmann stated that the chamber members’ suggestion that they might seek redress against the Reich on account of the embassy’s recommendations regarding the income tax question was entirely unfounded. He pointed out that the firms were well aware that, under the German-Chinese treaty, German nationals were subject to the same tax obligations as Chinese nationals. The embassy, he explained, had been working with the firms to find a way to achieve equal standing with nationals of countries still enjoying extraterritorial privileges, and, for this purpose, it had seemed advisable to withhold payment until the Chinese authorities adopted a clearer position. Had everyone paid from the outset, he noted, any intervention by the embassy would have been unnecessary. The embassy’s suggestion, he emphasized, had been in no way obligatory. If the chamber’s members now believed it preferable to pay in light of the penal provisions of the law, each firm would have to be guided by its own interests in the matter.Footnote 45
On March 18, 1937, Kriebel submitted a detailed report addressing the income tax issue. He emphasized potential diplomatic risks, arguing that if German acquiescence without securing adequate protections for German interests—particularly regarding settlement rights, estate treatment, and land acquisition—future bilateral relations could be adversely affected.Footnote 46 However, Trautmann adopted a more moderate stance. Despite the absence of consensus on income taxation between Germany and China and intelligence suggesting minimal risk of forceful tax collection from German nationals, Trautmann advocated for restraint. He stated that he “would not like to issue new guidelines for the conduct of German nationals at this time … [he] rather believe[s] that it should suffice to inform the companies about the legal and factual situation, especially since the embassy is not in a position to give binding instructions.”Footnote 47 This position aligned with the Chinese Ministry of Finance’s assessment that formal German recognition of the new tax law was unnecessary given that German nationals no longer enjoyed extraterritorial protection.Footnote 48
The German diplomatic records discussed above reveal that China’s abolition of extraterritoriality for German nationals following the First World War and its subsequent assertion of fiscal sovereignty effectively created compliance pressure on German businesspeople in China, which in turn exerted leverage on the German government in its negotiations with China. German archival records further document interactions between the German embassy and Chinese finance officials. On April 6, 1937, “[t]he head of the Income Tax Office” met with Trautmann to address German concerns regarding equal treatment. The Chinese financial official offered a significant counterargument to German equality concerns, stating: “The Chinese government considers all foreigners liable to taxation, but only lacks the means to enforce the law against some. He admitted the practical discrimination but said that the Chinese government could not deviate from the principle; otherwise, it would never have achieved a modern tax administration.”Footnote 49 This exchange illuminates a fundamental divergence in legal interpretation regarding the principle of equality under international law. The Chinese government maintained that equality as such—equality in principle and in law—satisfied international legal requirements. In contrast, the German position demanded equality as applied, insisting on uniform practical enforcement, a standard that the Chinese authorities regarded as exceeding reasonable international legal expectations.
Finally, Trautmann’s records from August 5, 1937—four months after the initial discussions—document Finance Minister Kung’s conditional concessions. This development followed Kung’s June 1937 visit to Berlin, where he met with Adolph Hitler to secure German assistance. Trautmann noted that, “[i]f the Hapro credits could be increased somewhat, he would probably make concessions on the income tax issue.”Footnote 50 The Handelsgesellschaft für Industrielle Produkte (HAPRO) (Trading Company for Industrial Products), originally a private enterprise responsible for German arms sales to China, was subsequently acquired by the German military in 1936. Following this acquisition, HAPRO entered into an agreement with the Nationalist government to provide credit facilities (Kudo Reference Kudo1998, 15).
The diplomatic exchange above reveals a significant aspect of fiscal sovereignty negotiations: China’s right to tax, despite its fundamental nature as a sovereign prerogative, ultimately became a negotiable element in broader bilateral economic and military arrangements.
