New US tax could hit Gulf oil companies

Without hearings and with little warning, the US has approved a new tax on some government contracts with foreign suppliers.

The tax is part of a bill signed on Sunday by President Barack Obama providing aid for workers who responded to the 2001 terrorist attack in New York.

New US contracts with foreign companies will be subject to a two percent tax if the goods or services purchased come from countries such as China, the UAE and Kuwait that aren’t part of the World Trade Organization’s Agreement on Government Procurement.

The tax’s likely targets include Middle Eastern oil companies such as Abu Dhabi National Oil Co. and the Kuwait Petroleum Corp. that sell fuel to the US military overseas. The effects won’t be determined until the government writes rules for assessing and collecting the tax.

“It will be a giant pain to implement,” said William Reinsch, president of the National Foreign Trade Council in Washington, which advocates for open international markets.

Business groups, including the US Chamber of Commerce, unsuccessfully tried to derail the tax, saying they were concerned about retaliation from other countries. The House and the Senate passed the bill December 22.

According to a December 20 statement from Senator Gillibrand’s – one of the backers of the bill - office, the tax would have several benefits. It would encourage countries to join the WTO agreement, promote competition for contracts and give US agencies an incentive to use US companies as contractors, the statement said.

The tax will raise $4.6bn over 10 years, according to the Congressional Budget Office.

Based on the statutory language, the tax could apply to some of the largest US contracts with foreign suppliers.

For example, Abu Dhabi National Oil and Kuwait Petroleum each have fuel distribution contracts with the Defense Logistics Agency.

Agility, a Kuwait-based logistics company, has contracts to supply food to the same agency. In 2010, those companies each received more than $1bn through September 30, according to data compiled by Bloomberg. None of the companies replied to requests for comment.

The Defense Department is studying the effect of the tax, spokeswoman Cheryl Irwin said in a statement. The department “will determine how to best implement in the very near future,” she said.