880.2553/6–2251: Telegram

The Chargé in the United Kingdom (Holmes) to the Department of State


6765. At mtg yesterday at FonOff Emb was given statement of HMG’s position re Kuwait oil negots. FonOff stated that AIOC was now prepared proceed with arrangement for settlement in Kuwait without awaiting decision from inland revenue on question of UK tax relief. HMG considers however, that the two fol alterations in present proposals are desirable.

a. The provisions for payments to Shaikh shld be revised to allow division of profits before deduction of foreign tax. Stated that HMG did not consider reduction of Shaikh’s share net profits on account of foreign tax is justifiable in principle, and it is understood IPC partners have recognized this in their proposals for Iraq.

b. AIOC has been advised that in HMG’s opinion an increase in Kuwait oil royalties is justified in view of gen level of royalties elsewhere and HMG reserves right if necessary to give same advice to Shaikh. FonOff indicates it is matter of decision for Shaikh and HMG will not insist on this point. Reference was made however, to AIOC Gulf agreement of principles, providing that if Shwuh or HMG insist, companies prepared to raise royalty to not more than twice present level.

MinFuel also advised Gulf of foregoing position yesterday. Gulf reps wish maintain principal of splitting profits after deduction of foreign tax, since this is in line with Aramco plan and also serves as check on further royalty increases. Understand Proctor requesting permission from Gulf board to make compromise proposal that unrelieved portion either US or UK tax may be deducted before splitting profits with Kuwait, with such deduction to be calculated on basis which is most favorable to Shaikh. Hence under present US laws allowing full tax relief, there wld actually be no deduction of foreign tax in Kuwait, but principle wld be preserved.

On June 20 Gulf and AIOC signed principles of agreement similar to those pouched Dept in Emb despatch 5905, June 6.1 It appears therefore if prompt agreement, can be achieved on alterations suggested by HMG, companies cld commence negots with Shaikh at early date.

  1. Not printed; it contained a copy of the draft letter of agreement covering the Gulf-Anglo-Iranian plan to increase the oil revenues of the Shaikh of Kuwait, which was to have been signed on June 5 (886D.2553/6–651).