Page 257 - Arabia the Gulf and the West

254 Arabia, the Gulf and the West

leading historian of the Middle-Eastern oil industry has categorized as ‘a policy
of complacent liberality, of concession in preference to bargaining, in the face
of successive and various government demands’.* When the Saudis
in 1950 demanded, in place of the fixed royally they were receiving on oil
production, a 50 per cent share of the company’s profits, such as the Ven­
ezuelan government had successfully negotiated with the oil companies
operating in its territory only a short time previously, ARAMCO hastened to

accommodate them. Although ARAMCO’s original and supplementary
concessionary agreements of 1933 and 1939 had specifically exempted it from
the obligation to pay income tax to the Saudi government, it now accepted
such an obligation and agreed to pay the Saudi government (in addition to the
royalty on every barrel of oil produced) income tax to the amount required to
bring the government’s total receipts up to one-half of the company’s operat­
ing profits. What eased the way to ARAMCO’s acceptance of this formula
was the agreement of the United States government to the classification of
these extra payments as foreign income tax, not as a distribution of profits,
thereby enabling the company to offset the payments against its income tax
liabilities in the United States. As might be imagined, the US Treasury lost a
great deal of revenue in the next twenty-five years, more, in fact, than would
appear at first sight; for the Saudis soon insisted that ARAMCO should sell its
oil at a publicly fixed price, a demand which led to the introduction of the
device of the ‘posted price’, a price which, from 1958 onwards, was
appreciably higher than the actual selling price. Income tax payments to the
Saudi government, however, were calculated on the basis of the posted price,
so that they remained on the whole artificially inflated, with a corresponding
further loss of revenue to the US Treasury.
Renewed demands by the Saudi government led in 1952 to the appointment
of Saudi directors to the board of ARAMCO, and to the transfer of the
company’s headquarters from New York to Dhahran. Now ARAMCO could
truly describe itself, as its public relations department was quick to do, as a
Saudi Arabian company, situated in Saudi Arabia and working for the benefit
of Saudi Arabia. There was a little more substance to the claim - for all that it

passed over the obvious financial reasons why ARAMCO’s parent companies
were involved in Arabia in the first place - than is usually the case with such
flummery. The rationale behind the United States government’s grant of tax
relief to ARAMCO in respect of the income tax it paid to Saudi Arabia was that
the revenues lost to the US Treasury would probably have been paid out to
Saudi Arabia, in any case, in the form of foreign aid. From the point of view of
the State Department the advantage in the arrangement made with ARAMCO
was that it allowed Saudi Arabia to be subsidized without the necessity of first
obtaining Congressional approval, as was normally the practice in the alloca­

tion of foreign aid.
• S. H. Longrigg, Oil in the Middle East, p. 209.