Saud Hashim Julaidan
Published — Monday 24 December 2012
Last update 24 December 2012 3:10 am
THE Ministry of Labor is finally collecting a monthly fee of SR 200 for each foreigner working in businesses, where the proportion of its foreign labor is more than 50 percent. This levy will be collected by adding this amount to the residency fee.
This move will raise the hiring costs of most foreign workers for establishments that have a predominantly foreign labor workforce from SR 750 a year to SR 3,100.
The sponsors usually pay residency fees, but there are a large number of sponsors who only exist on paper. These 'paper sponsors' are unlikely to bear any additional costs, with workers having to end up paying the extra fee instead.
From a financial aspect, this fee will make sponsors to pay more to hire foreign labor, which in turn would generate revenues for the Human Resources Development Fund. Ultimately, sponsors will have to absorb most of the expenses because the demand for foreign labor is characterized by low flexibility (because of the low unemployment rate of foreign labor), which will lead to employers paying most of the costs, while the rest of it will be paid by expatriate workers. Average wages may fall somewhat but most of the tax will be added to the cost of production. The additional costs, which will result from this tax, will be added to prices, and in the end the consumer will carry most of the tax.
The size of the tax default collected is estimated by the number of workers subjected to them multiplied by the amount of the tax. Many businesses will seek to obtain exemptions from this tax, with the exception of domestic workers and institutions, which have less than about 50 percent foreign workforce. It is expected that some sectors, such as agriculture and possibly institutions or sponsors who obtained exemptions. Taxation will lead to high evasion, which in turn will raise the proportion of informal labor. Taxation has also led to a significant decline in the number of residency renewal, which foretells a significant rise in evasion of this tax.
If the implementation of the tax in its current form is strictly implemented, around three to four million workers will succumb to it, but a high evasion rate of 10 percent, for example, will reduce the number subject to this tax to between 2.7-3.6 million workers. In this case, the Human Resource Development Fund will be able to collect SR 6.5-8.6 billion from this tax. The revenues of the country as a whole will rise slightly less than this amount, because of the expected rise in the residency fee evasion.
On the other hand, the imposition of the tax will result in raising costs of state enterprises with the same cost of taxes on workers operating on projects for the state, and this will result in reduced net state resources. This means that on the one hand, state revenues will rise, while expenditures would rise but to a lesser degree, since tax will be distributed on other economic sectors, according to the focus of taxable foreign labor in each sector.
Employment data indicate that workers in the construction sector will make up about a third of the labor force subject to the tax, which will lead to a raise in the cost of housing construction projects by about one-third of the state tax. Constructions are not directly affected by inflation, but would be indirectly through rents.
As for the distribution of the tax on economic sectors, the non-oil private sector will bear almost all costs because the proportion of foreign workers in state institutions stands at less than 50 percent. And in the event that any institution or sector such as the health sector contains higher rates of foreign workers, they are expected to be excluded. However, the oil sector will not pay any of the fee, because most of its workforce work for Saudi Aramco, which employs more than 50 percent Saudis, it also employs a small number of foreign workers if at all.
The consumer goods sector will pay bulk of the levy, which will consequently push up the prices to adjust for the higher fee.
Should the consumer bear three-quarters of the tax and workers pay the rest, the tax would raise the total cost of goods and services by about SR 9.4 to 5.6 billion, due to the fact that part of these costs are borne by the state and will not enter into cost of goods and services produced and consumed by the population. This will increase commodity costs and consumer services by about SR 3.7-4.9 billion (on the premise that a quarter of taxable labor work on projects for the state). The tax will affect directly the production and marketing of consumer goods and services, while part of it will indirectly affect rents by raising the cost of housing construction.