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IMF urges Saudi to explore new taxes to boost non-oil revenues

Saudi Tourism Authority
Floating the idea of taxes and business reform: Tourism, retail and manufacturing and construction are driving non-oil growth in Saudi
  • Levies on income, profit and property could be considered
  • UAE’s 9% corporation tax sets example
  • Saudi private sector growth is buoyant

Saudi Arabia should investigate new taxes, including on income and property, as it aims to boost its non-oil revenues.

While significant change has already been undertaken by the kingdom, with a tripling of VAT to 15 percent during the coronavirus pandemic, more can be done, said Amine Mati, assistant director and mission chief for Saudi Arabia and head GCC division, International Monetary Fund (IMF). 

“Under challenging circumstances you have seen the VAT rate has been tripled. That has brought a significant increase in non oil revenue,” Mati said.

“This is in line with the kingdom’s revenue diversification efforts. So our advice is to maintain VAT at 15 percent which is still lower than some emerging market tax rates, so we think that is still appropriate.

“With non-oil revenue at 12 percent of GDP we think that there is room to grow, the authorities agree, and we think that looking at different taxes would be one way to look at it. 

“There’s different possibilities here. Taxes on income and profit, and taxes on property. These are all avenues that should be explored.” 

Person, Human, Suit
Tax man: Amine Mati of the International Monetary Fund suggests taxing Saudis on income or property

Tax is one of the key questions facing leaders in the Gulf region as they prepare their countries for a post-oil future.

The UAE announced in January it would impose a nine percent corporate tax starting in 2023 as it seeks to align itself with new international standards, particularly the global minimum tax on multinational corporations endorsed by the Group of 20 major economies.

Rumours have abounded for years about the introduction of some sort of tax on income.

Saudi Arabia, Kuwait and the UAE have batted away suggestions over the past decade, but the issue re-emerged in late 2020 when international media reported Oman planned to start taxing high earners from 2022.

This was understood to be part of measures to tackle the sultanate’s budget deficit, which had ballooned due to low oil prices and the coronavirus pandemic. 

However, last year officials seemed to distance themselves from the plan, saying no final decision had been taken and the country has since witnessed an economic rebound.

Services sector

Mati also said sectors such as retail, tourism, manufacturing and construction are likely to drive non-oil growth in Saudi Arabia.

“The whole services industry is expanding tremendously,” he said. 

“Tourism is developing with hotels, and the infrastructure and services that surround that will generate growth.

“Construction will continue to grow given the strong demand for mortgages and home ownership.”

Person, Human, Face
Energy price reform could support climate objectives set out at the Saudi Green Initiative forum

He also urged ongoing reforms to energy prices so that domestic fuel prices converge with international prices.

They would generate fiscal savings as well as support the authorities’ climate objectives, set out in the Saudi Green Initiative, he added. 

His comments follow an IMF report that says Saudi Arabia is likely to be one of the world’s fastest-growing economies this year as sweeping pro-business reforms and a sharp rise in oil prices and production power from a­ pandemic-induced recession in 2020. 

Gross domestic product is expected to expand by 7.6 percent, the fastest growth in almost a decade.

Inflation contained

Mati also said the threat of inflation, which is taking hold in the West, is unlikely to impact the kingdom’s economy.

Despite higher prices for imported commodities, inflation is expected to remain contained at 2.8 percent in 2022 as the central bank tightens policy in line with the US Federal Reserve. 

The IMF said maintaining control of public spending despite higher oil proceeds will be important, but there is scope for more targeted social spending. 

It added that managing oil revenues in a sustainable manner, so that spending does not rise and fall in line with the price of oil, would promote fiscal sustainability and prevent a return to previous oil-driven cycles of boom and bust. 

The report said the Saudi financial sector remains resilient and systemic risks are low, with increases in interest rates expected to have only a “limited impact” on the economy in an environment of high oil prices and strong liquidity. 

According to the IMF, Saudi Arabia is taking “impressive steps” to improve the business environment, attract foreign investment and create private-sector employment. 

These initiatives, combined with governance and labour market reform, have made it easier to do business, increased the number of industrial facilities and raised female participation in the labour force.