Revenue sharing agreements in UNCLOS are not the same as a tax

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.

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: 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.

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.