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Income tax: Will you leave GCC?

Tax-free income has long been the magnet that attracts millions of expatriates to the oil-rich countries in the GCC region. “We offer an attractive tax-free salary,” boasts the career portal of a major GCC airline.


But is this soon going to be a thing of the past? Recent developments in the Arabian Gulf signal that the taxman may knock on your door in the near future.


When shrinking oil revenues began to erode their budgets, GCC countries were pressed to take several measures to keep their economies upright. The governments have been making large fiscal adjustments and exploring ways to diversify sources of income, rather than solely depending on hydrocarbon exports.


As a part of these measures, the region’s sovereigns have also begun, collectively and individually, to ponder about introducing various tax regimes to shore up finances.


Will incomes be taxed?

While the GCC countries together agreed on the main aspects of implementing value-added tax (VAT) across the region in December last year, many of them separately announced their plans and proposals to introduce various taxes on individuals and business entities in the following months, with Saudi Arabia being the latest to make such an announcement.


On Monday (June 6), Riyadh’s cabinet approved the National Transformation Programme 2020, which included instructions for the finance ministry to prepare and implement an income tax on residents excluding Saudi nationals.


This follows the Kuwait cabinet’s approval in March of a ten per cent tax on profits of companies. Meanwhile, Oman announced in January that it was introducing a 15 per cent corporate income tax, while Qatar has been taxing companies in the country at a rate of ten per cent since 2009. Reports have suggested that the UAE and Bahrain also have plans to introduce tax on corporate profits.


Meanwhile, the UAE is in the process of implementing a five per cent VAT from January 1, 2018.


Is this making the GCC unattractive?

A survey released earlier this week by CFA Society Emirates, an association for financial and investment professionals, revealed that 80 per cent of the respondents would consider moving abroad if an income tax were introduced in the GCC states.


In fact, for 59 per cent of CFA members and charter-holders polled in the survey, the region’s tax-free environment was a key factor in their decision to reside here.


On the corporate level, the survey revealed that 41 per cent of employers will consider relocating if corporate tax were introduced in the Gulf countries where they operate.


The survey also revealed that 82 per cent of the respondents said that VAT, when implemented in UAE, would lead to higher inflation rates. They also noted that demand for luxury goods will be affected the most by additional VAT costs, followed by cars, tobacco and real estate. Meanwhile, respondents saw healthcare as the sector that will be least impacted by the additional tax costs.


Major financial institutions and rating agencies have long warned the economies in the region against various subsidies and urged them to consider new ways of raising revenue, including the introduction of taxes to deal with their ballooning fiscal deficits.


In February this year, Christine Lagarde, managing director of International Monetary Fund (IMF), said that the oil exporters in the Middle East and North Africa have lost more than $340 billion of revenues last year because of low crude prices.


Lagarde, who was speaking at The First Arab Fiscal Forum in Abu Dhabi, said the GCC economies have made large fiscal adjustments in the past and that she was “confident that they can do it again.”


She reiterated the IMF’s call to introduce new taxes and to overhaul the existing tax system, giving greater emphasis on corporate income taxes as well as property and excise taxes in the GCC states.


“Start by putting in place a simple system that initially focuses on VAT – ideally, a harmonised regional VAT,” she stressed, adding that even at a low single-digit rate, such a tax could raise up to two per cent of GDP.


Following the successful rollout of VAT, the governments can continue “to invest in building tax administration capacity that could eventually allow for introduction of personal income taxes,” Lagarde said then.