Saudis announce new tax rate for Aramco amid plans for IPO

by Frankie Norman April 5, 2017, 0:53
Saudis announce new tax rate for Aramco amid plans for IPO

Saudi Arabia depends on oil revenue for 62% of government revenue, down from 73% in 2015.

Investment experts believe that the tax change is meant to indicate to potential investors in Saudi Aramco that the company will have a higher level of available cash, which may be used to pay out dividends, a move which could amp interest in the IPO.

Deputy Crown Prince Mohammed bin Salman, who leads economic reforms, has said the IPO will value Aramco at a minimum of United States dollars 2 trillion.

The new code, rolled out by royal decree from King Salman, taxes Aramco at 50 per cent on income retroactively starting January 1.

The reduced tax rate announced by Saudi Arabia could add $1 trillion to Aramco's valuation, according to Rystad Energy.

If the national oil company achieves a valuation of $2 trillion, it would need to sell just 5% of itself to raise $100 billion.

The new taxes are based on the size of the firms' income.

"This tax change has a huge impact on the valuation of Saudi Aramco, said Espen Erlingsen, vice president of analysis at Rystad Energy, in a statement".

Under the new rates, hydrocarbon companies in Saudi Arabia with capital of more than 375 billion riyals (S$139.424 billion) will pay a tax of 50 per cent, according to SPA. - Aramco's formal name - the company's total value after costs will be close to $3.4 trillion, he said.

Saudi Arabia plans to sell five percent of Aramco next year, as part of efforts to build up a large sovereign wealth fund and diversify Riyadh's economy, which is at present hugely dependent on oil.

"The royal decree concerning taxes is in the interest of the kingdom, its citizens and future generations", said Energy Minister Khalid al-Falih, whose country is the world's biggest oil exporter.

The move comes head of a planned listing of shares in Saudi Aramco sometime next year.

That figure jumps to 85 percent tax on producers with invested capital that does not exceed $60 billion.

The company said in a tweet that the change bring its tax rate "in line with worldwide benchmarks".

"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".

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