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Saudi Arabia Exploring Expat Income Tax

Investopedia logoInvestopedia 09-06-2016 Shiv Mehta, CFA
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Saudi Arabia’s Ministry of Finance is exploring options to generate revenues by imposing income taxes on foreign residents. The proposal is part of Saudi Arabia’s National Transformation Plan, a multi-year program to reduce reliance on oil revenues.

Finance Minister Ibrahim al-Assaf, however, clarified, “[Taxing foreign residents is only] an initiative that will be discussed.” He added, “It is in reality an old proposal, and it was presented in the past, but it is one of the initiatives that will be raised by the finance ministry.” (See also: Is Saudi Arabia Giving Up on Oil?)

What Do Economists Have to Say?

Many economists believe that the proposal is unlikely to materialize as it could hinder the country’s ability to attract foreign direct investment, which it will need to revive growth. However, given the fact that the proposal has been raised, the Deputy Crown Prince Mohammed appears ready to consider steps which have been ignored by previous rulers.

Mohammed Alsuwayed, the Riyadh-based head of capital and money markets at Adeem Capital, said, “I don’t believe it’s wise to introduce such a thing at a time when the kingdom is trying hard to attract direct foreign investments and not having income taxes was one of the most attractive prospects here.”

Said A. Al-Shaikh, chief economist at the kingdom’s National Commercial Bank, said, “[Success] of any such tax would really depend on the rate imposed and the segments of foreign workers that would be levied on.” He added, “A tax on foreigners may end up being borne by their employers, who will find it more difficult to attract staff and fill posts whether it’s for low or high wage jobs.”  

Strategies Already Employed

Prince Mohammed has already started cutting expenditures such as waiving off fuel and utility subsidies and has also initiated reductions in the wage bill. The government has also become one of the six Gulf Cooperation Council (GCC) countries to introduce the VAT system.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said, “Deepening the taxation base will be an important step in increasing non-oil revenue, which will likely start with VAT first, but the discussion of income tax is notable.” (See also: OPEC Strategy Stable, Saudi to Borrow $15 Billion.) 

Dwindling Economy and Rising Debt

In the wake of oil prices falling from above $100 per barrel to below $30 per barrel, the Saudi Arabian government has resorted to spending cuts, issued bonds and undertaken various other measures. The National Transformation Plan also expects the public debt to increase from 7.7% currently to 30% of the GDP by 2020.

Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes, said, the government’s debt will increase by another $200 billion in the next five years. On the other hand, the GDP is expected to grow by 1.5% in 2016, down from 3.4% in 2015, according to Bloomberg’s consensus estimates.

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