Saudi Arabia revises oil tax in big step towards reform and IPO

Saudi Arabia cut its income tax for oil companies, a move aimed mainly at preparing its state oil company for a partial privatisation.

Saudi Arabia’s finance ministry set new income taxes for oil companies yesterday in a well-flagged move towards promised fiscal reform and to help pave the way for a possible sale of a small part of its national oil company, Saudi Aramco.

The government announced in a statement via the official news agency that the income tax rate for companies with a capital value above 375 billion Saudi riyals (Dh367.24bn) would be cut to 50 per cent from 85 per cent.

Aramco, which is above the 375bn riyals capital threshold, currently pays a 20 per cent royalty on its production – which averaged about 10.5 million barrels per day last year – and an 85 per cent rate on its income.

Its chief executive, Amin Nasser, welcomed the new tax regime and said it would mean the company’s tax rates are at internationally competitive rates.

The government has been urged by the IMF, among others, to reform its fiscal system to bring it into line with international practice and to attract private sector investors not only to Aramco and the hydrocarbon sector but to a wide range of privatisation projects the kingdom has set out as part of the government’s Vision 2030 reform programme.

But yesterday’s move is clearly primarily aimed at preparing Aramco for a potential initial public offering of shares.

“To get a higher value for the Aramco IPO they need a lower government take,” said Robin Mills, the chief executive of Qamar Energy, a Dubai-based energy consultancy.

The government is highly dependent on the revenue it gets from Aramco, so the income lost by reducing the tax rate would be mostly made up by taking dividends, which would be paid to private investors also.

“But we’ll need to see details of the dividend policy,” noted Jason Tuvey, the Middle East econonmost at Capital Economics. “All they’ve given us here are four figures, so the dividend policy will be the next big thing,” he added.

“And we still need to see Aramco’s finances which, presumably, we’ll learn from the IPO prospectus, which still may be a year or more away.”

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The government announced tax rates on a sliding scale: tax will be 65 per cent for companies whose capital is between 300bn and 375bn riyals; 75 per cent for 225bn to 300bn riyals; and 85 per cent for companies below 225bn riyals. There was no further explanation of these tax rates.

“It’s odd because Aramco is the monopoly producer,” said Mr Mills, who is also a columnist for The National. If it is aimed at setting rates for some future smaller producers in the kingdom “that would be huge but also weird as it raises taxes the smaller a company gets, which is the reverse of what’s normally done”, he added.

Reform of the energy sector is the centrepiece of Saudi Arabia’s efforts to breath some entrepreneurial life into its economy and prepare it for a post-oil world.

Other fiscal changes the government has announced include a gradual liberalisation of the domestic energy market, including loss-making domestic Aramco oil product sales. Reducing subsidies generated additional revenue for Aramco last year of 28bn riyals, the IMF estimates.

The IPO was first announced last year by deputy crown prince Mohammed bin Salman, who has been the main public voice backing Saudi reform.

While the deputy crown prince said an Aramco IPO would value the company at US$2 trillion based on its vast oil reserves, analysts have started to publicly cast doubt on that estimation.

The valuation of the shares would be based on the expected cash flow of the company, which depends primarily on its export rates over a few years as well as its costs, and government policy on production, tax, investment, subsidies and host of other key planks.

There is now some clarity on the tax rate but, as Mr Tuvey points out, the most important factor for Saudi Arabia and Aramco is the global oil market and what that means for its output rate – which has been sharply cut by the deal the kingdom engineered last November – and international oil prices, over which it has much less control than it used to have.

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