Gulf Countries Revise Tax Regimes to Boost Investment and Growth

In recent years, tax developments in the Middle East have significantly impacted the region’s economy. Governments in the Gulf Cooperation Council countries—Bahrain, Kuwait, Oman, Qatar, Kingdom of Saudi Arabia, or KSA, and the United Arab Emirates, or UAE—have implemented various tax measures to generate revenue, build a foundation for regional development, and reduce their reliance on oil and gas revenue.

These developments stand to further impact the region as GCC countries evolve their tax systems to achieve national goals and boost the overall drive towards diversification in the region’s economies.

Need for Diversification

Despite some differences, GCC countries share tax trends and dynamics. Governments in the region have long been known for their tax-friendly policies, made possible by their reliance on the hydrocarbon industry and the related revenue to support public spending, with very limited or zero taxation.

Only a few, such as the KSA and Kuwait, have imposed levies on foreign businesses operating on their soil. Notably, oil and gas revenue in GCC countries account for approximately 50% of gross domestic product, whereas other revenue is comparatively low. World Bank data puts the tax revenue to GDP ratio at approximately 8% in the KSA, less than 1% in the UAE, 1.5% in Kuwait, and 4% in Bahrain.

Given the shift towards sustainable energy, oil and gas revenue is expected to fall in the future, in contrast with a forecast rise in public spending. Most major international institutions therefore agree that GCC countries need to introduce tax reforms to diversify revenue sources and protect against economic shocks caused by the volatility of the oil and gas industries.

The international tax landscape has helped and will keep on pushing countries to revise their tax systems. However, diversification must be done carefully to avoid adverse effects on businesses and the economy. Governments in the region should work with businesses to ensure a smooth transition to a diversified tax system.

Tax Reforms

All GCC countries except Kuwait have signed the OECD Inclusive Framework on Base Erosion and Profit Shifting—a 2016 initiative to address tax avoidance strategies used by multinational enterprises to shift their profits to low-tax jurisdictions. The initiative is aimed at ensuring that companies pay taxes where economic activities take place and where value is created. It is also the base for negotiations between 130 countries to achieve a minimum corporate tax rate of 15%, known as the global minimum tax.

Each GCC country is implementing different tax system reforms. For example, the UAE recently introduced a 9% corporate income tax in effect from June, whereas the KSA has a flat corporate income tax of 20%. Qatar levies a corporate income tax of 10%, and Kuwait has a progressive tax system for individuals.

Evolving Tax Options

Governments in the region have been exploring different tax options, including corporate and personal income tax, to diversify their revenue streams. The most significant change was the GCC countries’ signing of the value-added tax framework agreement in 2016, whereby they pledged to introduce 5% VAT, and the resulting introduction of a VAT system in the KSA, the UAE, and Bahrain in 2018 and 2019.

The introduction of VAT has led to changes in business operations, including accounting and record-keeping requirements. Businesses must now keep proper records of all transactions and ensure compliance with VAT regulations. Non-compliance can result in hefty penalties, which makes it essential for businesses to understand the new tax system and comply with its requirements.

Future Tax Dynamics

Global economic trends will be one of several factors that will shape the future of tax dynamics in the Middle East. Governments in the region will need to balance the need for revenue with the need to attract investment and promote economic growth. They will also need to bring their tax systems into line with technological advances, particularly digitalization and e-commerce.

The GCC has always been known for tax-friendly policies for businesses and individuals. This trend continues with some of the lowest taxation rates globally for the GCC economies to stay relevant and ensure foreign investors remain interested in the region. It will be interesting to see how the tax landscape evolves once the global minimum tax is introduced in Europe in 2024, and what changes, if any, are triggered in the region.

Businesses will need to stay abreast of the changes to ensure compliance and avoid penalties. This includes keeping an eye out for changes to existing tax rules in GCC countries and for tax reforms. For example, consultations on changes for the KSA zakat and tax laws are happening simultaneously as further decisions and guidance on UAE’s corporate income tax law continue to be issued.

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

Author Information

Marco De Leo is managing partner of BonelliErede’s Dubai office.

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