Gulf states should not ignore value of talented, wealth-creating expats - PwC

PwC says increasing taxes could weigh on businesses and impede efforts to attract foreign investment

  
Dubai skyline. Image used for illustrative purpose.

Dubai skyline. Image used for illustrative purpose.

Getty Images

As the Gulf Cooperation Council (GCC) region looks to diversify, it is appreciating the value of expatriates as entrepreneurs, investors, consumers and increasingly, as taxpayers, PwC said in a recent report.

According to the global accounting and professional services firm, labour reform developments in the GCC are looking to rethink the roles and rights of expatriates, who were long assumed to be temporary residents in a transitional phase of development.

As governments look ahead to transform the region and create new avenues of growth, “the value of talented and wealth-creating expats should not be ignored,” PwC said in the report.

Richard Boxshall, Middle East Senior Economist at PwC Middle East said: “These changes in residency and labour rights have attracted and retained high-value expats, while at the same time improving the business environment. We expect these long-term residency schemes to continue being a major development in the coming years as we look to attract, and retain, the world’s top talent and investors.”

Qatar was the first to launch the long-term residency scheme in 2018, followed by Saudi Arabia in 2019 and the UAE with its Golden Visa, which is available to select investors and talent from around the world.

Taxation in the Gulf states

Although the GCC has generally been a no tax, or very low tax zone, the tax environment is now changing rapidly, spurred by the challenge of lower oil prices since 2015 and by a growing appreciation, particularly over the last year, that the clean energy transition requires a rethink of the region’s model. Efforts to diversify both economies and public finances are finally beginning to make progress, but the challenge is to prevent those two objectives from working against each other, the report said.

A majority of the tax increases since 2017 have come from VAT, applied so far in three countries, and from “sin tax” excise duties, applied everywhere but Kuwait. Together, VAT and excise tax raised around $24 billion, which is more than a quarter of the total tax revenues in 2019.

The tripling of VAT in Saudi Arabia in July 2020 and the launch of VAT in Oman in April should see the take double again to about $47 billion in 2021, nearly half of all GCC taxation. The other major increase has come from Saudi Arabia’s expat levies, phased in since 2017, which raised approximately $15 billion in 2019 alone.

Boosting the tax take is a high priority, particularly for the countries with the least fiscal space and reserves, such as Oman, Bahrain and, to a lesser extent, Saudi Arabia. However, there are risks that the increasing cost and complexity of taxes could weigh on local businesses and impede efforts to attract foreign investment.

One response has been to grant temporary exemptions. Most GCC states offered these during 2020, particularly to firms in the sectors most affected by local lockdowns. Even before the pandemic, Saudi Arabia was providing exemptions for manufacturing firms and small-to-medium enterprises to the burdensome expat levy. Short-term exemptions are beneficial, but businesses also need longer-term predictability to facilitate investment and risk-taking, the report said.

Gulf countries are heavily dependent on migrant labour. In the UAE alone, foreign workers represent an estimated 88 percent of the population.  S&P said in a recent report that the region’s population has declined by about 4 percent in 2020 due to an exodus of foreign workers. 

(Writing by Brinda Darasha; editing by Seban Scaria)

(brinda.darasha@refinitiv.com)

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