Economic diversification has been a key focus for policymakers in recent years, and taxes are seen as one way to generate non-oil revenue and promote sustainable growth.
And yet, this region must walk a fine balance. The GCC is prized for its absence of taxation, which has contributed to its development as a business hub. Introducing new taxes risks its reputation as a favourable business destination.0
From No Taxation To Low Taxation
Many GCC member-states are finding compromise by implementing low taxes, or taxes with a narrow base. While still contributing to the national coffers, these taxes are not seen as a major burden to businesses or individuals compared to the Western world. Let's take a look at some of the taxes that have been introduced across the GCC in recent years.
In 2018, Saudi Arabia introduced a value-added tax (VAT) of 5%. In 2020, the rate was raised to 15% as a temporary measure, but an end date has not yet been announced.
In 2019, the Saudi government also announced that sugary drinks would be subject to a 50% Excise Tax as part of the battle against obesity and diabetes within the Kingdom. In the same vein, a 100% Excise Tax on electronic devices, liquids, and equipment used for smoking was introduced to try to curtail the nation's vaping habits.
In 2021, the government announced: "The Kingdom of Saudi of Arabia intends to cease contracting with companies and commercial institutions with regional headquarters not located in the Kingdom. The cessation will include agencies, institutions and funds owned by the government and will take effect 1 January 2024."
The RHQ Program is a ‘Vision 2030’ initiative jointly developed by the Ministry of Investment Saudi Arabia (“MISA”) and the Royal Commission for Riyadh City (“RCRC”), with the objective of inviting global companies to establish or relocate their regional headquarters in the Kingdom of Saudi Arabia.
It is a major development strategy for the Government of KSA, as it intends to transform Riyadh into one of the top 10 city economies globally by 2030. The Board of the RCRC has confirmed the Government’s proposal to increase the number of visitors to more than forty million by 2030.
A big part of the UAE's attraction as a global business and financial centre is its lack of income tax. However, the UAE does have a robust social security regime, which taxes GCC resident nationals at 17.5%. Meanwhile, Emirati locals are subject to a 5% rate, and a further 12.5% is paid by their employer.
There is no corporate or capital gains tax (unless you are an oil company or foreign bank). But like Saudi, in 2018 the nation did introduce a VAT rate of 5% on all goods and services with a few exceptions.
In 2022, the Federal Tax Authority (FTA) announced that the activities, sectors and entities mentioned below will be subject to corporate income tax:
- all businesses and individuals conducting business activities under a commercial licence in the UAE.
- free zone businesses (The UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business set up in the UAE’s mainland.)
- Foreign entities and individuals only if they conduct a trade or business in the UAE in an ongoing or regular manner.
- Banking operations.
- Businesses engaged in real estate management, construction, development, agency and brokerage activities.
However, the Corporate Income Tax (CIT) rules are due to change from 1 June 2023, when the plan is to introduce a federal corporation tax at 9% for businesses with net profits of AED 375,000 or more.
Despite its relatively diversified economy, Oman is still quite dependent on oil revenue — something that has kept taxation comparatively low.
However, Omani nationals (not foreigners) are required to contribute to their social security, 10.5% of which is paid by the employer directly. In 2021, the government did introduce a VAT rate of 5%. Additionally, alcohol, energy drinks, pork products, and tobacco products are subject to an excise tax rate of 100%
Kuwait hasn't been as quick to roll out taxes as some of its neighbours. There is currently no VAT, no personal income tax, and no withholding tax in Kuwait. Companies wholly owned by Kuwait or GCC nationals will not be subject to any taxation either, but foreign-owned companies (whether partially or fully) may be subjected to a flat rate of 15%, which is then calculated in line with the percentage of foreign ownership.
Qatar's tax regime is quite similar to Kuwait in that there is no personal income tax or VAT. However, there is a Company Tax law that applies a rate of 10% to the total stated income of any company operating within its border and this rate must be paid annually.
There is no personal income tax or corporate tax in Bahrain. However, there is an exception for companies that operate within the hydrocarbons industry. They’re subject to a taxation rate of 46%.
There is a social security contribution requirement, which currently stands at 19% for Bahrainis (12% paid by the employer) and 4% for expatriates (3% paid by the employer). VAT was introduced in 2019 at a rate of 5% before increasing to 10% in 2020.
What Lies On The Taxation Horizon?
While taxation across the GCC remains relatively low, there is an indication that this may change in the future. Since 2020, Oman's finance ministry has been considering the introduction of Personal Income Tax to combat its budget deficit. Dubai on the other hand is planning to introduce a federal corporate tax in 2023 at a rate of 9% for businesses with a net profit of AED 375,000 or more. Kuwait and Qatar are also mulling their current VAT situation, but so far it appears that plans have been delayed until 2024.
As the economic landscape continues to change, so too will the taxation landscape of the GCC. Businesses and employees operating in the region must stay abreast of these changes to ensure they remain compliant and avoid any penalties. With the help of a qualified professional, this can be easily achieved.
To discuss your tax requirements contact our Head of Tax, Adel Daglas.