Corporate Tax

Ought to GCC International locations Be Afraid of the G7 Company Tax Plan?

DUBAI: The threat seemed clear. The low-tax countries of the Middle East would have to adapt to the high tax and spending economies of Europe and North America and enforce large tax increases that would jeopardize their global competitiveness.

But while initially hailed as “historic”, when the recent G7 proposals for a unified global corporate tax system focused on the basics, pundits and politicians seemed more inclined to wonder what all the fuss was about.

No more than in the Middle East. At first, the G7 plan appeared to threaten the low-tax systems in place in most of the GCC countries, which were seen as an integral part of their economic growth strategies.

Financial experts were quick to see the implicit threat to the GCC’s economies. “One could argue that the G7 proposals are an example of how the rich industrialized countries are trying to impose their own economic and tax systems on the rest of the world, where many like the GCC have so far coped perfectly with their own practices.” Tarek Fadlallah , Dubai-based CEO of Nomura Asset Management Middle East, told Arab News.

Saudi Arabia was considered to be particularly hard hit by the consequences of a global tax. The Kingdom is a member of the G20 group of countries and is bound by the decisions that this body makes at its annual meetings. The next step of the G7 with its tax plan is to transfer it to the broader G20, where the Saudi politicians would have to take a position on the proposals.

Economic advisor Nasser Saidi said the implementation phase of the proposals will require tough negotiations. “It needs to be accepted by the G20 to reveal the differences between the need to raise taxes in the developed G7 countries, which are facing unprecedented budget deficits (in part due to the recovery of stimulus spending and lower revenues), and the developing countries, which want low corporate taxes. “To attract investment, technology and expertise,” Saidi told Arab News.

However, Mohammed Al-Jadaan, the Saudi finance minister, was confident about the G7 proposals, welcoming them, noting that the G20 summit last year made explicit plans for post-pandemic recovery through tax spending by the world’s largest economies.

Asad Khan, head of asset management at the UAE’s Emirates Investment Bank (EIB), agreed that the devil is in the details of the proposals for regional decision-makers. “For the G7 deal to be a global success in the long run, the broader G20, which includes major economies like China, India, Russia and Saudi Arabia, must come on board and ratify the deal,” he told Arab News.

“The sticky details like ‘at least 15 percent minimum tax’ and ‘over 10 percent profit margin’ would remain a bone of contention, but the essence of the agreement is valued and can be approved by the G20, albeit with a few exceptions. ”

Regardless of the compromise negotiated by global politics, the G7 proposals put the sensitive issue of taxes in the Middle East back into the spotlight. The region is regularly featured on lists of global tax havens where “seedy men in sunny places” can avoid their taxes.

For example, earlier this year the Tax Justice Network lobby group included the UAE in the top 10 tax havens where companies on a rampage of “global corporate tax abuse” could set up shop.

The United Arab Emirates have launched a campaign to be removed from the “black lists” of the international financial authorities.

This section contains relevant reference points placed in (opinion box)

Some experts believe this to be a misconception of the role taxes have played in the region. Though Gulf income tax is still unknown, many countries have introduced sales tax on consumption, with Saudi Arabia tripling the rate to 15 percent last year to meet the economic demands of the pandemic recession.

In many GCC countries, corporate tax is also payable in a number of industries, particularly oil and banking. And there are a wide range of government fees and charges levied in all areas of the company across the region.

The International Monetary Fund has regularly proposed some form of income tax in the region, a request that has so far been rejected by economic policy-makers who were aware of the need to attract expatriates to live and work in the GCC countries.

A tax attorney who refused to be named told Arab News: “The United Arab Emirates and other GCC countries are not tax havens in the same way as the Cayman Islands or Lichtenstein. They are legal systems that were reluctant to levy taxes in the past and have actually used this as an instrument of economic policy. “

The best example of this are the free zones (FC) and special economic zones (SEZ) that have emerged in the region to attract foreign direct investment.

Could this formula for success be jeopardized by the G7 proposals?

“Countries that have relied on zero taxation in their FCs and SEZs to attract capital and diversify their economies are accused of facilitating tax avoidance and growing demands for information exchange for tax purposes and higher corporate governance standards, transparency and disclosure”, said Saidi. .

The kingdom recently promised a number of incentives, including tax breaks, for multinational corporations to set up their headquarters in Riyadh to turn the city into the financial hub of the Gulf.

Details of the plan, which should come into effect in 2024, are still being worked out. “The jury has yet to decide how a corporate tax rate of 15 percent across the GCC would affect the competitiveness of the various financial centers vying for supremacy in the region,” said Fadlallah.

At first, the G7 plan appeared to be a threat to the low-tax regimes in most GCC countries like Saudi Arabia, which were seen as an integral part of their economic growth strategies. (AFP / file photo)

Khan of the EIB said tax policy is only one factor in the region’s competitiveness. “We believe the GCC governments have consistently sought to compete for foreign capital on terms other than low taxes,” he told Arab News.

“While we agree that the minimum tax clause will force a rethink for zero-tax countries in the region to attract and retain FDI, we believe the Middle East remains a strategic regional hub for global corporations and Western powers.

“The region has a young, dynamic workforce and extremely favorable demographics with higher disposable incomes. The region is also a large, stable source of funding for new age startups through sovereign wealth funds. “

All in all, the G7 proposals have made some big headlines for the tax-and-spending developed world and will be a boon to global tax lawyers and accountants. However, they are unlikely to be a major factor in the long-term thinking of economic policy makers in the Middle East.

——————

Twitter: @frankkanedubai

Related Articles