Inviting foreign direct investment (FDI), nations across the MENA region are offering tax incentives as well as making it easier to do business there. In a parallel set of moves, MENA nations are moving forward with the development of their broader economies, government agencies and tax regimes.
Four of the six member states of the Gulf Cooperation Council (GCC)—the Kingdom of Saudi Arabia (KSA), Bahrain, Oman, and the United Arab Emirates (UAE)—have for the first time introduced value-added tax (VAT), with a fifth member, Qatar, expected to do so in January 2023. The GCC has also implemented excise taxes. The UAE has also announced that it will introduce corporate tax effective June 1, 2023, and Bahrain has similar plans.
Tax authorities have also embarked on digital transformation, with e-invoicing already introduced in Egypt and the KSA, under RFP (request for proposal) in Jordan and being considered by others. This regional tax transformation reflects efforts to further develop economies as well as to create revenue for government spending and public works.
Change across the MENA region presents new opportunities for businesses. However, so much is in play that reviews of shifting and expanding incentives and tax landscapes to the opportunities themselves will require detail-focused, nation- and project-specific due diligence.
What Steps Are MENA Nations Taking to Attract FDI?
Nations across MENA are now taking steps to incentivize investment. For 2021, the top three inbound foreign investment destinations include the UAE ($19.9 billion), Egypt ($5.9 billion) and the KSA ($5.5 billion). Each of these three nations presents a number of attractiveness levers.
For example, the UAE is seeking investment in the natural resources, medium- and high-tech sectors and pharmaceuticals. To achieve its aims, the nation has created over 35 free zones. Foreign investment rules are also being relaxed for certain sectors.
In addition to these incentives, the UAE also offers:
- a business-friendly environment
- advanced digital and trade infrastructure
- an extensive tax treaty network
- favorable immigration rules.
In the KSA, priority sectors include financial services, real estate and hospitality, retail, e-commerce, and information and communications technology. Here, incentives include:
- a regional headquarters initiative (to invite companies to use the KSA as their regional base)
- introduction of special economic zones
- tax/customs incentives (beyond special economic zone)
- a “made in Saudi” incentive program to encourage domestic manufacturing and service provision
- equity funding, primarily for start-ups and medium-sized companies
- research grants.
The country has also reduced restrictions on the gig economy, in particular for delivery services.
Egypt is offering incentives such as:
- stamp duty exemption on certain transactions, such as spot transactions on the Egyptian Exchange (EGX) or on proceeds from the sale of listed shares by Egyptian residents (as of January 2022)
- temporary customs release and a unified reduced customs tax rate
- additional incentives contingent on the focus of the investment, with the most favorable terms aligned with the national interest targets situations.
Capital confidence is rebounding across the region as mergers and acquisitions are again on the rise. Many of the region’s smaller nations are also achieving success in attracting new tranches of FDI—consider Jordan receiving $0.7 billion, Qatar $1 billion, and Oman $4.1 billion.
What Is the State of Evolving Tax Administration Across MENA?
A wave of first-time tax introduction, along with continuous evolution of taxes, is sweeping the region. The KSA introduced its first excise tax in June 2017, followed quickly by the UAE in October of the same year. Both the KSA and the UAE introduced VAT on Jan. 1, 2018.
A key driver of change is that most of these regimes featured little to no prior administration, meaning innovation is relatively unhampered by legacy infrastructure.
One of the most noticeable changes is that various nations in the region are moving to introduce VAT for the first time. As mentioned above, over the past four years, four of the six member states of the GCC have introduced VAT. Qatar is expected to introduce VAT in 2023 and Kuwait sometime after this. Four out of the six GCC states have already introduced corporate tax. The UAE also plans to introduce this tax beginning June 1, 2023, with Bahrain expected to follow.
Most nations in the MENA region have joined the Inclusive Framework of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative—Bahrain, Jordan, Morocco, the KSA, Oman, Pakistan, Qatar, Tunisia and the UAE—and are working to adopt the associated best practices. Egypt updated its transfer pricing guidelines and introduced country-by-country reporting (CbCR) in October 2018. CbCR was next adopted in September 2018 by Qatar, in April 2019 by the UAE, and then in September 2020 by Oman. The KSA is reviewing its tax treaty network along with its compatibility with BEPS 2.0.
Other significant adoptions across the region include the arrival of e-invoicing. Inspired by the Latin American model, tax authorities in Egypt were the first to implement the practice, followed by the KSA. Looking ahead, the UAE, Qatar, Jordan, Oman and Bahrain plan to follow suit.
What Are the Opportunities?
To better understand the opportunities available in MENA, a key place to focus on is the vision statements proffered by the various nations. The KSA, for example, is making strides in sectors such as real estate and hospitality. The KSA has also made the decision to develop an entirely new city, Neom, to be built on the shores of the Red Sea, which will feature advanced smart city technologies, with the goal of becoming a major tourist attraction.
In addition, the KSA’s Vision 2030 announces intentions to develop the healthcare, housing and financial sectors to digitize those sectors of the government essential to the realization of the Vision 2030 goals.
Oman’s Vision 2040 outlines its ambitions to become a knowledge-based society, enabling the nation to shift from carbon dependency. It vows to set and achieve meaningful goals across the board, from modernizing its judiciary, legislative and education systems to enhancing sustainability.
Qatar’s Vision 2030 outlines various pillars addressing economic growth, social development, and sustainability, tending to the needs of both the current and future generations while preserving local traditions.
Investors should consider the following steps to promote potentially fruitful investments:
- Perform rigorous due diligence of both the specific project and the surrounding ecosystem of partners, government agencies, tax authorities and others. Success factors will include the cooperation of a wide range of participants.
- Choose projects and investments that speak to the needs and the vision of any particular nation. Stay abreast of developments in the MENA region.
- Conduct a thorough exploration of the evolving funding and incentives landscape.
This is an era of change for the region and thus, an opportunity for investors. Authorities are taking steps to increase FDI. MENA nations are taking steps to modernize government agencies, including tax administrations, and to digitize their economies. Great strides are already evident with more on the horizon. Investors should consider exploring what MENA offers.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
The views expressed in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
Ahmed Al-Esry is EY Middle East and North Africa Tax Leader. His experience spans the oil and gas, construction, manufacturing and financial services industries where he has led tax advisory, audit, and consulting assignments across the MENA region. This includes assisting with the acquisition of new business for both local and multinational companies as well as leading on multi-country tax due diligence projects.
The author would like to thank his colleagues for their valuable contributions to to this article: Heba Wadie, Mina Al-khudairi and Stuart Halstead.
The author may be contacted at: firstname.lastname@example.org