Saudi Aramco tax slashed to prepare oil producer for giant IPO

KUWAIT (Bloomberg) -- Saudi Arabia slashed the tax rate paid by state oil producer Saudi Aramco, a key milestone in preparing the company for what may be the world’s biggest initial public offering.

Aramco’s income tax, paid on the company’s profit, is being cut to 50% from 85%, CEO Amin Nasser said in an emailed statement. The centerpiece of plans to overhaul the economy of the world’s largest oil exporter, Saudi Arabia aims to sell as much as 5% of the company late next year in an IPO that the kingdom estimates could value the business at about $2 trillion.

“The new tax rate will bring Saudi Aramco in line with international benchmarks,” Nasser said. The new rate is effective retroactively from Jan. 1.

Reducing the company’s income tax payments by more than 40% will free up billions of dollars of cash flow that Aramco can pass on as higher dividend payments, a step seen as crucial to enticing investors to the IPO and maximizing the company’s valuation. It will also shake up the kingdom’s finances: the state relies on taxes on oil production for about 60% of government revenue.

“The 50% tax rate will be very lucrative to investors who should be gearing up for its privatization,” John Sfakianakis, director of economic research at the Gulf Research Center Foundation in Riyadh, said in an emailed statement. “This is one of many steps that will begin a process of investor-friendly initiatives that will help in whetting appetites.”

The Aramco share sale is part of policy proposals by Deputy Crown Prince Mohammed bin Salman to set up the world’s biggest sovereign wealth fund and reduce the economy’s reliance on hydrocarbons. Saudi Aramco’s crude reserves are estimated at about 260 Bbbl.

His $2 trillion valuation, based on Aramco’s right to exploit the kingdom’s giant oil reserves, would see the sale raise $100 billion and dwarf Alibaba Group Holding Ltd. as the largest IPO in history. But others have said that valuation could be ambitious given uncertainty about oil prices, the future of fossil fuels and political risks in the Middle East.

While Aramco has yet to reveal any detailed financial information, setting a lower income tax rate will remove one of the most important variables as the global investment community sizes up the deal. As well as income tax, Aramco currently pays a 20% royalty on revenue, a levy today’s announcement left unchanged.

The fact that Saudi Arabia’s finance ministry will need to depend on dividends from Aramco, whose fields pump more than 10 MMbopd, means that potential investors can probably rely on stable payments.

“It is very important to make it clear that the hydrocarbon resources of Saudi Arabia remain sovereign,” Energy Minister and Aramco Chairman Khalid Al-Falih said in a statement. “Any reduction in tax revenues arising from this Royal Order is replaced by stable dividend payments and other sources of revenue from hydrocarbon producers to the government.”

Under the new rates, hydrocarbon companies in Saudi Arabia with capital of more than 375 billion riyals ($100 billion) will pay a tax of 50%, according to SPA. Those with capital of between 300 billion and 375 billion riyals will pay an income tax of 65%. Companies with capital of between 225 billion and 300 billion riyals will pay 75%, and those with capital below 225 billion riyals 85%.