Revenue sharing agreements in UNCLOS are not the same as a tax
Opponents argue that by ratifying UNCLOS, the United Nations would be given the first opportunity to tax U.S. citizens. However, this is a misunderstanding of the royalties structure within UNCLOS. The International Seabed Authority requires royalty payments from all companies engaged in seabed mining in areas that do not belong to any country and are therefore under the management of the ISA. These payments are a small fraction of the revenue and similar to payments U.S. companies already pay around the world to governments for resource concessions.
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The US government receives one of the lowest government “takes” (total revenue, as a percentage of the value of the oil and natural gas produced) in the world.98 Thus, it should come as no surprise that the petroleum industry has deemed the miniscule ISA royalties as entirely reasonable. The petroleum industry has agreed to pay all royalties associated with deep seabed extractions—beyond 200 nautical miles—to the US Treasury, just as they would when drilling within the US EEZ.99 For the first five years of production, no royalties are required to be paid to the ISA; only once the sixth year of drilling commences would the US be required to remit a small percentage, 1%, of their drilling royalties, to the ISA.100 In other words, the money the ISA receives, beginning during the sixth year of drilling, is essentially subtracted from the revenue the US would otherwise receive from the royalty payments made by the petroleum industry. To depict the ISA as an international taxing authority, infringing on US sovereignty, that will drain US tax revenue is a hyperbolic mischaracterization that distorts not only the impact of article 82, but also skews the entirety of the UNCLOS debate itself.
Myth: The convention gives the United Nations its first opportunity to levy taxes.
False--the convention does not provide for or authorize taxation of individuals or corporations. It does include modest revenue sharing provisions for oil and gas activities on the continental shelf beyond 200 miles after the first five years of production and certain fees for deep seabed mining operations. The oil and gas fees are less than the royalties paid to foreign countries for drilling off their coasts and none of the revenues go to the United Nations. These de minimus revenues, which average between two and four percent over the projected life of a well, were a small price to pay for enlarging the U.S. continental shelf by 15 percent, an area larger than the state of California. This is one of the reasons the U.S. oil and gas industry so strongly supports the convention. With respect to deep seabed mining, U.S. companies that apply for deep seabed mining licenses would pay their fees directly to the ISA; no implementing legislation would be necessary. United States consent-that is, its veto would be applicable-would be required for any transfer of such revenues. Yet because the United States is a non-party, U.S. companies currently lack the ability to engage in deep seabed mining under domestic authority alone. By ratifying the treaty, our firms will have this ability which will open up new revenue opportunities when deep seabed mining becomes economically viable. The alternative is no deep seabed mining for U.S. firms, except through other nations that are convention parties. When the Interior Department charges royalties to U.S. oil companies for the development of oil and gas from our continental shelf, it is not exercising a "taxing power," rather it is selling access to an asset. Similarly, royalties paid for these rights are not a "tax" on U.S. taxpayers any more than such royalties paid by U.S. miners to Chile or Indonesia to mine resources there are such a "tax." Perhaps most importantly, until the United States accedes to the convention, it will not be able to exercise its veto over distribution of revenues from every other nation in the world generated by these provisions. And when we do accede, we not only have veto rights over distribution of revenues from U.S. mines, but from all other seabed mines as well. As such, these provisions greatly expand U.S. influence over financial aid decisions.
"The Senate should give immediate advice and consent to the UN Convention on the Law of the Sea: why the critics are wrong.
." Journal of International Affairs
. Vol. 59, No. 1 (Fall/Winter 2005) [ More (18 quotes) ]
Myth: Ratifying the treaty will create a tax on US businesses. Fact: Wrong. The treaty creates U.S. property rights for vast mineral and oil wealth. The ISA simply grants permits to countries to mine and drill for resources thereby giving companies and countries title – something vital to the very foundation of property rights. One cannot hold a property right if one does not first have title. Once title is granted and resource development takes place, certain Reagan amendments go into effect. Ronald Reagan fought for certain mineral rights for the U.S. and he got them in the 1994 amendments to the treaty. That’s why Reagan’s former Chief of Staff, James Baker, supports ratifying the LOTS. Just as with any other resource development project, there is a royalty schedule: no royalty payments of any kind for the first five years of resource development and after five years the royalties cap at 7%. Right now, Russia, China and 161 other countries are eligible to exploit global resources, enrich their nations, fill the ISA coffers with royalties, and then direct ISA expenditures around the world. Once the U.S. ratifies the treaty, we would be granted 100% veto power as to how all ISA resources from all countries are allocated. That is why Condoleezza Rice endorses the treaty – the U.S. pays up to 7% for just our country, but we get veto power over 100% of the ISA coffers for every royalty from every country. That means zero global mineral and oil wealth payments from anywhere in the world going to rouge states. The only way the U.S. can accomplish this is by ratifying the Law of the Sea Treaty and taking our seat at the ISA.
