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Emet m'Tsiyon

Tuesday, September 06, 2005

KINDLY MAKING ARABIA RICH

The mighty American taxpayer is a very generous fellow, sometimes without even knowing it. The fabulous wealth of the kings of Arabia, which pays for Cadillacs and air conditioners, desert palaces, falcon trainers, and explosives for the Hamas [and Fatah, etc.], is due in substantial part to his generosity. Maimonides says that the highest degree of charity is when the recipient doesn't know the identity of the donor or the donor that of the recipient. In the case of the Saudi dynasty, the donor wasn't even aware of just how generous he was. How noble!

This poignant, heartwarming tale of charity and affection unfolds as follows:
Oil was discovered in Arabia around 1930, during the reign of the newly installed Saudi dynasty which very kindly allowed its dynastic name to be attached to that of the country. Oil was flowing out of Arabia by the late 1930s in a river of black gold. The Arabian-American Oil Company, ARAMCO, was formed in the 1940s as a consortium of American firms to extract and ship the oil. Now, as Leonard Mosley tells the tale, ARAMCO executives were expected to produce profits for the members of the consortium. On the other hand, "they had to keep the king supplied with more and more money." The monarch had a certain loving affection for the filthy lucre. "There was little they [ARAMCO] could do about the fact that it was promptly wasted in foolish extravagances or poured into the coffers of the swindlers around the court. What Ibn Saud's ministers wanted was not advice but more revenues, and the more they were paid, the more they spent and the deeper the kingdom slid into debt." What an unbecoming situation.

Fred Davies of ARAMCO testified before a Senate Committee in 1957:
"They asked us as early as 1948. 'Isn't there some way in which we can get a greater take?'"

Mosley goes on:
"Now they began demanding so much money that ARAMCO's lawyers in the United States believed that in order to satisfy them the whole nature of the company's concession might have to be altered in order to provide it . . . Moreover, if made out of ARAMCO's revenues, the payments would have wiped out a large proportion of the company's profits, and the parent companies [of ARAMCO] were in no mood to accept that. . .

"But how could a way be found to satisfy the greedy demands of the king's courtiers without dealing a death blow to Aramco's profitability?"
Now, ARAMCO paid more in US federal corporate income tax in 1949 than it paid in royalties to the Saudi Treasury, that is, more than it was pouring into the private piggybank of the Saudi royals.
"In 1950 . . . the figures were leaked to the Saudis. The result was, in the words of Fred Davies, that 'they weren't a darn bit happy about it.' Soon after they were asking the question that anyone with ARAMCO's profitability at heart would have wanted them to ask: 'Isn't there some way in which the income tax you pay to the United States can be diverted to us in whole or in part?'

"At this point the company suggested that the Saudi government consult the U.S. Treasury. ARAMCO had already discussed its problems with George McGhee, of the Treasury Department, who, according to Davies, 'appreciated our difficulties.' The result had been the dispatch to Jidda of a Treasury Department official, George A Eddy, who had conferred with Saudi officials about their money problems. When asked a direct question by a Saudi official about how more money might be raised from 'foreign firms,' Eddy had first consulted the U.S. ambassador in Jidda as to whether he might answer the question, and then, given permission, had pointed out that several methods were available. . . one of them was to demand an increase in royalties on oil produced; the other was to institute an income-tax system and get more money from the company by direct taxation. Eddy added: 'I did explain to him [the Saudi official] the difference of the effect on the company of a royalty and an income tax.'"
Here Mosley is being cute, less than frank. He does not mention the actual legal mechanism by which the Saudis could get more money for the oil without the money coming out of ARAMCO's pocket. This is called the Foreign Tax Credit. As a means of encouraging American companies to invest abroad, it had been on the books since about 1920. It provided that US companies doing business abroad could deduct the full amount of taxes paid to foreign governments from their US corporate income tax. Hence, if the Saudi kingdom imposed a per barrel "oil income tax," then such payments by ARAMCO would be deducted dollar for dollar from the company's corporate income tax. So this semantic subtlety meant that the money paid to keep the kingdom in Cadillacs was essentially paid by the US taxpayers as a whole. Semantically disguising royalties as a Saudi "oil income tax" placed the burden of payment --that is, of enriching the Saudis on the shoulders of the taxpayers.

Mosley explains this without actually naming the law.
". . . if the Saudi government simply increased the amount of royalty it was receiving from ARAMCO per barrel of oil, it would have a direct and damaging effect on the profits of the company. If however, the Saudi government were to start an income-tax system, any such money paid to them by ARAMCO could, under US law, be deducted from the amount of tax the company was liable for in the United States . . .

". . . a Washington lawyer, John F Greaney . . . subsequently drafted an Income Tax Law for the Kingdom of Saudi Arabia which was instituted by royal decree on December 26, 1950. . . a munificent Christmas present for both the Saudi government and ARAMCO. . .

"From ARAMCO's point of view, the nicest aspect of the new system was that it didn't cost them a penny. They simply wrote off their Saudi Arabian taxes [sic!] against their liabilities for US tax." [quotes from Leonard Mosley, Powerplay: Oil in the Middle East (New York: Random House, 1973), pp 193-195]
This information should be contrasted with the usual claims by the Israelophobes, whether "right" or "left," that Israel is favored against the Arabs by the West, by the United States, or by the "capitalists," etc. Why doesn't the "left" before any others talk about this situation? To the extent that the "left" does not talk about such massive transfers of capital, it falsifies the whole Middle Eastern situation.

UPDATING to July 19, 2007, see link below to Tariq Ali article
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More info on this matter available in:
Tariq Ali - a review [click on link] in the Establishment-controlled London Review of Books [19 July 2007] of two new books on Saudi Arabia [July 2007]
John Blair - The Control of Oil
James Ridgway - New Energy

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2 Comments:

  • How long did this go on?

    Building up the wogs is the worst mistake America, Britain and France ever made, bar none.

    By Blogger Jeff Bargholz, at 9:31 PM  

  • Jeff, I'm not sure when it ended or if. There was some noise being made in the US Congress back in the 1970s over this matter, and into the early 1980s. There was talk of changing the system, eliminating application of the Foreign Tax Credit to oil, etc. But I don't know if that old system was ever ended, or if it was, was there a new system set up to do the same thing.
    One change made was that a Saudi national oil company was set up to take over production management from ARAMCO. But I wouldn't be surprised if the major technical staff are still Americans. Unfortunately, I haven't had the time in recent years to investigate the economics of oil.

    By Blogger Eliyahu m'Tsiyon, at 3:01 PM  

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