Great Britain
According to Chinese diplomatic archives, Great Britain invoked the principle of equal treatment to decline China’s taxation request. The Chinese official responsible for negotiations with Britain was the deputy minister of foreign affairs Hsu Mo, an international lawyer who held a doctorate in law from the University of Melbourne. Hsu had served as a professor of international law at Nankai University in the 1920s and was later appointed as a judge at the International Court of Justice in 1946 (International Court of Justice 1956). In April 1937, in his correspondence with British Ambassador Hughe Knatchbull-Hugessen, Hsu emphasized that “Great Britain was the first country which introduced the system of levying a direct progressive tax on personal earnings, which has since been adopted in all important countries and considered best in theory, most equitable in practice…. The Chinese income tax law was compiled only after a careful study of the British and other foreign laws of this kind with a view to their adaptation.” Furthermore, Hsu cited the public statement made by Chamberlain, the British foreign secretary, in 1927, in which “His Majesty’s Government” had indicated they were “prepared to make British subjects in China liable to pay.”Footnote 51 Knatchbull-Hugessen responded to Hsu, stating that,
[u]nlike some other Powers, we do not adopt the attitude that our nationals are under no circumstances subject to Chinese taxation, but we consider it essential that the taxation shall be legal, reasonable in amount and generally paid by Chinese and other foreigners. … when we see that these taxes are not being regularly paid even by Chinese, and much less by other foreigners, we cannot reasonably be expected to advise our nationals to pay them. Nevertheless, wherever there is reasonable compliance with the fundamental conditions which we have laid down, our nationals are among the first to come into line.Footnote 52
The British ambassador maintained this position in his discussions with Hsu Kan, the deputy minister of finance.Footnote 53 In essence, while Britain acknowledged China’s fiscal sovereignty, they refused to set a precedent by facilitating income tax collection from British residents in China, citing the principle of equal treatment.
British discussions regarding China’s income tax issue are documented in the Treasury Papers of Sir Frederick Leith-Ross. Leith-Ross had served as the chief economic adviser to the prime minister and chancellor of the exchequer on financial relations with foreign countries since 1924. In 1936, he was dispatched to China as an advisor on silver and currency reform matters. Existing historiography has predominantly focused on his contributions to monetary issues and economic competition among treaty powers in East Asia while overlooking his perspectives on Chinese income taxation (Endicott Reference Endicott1973; Best Reference Best2013). The National Archives file T 188/164, titled “China: Collection of Income tax,” contains 232 pages of correspondence between Leith-Ross and various stakeholders, including the British Foreign Office, the Treasury, British banks, and merchants in China regarding income tax matters. This collection of documents provides additional insight into British deliberations on the issue. In his letter to Treasury Secretary Warren Fisher, Leith-Ross outlined both the practical challenges and political risks of British resistance to Chinese income taxation. He observed that major businesses operating in China’s international settlements could easily restructure themselves as foreign corporations to avoid taxation. While empathizing with the Chinese finance minister’s fiscal challenges, he noted the irony that foreign residents frequently criticized the Chinese government’s inability to balance its budget while simultaneously resisting taxation measures that could help achieve fiscal stability. In addition, he warned that British inflexibility on taxation might have adverse political consequences, potentially intensifying Chinese demands for the abolition of extraterritoriality and spurring criticism of international settlements.Footnote 54 This view aligns with Britain’s broader policy of strategic accommodation toward ascending Chinese nationalism, as discussed in the preceding section on China’s efforts to secure Western recognition of fiscal sovereignty.
