How new GCC tax laws will affect your business

Unsplash/Kelly Sikkema

To tax or not to tax… That is one of the key questions facing leaders in the Gulf region as they prepare their countries for a post-oil future.

Although Dr Thani Bin Ahmed Al Zeyoudi, the UAE’s minister of state for foreign trade, went on record in February to say “income tax is not on the table at all now”, many experts believe it is a case of when, not if, personal income tax is levied in the GCC.

“It is inevitable, albeit a last resort for many regional states. Because of low oil prices in recent years, Gulf states were obliged to explore ways to diversify revenue streams, and personal income tax is one such tool,” said Sami Fadlallah, economic researcher at business set-up firm Healy Consultants Group.

“With income pouring into the oil-producing Gulf states, this is not something we expect to see in the near to medium term in the stronger economies such as the UAE,” he added. 

Jan Kamphuisen, head of Albright Stonebridge Group’s UAE office, agreed: “Timing will depend on national economic reform and diversification agendas, but by the end of this decade most, if not all Gulf states, will have implemented some form of income tax.”

The UAE announced in January it would impose a 9 percent corporate tax starting in 2023 as it seeks to align itself with international standards, particularly the global minimum tax on multinational corporations endorsed by the G20 major economies.

The corporate tax announcement surprised some observers, given the UAE’s reputation as a low-tax environment.

Income tax rumours

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 that Oman planned to start taxing high earners from 2022.

The new tax 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.

Scott Livermore, economic adviser at the Institute of Chartered Accountants in England and Wales (ICAEW) and chief economist at Oxford Economics, believes the Gulf region needs more of a long-term plan for diversifying tax bases.

“The countries in the Gulf need to diversify their tax base and there is still plenty of headroom for VAT, corporate tax and income tax to rise and for the region to [remain] a low-tax region. And while tax is an important factor for individuals and businesses in choosing a location, other factors such as regulations, bureaucracy, risk and quality of life are as – if not more – important,” he said.

“I think the countries of the region would benefit from setting out a clear and credible long-term plan for diversifying their tax bases, rather than having a situation where there is realisation that diversification is necessary, but uncertainty over what taxes and when they may be implemented.” 

VAT introduced

Other types of taxes are already in place in the Gulf. The six GCC member states signed a Common VAT Agreement in June 2016 to introduce a sales tax at a rate of 5 percent.

Saudi Arabia and the UAE were the first to do so in January 2018, followed by Bahrain in January 2019 and Oman in April 2021. The VAT rate in Saudi Arabia was subsequently increased to 15 percent in July 2020.

According to Fadlallah, VAT implementation in Kuwait and Qatar is expected to happen in the near future after previously being deferred with no definitive date set. 

“The reasons for this have been caution over the effects of VAT on their local economy as well as assessing the results of the UAE and Saudi Arabia [experiences],” he explained.

Beyond VAT, many people have long complained about the number of business-related fees in the GCC, although some of these have been delayed, waived or reconsidered as part of the region’s response to the coronavirus pandemic.

Experts say more and higher taxes in the UAE and across the GCC are on the policymaking horizon, although implementation will be a slow process. Surging oil and gas prices may have reduced the short-term urgency for new sources of tax revenue, but discussions are still very much on the table. 

Still attractive

Some see the UAE’s corporate tax as reflecting its efforts to attract foreign investments and international talent. The rate is low from a regional and global perspective, ensuring the country remains in a competitive position to attract firms and investors. It still leaves the UAE with the lowest global corporation tax, alongside Hungary and Montenegro which also have a rate of 9 percent.

“The Gulf will remain an attractive destination for regional talent in particular, but [the high] cost of living – and by extension employment cost – is a factor governments should consider,” said Kamphuisen. “Most Gulf states have gradually introduced a range of fees to offset the lack of income tax revenues. It will be interesting to see if some of this will be rolled back once an income tax is introduced.”

According to Hassan Paracha, accounting officer at Healy Consultants Group, the new corporate tax will not significantly dent the ability of the UAE to attract investment. “Firstly, companies in free zones will continue to benefit from their tax advantages and will thus be unaffected by the judgement if they adhere to all regulatory requirements and do not conduct business [onshore],” he said.

“Secondly, other Gulf countries, including Saudi Arabia, Oman and Qatar, already levy a corporate tax on multinationals operating in their economies, with rates of 20 percent in Saudi Arabia, 15 percent in Oman and 10 percent in Qatar.”

Kamphuisen agreed: “Companies understand that this is part of the UAE’s endeavours to transform its state-dominated petro-economy into a modern diversified knowledge economy.”