Whilst VAT has been introduced across KSA, UAE, Oman and Bahrain, the recent announcement of income tax across Oman may further evoke realigned strategies across the region. We share our insights on the current tax structure, comparing with similar emerging economies, whilst providing insights on the tax structures which could be adopted for future resilience.
Across economies tax is positioned as an effective framework to direct financial resources to achieve social justice aiming to support economic and political stability through the redistribution of income. In addition, tax is an important tool in stimulating investment, encouraging production, and increasing the country's public revenues. Further tax can also influence the flow of foreign investments by establishing a system that stimulates and attracts foreign capital.
Adel Daglas, Director of Tax for Grant Thornton Saudi Arabia, said: "In the last five years, the countries of the Gulf region have sought to increase economic diversification and as such have developed strategies which drive reform to reduce the public budget deficit, whilst diversifying sources of revenue away from the oil and petroleum industry. This has led to the introduction of value-added tax (VAT) across the region, since early 2018 in the Kingdom of Saudi Arabia and the United Arab Emirates, followed by Bahrain and more recently Oman.
The introduction of VAT averted a deep financial crisis amongst the gulf economies, enabling revenue to be reinvested to supporting businesses, creating a source of income for the continuation of government services, whilst withstanding the impact of oil price fluctuations.
It is estimated that revenues from value-added tax alone will generate two to five billion dollars, which will increase given Saudi Arabia has increased its rate to 15% to realign with global standards and to ensure its economy remains sustainable for future growth.
Aside from VAT, the Kingdom also imposed withholding tax, along with several other models which aims to encourage localisation of services and products, wherever possible. As a comparative to advanced economies, the tax landscape across the GCC is in its infancy stage, with developments being adopted in alignment with economic activities.
Whilst the advanced economies have introduced tax several decades ago, with some economies having tax dating back to as early as the 40’s, their tax structures have advanced as their societies and economies have developed. The same can be said for the GCC, as the economies advance towards innovation, technological transformation and evolution of its industries, the tax structure too will need to develop, with increased revenues required to maintain public services and essential investments. We foresee additionally taxes being introduced at affordable rates, which will align to global standards and enable transaction data to be recorded for future analysis.
In alignment with this, there has been much debate around the introduction of income tax across the GCC, any such taxes will be aligned to its counterparts in Singapore, which is low and yet still attractive for foreign expats to live and work across the gulf.
The challenge which gulf countries will need to address is the need to build reinforcing processes to avoid tax evasion, whilst enhancing tax administration and improving tax awareness across the region. This will enable businesses to comply effectively, whilst providing essential revenue for core societal services. This has become a much more pressing challenge given the importance which tax has played in supporting countries to manage revenue fluctuations due to the pandemic.
In summary, the GCC countries have the opportunity to build a robust tax structure which is aligned to advanced economies around the world, which will introduce ongoing enhancements to regional policies, the ability for countries to deliver their growth strategies and to continue provide world-class public services, however integration and alignment of tax is needed at a regional level to support the flow of good, services and investments, which when aligned can be further developed for global orientation.