As an alternative to an outright rejection of Chinese taxation demands, Leith-Ross proposed a diplomatic solution to balance British privileges with Chinese fiscal sovereignty. He advocated for multilateral negotiations involving American and French authorities to reach a compromise with the Chinese government. He suggested that accepting reasonable taxation conditions would actually strengthen Britain’s position in preserving other privileges. As a practical solution, he proposed establishing a foreign tax department within the Chinese government, staffed by foreign officials, to handle the assessment and collection of taxes from foreign residents. This arrangement, he believed, would likely be acceptable to Chinese authorities while addressing foreign concerns about tax administration.Footnote 55 The proposed administrative arrangement garnered support from other senior Treasury officials. Edmund Leo Hall-Patch, who would later assume pivotal roles at the Organization for European Economic Co-operation, the International Monetary Fund, and the International Bank for Reconstruction and Development, indicated his intention to address the China Association, suggesting that “the foreign communities would be more likely to accept new taxes if the administration was entrusted to foreign officials. I do not know whether the Chinese government would be prepared to contemplate this, but it seems to me that this is the only possibility.”Footnote 56 Reinforcing this approach, Leith-Ross instructed the British consul-general in Shanghai to “do what you can to encourage Dr. Kung to engage foreign experts provided he realises the limitations.”Footnote 57
Additionally, Leith-Ross highlighted the legal complexities that British banks would face in implementing Chinese income tax regulations. In December 1936, he reported that British banks were prepared to collect taxes only on long-term deposits of twelve months or more, resisting the broader implementation of tax collection at source. The fundamental question centered on whether British banks could assist Chinese authorities in preventing tax evasion by Chinese citizens without becoming entangled in tax matters involving other nationalities.Footnote 58 By May 1937, the acting crown advocate cautioned that British banks might face legal liability, including potential damage claims, if they were to deduct Chinese government taxes from either customer accounts or employee salaries, as such actions could constitute breaches of both contractual obligations and client confidentiality. Without cooperation in the banking sector, the successful implementation of China’s income tax legislation would face significant obstacles.Footnote 59 As will be examined in the next section, the US State Department also expressed similar legal concerns regarding the implementation of income tax law by American banks operating in China.
To sum up, while Great Britain ultimately declined to require its subjects to pay the newly instituted income tax, its response demonstrated a nuanced position: Britain acknowledged China’s sovereign right to tax foreign residents, proposed concrete solutions for implementation, and endeavored to address the associated legal impediments.
United States
The American response, as documented in Chinese diplomatic records, lacked substantive legal justification. On September 18, 1936, US ambassador Nelson Johnson replied to the Ministry of Foreign Affairs that the “matter [of complying with the income tax law] was referred to the Department of State at Washington, which has now directed me to inform Your Excellency that the regulations cannot be considered as applicable to American nationals.”Footnote 60 The response provided neither explanation nor rationale for this position. Chinese historian Wei Wenxiang (Reference Wei2022, 438) thus characterizes this diplomatic communication as evasive and lacking a reasonable foundation. The US diplomats clearly acknowledged that it was unreasonable. In a letter to the State Department on September 3, 1936, Johnson introduced the refusals and reasons of France, Japan, and Britain regarding China’s new income tax law. Johnson wrote: “I respectfully recommend that this Embassy reply to the Foreign Office, stating that the American Government cannot acquiesce in the payment of the tax by American nationals unless it is paid by other foreign nationals.”Footnote 61 However, his recommendation was rejected by the State Department. In their reply on September 16, the State Department recognized that the 1903 treaty “would allow a reasonable exercise by China of the ordinary sovereign rights in fiscal matters, and at the same time prevent abuse of power through the imposition of undue burdens upon foreigners residing or doing business in China.” Therefore, “the Department feels that it would not be advisable or practicable to reply to the Foreign Office in the sense recommended in your telegram of September 3.” Instead, the State Department continued to write: “In view of the character of the income tax, its high rates on average incomes, the difficulty of orderly and impartial administration, and considerations connected with the collection of the tax from American nationals, the Department at this time is disinclined to indicate approval, even by implication, of the income tax regulations.”Footnote 62
