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DUBAI: The threat seemed clear. Low-tax countries in the Middle East are expected to align themselves with the heavily taxed and spendthrift economies of Europe and North America, and impose steep tax increases that would threaten their global competitiveness.
But although initially hailed as ‘historic’, when pundits and policymakers pored over the details of recent Group of Seven (G7) proposals for a uniform global corporate tax system, they seemed more inclined to wonder why about.
None more than in the Middle East. Initially, the G7 plan was seen as a threat to the low tax regimes in place in most GCC countries, which were seen as a crucial part of their economic growth strategies.
Financial experts quickly recognized the implicit threat to GCC economies. “One could argue that the G7 proposals are an example of wealthy developed countries trying to impose their own economic and fiscal regimes on the rest of the world, where many, like the GCC, have been very successful with their own practices so far. Tarek Fadlallah, CEO of Dubai-based Nomura Asset Management Middle East, told Arab News.
Saudi Arabia was seen as particularly vulnerable to the fallout from a global tax. The Kingdom is a member of the G20 group of countries and bound by the decisions that this body takes at its annual meetings. The G7’s next step with its tax plan is to submit it to the wider G20, where Saudi policymakers are expected to take a stand on the proposals.
Economic consultant Nasser Saidi said the implementation phase of the proposals would lead to difficult negotiations. “It will have to be accepted by the G20, exposing the differences between the tax hike needs of developed G7 countries facing unprecedented budget deficits (in part due to the coverage of stimulus spending and the lower income) and developing countries that want a low corporate tax. rate to attract investment, technology and know-how, ”Saidi told Arab News.
But Mohammed Al-Jadaan, the Saudi finance minister, appeared optimistic about the G7’s proposals, welcoming them and stressing that the G20 summit the previous year had specifically approved the budgeting plans for the post-pandemic recovery by the bias in the tax expenditures of the largest economies.
Asad Khan, head of asset management at the Emirates Investment Bank (EIB) in the United Arab Emirates, agreed the devil would be in the detail of the proposals for regional policymakers. “Now, for the G7 deal to be a long-term global success, the wider G20, which includes major economies like China, India, Russia and Saudi Arabia, must join us. and ratify the deal, ”he told Arab News.
Sticky details like ‘at least 15% minimum tax’ and ‘more than 10% profit margin’ would remain a bone of contention, but the essence of the deal is appreciated and may well be approved by the G20, with some exceptions. “
But regardless of the compromise agreement reached by global policymakers, the G7 proposals once again shine the spotlight on the sensitive subject of taxation in the Middle East. The region has been regularly featured on lists of global tax havens where “shady men in sunny places” can avoid paying their dues.
For example, earlier this year, the lobby group Tax Justice Network placed the UAE in the top 10 tax havens where businesses could set up shop in a wave of “corporate tax abuse.” worldwide “.
The UAE has waged a campaign to get itself removed from “blacklists” compiled by international financial authorities.
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Some experts believe this is a misconception about the role that tax has played in the region. Although personal income tax is still unknown in the Gulf, many countries have introduced a value-added tax on consumption, with Saudi Arabia tripling the rate to 15% last year to respond. to the economic demands of the pandemic recession.
Corporate tax is also payable in a range of industries, including petroleum and banking, in many GCC countries. And there is a wide range of government fees and levies imposed across all industries in the region.
The International Monetary Fund has regularly suggested some form of personal income tax in the region, a call that has so far been rejected by economic policymakers aware of the need to attract expatriates to live and work in the region. GCC countries.
A tax lawyer, who asked not to be named, told Arab News: “The UAE and other GCC countries are not tax havens like the Cayman Islands or Lichtenstein. These are jurisdictions that have historically been opposed to the imposition of taxes and have in fact used it as a tool of economic policy. “
The best illustration of this are the free zones (ZF) and the special economic zones (ZES) which have emerged in the region to attract foreign direct investment.
Could this successful formula be called into question by the G7 proposals?
“Countries that have relied on zero taxation in their ZFs and SEZs to attract capital and diversify their economies will be accused of facilitating tax evasion and increasing demands for exchange of information for tax purposes and standards of governance. higher corporate, transparency and disclosure, ”Saidi said. .
The Kingdom recently pledged a series of incentives, including tax breaks, to multinationals that have set up their headquarters in Riyadh as part of the strategy to make the city the financial center of the Gulf.
Details of the plan, which would take effect in 2024, are still being worked out. “The jury is still out on how a 15% corporate tax rate in the GCC would impact the competitiveness of the various financial centers vying for supremacy in the region,” Fadlallah said.
Khan of the EIB said fiscal policy was only one factor in the region’s competitiveness. “In our view, GCC governments have consistently tried to compete for foreign capital on terms other than low taxes,” he told Arab News.
“While we agree that the minimum tax clause forces a rethinking of zero-tax countries in the region to attract and retain FDI, we feel the Middle East remains a strategic regional hub for foreigners. global companies and Western powers.
“The region boasts of a young and dynamic workforce and an extremely favorable demographics with higher disposable income. The region is also an important and stable source of funding for new-age startups through sovereign wealth funds. “
Overall, the G7 proposals have made headlines among developed countries that impose taxes and spending, and will be a boon to lawyers and tax accountants around the world. But they are unlikely to be a big factor in the long-term thinking of economic policymakers in the Middle East.