'File 60/20 I (C 93) Imperial Bank of Iran: Bahrain, etc' [‎102v] (205/409)

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roferrod to in article 7 of the concession dated 1899 can only be ai ri\ed at after
deduction of British income tax. _
As requested in your Excellency's letter, I am forwarding you, without
prejudice to the bank's contention, a statement, prepened and certifiGd by the
bank's auditors, setting forth the net profits of the bank, royalty paid and taxes
paid, not only for the years 1916 to 1925 but from the inception of the bank until
193l! when royalty no longer became payable.
The statement shows the royalty paid and the royalty that would have been
payable if the view of the Finance Minister were upheld.
It will be seen from this statement that the Minister of Finance is mistaJken
in supposing that up to 1915 royalty was calculated and paid on the net profits
before deduction of British income tax. In most of the years from 1891 to 1916 only
the minimum royalty of £4,000 was payable, but there were a few years in which
there would have been a slight excess payable, namely, 6 per cent, on £26,474 if
the contention of the Ministry of Finance had been adopted.
After 1916 the profits of the bank were greatly increased by the exigencies
of the war and the full royalty on these profits, after deduction of British income
tax, has been paid to the Iranian Government. But, as this is a point to which
the attention of the Ministry of Finance is specially called, a large portion of
these exceptional profits, instead of being distributed to the shareholders, were,
in accordance with sound financial practice, placed to reserve funds. The reserve
funds and the annual additions to them are invested in British Government
securities, the interest of which is paid to the bank net, after deduction of the
Government tax.
The board hold that, even if the Finance Minister's method of calculating
royalty were adopted as regards the trading profits of the bank, it cannot be
extended to the gross income of the invested funds which the bank has only
received after deduction of tax.
There is, however, another matter which would have to be considered in any
arbitration, and that is the unsettled claim of the bank on the Government of
Iran for the losses occasioned by the looting of certain of their branches during
the war by Iranian armed forces. Full particulars of these losses have been
submitted to the Government of Iran in former years, and the total amounts to
5,952,027 rials. In order, however, to arrive at a friendly settlement, the board
would agree to withdraw this claim if the Government of Iran, on their part,
withdraw their present demand and give the bank a complete discharge for past
royalties.
There is a point not mentioned in your Excellency's letter which may be
alluded to here so as to arrive at a complete settlement of all matters in dispute
between the Government of Iran and the bank. This is the repeated request made
by the Ministry of Finance that the bank should agree to pay income tax in Iran.
It is hardly necessary to remind your Excellency of article 5 of the Bank's
concession, which lays down that "the bank, its establishments and branches,
shall be wholly exempt from every kind of taxes and imposts," and it would be
impossible for the bank to agree to pay income tax in Iran on profits made in
England and Iraq in addition to British income tax. But as regards net profits
derived purely in Iran, as certified by our auditors, the board would not be
unwilling to pay the Iran income tax, provided they were given a satisfactory
quid -pro quo. Reasonable compensation for such a departure from the terms
of the concession would be not only the friendly settlement of the royalty question
as indicated above, but also, as suggested by General Amir Khosrowi, the confine
ment of the National Bank to the functions of a Bank of Issue only and the
reappointment of the Imperial Bank as the commercial and exchange bank of the
country, entrusted, as before, with the Government's exchange business.
It is gathered, however, from the final sentence in your Excellency's letter
you would prefer that an endeavour first be made to settle the matter by agreement
rather than by resort to arbitration. In this the board concur, and to this end
they suggest that the various points in dispute be brought before representatives
of the Government and the bank with a view to a settlement being arrived at.
I have, &c.
H. S. BARNES, Chairman.