Saudis Arabia said to weigh oil price linked tax for Aramco before IPO

London, UK - Saudi Arabia is considering a flexible tax system for state-owned oil company Aramco that would increase royalty payments when crude prices rise, according to people familiar with the deliberations.

Riyadh is mulling a proposal from Saudi Aramco to replace the current fixed royalty on revenues, the same people said, asking not to be named.

Aramco has proposed to initially set the royalty at 20 per cent - the same rate as today’s fixed rate - and increase it automatically if oil prices rise significantly.

The Saudi government hasn’t yet decided whether to go ahead with the flexible royalty and it could decide against it, one of the people said. On top of the royalty, Saudi Arabian Oil Co, as Aramco is formally known, pays income tax on profit, which the government recently cut to 50 per cent from 85 per cent.

The kingdom aims to list about five per cent of Aramco in an initial public offering (IPO) in the second half of 2018. While a flexible levy would help the kingdom to raise extra revenue if oil prices climb, it’s likely to prove unpopular with potential investors as it would reduce their exposure to higher prices.

The Saudi Ministry of Finance directed questions on the flexible royalty to Saudi Aramco. The company declined to comment.

Saudi Arabia relies heavily on oil for its finances and has an economic programme, dubbed Vision 2030, to break free from hydrocarbons. Still, oil will account for roughly 70 per cent of total government revenue this year, according to the International Monetary Fund (IMF). With oil trading around US$50 a barrel, the country’s is struggling to balance the books - the IMF projects a fiscal deficit of 9.3 per cent of the gross domestic product, down from 17.2 per cent in 2016.

A price-linked taxation system isn’t unusual in commodities as governments seek to protect the industry from downturns while sharing in the bumper prof- its of bull runs. The UK, for example, uses a similar model for oil producers in the North Sea. Russia also varies tax rates with oil prices and the Australian government has proposed in the past price-linked taxes for iron ore producers too.

In the past, Saudi officials have said the flotation would value Aramco at as much as US$2tn, making it the world’s largest company by market value. On that basis, selling just five per cent could raise US$100bn, ranking it as the IPO the biggest ever.

However, analysts have cautioned that Aramco is more like to be worth about US$1tn noting that other national oil companies that have sold shares have achieved relatively low valuations compared with the size of their oil reserves.