During the meeting on September 17, 1936, between Willys R. Peck, the counselor of embassy and Finance Minister H. H. Kung, the latter expressed his expectations regarding the cooperation of American firms and banks in tax collection. Kung emphasized that “[h]e was especially anxious that American firms should deduct the income tax from salaries of Chinese employees in accordance with the law and that American banks should deduct the tax from income derived by Chinese from deposits in such banks.”Footnote 63 However, the State Department maintained an uncompromising position, instructing that “Peck should explain to Kung that American firms could not be expected to act as agencies of the Chinese Government in the collection of the tax from Chinese citizens.”Footnote 64 Furthermore, in his meeting with Peck on September 22, Kung contested the characterization of Chinese income tax as an undue burden, stating that
he quite understood that the American Government might entertain objections to features of the income tax law itself such as its comparatively heavy incidence on incomes in very low brackets, which features were occasioned by standards of living peculiar to China, but having regretted the public impression which would be created by the statement made in the Embassy’s notifications to the Foreign Office without explanation or qualification that the law could not be considered as applicable to American nationals.Footnote 65
He emphasized that he had “personally endeavored to frame an equitable tax law which would not be oppressive in its rates or mode [of] collection” and highlighted “the urgent need of the Chinese Government for additional funds wherever [possible] to carry out vital projects such as currency reform.”Footnote 66
The correspondence above reveals that, while the United States acknowledged China’s fiscal sovereignty, it justified its refusal on two grounds: the alleged excessive burden of China’s income tax and concerns about the impartial implementation of tax administration. With the full-scale outbreak of the Sino-Japanese War in July 1937, diplomatic negotiations concerning the implementation of the income tax came to a virtual standstill. In 1943, China successfully secured the abolition of extraterritoriality from all treaty powers. Gao Bingfang, then director of the Direct Tax Department, promptly advised the minister of finance that, since many foreign nationals had previously invoked treaty privileges to evade taxation, the government should seize this opportunity to ensure that foreigners bore the same tax obligations as Chinese nationals. The minister of finance, however, replied: “This is not a period of normal commerce; there is no tax to collect. There is no need to invite unnecessary disputes or incur ill will. This matter shall be tabled for now.”Footnote 67 Following the conclusion of the Second World War in August 1945, China immediately descended into civil war, and the Nationalist government’s efforts to assert through international law the right to tax aliens were once again suspended.
Implications for international fiscal/tax law
Scholarship in Third World Approaches to International Law has demonstrated that international legal doctrines developed from Western experience, though ostensibly neutral, embed structural inequalities (Anghie Reference Anghie2005). While many of the normative principles of taxation discussed below represent law in the books and do not trace historical developments, the preceding account of China’s experience offers implications for law in action, particularly in non-Western contexts. Sunita Jogarajan (Reference Jogarajan2018, 9) identifies two prevailing theories in the 1930s that justified a nation’s power to tax: protection theory and control theory. The former posits that the protection afforded to an individual within a country’s borders confers upon the government the authority to tax that person, which aligns with the position taken by China’s Ministry of Foreign Affairs at the time. The latter asserts that taxation is imposed merely as a function of the sovereign’s inherent right or power.
Some scholars referred to control theory as sovereign theory in matters of international taxation. Martha (Reference Martha1989, 22–23), in support of this theoretical framework, notes that French scholar Edgard Allix argued that the state emerges as a historical necessity, and its taxation authority derives from the fundamental aim of ensuring its continued existence. Allix further developed this argument by establishing that fiscal jurisdiction rests upon the principle of allegiance—specifically, political allegiance for national citizens and economic allegiance for foreign persons and entities. This perspective is reinforced by Arthur Albrecht (Reference Albrecht1952, 148), who maintains that taxation authority “is justified in international law essentially as an attribute of statehood or sovereignty.” An examination of this historical context reveals that the concept of control extends beyond mere theoretical authority (“control as such”) to encompass practical implementation or “control as applied.” Despite the 1903 Sino-American treaty’s explicit recognition of China’s fiscal sovereignty, China’s inability to effectively audit income tax returns from both citizens and foreigners and to collect taxes universally due to limited state capacity provided grounds for various nations to refuse compliance.