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[MYTH]: The Convention gives the UN its first opportunity to levy taxes. The Convention does not provide for or authorize taxation of individuals or corporations. It does include revenue sharing provisions for oil/gas activities on the continental shelf beyond 200 miles and administrative fees for deep seabed mining operations. The amounts involved are modest in relation to the total economic benefits, and none of the revenues would go to the United Nations or be subject to its control. U.S. consent would be required for any expenditure of such revenues. With respect to deep seabed mining, because the United States is a non-party, U.S. companies currently lack the practical ability to engage in such mining under U.S. authority. Becoming a Party will give our firms such ability and will open up new revenue opportunities for them when deep seabed mining becomes economically viable. The alternative is no deep seabed mining for U.S. firms, except through other nations under the Convention. These minimal costs are worth it.
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If the words “United Nations” are a red flag to some, the concept of a foreign entity taxing a U.S. corporation is anathema. This is what some, including Senator Risch, see in UNCLOS. He argues that since 1776, the United States has never ceded its authority to tax anyone else.29 As Secretary Clinton pointed out, UNCLOS is a royalty agreement related to drilling and extraction in areas beyond 200 nautical miles from a coast.30 She has stated that U.S. companies already pay royalties to at least one commission—the Inter- national Telecommunication Union—so a precedent exists.31 U.S. oil and gas companies routinely pay royalties to foreign nations based on profits made from the materials pumped or extracted in these countries. Another leading isolationist, Senator James Inhofe of Oklahoma, argued that the royalties were taxes paid to a foreign entity. The Chairman of the Committee, Senator John Kerry, responded that President Reagan renegotiated this issue “with the oil companies and gas companies at the table” and they all agreed to the royalties. He also pointed out that the UNCLOS royalties were far less than the royalties paid in the Gulf of Mexico. Indeed, while certain isolationists may object to these royalties, those who would be paying them—the Exxons, Shells and Lockheed Martins—support UNCLOS. These companies realize that 93 percent of some profit is much better than 100 percent of nothing, as they are wary of drilling on the Continental Shelf since the United States has not ratified UNCLOS.
[MYTH] The Convention gives the UN its first opportunity to levy taxes.
The Convention does not provide for or authorize taxation of individuals or corporations. There are revenue sharing provisions for oil/gas activities on the continental shelf beyond 200 miles and administrative fees for deep seabed mining operations. The amounts involved are modest in relation to the total economic benefits, and none of the revenues would go to the United Nations or be subject to its control. U.S. consent would be required for any expenditure of such revenues.
[MYTH] The International Seabed Authority has the power to regulate seven-tenths of the earth’s surface, impose international taxes, etc.
- The Convention addresses seven-tenths of the earth’s surface. However, the International Seabed Authority (ISA) does not.
- The authority of the ISA is limited to administering mining of minerals in areas of the deep seabed beyond national jurisdiction, generally more than 200 miles from the shore of any country. At present, and in the foreseeable future, such deep seabed mining is economically unfeasible. The ISA has no other role and has no general regulatory authority over the uses of the oceans, including freedom of navigation and overflight.
- The ISA has no authority or ability to levy taxes.
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Myth: The Convention gives the UN its first opportunity to levy taxes.
Reality: Although the Convention was negotiated under UN auspices, it is separate from the UN and its institutions are not UN bodies. Further, there are no taxes of any kind on individuals or corporations or others. Concerning oil/gas production within 200 nautical miles of shore, the United States gets exclusive sovereign rights to seabed resources within the largest such area in the world. There are no finance-related requirements in the EEZ. Concerning oil/gas production beyond 200 nautical miles of shore, the United States is one of a group of countries potentially entitled to extensive continental shelf beyond its EEZ. Countries that benefit from an Extended Continental Shelf have no requirements for the first five years of production at a site; in the sixth year of production, they are to make payments equal to 1% of production, increasing by 1% a year until capped at 7% in the twelfth year of production. If the United States were to pay royalties, it would be because U.S. oil and gas companies are engaged in successful production
16 beyond 200 nautical miles. But if the United States does not become a party, U.S. companies will likely not be willing or able to engage in oil/gas activities in such areas, as I explained earlier.
