886D. 2553/6–2551

Memorandum of Conversation, by the Associate Chief, Monetary Affairs Staff (Rosenson)


Subject: Kuwait Oil

Participants: Colonel Drake, Gulf Oil Company
NEA—Mr. McGhee
Other Company representatives and Department Officers

The only issue discussed was whether, in the contemplated arrangement with Kuwait for a 50–50 division of the profits, taxes paid in the U.K. (by the AIOC) and in the U.S. (by Gulf) should be deducted from gross profits before the 50–50 split. At the present time it would make no difference to Gulf as the company expects that its payments to Kuwait under the plan would exceed its tax liability to the U.S. and that the U.S. Treasury would offset the payment to Kuwait against its tax liability. However, if taxes here should go up or certain exemptions and depletion allowances which American oil companies are now enjoying should be eliminated, it would be a serious matter for Gulf to have to pay a heavy tax in the U.S. and, on top of that, pay Kuwait 50% of its gross profits.

The U.K. Foreign Office wants the two companies to share profits with Kuwait before deductions for taxes at home. No one at the meeting knew what is behind this position, as the alleged reason—i.e., to help the Sheikh of Kuwait—is not taken seriously. It was surmised that one possible reason was a desire on the part of the U.K. that both companies should pay an equal amount to the Sheikh. At the present time Gulf would pay more if “foreign” taxes were first deducted. This is because Gulf would pay no taxes in the U.S. (now) whereas AIOC, being entitled to only partial credit for its tax payment to Kuwait, would still have a tax liability to the U.K. Thus on the basis of prior “foreign” tax deductibility the profit pie which AIOC would divide with Kuwait would be smaller than the Gulf pie.

In an effort to meet this point the Gulf representatives in London have made a counter-proposal under which (a) the principle of “foreign” tax deductibility would be preserved; (b) the “foreign” tax deducted would be the same for both companies and would be either the U.K. or British tax liability, whichever was smaller.

Mr. McGhee was sympathetic with the company’s point of view and thought that the British proposal would endanger the 50–50 arrangement that has already been made between Aramco and Saudi Arabia by encouraging the latter to increase its demands.

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He advised the company to stick to its guns and said that in the meantime the Department would inquire from London to see if it is possible to ascertain what the motives of the Foreign Office are.1

  1. Telegram 6118 from Washington, June 25, asked the Embassy to find out if the British Government’s stated objections to the Gulf proposal represented its true reasons for objecting (880.2553/6–2551). Telegram 40 from London, July 3, reported the Ambassador felt the British position was firm, and was based on what it considered its responsibility to the Shaikh of Kuwait as his protecting power (880.2553/7–351).