Status of Tax Regime in GCC

Apr 01, 2015

The GCC region is known for its low tax regime. The issue of taxation in the GCC has been discussed since the 1980s and has seen many changes in the years. The tax rates and tax structures vary among the GCC countries. Kuwait introduced a corporate tax in 1955. Saudi Arabia had an income tax on foreigners until 1975, after which it was suspended owing to increasing revenue from oil exports and the need to attract expatriates to work in the Kingdom.

GCC Taxation –History and Perspectives
The GCC region is known for its low tax regime. The issue of taxation in the GCC has been discussed since the 1980s and has seen many changes in the years. The tax rates and tax structures vary among the GCC countries. Kuwait introduced a corporate tax in 1955. Saudi Arabia had an income tax on foreigners until 1975, after which it was suspended owing to increasing revenue from oil exports and the need to attract expatriates to work in the Kingdom.

Countries in the GCC, apparently, have somewhat similar histories with respect to introduction of various taxes during the period post-1980. There has been opposition from various groups for the introduction of such taxes. For instance, in Saudi Arabia and Bahrain there were instant opposition to the proposal for introduction of income tax.  Moreover, the region still does not have any personal taxes but they have corporate taxes which were introduced over the years.

In the early 1990s, many GCC countries studied the feasibility of introducing VAT and corporate tax as part of their economic reforms. Organizations like IMF and World Bank have stressed the importance for taxation as a form of supporting economic diversification. Effective taxation regimes require robust institutions and mechanisms to be in place for efficient tax collection and utilization.
 
Why GCC countries need to impose personal taxes?

The economy of the GCC countries is mainly dependent on oil exports for the government revenue. Historically when oil prices have fallen, as during the gulf war, these countries have had difficulty in meeting their expenses as their revenues reduced.

Country  Particulars  1990 1995 2000 2005 2010 2015 2016 2017 2018 2019
Bahrain  GDP  4.53 5.85 7.97 13.46 22.36 29.86 36.322 37.69 39.24 40.41
   Population  0.48 0.58 0.67 0.73 1.06 1.17 1.25 1.27 1.30 1.32
Kuwait  GDP  18.29 27.19 37.72 80.8 135.06 186.18 185.12 192.44 201.16 210.93
   Population  2.13 1.57 2.21 2.99 3.6 3.98 4.22 4.34 4.46 4.59
Oman  GDP  11.69 13.8 19.45 30.91 62.25 87.45 83.33 85.85 88.98 92.72
  Population  1.63 2.09 2.4 2.5 3.06 3.55 3.96 4.08 4.21 4.34
Qatar GDP  7.36 8.14 17.76 42.46 110.84 183.62 244.301 261.748 279.154 297.851
  Population  0.46 0.52 0.6 0.79 1.35 2.34 2.622 2.74 2.80 2.82
Saudi Arabia  GDP  116.78 42.46 188.69 315.76 438.01 644.97 3,149.16 3,287.41 3,442.27 3,608.40
   Population  15.18 18.13 20.47 23.11 26.1 29.02 31.86 32.50 33.15 33.81
UAE  GDP  35.99 40.73 70.22 134.17 252.74 372.12 461.90 488.00 522.19 562.54
   Population 1.84 2.41 2.99 4.1 5.05 5.69 9.86 10.14 10.43 10.75
                         
  Source: IMF

With oil prices entering a period of sustained volatility and downward pressures, it is likely that the oil-based GDPs are likely to suffer. With a growing population and the need to create employment, there is the need to consider personal taxes as a measure to replenish government coffers that can, in turn, fund projects that are of value to the citizens. Bodies like the IMF have repeatedly urged many GCC nations to bolster economic diversification efforts in order to create sustainable revenue streams.

In fact, the IMF has recommended that they cut spending and implement income tax, corporate tax, consumption tax and value added tax. Also, the IMF has encouraged the introduction of indirect and direct taxation in countries where they were previously either minimal or absent altogether, expansion of taxation schemes in countries where they were already present, and an effort to use existing schemes as an inducement to encourage regional taxation schemes. Additional factors for GCC countries in considering the introduction of new taxation stem from their economies’ increasing exposure to global trade. These include the growing numbers of bilateral and/or regional Free Trade Agreements (FTAs) concluded in recent years such as the Bahrain-US or GCC-Singapore FTA, or the Oman-US FTA that is under consideration.

Country Specific Taxes

Saudi Arabia

Saudi Arabia had an income tax on expatriates until 1975, after which it was suspended in line with expanding oil revenues. In 2004, Saudi Arabia cut its corporate taxes from 30% to 20% to attract foreign investors. The Kingdom is in the process of introducing many changes in its taxation policies and is attempting to do that on a consensual basis.

