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The Financial Times

Kuwait misled UK over buyer of $1.7bn BP stake. By PETER BRUCE and ROBERT PESTON. 24 September 1993

KUWAIT misled the UK government about the identity of the purchaser of a 21.7 per cent stake in British Petroleum in the late 1980s. As a result, it received more than Pounds 600m in tax refunds to which it was not entitled. According to detailed testimony from a former senior Kuwaiti official, the Dollars 1.7bn (Pounds 1.1bn) stake was bought in late 1987 and early 1988 for the Kuwait Petroleum Corporation, Kuwait's national oil company. Until now, Kuwait has always maintained that the buyer was the Kuwait Investment Office on behalf of the state fund, the Reserve for Future Generations. The official, who cannot be named because he fears reprisals, says the Monopolies and Mergers Commission, which investigated the BP investment, the British government and the Inland Revenue were all misled about the identity of the buyer.

His statement has been corroborated by a past Kuwaiti minister and two former KIO employees and is also supported by copies of Swiss bank statements which show that the KIO manages KPC's funds.

KPC ownership of the shares may mean that more than Pounds 600m of tax refunds which Kuwait has received on income from the BP shares is repayable. This includes a Pounds 458m payment which the Inland Revenue made to the KIO in the spring of 1989 as part of a complicated deal by which BP bought back more than half the stake from Kuwait.

Mr Gordon Brown, the shadow chancellor, said yesterday: 'I will call for a statement from the chancellor on this extraordinary loss of tax revenue ... I want an independent inquiry into it.'

Kuwait received the Pounds 600m of tax credits because the KIO, as an arm of the Kuwaiti government, is treated in the UK as a sovereign for tax purposes. Under an international convention, sovereigns do not pay tax. However, companies set up by issuing shares, such as the KPC, do not qualify for sovereign immunity.

'Sovereign immunity is being abused,' said Mr Brown, who co-incidentally has been considering whether the Labour party should commit itself to a policy of narrowing the scope of this tax privilege, which tax experts say costs the Inland Revenue billions of pounds in some years.

The best known beneficiaries of this convention are the hugely wealthy oil-producing states such as Abu Dhabi, Brunei and Kuwait, which have built up large portfolios of securities and property in the UK and other industrialised countries.

The disclosure of Kuwait's ruse to disguise the ownership of the BP shares is certain to complicate relations between the UK and one of its closest Gulf allies.

The Financial Times has obtained documentary evidence that the KIO has managed KPC's funds for 10 years. This secret arrangement between the KIO and the KPC has been confirmed by the president of the KIO, Mr Rashaid Al-Badr. 'We manage money for the KPC,' he said.

Mr Al-Badr, however, said he did not believe the KPC had bought the BP shares, although he was not at the KIO at the time of the BP raid.

A former Kuwaiti official said he understood that the remaining 9.7 per cent holding in BP had now been transferred out of KPC's special account at the KIO and into the KIO's main portfolio. However, he said he believed that income from the BP shares was still being transferred to the KPC account. A large part of KPC's investments managed by the KIO, which eventually totalled Dollars 5bn, was hidden in a specially created account, the Number Two account, at a Swiss bank, Lombard Odier. It was managed by the late Mr Trevor Ball, who was the KIO's chief investment manager until he died in 1991.

The Inland Revenue finds itself in a difficult position. It is aware of the evidence that the purchaser of the BP shares was the KPC.

However, when giving Kuwait the Pounds 458m tax credit in 1988, it received a statement from Kuwait that the shares were directly owned by the state and therefore qualified for tax immunity. 'It is not easy to challenge a statement made by a sovereign', said a UK official, 'especially one of our main allies in the Gulf.'