Foreign Relations of the United States, 1952–1954, The Near and Middle East, Volume IX, Part 1

886A.2553/2–1153

No. 284
Memorandum by the Assistant Secretary of State for Near Eastern, South Asian, and African Affairs (Byroade)¹

secret

Washington, February 11, 1953.

Subject:

• Proposed Treasury Action on Auditing Aramco Tax Statements

Problem

It has come to my attention that the Treasury Department is now auditing Aramco’s 1950 tax statement. 1950 was the first year that Aramco initiated the 50–50 profit-sharing formula in the Middle East which had the effect of transferring to the Saudi Arabian Government corporation taxes paid previously to the United States Government. Two offices in Treasury are apparently interested in this problem: the legal staff and the policy staff. It is understood that from a legal point of view Aramco is within the law; from a policy point of view it is understood that Treasury is most reluctant to take the full onus of allowing this transfer of tax and will recommend to the Secretary of Treasury that he first obtain clearance from Congressional leaders.^* The question is what action, if any, is required of State at this time.

Background

The Saudi Arabian Government passed an income tax law in 1950 providing for a corporation tax which, when added to existing royalty payments, would give the Saudi Arabian Government and Aramco a 50–50 split of net profits. The company agreed to this tax on the grounds that taxes paid to Saudi Arabia could be deducted from their U.S. tax. Company lawyers were assured that this move was legal and could find precedents in Venezuela for this action.

The Aramco move quickly led to similar action by the other American companies operating in the Middle East. The net transfer from the U.S. Treasury is now probably in the neighborhood of two hundred million dollars a year. In order to become legally eligible for this U.S. tax credit Gulf in Kuwait went through a complete company reorganization, and Jersey and Socony in Iraq undertook incomparably complex and protracted inter-company negotiations with their French and British partners (and Gulbenkian) who in turn heavily involved the British and French Governments in this problem. The Department has fairly extensive files on these oil company negotiations.

Discussion

Although it is difficult to foresee the precise results such action would have in the Middle East, the complications in the international oil business which would result from a negative finding on the part of the U.S. Government could be expected to be severe. It also is most probable that Middle East governments would react by forcing these companies to incorporate locally. The companies themselves might even recommend this course to the local governments. This would presumably serve to negate any negative decision taken by the Treasury Department and we might be just where we are now, plus a certain amount of publicity, which from the NEA point of view could be expected to be damaging.

Conclusion

I would appreciate your consideration and advice on this problem.² On a basis of the few facts at my disposal regarding the tax problem and having in mind the apparently fruitless and unfortunate results of the antitrust moves on an already upset Middle East, I wonder if it might not be in the national interest for the Secretary of State to suggest resolving this problem by Executive study and action rather than turn the problem over to the Legislative Branch of the Government. Such a course would seem particularly appropriate if it is established that the companies and Middle East governments can in effect force a ruling in their favor regardless of what the U.S. Government decides, i.e. by incorporation abroad.

1. Drafted by Funkhouser and addressed to Linder, Phleger, and Mann.
2. This information on Treasury action should be closely held within State. [Footnote in the source text.]
2. In a response to Byroade, dated Feb. 12, Phleger stated that he thought it unwise to try to keep the Secretary of the Treasury from discussing the matter with appropriate Congressional leaders and suggested Byroade or Linder inform the appropriate Treasury official the Department of State was interested in seeing a prompt resolution of the matter as quietly as possible in view of the foreign policy considerations set forth in the memorandum. (886A.2553/2–1153)