Should GCC states be afraid of the G7 corporate tax plan?

G7 leaders from Canada, France, Germany, Italy, Japan, the UK and the United States meet this weekend for the first time in nearly two years, for three-day talks in Carbis Bay, Cornwall. (AFP)
G7 leaders from Canada, France, Germany, Italy, Japan, the UK and the United States meet this weekend for the first time in nearly two years, for three-day talks in Carbis Bay, Cornwall. (AFP)
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Updated 13 June 2021

Should GCC states be afraid of the G7 corporate tax plan?

G7 leaders from Canada, France, Germany, Italy, Japan, the UK and the United States meet this weekend for the first time in nearly two years, for three-day talks in Carbis Bay, Cornwall. (AFP)
  • Global minimum corporate tax of 15 percent seeks to end downward spiral of corporate tax rates
  • For Saudi and other GCC policymakers, the devil will be in the detail of the new tax proposals

DUBAI: The threat seemed clear. The low-tax countries of the Middle East would have to fall in line with the high tax-and-spend economies of Europe and North America, and impose big tax increases that would threaten their global competitiveness.

But although initially hailed as “historic,” when the experts and policymakers got down to the nitty-gritty of the recent Group of Seven (G7) proposals for a uniform global corporate tax system, they seemed more inclined to ask what all the fuss was about.

None more so than in the Middle East. Initially, the G7 plan appeared to be a threat to the low-tax regimes in place in most GCC countries, which have been regarded as a crucial part of their strategies for economic growth.

Financial experts were quick to recognize the implicit threat to GCC economies. “You could argue that the G7 proposals are an example of the rich developed countries trying to impose their own economic and fiscal regimes on the rest of the world, where many like the GCC have managed with their own practices perfectly well up to now,” Tarek Fadlallah, Dubai-based CEO of Nomura Asset Management Middle East, told Arab News.

Saudi Arabia was regarded as especially exposed to the fallout from a global tax. The Kingdom is a member of the G20 group of countries, and bound by the decisions that body takes in its annual meetings. The G7’s next step with their tax plan is to put it to the wider G20, where Saudi policymakers would have to take a stance on the proposals.

Economic consultant Nasser Saidi said the implementation phase of the proposals would make for hard negotiations. “It will have to be accepted by the G20, laying bare the differences between the tax-raising needs of the developed G7 countries facing unprecedented budget deficits (in part due to cover stimulus spending and lower revenues) and developing countries that want low corporate tax rates to attract investment, technology and know-how,” Saidi told Arab News.

But Mohammed Al-Jadaan, the Saudi minister of finance, appeared to be sanguine about the G7 proposals, welcoming them and pointing out that the previous year’s G20 summit had specifically endorsed plans to budget for post-pandemic recovery through the tax spend of the world’s biggest economies.

Asad Khan, head of asset management at Emirates Investment Bank (EIB) of the UAE, agreed that the devil will be in the detail of the proposals for regional policymakers. “Now, 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 need to come on board and ratify the agreement,” he told Arab News.

“The sticky details like ‘at least 15 percent minimum tax’ and ‘above 10 percent profit margin’ would remain a bone of contention, but the essence of the deal is appreciated and may well be endorsed by the G20, albeit with several exceptions.”

But whatever compromise deal is hammered out by the global policymakers, the G7 proposals again turn the spotlight on the sensitive subject of tax in the Middle East. The region has 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 companies could set up in a spree of “global corporate tax abuse.”

The UAE has waged a campaign to get itself taken off “blacklists” compiled by international financial authorities.

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Some experts believe this is a misconception of the role that tax has played in the region. Although personal income tax is still unheard of in the Gulf, many countries have introduced value added tax on consumption, with Saudi Arabia tripling the rate to 15 percent last year to meet the economic demands of the pandemic recession.

Corporation tax is also payable in a range of industries — notably oil and banking — in many GCC countries. And there are a wide range of government fees and levies imposed across all business sectors throughout the region.

The International Monetary Fund has regularly suggested a form of personal income tax in the region, a call that has so far been resisted by economic policymakers conscious of the need to attract expatriates to live and work in GCC countries.

One tax lawyer, who asked not to be named, told Arab News: “The UAE and other GCC countries are not tax havens in the same sense as the Cayman Islands or Lichtenstein. They are jurisdictions that have historically been averse to imposing taxes, and have actually used that as a tool of economic policy.”

The best illustration of this are the free zones (FZs) and special economic zones (SEZs) that have sprung up in the region as a way of attracting foreign direct investment.

Could this successful formula be jeopardized by the G7 proposals?

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

The Kingdom recently promised a raft of incentives, including tax breaks, to multinationals that set up their headquarters in Riyadh as part of the strategy to make the city the financial hub of the Gulf.

Details of the plan, which would become effective in 2024, are still being worked through. “The jury is still out on how a 15 percent corporate tax rate across the GCC would impact the competitiveness of the various financial hubs vying for supremacy in the region,” Fadlallah said.




Initially, the G7 plan appeared to be a threat to the low-tax regimes in place in most GCC countries, such as Saudi Arabia, which have been regarded as a crucial part of their strategies for economic growth. (AFP/File Photo)

Khan of EIB said that tax policy was only one factor in the region’s competitiveness. “In our view, GCC governments have been constantly trying to compete for foreign capital on terms other than low taxes,” he told Arab News.

“While we agree the minimum tax clause forces a rethink for zero-tax countries of the region to attract and retain FDI, our sense is that the Middle East remains a strategic regional hub for global corporates and Western powers.

“The region boasts of a young, dynamic workforce and extremely favorable demographics with a higher disposable income. The region is also a big, stable source of funding for new-age startups via the sovereign wealth funds.”

