The Prize: The Epic Quest for Oil, Money, and Power

by Daniel Yergin

The terms of J. Paul Getty’s new Neutral Zone concession certainly demonstrated to them that oil companies could pay much more. Yet the Saudis did not want to squeeze too hard. There was still a very large investment program to be carried out within the concession. Moreover, having just seen Aramco lose market share, the Saudis did not want to hobble the company with additional costs that might make its oil uncompetitive with that produced by other Persian Gulf countries. Perhaps they could get more money out of Aramco without directly affecting the company’s competitive position. The Saudis did their research; they had even, unbeknownst to Aramco, retained their own adviser on American tax law, and to their delight, they learned about a most interesting and intriguing provision in American tax laws that would leave Aramco whole. It was called the “foreign tax credit.” Under legislation dating back to 1918, an American company operating overseas could deduct from its United States income tax what it paid in foreign taxes. The objective was to avoid penalizing American companies doing business abroad. Royalties and other fixed payments—costs of doing business—could not be deducted, only taxes paid on income. That distinction was all important. For it meant that if Saudi Arabia had collected not only $39 million in royalties in 1949, as it had done, but also another $39 million in taxes, then that $39 million tax bill could have been deducted from the $43 million tax bill th...