Not quite a philosophic, or existential, question but an important one all the same – just what is profit at a nationally owned resource company? The importance of this being that sure, Saudi Aramco is the world’s most profitable company but how much of that actually belongs to the stockholders as the stockholders in Saudi Aramco?
More, will whatever that definition is before the IPO be the same one that pertains some years after it?
But now we’ve got a government-owned company that owns and also lifts all of that resource. From the government’s point of view, it doesn’t matter what is the royalty, the profit, or even the tax upon the profit. It all goes to the same place. Which is something that should make us nervous out here if and when that IPO comes along. For we’re very interested indeed in what is the split between the righteous taxation of royalties and the possibly overbearing taxation of profits. We get a share of post-tax profits as stockholders, profits which can be significantly reduced if that royalty rate changes. We might even find that the royalty rate ahead of the IPO is lighter than it will be in the future, making that initial part of the offering more attractive.
The economic background is that we’ve two entirely different taxes being thought about here.
A royalty is, with a natural resource, the payment that is associated with the simple existence of the thing. Oil, some metal deposit, they’re not created by human activity. Thus we don’t get less of it by taxing that simple existence – this is exactly the argument in favour of land value taxation.
Digging up a resource, as with improvements to land, is something that is done by human activity. It requires effort, capital and so on, and the more we tax those and the returns from them the less we’ll get in digging up resources and or improving land.
Simple stuff and well known and why both land value taxation and resource rent taxation should be punitive until the pips squeak. We’ve got to get our tax money somewhere and it really should be where we’re not going to get any less of something by taxing it.
The profits made from applying capital, labor, ingenuity etc should not be so taxed. They might be taxed, but shouldn’t be at the same rate as the existence.
So, the concern over Saudi Aramco. At the moment it doesn’t matter to the Saudis how they organise this as they get all those revenues anyway. But once ownership changes through an IPO then we out here are intensely interested in that split of taxation. And how much do we think that whatever that split becomes is going to be in our, or in their, favour?