Saudi Arabia and the UAE have taken the lead on tax reform so far, especially in introducing VAT, across the GCC's six member countries, which also includes Bahrain, Kuwait, Oman, and Qatar. Saudi Arabia’s VAT hike from 5% to 15% in May is another leading move, one that may open the region to more independent taxation that will put budget pressures on MENA businesses.
“That’s quite a hike, even more than the IMF suggested, and in this environment that is brave to say the least,” said one head of tax at a UAE-based conglomerate about the Kingdom of Saudi Arabia’s (KSA) recent VAT rate rise amid the pandemic. “If you look at the GCC setup then the rate should have been agreed between the countries. KSA has gone out on a limb here. What does that mean for the other GCC members? This may be a license to do whatever they want.”
Given the effects of depressed commodity and energy prices under the global pandemic and the need to diversify away from oil revenues, the GCC countries are likely to expand their tax bases over time, especially if Saudi Arabia and the UAE are taking steps to broaden their tax regimes.
Many UAE tax professionals think corporate taxes will likely be introduced in the region within a year depending on the pandemic following comments from a top Emirati lawyer featured in Arabian Business. “It may take a year, [but] with the current knowledge ... I think it's a good time,” said Habib Al Mulla, executive chairman and partner at Baker McKenzie UAE, who is often consulted to draft and advise on federal and Emirate-level laws in the UAE.
Taxpayers are worried whether there may be greater fragmentation across GCC tax systems. The UAE and Saudi tax authorities sometimes offer varying responses to working out tax assessments and discrepancies, since VAT is still a relatively recent concept in the region. Tax directors can see GCC members behaving more independently in the future, whether in increasing VAT rates or introducing other taxes to strengthen public finances, in a region traditionally dependent on oil.
The UAE does not have an internationally recognised corporate tax system, but does have a fixed fee structure for companies to continue operating within an Emirate. Some policy advisors argue that a formal regime in the UAE amid the pandemic can expand market opportunities by replacing the fixed operating fee structure on companies with a corporate tax that accounts for the size of a company and its profit and revenue.
However, this has not dismissed the worries of larger companies and their finance executives who have predicted that tax changes would replace the existing regime, including the fixed fee structures in the UAE, but not amid a pandemic.
“In my view, increasing tax rates and adding new tax measures will have a big negative impact on the economy [across the GCC countries],” said one Middle East head of tax for an automotive company. “Corporate taxes introduce more economic competition in the region, which seems like it may come at a very bad time for businesses,” he added.
Many tax professionals praised fast-paced changes in the UAE’s tax system that are catching up with countries in Europe and North America on legal and technical tax matters, but expanding into corporate taxes does come with plenty of market hesitations, especially timing. Tax professionals do not want additional pressures in navigating evolving tax systems while working with strained budgets during the recovery phase of the pandemic.
However, UAE-based tax professionals widely agree that corporate taxes are coming and the market is preparing as domestic tax talent continues to grow and mature from pioneering tax regimes.
The introduction of a corporate tax to replace a fee-based system will make the UAE and its neighbouring countries that follow similar tax reform more competitive in the international economic environment.
