Memorandum of Conversation, by Richard Funkhouser of the Office of Near Eastern Affairs

Participants: Mr. Terry Duce, Aramco
PED—Mr. Moline
NE—Mr. Funkhouser

In discussing the new agreement Mr. Duce stated inter alia:

1. Aramco cleared up all 12 outstanding demands of the Saudi Arab Government by the December 30 Agreement.2 Disagreements over Tapline however were not included in these negotiations and would have to be discussed separately. Mr. Duce was not worried about the latest Saudi Arab demands on Tapline for protection expenses.3 (Saudi Arabian Government now earns nothing from Tapline directly. 15 years from the completion of the line Tapline must pay transit fees.)

2. Under the December 30 Agreement Aramco submits to the two Saudi Arab tax laws: the October 20% profits tax and the December 27 50% profits tax. It was not made clear how the taxes were [Page 277] applied or how they operated with respect to U.S. taxes. It appears that the 20% tax is responsible for the largest bite of Aramco profits since it reportedly is levied before U.S. taxes. The 50% December 27 tax is reportedly levied after U.S. taxes.

3. Saudi Arab income is calculated by taking 50% of company profits after expenses have been deducted. Mr. Duce gave the following company figures covering 1950. (These figures were given in utmost confidence and should not even be quoted back to Mr. Duce.) Aramco showed 1950 profits $292,000,000, expenses $66,000,000, U.S. taxes $6,000,000. Mr. Duce did not explain the $6,000,000 U.S. tax. Of the remaining $220,000,000 net profit, the Saudi Arabian Government would get $110,000,000: $58,000,000 for royalties and rents, $8,000,000 duties, $32,000,000 as 20% tax and $12,000,000 as 50% tax. These figures would change significantly in 1951, particularly since the royalty would under the new agreement be reduced from the free market rate of gold ($12.00 rate per gold sovereign or 32¢ per barrel) to the legal rate or approximately 21¢ per barrel.

4. Mr. Duce stated that the new Saudi Arab tax laws virtually eliminated all U.S. taxes. He however emphasized that the U.S. Government would still receive 8% tax on dividends to parent companies, 30% tax on stockholders dividends and the 10.5–21¢ duty on oil imports from Arabia. If 300,000 barrels a day were imported into the U.S. from Arabia, Mr. Duce added the U.S. Government would earn some $20,000,000. Mr. Moline expressed astonishment that any such rate of imports of Arabian oil into the U.S. might be contemplated.

5. Mr. Duce stated that any specific figures on the Aramco Agreement and any interpretation regarding the way the new taxation would work would have to be given the Department by Mr. Brougham, the Financial Vice-President of Aramco. Mr. Duce doubted whether Aramco would request any decision on tax credit from the Treasury Department at this time. He stated that the company would probably file their income tax returns showing taxes paid to the Saudi Arabian Government and await developments.

6. Mr. Duce calculated that 1950 royalties would come to approximately 56¢ per barrel. Mr. Duce stated that submerged areas would fall under the profit-sharing arrangement with the only difference being that the royalty figure would continue to show a 5¢ per barrel greater return than on the mainland. The total return on any submerged area production would however be 50% of net profits as on the mainland. Mr. Duce seemed to expect that the two concessions might be unified. He had no comments as to whether the drilling obligations on these submerged areas might be eliminated.

7. By the new agreement Aramco gained the privilege of paying royalties in any currencies collected from oil sales and/or gold. The company might pay in gold if they could buy gold at IMF prices. Mr. [Page 278] Duce was asked whether payment in gold would not again be so profitable to the Saudi Arabs that it would be a difficult diet to drop. There was no comment.

8. The new agreement also called for elimination of the 5¢ premium on company rial purchases. Mr. Duce was inclined to minimize this feature of the agreement.

9. Mr. Duce was informed that the Department was anxious to secure a copy of the new agreement and to have the details explained, particularly the meaning and operation of the two Saudi income taxes. Mr. Duce stated that the agreement was 99% approved by the Aramco Board and that the Department would receive a copy immediately following final approval, expected January 15.4 He asked if a full review by Messrs. Davies, Brougham and other top officials who participated in the negotiations would be desirable from the Department’s point of view and was assured that it would be.

  1. This memorandum of conversation was drafted on January 19.
  2. For previous documentation on the Aramco-Saudi Arabian Government Agreement of December 30, 1950, see Foreign Relations, 1950, vol. v, pp. 9 ff. Duce met with Department of State officials so they could obtain details of the Agreement, pending a Washington visit by top Aramco executives who had participated in the negotiations. A memorandum from Funkhouser to McGhee, dated January 25, stated that at a January 26 luncheon top Aramco officials would fill in the gaps that remained in the Department’s information after this January 10 discussion. Among points to be raised by the Department at the luncheon were questions about the way Saudi Arabian taxes were to be levied, whether the Saudi Arabians would see the Aramco books, and whether Aramco considered its profit-sharing type of agreement adaptable to the situations in Iran and Iraq. (NEA Files: Lot 57 D 177: Saudi Arabia–Aramco, 1951) No memorandum of conversation of a January 26 Aramco luncheon has been found in Department of State files.
  3. Telegram 433 from Jidda, January 10, reported the Saudi Arabian Deputy Minister of Finance had met the previous day with the AramcoTapline representative to the Saudi Arabian Government and again raised the question of payments for the protection of Tapline (886A.2553/1–1051).
  4. On April 17 Duce sent Fred Awalt an Aramco pamphlet entitled “Agreements between Saudi Arab Government and Arabian American Oil Company,” containing copies of agreements between Aramco and the Saudi Arabian Government from the original Concession Agreement of May 29, 1933, to the end of 1950. Included were copies of the Agreement of December 30, 1950; the Saudi Arabian Royal Decree of November 4, 1950, imposing an income tax on individuals and companies; and the Royal Decree of December 27, 1950, imposing an income tax of 50 percent of the net operating income of petroleum companies. (886A.2553/4–1751)