Table 2: Taxation in the Kingdom of Saudi Arabia
Taxation Category Rate
Personal Income Tax Nil
Corporate Tax Maximum of 20%
Value added tax
(VAT)
Nil

Source: KPMG, HSBC
 
Kuwait

Kuwait introduced corporate tax in 1955. In 2000, IMF noted that Kuwait had taken efforts to reform its corporate tax law, broad based consumption tax and the levying of excises on luxury items. In 2007, the Kuwaiti government reduced the corporate tax of 1955 from 55% to 15% as they felt it hindered the flow of foreign investments into Kuwait. Since 2013, there has been persistent speculation that Kuwait is considering a VAT regime. However, nothing official has been announced so far.
Table 3: Taxation in Kuwait
Taxation Category Rate
Personal Income Tax Nil
Corporate Tax Flat rate of 15% on foreign companies
Value added tax
(VAT)
Nil
Source: KPMG
 
Bahrain

Like many other GCC countries, no form of personal, corporate, withholding or VAT is applicable in Bahrain. However, there is the municipal tax of 10% on the monthly rental of residential and business real estate. In addition, a 5% levy on gross turnover is imposed on the hotel services industry and entertainment. In October 2009, the Bahrain parliamentary chairman proposed placing a tax on foreign investors setting up large-scale projects. However, the parliamentary committee amended the proposal to include Bahraini and GCC investors to avoid contravening World Trade Organization regulations. Given that Bahrain’s hydrocarbons base is not as robust as most other GCC peers, the country is expected to device a strategic taxation regime sooner rather than later.

Table 3: Taxation in Bahrain
Taxation Category Rate
Personal Income Tax Nil
Corporate Tax Flat tax rate of 46% on oil companies. Zero percent for others
Value added tax
(VAT)
Nil
Source: KPMG
 
Qatar

Since the closing stages of the previous century, Qatar has been looking at taxation as a tool for supplementing State revenues beyond just the prodigious hydrocarbon revenues. In 2008, the corporate taxes were reduced from 35% to 10%, in line with the prevailing trend in the region during that period.
The tax regime in Qatar is territorial in nature. I.e., taxes are levied only on income generated fully or partially in the sea and soil of the State of Qatar. Income generated by Qataris or Qatari entities outside Qatar is not subject to any taxes. Also, there are two streams of taxes in Qatar – corporate tax and withholding tax.

Table 4: Taxation in Qatar
Taxation Category Rate
Personal Income Tax Nil
Corporate Tax The general tax rate is a flat 10%; but a 35% rate applies to hydrocarbons’ operations
Value added tax
(VAT)
Nil
Source: KPMG, Deloitte
 
Oman

Oman introduced corporate tax in 1994. In 2000, it announced tax reductions for foreign investors to attract foreign investments. In 2001, IMF in its report recommended Oman to introduce excise taxes on luxury goods and services, and a simple property tax to replace the taxation of rental agreements in the short run. To offset falling oil revenues, in 2003 Oman imposed a road tax and raised petrol prices. Oman also came out with the executive regulations for the Income Tax law in 2012 with the introduction of 18 new tax forms. The laws were approved by the government and were implemented in 2013.
 
Table 4: Taxation in Oman
Taxation Category Rate
Personal Income Tax Nil
Corporate Tax A flat rate of 12%
Value added tax
(VAT)
Nil
Source: KPMG, PKF
 
United Arab Emirates

UAE had plans to introduce income tax in 1988, but they did not materialize due to several hurdles. Within the UAE itself, Dubai has pulled ahead of the rest of the country in terms of strategizing over tax regimes.  The structural differences within the UAE in terms of how the various polities are arranged means that different Emirates enjoy autonomy with respect to their own policies’ framework.  In 2009, UAE proposed a 2-5% VAT on goods and services that has however not seen any follow-up implementation, as of yet.  The UAE is expected to adopt a patient approach of learning lessons from potential future VAT implementation experiences and then carry them over to the personal taxation space, expected still later.
Table 4: Taxation in the UAE
Taxation Category Rate
Personal Income Tax Nil
Corporate Tax A sliding scale of which the maximum can go up to 55%, for incomes exceeding AED 5,000,000
Value added tax
(VAT)
Nil
Source: KPMG, PKF
 
Table 5: GCC Comparative Tax Matrix
Taxation Category KSA Kuwait Bahrain Qatar Oman UAE
Personal Income Tax Nil Nil Nil Nil Nil Nil
Corporate
Tax
Maximum of 20% Flat rate of 15% on foreign companies Flat tax rate of 46% on oil companies. Zero percent
for others
The general tax rate is a flat 10%; but a 35% rate applies to hydrocarbons’ operations A flat rate
of 12%
A sliding scale of which the maximum can go up to 55%, for incomes exceeding AED 5,000,000
Value added tax
(VAT)
Nil Nil Nil Nil Nil Nil

Source: KPMG, PKF, Deloitte

Conclusion
The GCC nations have felt the necessity of taxes in order to strengthen their economy and reduce their dependence on the oil exports. These countries have faced hurdles in the implementation of taxes. There has been proposals from the various GCC governments to introduce a unified VAT across the region and 2015 was set as the tentative target for its introduction. Any VAT regime, if introduced, is expected to be around 5-10% in the GCC countries. The personal taxes are not expected to be implemented in the near future. These countries will first have to successfully implement the VAT and develop collection systems that are efficient. There are reports that collection systems are being explored in the UAE and Bahrain, which can be studied and by other GCC countries as part of analysis on the topic.

The distribution of the tax revenue forms an important aspect of taxation policy. The taxation policy should benefit the country and the society as a whole without undue pressure on those who experience only low income levels. There will also be the growing requirement for standardization and harmonization of taxation policies and regimes across the GCC in order to foster a more business friendly environment and for boosting intra-GCC trade. Such a move could also alleviate the need for the GCC nations to compete among themselves in terms of taxation thresholds as a form of incentive for FDI.  Most importantly, for the various GCC authorities, a steady inflow of coordinated taxation revenues into the States’ coffers can provide strong buffers against oil price volatility in the international markets, something that entered pronounced territory in the second half of 2014.