880.2553/10–153
No. 313
United States Record of the Fifth
Session of the United States–United Kingdom Talks on Middle East
Oil1
Subject:
- Fifth Session—U.S./U.K. Talks on Middle East Oil
Participants:
- British Embassy Team—
- Mr. Harold Beeley, Counselor
- Mr. R. W. Bailey, Political Officer, NE
- Mr. J. A. Beckett, Petroleum Attaché
- Mr. Victor Butler, British Foreign Office
- U.S. Team—
- NE—Mr. Hart
- NE—Mr. Robertson
- OMP—Mr. Willis Armstrong
- PED—Mr. Robert Eakens
Mr. Hart opened the meeting by remarking that this last session of the current U.S./U.K. talks on Middle East oil was for the purpose of tidying up loose ends on the various problems covered. He felt that the talks had been both profitable and useful. The Department would be happy to review the Middle East oil situation periodically. [Page 741] Referring to a request made by Mr. Beeley at the last session, he expressed the thought that we might hold the periodic talks once every six months with the understanding that special arrangements could be made to hold discussions more frequently if warranted by any particular important development. He added that we were gratified with the way in which the talks had progressed and wished to refer particularly to two developments. First, it seemed to him that the talks had been most useful in seeking further ways of establishing a relationship of confidence between the two governments. Second, he appreciated the thoughts advanced on the avoidance of “ganging up” on the part of our two governments against the Arab States concerned. He added that it had been most useful that the principles upon which action might be guided had been and could continue to be considered. Furthermore, a by-product of the talks may be a more systematic consultation with the oil companies concerned on both sides.
Mr. Beeley replied that his Government appreciated the time and thought given to these talks. As a consequence, he had been able to encourage his Government in London that the two governments were working along similar lines. While his instructions had been to seek periodic talks on a quarterly basis, he believed that his Government would be agreeable to holding meetings once each six months, particularly in view of the understanding that additional discussions could be arranged when necessary. According to this arrangement, the two governments could schedule the next regular talk for March or April of 1954.2 Meanwhile, the problem of public relations between the companies on the one hand and the producing and transit countries on the other, and the type of contribution which our two governments might be able to make in this field, could be explored. The emergence of the Iranian oil industry was a development that should be watched.
Mr. Hart stated that Ambassador Moose, who was back from Syria on consultations in the Department, had made certain suggestions in respect to the transit problem. Ambassador Moose had indicated that he is impressed with the frailty of any profit sharing arrangement under which the oil companies make pipeline payments. He believes the 50–50 profit sharing plan is both unsound in principle and dangerous in practice. The only principle which the transit countries recognize is the principle of getting larger and larger payments from the pipelines. Should the profit sharing principle be admitted, it might well turn out to be a step toward nationalization such as occurred in Iran; it might well inspire parallel [Page 742] demands on foreign companies engaged in air or sea transportation which serve ports or airports in the Near East; it could inspire the Government of Egypt to invoke the profit sharing principle in order to share the savings of tankers passing through the Suez Canal. If the local government is able to impose 50–50 profit sharing, there is no obvious point, short of the capacity of the company to pay, where further increases in the government’s demands can be halted. A 50–50 division has no more innate value than 60–40, 75–25 or any other ratio. The calculation of the profits to be divided, whatever the proportionate share, is sure to be a thorny problem. A more desirable course would be one embodying a principle which could be defended by the pipeline companies and which the U.S. Government could better support. A suggested course would be for the pipeline companies to propose, when the pressure for a new arrangement becomes irresistable, and push a counter plan to demands for profit sharing, offering to give up their special positions of tax immunity in return for “national treatment” whereby their property and income would be taxed at a rate no higher than that applied to local firms and their obligations and rights would be those of a domestic business concern. The highest currently applicable tax rate in Syria is thirty-six per cent. We have under consideration in Syria a FCN treaty calling for national treatment.
Mr. Butler responded that he thought it would be extremely wise that the oil companies fit into the general tax structure of the Arab States. He added that he was under the impression that Aramco and IPC had been thinking along these lines. Mr. Eakens observed that the oil companies were thinking in terms of some form of taxation, but exactly what form was not yet clear. However, he added that giving up their tax immunity would involve a major decision by the oil companies.
Mr. Armstrong pointed out that if the tax principle were to be considered, it might be well to examine how changes in the law could be made in respect to oil company payments. Tax laws, for instance, could be changed by the governments unilaterally without any consultation with the oil companies. On the other hand, if the oil companies held valid agreements with the government, presumably the agreements would be changed only as a result of bilateral negotiations. To this observation Mr. Metzger added that once you stake out national treatment as the standard of treatment, the oil companies would get no better or no worse treatment than the nationals of the countries concerned.
