The Case of Aramco

Wyoming's Democratic Senator Joseph C. O'Mahoney, who has been sniping away for months at the foreign operations of U.S. oil firms, last week developed a new line of attack. He asked the Administration to consider imposing a tariff on oil imports, to offset "the threat to our national security" resulting from the loss of tax revenues from overseas oil operations. What Senator O'Mahoney meant in particular was the Arabian American Oil Co.'s tax arrangement with Saudi Arabia, through which Aramco last year avoided paying a penny of corporate income tax to the U.S. Treasury.

U.S. firms are permitted to deduct foreign taxes from their U.S. tax load, but in Aramco's case, the argument is whether the money Aramco pays Saudi Arabia is a tax or a disguised royalty. The difference is important. Royalties paid abroad can be deducted as business expenses before a company figures the net on which it pays U.S. taxes; direct foreign taxes, on the other hand, can be deducted from the tax bill itself, thus greatly reducing--or wiping out--the company's U.S. tax liability.

New Split. Until 1950, Aramco paid Saudi Arabia about 20% royalty on all oil profits. Then, vexed that the U.S. was getting more in income taxes on Aramco profits than Saudi Arabia got in royalties, and spurred by a 50-50 oil-profit split in Venezuela, King Saud decided that Saudi Arabia should get 50% of the oil profits. But instead of increasing royalties, Saudi Arabia passed an income tax which, together with royalties, would take half of Aramco's profits.

Aramco could have fought the tax, since a 1933 agreement with the Saudi Arabian government barred income taxes. But it decided to pay anyway, because the tax did not actually cost Aramco any additional money. It simply shifted the company's tax payments from the U.S. to Saudi Arabia. Last year, by deducting its payments to Saudi Arabia ($280 million) and taking advantage of the 27 1/2% depletion allowance given to all U.S.-owned oil companies, Aramco wiped out its U.S. corporate tax liabilities. Senator O'Mahoney and others contend that Aramco and Saudi Arabia settled on a new income tax instead of increased royalties so that Aramco could write off all its increased payments from U.S. tax.

Treasury Approval. Aramco says that changing conditions forced it to accept the Saudi Arabian income tax. King Saud insisted on an income tax instead of a royalty, the company maintains, because he wanted to get more money, yet give Aramco incentive to grow in Saudi Arabia by leaving its profit return untouched. Aramco points out that the U.S. still derives substantial benefit from taxes levied on the company's declared dividends and on dividends to stockholders of the four U.S. companies that own Aramco.

What Senator O'Mahoney did not mention was that Aramco's 1950 tax arrangement with Saudi Arabia was later approved by the U.S. Treasury Department, bossed by Dwight Eisenhower's friend, George Magoffin Humphrey. Regardless of the merits of the arrangement, the department evidently felt that it was in the best interests of the U.S. to have Aramco sitting on one of the world's most strategic-oil areas--even if it meant sacrificing some revenue.

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