Moreover, the question arises as to whether international law guarantees a nation’s sovereignty in matters of taxation. Avi-Yonah (Reference Avi-Yonah2007, 27) has asserted that “the right of countries to tax income arising in their territory is well established in international law.” Arnold A. Knechtle (Reference Knechtle1979, 19–20; emphasis in original) argued that “taxation is just when it is raised generally and equally; in short, if it meets the precept of equal rights. … Once the postulate of fiscal justice has been achieved, distortions of competition due to taxation disappear.” Kees van Raad (Reference Van Raad1986, 45) has further indicated that, “although there may be some authority for the view that unfair tax discrimination against aliens is invalid under customary international law, the practice appears too contradictory to permit the definite conclusion that this view is a clearly established rule.” However, the historical evidence in the case of Republican China suggests that restrictions on taxation sovereignty encompassed considerations such as avoiding undue burdens and ensuring equitable treatment. Again, this equal treatment requirement encompasses both the law as it is written and how it is applied in practice. Some might argue that, according to modern tax compliance studies, third-party reporting is a relatively simple yet effective way to ensure compliance. However, the structural features of developing countries, including large informal sectors, high self-employment, weak financial intermediation, and limited administrative capacity, severely constrain the feasibility and effectiveness of third-party information systems (Joshi, Prichard, and Heady Reference Joshi, Prichard and Heady2014; Pomeranz and Vila-Belda Reference Pomeranz and Vila-Belda2019). China is not an exception. As Arthur N. Young (Reference Young1965, 32) later recounted, American advisors of the 1929 Kemmerer Commission advised against introducing an income tax in China during the 1930s, citing inadequate business recordkeeping, popular distrust of government, the impracticability of self-assessment, and an underdeveloped tax administration ill-equipped to administer direct taxation with fairness and efficiency. Felix Boecking (Reference Boecking2017, 191–92) also indicates that “private employers, on the whole, refused to open their books to the bureaucracy of the Ministry of Finance.”
Furthermore, the invocation of extraterritoriality as a basis for limiting tax sovereignty implies that only “civilized” nations were deemed to possess the sovereign right to tax foreign residents. These requirements were not entirely pretextual on the part of countries that did not wish to comply. Prior to 1949, China’s customs duties and salt taxes were jointly administered by Chinese and foreign authorities—primarily, the British—and the treaty powers did not object to paying these two types of taxes in China. Debin Ma and Jared Rubin (Reference Ma and Rubin2019, 281) argue that the Maritime Customs and Salt Revenue administration established “centralized national level bureaucracies with taxes levied according to transparent and pre-set rules and staffs paid good wages with stable tenure and relatively little corruption” within China’s fiscal administrative system. This turn toward the rule of law and transparency established credible commitment mechanisms, consequently enhancing tax revenue generation.
As noted above, Leith-Ross did propose establishing a foreign tax department within the Chinese government, staffed by foreign officials, to handle the assessment and collection of taxes from foreign residents. However, in 1930s China, where nationalist sentiment was running high and the government and public were already vigorously demanding tariff autonomy, it is difficult to imagine that China could have made further concessions on fiscal sovereignty by allowing for the Western-led administration of income tax collection. After all, the Ministry of Finance had long viewed direct taxation as a goal worth pursuing, seeing it as a hallmark of “administrative modernity” (Boecking Reference Boecking2017, 1, 191). In short, although the requirement of equal treatment and control as it is applied seems to be neutral, it presents a paradox for nations in the process of modernization: the absence of substantial control precludes effective taxation, yet the lack of financial resources impedes the establishment of such control. The non-discrimination principle would exacerbate existing competitive disparities between local and foreign businesses. These aspects appear to have been overlooked in the existing historiography of international tax law, which is predominantly based on Western experiences.
Conclusion
Given the paramount importance of foreign direct investment in economic development, the taxation of foreign entities remains a critical imperative for developing economies. However, in contexts of limited state capacity, non-domestic persons and entities demonstrate a heightened propensity for tax avoidance. This phenomenon is exemplified by the case of Republican China, where international lawyers sought to establish legitimacy for domestic taxation policies within the international legal framework. The Nationalist period from 1928 to 1949 marked a transformation in Republican China’s fiscal governance. The implementation of the Provisional Income Tax Act of 1936 represented an initiative to extend its fiscal jurisdiction over both domestic and foreign residents despite the constraints imposed by extraterritorial privileges. Chinese diplomatic representatives who received legal training in the West persistently advocated for international recognition of China’s sovereign right to levy taxes on foreign persons and entities.
