Tax cut to sweeten Aramco share sale

Government limits tax on company to 50% from 85%

Saudi Arabia’s government has cut the income tax paid by national oil giant Saudi Aramco to smooth the company’s initial public offer of shares next year, which is expected to be the world’s largest equity sale.

A royal decree yesterday, retroactive to January 1, set a tax rate of 50 per cent for the firm. Previously, Aramco had paid 85 per cent tax, plus a 20 per cent royalty levied at a different stage; the decree did not mention the royalty.

The step appeared likely to reduce Aramco’s tax burden by as much as tens of billions of dollars, which could make the firm much more attractive to private investors. Saudi authorities had been considering such a change for months, sources said.

“The royal order is a milestone in setting the stage for the world’s biggest IPO. I am sure there will be more such moves to follow in coming weeks and months,” an oil industry executive said.

“It shows the Saudi government is serious about the IPO of Saudi Aramco, and this is a very strong message to those who doubted that the government will follow through on taking Aramco public.” The government aims to sell up to 5 per cent of Aramco, listing the shares in Riyadh and at least one foreign exchange, to raise cash for investment in new industries, as the kingdom seeks to diversify its economy beyond oil exports in an era of cheap crude.

Saudi officials have predicted the IPO will value the company at $2 trillion (Dh7.35 trillion) or more. Many private analysts have been sceptical, making estimates below $1 trillion, but a 50 per cent tax rate could bring the offer closer to $2 trillion.

Saudi Arabia set a range of income tax rates for producers of oil and hydrocarbons, the official Saudi Press Agency reported yesterday, quoting a royal decree.

The tax rate for investments exceeding 375 billion riyals ($100 billion, Dh367 billion)) will be 50 per cent, SPA said. It gave other rates for producers with smaller investments.

SPA did not say whether the announcement was directly related to national oil giant Saudi Aramco. Saudi authorities also announced a plan to cut the tax rate on Aramco from 85 per cent to 50 per cent to encourage foreign investment when the company is has it initial public offering (IPO).

“This move carries strategic benefits for Saudi Arabia, its citizens and future generations,” Finance Minister Mohammad Al Jadaan said in a statement about the tax cut.

The government, which is struggling to close a budget deficit due to cheap oil that totalled $79 billion last year, obtains over 60 per cent of its income from oil, so the tax change could affect its finances.

However, analysts said the measure might not have a big impact since tax revenue was expected to be replaced by dividend payments from Aramco.

“Any tax revenue reductions applicable to hydrocarbon producers operating in the kingdom are replaced by stable dividend payments by government-owned companies, and other sources of revenue including profits resulting from investments,” Jadaan said.

The firm has not revealed its post-IPO dividend policy.

He said in a later statement to Reuters that the 2017 state budget had been prepared with the tax change in mind, so government revenues and public services would not be affected.

Industry executives have said the IPO will help Aramco, one of the country’s most efficient state enterprises, expand its business in line with market principles and form partnerships with privatesector companies around the world.

Aramco chief executive Ameen Nasser said in a statement that the tax cut would help Aramco develop by bringing the company in line with international benchmarks.

The kingdom has intensified economic reform efforts after oil prices plunged last year below $40 per barrel from above $100 in 2014.

The budget deficit last year amounted to $79 billion, down from the record deficit of $97 billion registered in 2015.