Concerning mineral activities in the deep seabed, which is beyond U.S. jurisdiction, an interested company would pay an application fee for the administrative expenses of processing the application. Any amount that did not get used for processing the application would be returned to the applicant. The Convention does not set forth any royalty requirements for production; the United States would need to agree to establish any such requirements.
In no event would any payments go to the UN, but rather would be distributed to countries in accordance with a formula to which the United States would have to agree.
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U.N. “Taxes”/Royalty Payments. Some have objected that the U.S. would be obligated to pay fees to the International Seabed Authority -- which some have inaccurately called “U.N. taxes” -- if the U.S. were to join the Convention and allow resource development on its extended continental shelf. Some have suggested that these fees could result in the loss of billions of dollars to the U.S. Treasury. The Bush Administration carefully considered these concerns and concluded that the licensing and fee structure established by the Convention was acceptable.
First, the fees are minimal in comparison to the enormous economic value that would be received, and the jobs that would be created, by the United States if its industry were to engage in oil, gas, and mineral development on the U.S. extended continental shelf in the Arctic. The U.S. would be required to make no payments for the first five years of production at any site, and then to pay a fee of one percent per year starting in year six, up to a maximum of seven percent in year twelve. Assuming the U.S. Government imposed, for example, a royalty fee of approximately 18 percent on the value of production on the U.S. extended continental shelf, that would be 18 percent more than the U.S. would gain if we stayed outside the Convention. In other words, joining the Convention would attract substantial investment, and produce substantial revenues for the Treasury, that would not otherwise be produced. So, even when the Convention payment is at its highest rate of 7 percent, the U.S. Treasury would still be 11 percent better off with respect to each production site than it would be if the U.S. does not join the Convention. This would be an enormous benefit -- not a loss -- to the U.S. budget.
Second, these fees would only have to be paid by the United States if there is actually production on the U.S. extended continental shelf.
Third, these fees were negotiated by U.S. negotiators in consultation with experts from the U.S. oil and gas industry, who deemed them to be acceptable.
Fourth, all of the western industrialized countries, including our major allies, as well as Russia and China, have concluded that these fees are acceptable and have joined the treaty. If these fees would actually cause the economic woes claimed by critics, then certainly these other countries would not have been willing to agree to pay them. Instead, most of these countries are already busily surveying and staking claims to their extended continental shelves so that their oil, gas, and mining companies can exploit these resources. For example, Norway -- which already has a sovereign wealth fund worth $700 billion, all of which has been derived from Arctic oil and gas profits -- is preparing to make a claim to the oil and gas on its extended continental shelf in the Arctic. Russia, Canada, and Denmark are all preparing to make similar claims in the Arctic using the provisions of the Convention, and they have agreed to pay royalties if they exploit the resources on their extended continental shelves.
Finally, royalty fees would not be paid to the United Nations. They would be paid through the International Seabed Authority, and back to the Parties to the Convention under a distribution formula developed by the Seabed Authority’s Council, where the U.S. would have a permanent seat and a decisive voice on how fees would be spent.
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Assertions that the Convention will create authority for an international organization to tax American citizens. The Convention does nothing of the kind. It does provide for payments on “commercial terms” to mine deep seabed minerals that do not belong to the United States. This is similar to payments to Indonesia or Chile for the ability to have access to resources in those countries. We would not remotely regard payments for such access as authority for taxation of American citizens by Indonesia or Chile. Moreover, unlike arrangements for minerals mining access in foreign countries, in the new deep seabed Authority United States firms will have assured access to mine, and the disposition of payments as well as the rules and regulations for such mining will be subject to a United States veto. Moreover, that veto is exercisable with respect to the distribution of revenues from firms of all other nations mining the deep seabed – thus effectively multiplying the ability of the United States to ensure that the distributions to states parties are put to a good use. Similarly, the Convention provides for minimal revenue sharing for oil and gas development in areas beyond the 200 mile economic zone. Such revenues, which would amount to an average of two to five percent over the life of a well, were an enormous bargain for the United States as payment in return for our obtaining sovereign rights over resources in an area of the continental shelf beyond 200 nautical miles that is roughly equivalent to the size of California. That is, we retain ninety-five to ninety-eight percent of the value of the future resources in this area beyond the 200 mile economic zone placed under United States resource jurisdiction by the Convention. Indeed, the revenue sharing system adopted was drafted by a representative of an American oil company on our law of the sea industry advisory group and has been perfectly acceptable to the oil industry. And even beyond the great bargain that was the purchase of Alaska, in this case not a penny is due until seven years after production begins. Moreover, once again, the distribution of any such revenues to states parties, including revenues from this small royalty from all production beyond 200 miles from other nations, would be subject to a United States veto;