Saudis announce new tax code for Aramco amid plans for IPO

Jon Howard
April 5, 2017

Saudi Arabia on Monday slashed its tax rate for oil companies just as the country plans to sell part of state-backed oil giant Saudi Aramco, expected to be the largest initial public offering ever. For instance, it welcomed Chinese e-commerce leader Alibaba Group Holding Ltd. (NYSE: BABA) back in 2014, which was, at the time, the world's biggest IPO. "I am sure there will be more such moves to follow in coming weeks and months", an oil industry executive told Reuters.

Saudi Arabia Finance Minister Mohammed bin Abdullah Al-Jadaan stressed that its tax break on Aramco and other large oil companies will have "no impact on the government's ability to deliver services to its citizens". Many private analysts have been skeptical, making estimates below $1 trillion, but a 50 percent tax rate could bring the offer closer to $2 trillion.

Saudi Arabia is preparing for the flotation by deepening relationships with its biggest buyers and locking in future demand for its oil. On Monday, China Petroleum Corp., known as Sinopec said it had been invited to take a stake in the operation and that talks were ongoing. "For the next step, we will deepen our communication and cooperation". That figure jumps to 65 per cent for producers with between $80 billion and $100 billion in invested capital, 75 per cent if between $60 billion and $80 billion, and 85 per cent on producers with invested capital that does not exceed $60 billion.

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The company said in a tweet that the change bring its tax rate "in line with global benchmarks". The firm has not revealed its post-IPO dividend policy.

The rate of the tax will vary based on the amount of investment committed by each respective firm, with lower levels of investment seeing a higher rate, maxing out at the current level of 85 percent. Under the new tax rate, much of the company's payments to the government are expected to be in the form of dividends, not tax. But cut the tax rate to 50 percent, and those earnings more than triple to nearly $68 billion.

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