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Oman’s decision to impose income tax on the wealthy likely to be emulated by the GCC

Oman finds itself forced to break a long-standing GCC norm by imposing income taxes on the wealthy in 2022. will it be followed by an avalanche of GCC decrees to do the same?

Oman's budget deficit has ballooned to nearly 19% of gross domestic product (GDP) in 2020 It would be highly surprising if other GCC economies weren’t discussing ways of diversifying their tax base The IMF says region will see a $224 bn shortfall in revenue and the economies of GCC will fall by 6% in 2020

Oman finds itself forced to deal with unprecedented economic difficulties, and decided to break a long-standing GCC norm by imposing income taxes on the wealthy in 2022. 

The economic outlook for the GCC is not pretty, battered by the combined effects of low oil prices and COVID-19.

These countries will be watching and some, if not all, will likely be following suit. 

Oman’s decision to tax income

Cash-strapped Oman plans income tax on wealthy starting 2022 as part of a broader program to tackle a budget deficit that’s ballooned to nearly 19% of gross domestic product (GDP) in 2020, as per the International Monetary Fund (IMF) and lower it to 1.7% by 2024, the country’s Ministry of Finance emailed Sunday.  

“Some of the goals are ambitious to the point of unrealism such as the narrowing of the budget deficit to 1.7% of GDP in 2024. The introduction of income taxes is not clear if it will apply only to expatriates or to citizens as well,” said Ziad Daoud, chief emerging markets economist, Bloomberg Economics.

The tax would apply to high-income individuals, but the doesn’t specify which income brackets.

Oman’s Sultan Haitham announced in mid-October he would introduce VAT in April next year.

GCC now watching, later acting

Affluent governments in Arab Gulf economies have long steered clear of imposing income taxes as a way to attract labor and companies, but in June 2016, Oman, Saudi Arabia, and the United Arab Emirates have all introduced 5% value-added taxes (VATs). Saudi tripled it in 2020 due to the Corona pandemic impact on Kingdom revenues.

All of the region’s monarchies will be forced to impose “some kind of income taxes eventually” because they are unable to make the current financial model work permanently,” said David B. Roberts, an assistant professor at King’s College London who studies the Gulf.

“If the process is undertaken in a sensible way, with focus on top earners, it might even have wider support.”

Scott Livermore, ICAEW economic advisor and chief economist at Oxford Economics, told Arabian Business: “It would be highly surprising if other GCC economies weren’t discussing ways of diversifying their tax base, including looking at personal and corporate income tax.”

He added that Oman could ease borrowing costs and access to funds in the short run and as such act has a pressure valve for the economy before the new taxes are actually implemented.

Oman’s economic woes 

Oman has been downgraded twice so far this year by both Moody’s and Fitch..

Fitch said in August that it expects Oman’s fiscal deficit at nearly 20% of GDP in 2020, up from around 8% of GDP in 2019, as a 32% crash in revenues driven by lower oil prices and production would more than offset an 8% cut in spending.

Oman’s government is also planning to gradually pare the state’s subsidies on electricity and water until completely removing them by 2025, as well as expanding the visa-fee exemption to more countries in a bid to spur tourism.

Oman’s debt surged to 60% of GDP last year. In October, the sultanate sold $1.25 billion in seven-year securities and $750 million in notes maturing in 2032. 

The International Monetary Fund sees Oman’s economy shrinking 10% this year, the steepest contraction among peers.

Regional economic difficulties

Saudi’s budget deficit is expected to widen to 12% of its GDP. The IMF expects the UAE’s economy to shrink by 6.6% this year and to swing back to modest growth of 1.3% in 2021. It estimated the UAE government deficit at 9.9% of GDP this year, up from 0.8% in 2019.

MENA countries have little choice than to accelerate plans for diversification away from oil, according to Aberdeen Standard Investments (ASI).

It predicted a 4.1% contraction for the region as a whole this year.

The IMF assumes the price of oil will average just under $42 barrel in 2020 and less than $47 a barrel in 2021. It forecasts the region will see a $224 bn shortfall in revenue this year and the economies of the six GCC states will fall by 6% in 2020.

Edris Alrafi, head of Middle East & Africa for ASI, said: “Economic diversification is the most realistic way that MENA’s economies can lift themselves out of this crisis.”

The IMF is asking for more fiscal space by enhancing tax compliance, increasing the progressivity of tax systems, and gradually eliminating fuel subsidies.

UAE’s income tax decrees 

Currently, the UAE does not have a federal corporate income tax (CIT) regime; however, most of the Emirates introduced income tax decrees in the late 1960s, and taxation is therefore determined on an Emirate-by-Emirate basis.

CIT may be imposed on all companies at rates of up to 55%. However, in practice, CIT is currently only enforced in respect of corporate entities engaged in the production of oil and gas or extraction of other natural resources in the UAE.

In addition, some of the Emirates have their own specific banking tax decrees, which impose CIT on branches of foreign banks at the rate of 20%.