New tax regime to boost Aramco IPO value

Under the new regime, hydrocarbon companies in Saudi Arabia will be taxed depending on their capital, according to a royal decree issued on Monday.

JEDDAH: Saudi Arabia approved Monday a new tax regime for oil and natural gas producers in the Kingdom, which will boost Saudi Aramco’s valuation as it plans to sell shares in its initial public offering (IPO) next year.
Under the new regime, hydrocarbon companies in Saudi Arabia will be taxed depending on their capital, according to a royal decree issued Monday and posted on the website of the Saudi Press Agency (SPA).
Companies with capital of more than SR375 billion ($100 billion) will pay 50 percent income tax. Those with capital between SR300 billion and SR375 billion will pay 65 percent tax.
Companies with capital between SR225 billion and SR300 billion will pay 75 percent, and those with capital below SR225 billion 85 percent.
Saudi Aramco will see its income tax rate fall from 85 percent to 50 percent, CEO Amin Nasser said Monday, adding that the new rates will put the company in line with international benchmarks. The new rate is effective retroactively from Jan. 1.
Saudi Arabia aims to sell as much as 5 percent of the company late next year in an IPO. With the drop in its tax rates, future investors who are interested in buying Saudi Aramco shares will see more cash flow.
This will be positive news for the company’s valuation, which the government estimates to be at least $2 trillion.
“The 50 percent tax rate will be very lucrative to investors who should be gearing up for its privatization,” said John Sfakianakis, director of economic research at the Gulf Research Center Foundation in Riyadh.
“This is one of many steps that will begin a process of investor-friendly initiatives that will help in wetting appetites,” he added.
“The royal decree falls in line with an earlier promise that Saudi Arabia will reduce the overall tax rate paid by its national oil company to make its 2018 IPO — potentially one of the largest in history — more appealing to investors.”
But the fall in tax rates does not mean the government will lose income. “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,” Energy Minister and Aramco Chairman Khalid Al-Falih said in a statement.
“It is very important to make it clear that the hydrocarbon resources of Saudi Arabia remain sovereign.”
Saudi Aramco welcomed the introduction of the new tax regime as another positive step in diversifying the Kingdom’s economy.
“We thank… King Salman… for the Royal Order,” said Nasser. “The new tax rate will bring Saudi Aramco in line with international benchmarks.”
Nasser said the company will continue to make a critical contribution to the diversification and growth of the Saudi economy in line with Vision 2030.