Mr. Eakens mentioned certain risks involved in accepting the principle of taxation as had been demonstrated in Venezuela. In that country, a tax law enacted on December 31 of 1947 or 1948 under the guise of a generally applicable tax, retroactive to the beginning [Page 743] of the year, had cost the oil companies some thirty million dollars in additional taxes without a single Venezuelan enterprise paying the tax. He added that Syrian tax levies on IPC would be larger than on Tapline, assuming profits are commensurate with transit distance and volume of oil transported.
Mr. Butler expressed the thought that the oil companies might find lesser risk deriving from increased taxation once the principle were established than on any arbitrary division like the 50–50 profit sharing. There would be great pressure on the part of the transit states to exceed the 50–50 ratio once revenues began to decline in order to maintain revenues at peak levels. A precedent had already been set in Iraq by IPC which had accepted the 50–50 principle on the profits of the pipelines between the wells and the Iraq-Syrian border.
At this point Mr. Beeley interjected that while the principle of taxation might be acceptable to Syria in respect to transit payments, Lebanon might object in view of the short transit distance across that country. To this Mr. Armstrong added that we have not succeeded in negotiating FCN treaties with any of the Arab States. We have, however, negotiated treaties with certain other countries in the Middle East such as Greece, Israel and Ethiopia.
Mr. Eakens stated that the fact that the oil companies enjoy tax immunity makes them vulnerable to being singled out for increased demands by the governments concerned. We might, therefore, discuss with the oil companies the question of whether they would be willing to accept the principle of taxation which would involve their giving up the tax immunity they currently enjoy. To this Mr. Beeley added that if separate pipeline companies are established, there may be less resistance to giving up tax immunity on the part of the oil companies concerned. Mr. Robertson suggested that this might be a decision for the companies to make.
At this point Mr. Metzger observed that the historical record regarding the ability of governments to support their nationals in respect of heavy taxation by other states shows that certain difficulties had been encountered. International law principles in the tax field were weaker than in other fields. If the taxes were not confiscatory or discriminating in nature, the government would not be standing on very solid ground. Consequently, when considering standing for national treatment on tax matters, it may look better in principle than it actually is in practice.
Mr. Hart observed that there is no easy solution for the transit problem as, on the other hand, the governments in the Middle East had not made a very good record in respect to recognizing the validity of existing contracts.
[Page 744]Mr. Metzger continued that there were other factors in the field of taxation that should be kept in mind. Foreigners domiciled here are treated on the same basis as Americans with a few notable exceptions. One exception is that domiciled foreigners are subjected to withholdings ranging from twenty-two per cent upward; while non-domiciled foreigners are subjected to withholdings ranging from thirty per cent upward. More important for the problem at hand, however, is that classifications can be made which provide certain differentiations on objectively reasonable bases without being considered discriminatory. Congress had said, for instance, that where employers have eight or more employees, they must pay social security tax; there was no requirement for a tax for employers who had less than eight employees. The courts have held that this and similar classifications are permissible, despite the fact that differences in treatment result. Classification applies in a very wide area. It would be very difficult for foreign nationals to attack differentiations under such classifications.
Mr. Armstrong stated that the Syrians could enact tax measures for all pipelines in the country at a rate of sixty per cent or more. The fact that IPC and Tapline were the only pipelines in the country would not enable our government to protect the companies on a basis of national treatment. Mr. Eakens added that this kind of precedent had already been established in Saudi Arabia where a fifty per cent income tax was levied only on oil producing companies.
At this point Mr. Hart suggested that we might turn our attention to how oil companies might bring about better understanding of Western enterprise on the part of the Arab governments and thus endeavor to make friends in the area. It was observed that the efforts of the oil companies to date had yielded limited results. Mr. Armstrong suggested that we look into the information activities conducted by our governments to see if they were contributing in the most effective way toward the problems under discussion. At the same time, we should avoid getting the government in a position of being adjuncts to oil company operations.
Mr. Beeley observed that the policy of the British Embassy in Iraq has been to avoid any impression that British Government media participated directly in this field. British Embassy officials there advised the oil companies on how they might handle their information programs most effectively. Furthermore, they encouraged the Development Board to publicize how the monies derived from oil revenues were being spent in useful ways.
Mr. Armstrong then mentioned that we might also continue our thinking and study concerning the merits of an oil study group or [Page 745] international agreement and review this matter at future meetings with the British.