Saudi Arabia’s government has cut the income tax paid by national oil giant Saudi Aramco

Saudi Arabia’s government has cut the income tax paid by national oil giant Saudi Aramco to smooth the company’s initial public offer of shares next year, which is expected to be the world’s largest equity sale.

A royal decree on Monday, retroactive to Jan. 1, set a tax rate of 50 percent for the firm.  Previously, Aramco had paid 85 percent tax, plus a 20 percent royalty levied at a different stage; the decree did not mention the royalty.

The step appeared likely to reduce Aramco’s tax burden by as much as tens of billions of dollars, which could make the firm much more attractive to private investors. Saudi authorities had been considering such a change for months, sources told Reuters.

“The royal order is a milestone in setting the stage for the world’s biggest IPO. I am sure there will be more such moves to follow in coming weeks and months.

Government aims to sell up to 5% of Aramco, listing the shares in Riyadh and at least one fx, to raise cash for investment in new industries.  As the kingdom seeks to diversify its economy beyond oil exports in an era of cheap crude.

Saudi officials have predicted the IPO will value the company at $2 trillion or more.  Private analysts have been skeptical, making estimates below $1 trillion, but a 50% tax rate could bring the offer closer to $2 trillion.

A move with benefits

“This move carries strategic benefits for Saudi Arabia, its citizens and future generations.  ” Finance Minister Mohammed al-Jadaan said in a statement about the tax cut.

The government, obtains over 60 percent of its income from oil, so the tax change could affect its finances.

“Any tax revenue reductions applicable to hydrocarbon producers operating in the kingdom replaced by stable dividend payments by government-owned companies.  And other sources of revenue including profits resulting from investments,” Jadaan said.

He states in a later statement to Reuters that the 2017 state budget had been prepared with the tax change in mind.  So government revenues and public services would not be affected.

Aramco chief executive said in a statement that the tax cut would help Aramco develop by bringing the company up.

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