OIL & GAS Riyadh weighs flexible tax plan for Aramco
Saudi Arabia is considering a flexible tax system for stateowned oil company Aramco that would increase royalty payments when crude prices rise, according to people familiar with the deliberations.
Riyadh is weighing up a proposal from Aramco to replace the current fixed royalty on revenues, the same people said. Aramco has proposed to initially set the royalty at 20 per cent – the same as today’s fixed rate – and increase it automatically if oil prices rise significantly.
The Saudi government has not yet decided whether to go ahead with the flexible royalty and it could decide against it. On top of the royalty, Aramco pays income tax on profit, which the government recently cut to 50 per cent from 85 per cent. The kingdom aims to list about 5 per cent of Aramco in an IPO in the second half of 2018.
While a flexible levy would help the kingdom to raise extra revenue if oil prices climb, it is likely to prove unpopular with potential investors as it would reduce their exposure to higher prices.
The Saudi minstry 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, Vision 2030, to break free from crude.
Oil will nevertheless account for about 70 per cent of total government revenue this year, according to the IMF. With oil trading around US$50 per barrel, the country is struggling to balance the books – the IMF projects a fiscal deficit of 9.3 per cent of GDP, down from 17.2 per cent in 2016.
A price-linked taxation system is not unusual in commodities as governments seek to protect the industry from downturns while sharing in the bumper profits of bull runs. The United Kindom, 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 also proposed in the past price-linked taxes for iron ore producers.
In the past, Saudi officials have said the flotation would value Aramco at as much as US$2 trillion, making it the world’s largest company by market value. On that basis, selling just 5 per cent could raise $100 billion, ranking it as the biggest ever IPO.
However, analysts have cautioned that Aramco is more likely to be worth about $1 trillion, noting that other national oil companies that have sold shares have achieved relatively low valuations compared with the size of their oil reserves. Saudi officials have promised to adjust the company’s taxation to lure foreign investors.
“When you look at the fiscal regime and the taxes, it has to be aligned with other listed companies,” the Saudi Aramco chief executive Amin Nasser said in January.