Gulf Conflict Creates Tax and Liquidity Risks for Multinationals

The current conflict in the Middle East is having an economic ripple effect throughout the region affecting multinationals. This series examines the impact the conflict is having on corporate tax practice and tax administration there.

Businesses in the six countries that comprise the Gulf Cooperation Council have had a respite from war with the temporary ceasefire between the US and Iran, but they are aware that peace is fragile and that hostilities may resume at any time.

Some issues from the continuing uncertainty are:

Liquidity crunch and recession risk. The blockade of the Strait of Hormuz has resulted in a spike in oil and gas prices that are the main exports of the GCC countries. Futures prices for Brent crude—oil taken from the North Sea—soared above $126 a barrel on April 30, its highest level since 2022 when Russia invaded Ukraine.

However, the US naval blockade has prevented most of these countries from benefiting from this increase, since they are physically unable to deliver the oil and gas to foreign importers. In addition, with domestic storage capacities full, many of these countries have also halted production of oil and gas.

Almost all GCC countries are facing a revenue deficit ranging from moderate to severe, and governments have postponed payments to suppliers. Given that these payments by the public sector drive liquidity in the GCC economies, businesses in the private sector are facing a severe liquidity crunch.

While many businesses have turned to regional banks to assist with working-capital requirements, they are aware that this assistance may be short-lived and the availability of funds may decrease significantly should hostilities resume.

Oxford Economics in late March expected GCC economies to enter a recession in the first half of 2026 and real GDP growth in these economies for the year 2026 to contract to minus 0.2%.

Thus, businesses and tax teams in the region should begin planning for a contraction in economic activity, the slowing down or cessation of ongoing projects, challenging liquidity constraints, the movement of mobile assets and people outside the region and the contraction of regional workforces.

Continued regional Pillar Two uncertainty. GCC countries apart from Saudi Arabia have implemented the global minimum tax on large multinational enterprises effective Jan. 1, 2025, and taxpayers generally are required to file the first set of tax returns in 2027.

Revenue authorities had planned to focus on the global minimum tax’s implementation in 2026 by issuing rules and regulations and preparing the required information-technology infrastructure. The conflict has distracted the authorities from this task and delayed the issuance of implementing legislation and clarifications.

The resumption of hostilities may cause further delays and setbacks, increasing uncertainty for businesses on how and when to comply with the global minimum tax requirements.

In-house tax teams had similarly planned to prepare for the tax by reviewing legal and information technology requirements and engaging with service providers. They similarly have been distracted by the dynamic and mercurial situation.

Permanent establishments. The blockade of the Strait of Hormuz restricted the inflow of materials, machinery, and equipment to the GCC countries which, together with the departure of specialized managerial and technical personnel, is likely to increase the time required to complete ongoing construction, installation and assembly projects.

Regional tax teams need to plan for the tax compliance obligations arising both from the creation of new permanent establishments in GCC countries as well as those outside the region created by relocating employees.

New place of effective management. Directors and senior management of companies who relocated outside the GCC generally haven’t returned to the region.

As the conflict enters its third month, this continued residence of senior executives may create a new place of effective management for GCC-resident companies, causing a greater likelihood of their worldwide income becoming taxable in the new place of effective management.

Tax teams need to continue to monitor this risk and plan for any new tax compliance obligations which may arise.

Transfer pricing. The conflict has had many economic impacts. Taxpayers should examine how their supply chain has been affected, what new costs have arisen, and which related party should bear those costs. Intercompany agreements should then be contemporaneously updated to reflect this new understanding amongst group entities.

• Freight and Insurance costs have spiked. Where a regional entity is purchasing goods from a group entity outside the region, which group entity should bear the increased costs?
• Global headquarters are spending significant time on managing and supporting group operations in GCC countries. How should these higher support costs be allocated between the headquarters and GCC subsidiaries?
• When manufacturing units in the GCC are underutilized due to the shortage of raw materials imported from outside the region, which group entity should bear the loss and in what proportion?

Tax teams that are responsible for global minimum tax obligations should continue to focus on those requirements. They should ensure that existing tax compliance obligations relating to GCC countries are met in a timely manner so that future penalties are minimized, while the emerging tax risks from new permanent establishments and places of effective management are addressed and transfer pricing documents promptly updated.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Tuhin Chaturvedi is a tax partner at RSM in Kuwait.

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