Bilateral negotiations with major powers—notably, France, Germany, Great Britain, Japan, and the United States—illuminated the complexities inherent in implementing international tax law within non-Western jurisdictions. Each nation’s diplomatic position reflected an intersection of juridical interpretations, economic imperatives, and geopolitical strategies. While certain nations, such as Germany and Great Britain, acknowledged China’s theoretical fiscal sovereignty, pragmatic implementation remained problematic due to concerns for equitable treatment and competitive neutrality. The Chinese case exemplifies the systemic challenges confronting developing nations in asserting fiscal sovereignty within international legal frameworks. The emergent principle of “control as applied” and the principle of non-discrimination highlighted a fundamental paradox: effective taxation necessitates robust state capacity, which itself requires substantial fiscal resources. This historical analysis contributes to the theoretical understanding of the complex relationship between international tax law and sovereign authority, particularly in the context of nations undergoing state modernization.
The Nationalist government’s attempts to implement foreign resident taxation achieved only partial success, constrained by both exogenous resistance and endogenous limitations of international law. In contrast, the establishment of the People’s Republic of China in 1949 precipitated a paradigmatic shift as the new regime effectively terminated the presence of foreign businesses. Following the 1979 opening up, the People’s Republic chose to cede fiscal sovereignty strategically, offering multinational corporations zero or minimal tax. This deliberate sacrifice of immediate tax revenue was in exchange for technology transfer requirements through mandatory joint ventures (Tung and Cho Reference Tung and Cho2000, 105–6; Jiang et al. Reference Jiang, Keller, Qiu and Ridley2024, 3). Namely, China traded short-term fiscal imperatives for long-term developmental objectives.
By 2007, China’s enhanced state capacity permitted a reassertion of full fiscal sovereignty. China not only terminated preferential treatment for foreign investors in core economic regions but also utilized international law to gain a competitive advantage over foreign multinationals operating in China (Kong, Li, and van der Hoek Reference Kong, Li and Peter van der Hoek2008, 656–57). China already had its own multinational firms, but it gave them preferential tax treatment by letting their parent companies register in tax havens and be classified as non‑residents. As a result, Chinese multinationals gained a major competitive edge over foreign companies doing business there (Cui Reference Cui2022, 13; Noked and Wang Reference Noked and Wang2024, 521–23). In addition, China has maintained a broad network of tax treaties with advantageous provisions. The 1984 US-China treaty exemplifies this asymmetry.Footnote 68 It permits China to impose taxes on transactions involving Chinese branches of American corporations, whereas the United States cannot do the same for the American operations of Chinese firms (Reese Reference Reese1987, 383–85). Additionally, China has so far declined to implement the global minimum tax on the grounds that revenue benefits would be limited and uncertain (J. Chen Reference Chen2025, 244–45). The trajectory from the fiscally constrained Nationalist government in the 1930s to the contemporary People’s Republic of China’s tax regime underscores how the concept of fiscal sovereignty in international law can both undermine and sustain a state.
Acknowledgments
I presented an earlier version of this article at the American Society of International Law’s International Law and Social Sciences Interest Group’s First Biennial Workshop and the nineth Stanford Law and Society Conference for Junior Researchers. I am grateful to Karen Alter, Reuven Avi-Yonah, Michael Banerjee, Peter Carroll, Wei Cui, William Dan, Haris Durrani, Melissa Macauley, Ajay Mehrotra, Curtis Milhaupt, Jing-wei Yuan, and the editors of Law and Social Inquiry for their invaluable feedback, and I extend special thanks to Che-Wei Chang for his generosity in providing copies of the German archives. I used generative artificial intelligence tools to assist with the translation of non-English sources; all translations were subsequently verified and corrected by me. All errors are mine.
Funding Statement
This project is supported by the Esherick-Ye Family Foundation Graduate Fellowship.
