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profits to the assessable revenue. They understand that these securities may have been purchased either from the proceeds of land sales or from surplus general balances. While they agree that any profits arising on the sale of securities purchased from the proceeds of land sales are exempted from assessment, they consider that any such profits, whether arising owing to exchange fluctuations or otherwise, in the case of securities purchased out of surplus general balances are properly assessable for military contribution.

These profits may arise from the sterling appreciation of the securities or from an increase in their value in dollars due to lower exchange. The sterling appreciation of investments of general balances, when realized, is already included in the revenue (see paragraph 291 of Colonial Regulations). There remains for consideration only the dollar appreciation of such securities. It would seem reasonable that such appreciation should be assessable to the military contribution, but the Council will not press this point, subject to confirmation by your Department of their understanding that the amount involved can only be very small, and that its separate calculation would involve special and complicated accounting arrangements. They agree similarly to the exclusion from the assessable revenue of the profits arising from the Crown Agents' routine realizations (see paragraphs 12 and 13 of the Governor's despatch No. 400).

12. In connexion with the profits on the sales of securities a new suggestion is made in your letter, viz., that the income arising from investments purchased with the proceeds of land sales should have been exempt from assessment in the past because the proceeds of the land sales are themselves so exempt, and that exemption should be allowed in the future. I am to state that the Council are unable to accept this view. They are prepared to agree to exemption in cases where such income is definitely used solely for the purpose of increasing the investments, but where the income is included in general revenue they consider that there can be no question but that it has been rightly subjected to assessment.

13. The penultimate paragraph of your letter concludes with an appeal to the Army Council to consider the claims in the spirit of certain remarks made by Lord Haliburton in a memorandum dated 8th June, 1899. On this point I am to observe that that memor- andum was directed in the main to the treatment on the basis of net receipts of new industrial undertakings, viz., those established by the Colonies after the fixation of the But the Council percentage of the assessable revenue to be paid as military contribution.

trust that, although they have not been able to accept the Colonial Office views on all the claims put forward for exemption or special treatment, it will not be felt that they have failed to consider the whole matter in the accommodating spirit which Lord Haliburton advised. It has been found possible by making certain concessions to accept the majority of the claims, but to accept the remainder would, in the opinion of the Council, seriously impair the general principles relating to military contributions as laid down by Lord Haliburton's Committees.

14. The military contribution of the Colony falls far short of the cost of its garrison, and the Secretary of State for the Colonies will readily understand the difficulty which the Army Council would feel, particularly at the present moment, in recommending to the Treasury any substantial departure, at the cost of the British taxpayer, from the long established principles relating to the contribution. In this connexion the attention of the Council has been drawn to the recent report (Cmd. 3932 of 1931) of a Commission appointed by the Secretary of State for the Colonies on the Hong Kong currency; referring to the large number of immigrants, the Commission remark (paragraph 38) that "This influx is doubtless due to the security of person and property which British rule affords, as well as to the very moderate taxation imposed on Hong Kong residents, and it is well known that capital is being steadily imported into the Colony by persons of the rentier and capitalist classes."

15. I am to express the hope that, after further consideration in the light of the various comments above, Secretary Sir Philip Cunliffe-Lister will not feel disposed to press further the claims still in dispute. In that event, subject to the concurrence of the Lords Commissioners of His Majesty's Treasury, the Council agree to the communication to the Colony forthwith of the accepted claims.

16. A copy of this letter has been sent to the Treasury.

I am, &c.,

H. J. CREEDY.

C. 92622/32 [No. 3].

123

No. 77.

HONG KONG.

THE OFFICER ADMINISTERING THE GOVERNMENT

to

THE SECRETARY OF STATE.

(Received 9.18 a.m., 30th July, 1932.)

TELEGRAM.

30th July. No. 159. Confidential. Your despatch of 3rd June, Confidential*. Military contribution. Paragraph 9 of War Office letter of 25th April†.

Repeal of Section 15 of Ordinance No. 14 of 1927 will be strongly opposed by Unofficial Members of Council. Ordinance has been in force for nearly five years with- out question and charge of military contribution on interest and Sinking Fund will arouse all old bitterness on the subject of military contribution. I strongly urge that no effort be made to interfere with Ordinance No. 14 of 1927.

The proposal to charge military contribution on interest and Sinking Fund of new loan will also be very strongly opposed. Revenue has been very largely expanded in Hong Kong in recent years on account of the enlargement of sphere of Government activities- see paragraph 3 of Lord Passfield's Confidential despatch of 26th July, 1930‡ --and on this expansion military contribution is paid to an extent which justifies a recon- sideration of the basis of contribution settled by Haliburton Committee.

Large capital expenditure is now required which can only be financed by loan and if military contribution is to be levied on interest and Sinking Fund as well as revenue derived from work to be constructed it will so greatly increase cost of work as seriously to retard development. Military contribution is already paid on waterworks revenue estimated for next year at 1,400,000 dollars in addition to water rates included in general

rates.

As regards paragraph 14 of War Office letter, whilst it is admitted that military contribution does not cover cost of garrison it is very strongly felt in the Colony that garrison is not maintained here merely for defence of Hong Kong but also for defence of British interests in China and that it would be entirely inequitable to charge Hong Kong with the whole cost.

Before any action is taken to charge military contribution on interest and Sinking Fund either existing Public Works Loan or on proposed new loan action which will arouse acute unofficial opposition I suggest that Peel be consulted.

Matter is urgent as Estimates for 1933 are now being considered and military contribution on interest and Sinking Fund for 1927 alone would be over 150,000 dollars.

C. 92622/32 [No. 5].

SIR,

No. 78.

COLONIAL OFFICE

to

WAR OFFICE. [Answered by No. 81.]

Downing Street, 19th August, 1932. I am directed to acknowledge the receipt of your letter of the 25th of April§, on the subject of the assessment of revenue for military contribution in Hong Kong, and to express appreciation of the concessions which the Army Council has indicated its readiness to make in paragraphs 2, 3, 4, 5, and 6.

2. As regards paragraph 7, it is regretted that the Army Council are unable to agree that the waterworks in the New Territories should be regarded as a new productive

* C. 92622/32 [No. 2]: not printed.

(C38051)

† No. 76.

‡ No. 67.

§ No. 76.

<* 2

PUBLIC RECORD OFFICE

Reference :-

C.O.882/11

PUBLIC RECORD OFFICE, LONDON | ALLY WITHOUT PERMISSION OF THE

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