Saudi Arabia dropped the income tax for its state oil giant Saudi Aramco, as part of a move to make its upcoming initial public offering more attractive for investors.
The new tax rate for Saudi Aramco will amount to 50 percent, slashed from 85 percent, retroactive to Jan. 1, according to a royal order. The company also pays a 20 percent royalty on revenues.
The tax rate is a vital piece in a puzzle the Saudis need to work out with investment bankers to determine the value of Saudi Aramco, the world’s biggest producer of crude oil. Current valuation estimates, ranging from $400 billion to $2 trillion, depend on various calculations of the worth of operations, projections of commodity prices, and costs including taxes.
The government aims to sell up to 5 percent 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.
The Saudis hope to offer the shares to foreign investors late next year, which would raise as much as $100 billion in what could be the biggest initial public offering in history.
“The new tax rate will bring Saudi Aramco in line with international benchmarks,” Amin H. Nasser, president and CEO, Saudi Aramco said in a separate statement.
Nasser reiterated that Saudi Aramco would continue to make a critical contribution to the diversification and growth of the Saudi economy in line with Saudi Vision 2030.
The Saudi government, which is struggling to close a budget deficit due to cheap oil that totalled $79 billion last year, obtains over 60 percent of its income from oil. The tax change could have affect its finances but Saudi Arabia’s Minister of Finance Mohammed bin Abdullah Al-Jadaan in another statement said the taxes would be replaced by stable dividends from state-owned companies and other fiscal inflows paid to the government including profit from investments.
“The royal order would not bear a negative effect, whatsoever, on the state capability to provide the public with any service, adding that any decrease, in the revenues related to previously imposed taxes, on the oil and hydrocarbon oil producing companies, in the Kingdom,” he was quoted in a statement on SPA, the official government news agency.