Saudi Arabia is considering a flexible tax system for state-owned oil company Aramco that would increase royalty payments when crude prices rise, according to people familiar with the deliberations.
Riyadh is mulling a proposal from Saudi Aramco to replace the current fixed royalty on revenues, the same people said, asking not to be named discussing government policies. Aramco has proposed to initially set the royalty at 20% – the same rate as today’s fixed rate – and increase it automatically if oil prices rise significantly.
The Saudi government hasn’t yet decided whether to go ahead with the flexible royalty and it could decide against it. On top of the royalty, Saudi Aramco pays income tax on profit, which the government recently cut to 50% from 85%.
The kingdom aims to list about 5% of Aramco in an initial public offering in the second half of 2018. While a flexible levy would help the kingdom to raise extra revenue if oil prices climb, it’s likely to prove unpopular with potential investors as it would reduce their exposure to higher prices.
The Saudi ministry of finance directed questions on the flexible royalty to Saudi Aramco. The company declined to comment.
Saudi Arabia relies heavily on oil for its finances and has an economic programme, dubbed Vision 2030, to break free from hydrocarbons. Still, oil will account for roughly 70% of total government revenue this year, according to the International Monetary Fund. With oil trading around $50 a barrel, the country’s is struggling to balance the books – the IMF projects a fiscal deficit of 9.3% of the gross domestic product, down from 17.2% in 2016.
A price-linked taxation system isn’t unusual in commodities as governments seek to protect the industry from downturns while sharing in the bumper profits of bull runs. The UK, for example, uses a similar model for oil producers in the North Sea. Russia also varies tax rates with oil prices and the Australian government has proposed in the past price-linked taxes for iron ore producers too.
In the past, Saudi officials have said the flotation would value Aramco at as much as $2 trillion, making it the world’s largest company by market value. On that basis, selling just 5% could raise $100 billion, ranking it as the biggest IPO ever.
However, analysts have cautioned that Aramco is more likely to be worth about $1 trillion noting that other national oil companies that have sold shares have achieved relatively low valuations compared with the size of their oil reserves.
Saudi officials have promised to adjust the company’s taxation to lure foreign investors. “When you look at the fiscal regime and the taxes, it has to be aligned with other listed companies,” Saudi Aramco chief executive officer Amin Nasser said in an interview in January.
© Gulf Times Newspaper 2022