All in all, the G7 proposals got some big headlines for the tax-and-spend developed countries, and will be a boon for the global tax lawyers and accountants. But they are unlikely to be a significant factor in economic policymakers’ long-term thinking in the Middle East.

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Twitter: @frankkanedubai


Saudi non-oil sector’s expansion continues

Saudi non-oil sector’s expansion continues
Updated 19 min 3 sec ago

Saudi non-oil sector’s expansion continues

Saudi non-oil sector’s expansion continues
  • Rising demand from domestic, overseas clients supported upturn: Survey

RIYADH: Non-oil business activity in Saudi Arabia maintained a sharp pace of expansion in July, despite slowing for the second month running, according to a survey released on Tuesday. 

Output grew at a sharp pace, underlined by a robust increase in new business inflows, but still staff levels rose only fractionally in July as firms continued to signal an excess of business capacity despite rising sales.

Rising demand from domestic and overseas clients supported the upturn, which some firms linked to competitive pricing strategies.

The seasonally adjusted IHS Markit Saudi Arabia Purchasing Managers’ Index (PMI) fell for the first time in four months to 55.8 in July, from 56.4 in June, due to weaker growth in output, new orders and employment compared to the previous month. 

Employment prospects were also harmed by a drop in future output expectations to the joint-weakest for more than a year, despite the strong improvement in operating conditions that extended the current run of growth to 11 months.

Hiring growth weakened to a fractional pace, as only few firms reported needing additional staff and backlogs were reduced solidly, suggesting a wide gap between demand and full capacity in spite of a sharp increase in new orders in recent months

“While Saudi Arabia’s PMI continued to signal strong growth in the non-oil economy in July, our survey data related to business capacity highlighted that challenging economic conditions prevailed,” said David Owen, an economist at IHS Markit.

“Firstly, employment growth slowed to only a marginal pace, suggesting that many companies still have little need for new hires in spite of a sharp rebound in new orders. Secondly, backlogs of work fell at the second-quickest pace for a year, adding further evidence that businesses have yet to reach pre-pandemic levels of capacity utilization,” he said.

“Sustained rises in demand should help the economy move closer to full capacity over the second half of the year. However, a drop in business expectations to its joint-weakest since June 2020 illustrated growing doubts that this will be a smooth ride,” he said.

Nearly 27 percent of surveyed businesses reported an increase in activity, linked to strengthening client demand and a loosening of pandemic-related measures.


SABIC set to announce Q2 financial results

SABIC set to announce Q2 financial results
Updated 24 min 55 sec ago

SABIC set to announce Q2 financial results

SABIC set to announce Q2 financial results

JEDDAH: The Saudi Basic Industries Corp. (SABIC) said that it will hold a virtual press conference to review the financial results for the second quarter of 2021 on Thursday.

Yousef Al-Benyan, SABIC vice chairman and CEO, will attend the conference.

Based on the data available on Argaam news website, analysts predict profits of SR6.4 billion ($1.7 billion) compared to SR2.2 billion losses in the second quarter of 2020.

SABIC is seeking to become the largest petrochemical company in the world by 2030. 

The petrochemical industry in the Kingdom has a significant impact as it contributes more than SR260 billion annually to the gross domestic product (GDP), representing 36 percent of the industrial GDP and more than 57 percent of non-oil exports.


Startup of the Week: Skil Studio; Perfecting the art of marketing, designing

Startup of the Week: Skil Studio; Perfecting the art of marketing, designing
Updated 15 min 35 sec ago

Startup of the Week: Skil Studio; Perfecting the art of marketing, designing

Startup of the Week: Skil Studio; Perfecting the art of marketing, designing

JEDDAH: Zakaria Ahmad owns a digital design agency called Skil Studios focused on identity building, graphic designing, and social media content building.

“We were working with another company but recently started our own business,” said Ahmad.

The entrepreneur is grateful for the customers who trust them with the design and layout.

Their services start with designing the identity that represents their clients, then services such as digital marketing, e-commerce, and social media content development are also offered. Sometimes the business also offers videography and photography services.

The company’s founder said that most companies here focus more on quantity rather than quality. He said his company’s goal is to start an agency that cares about its clients and has their best interest in mind.

“We appreciate art in everything,” Ahmad said. He believes marketing and identity building is an art and his company seeks to achieve the target with perfection.

He said that they want to offer something new. Ahmad said his team does not believe in “copying and modifying already existing designs,” instead they want to introduce the latest global trends in the Middle East without compromising on their uniqueness.

He admitted that the business faced quite a few challenges along the way, which is usual for a startup.

“We were looking for talented people with a passion for designing and art to help us achieve our goals,” Ahmad said.

Ahmad is most proud of his company’s identity and the trust that his team has built with clients due to their sincere efforts.

He said members of the creative team ensure they understand the requirement of clients and deliver them whatever their demands are.


WEF leader urges countries to ‘pay close attention’ to digital currency

WEF leader urges countries to ‘pay close attention’ to digital currency
Updated 03 August 2021

WEF leader urges countries to ‘pay close attention’ to digital currency

WEF leader urges countries to ‘pay close attention’ to digital currency
  • The Asian superpower recently announced it will allow foreign visitors to use digital yuan in the upcoming Winter Olympics

DUBAI: Digital currency is going to play a big role in the global economy, a World Economic Forum (WEF) committee leader said, and nations need to pay attention to its unprecedented progress.

“Somebody needs to be paying close attention to this space, and assessing on a weekly basis, what the national policy ought to be regarding digital currencies,” Sheila Warren, deputy head of the Centre for the Fourth Industrial Revolution (C4IR) committee of WEF, told Arab News.

Digital currency will continue to evolve, she said, adding some nations have already started investigating its effect on their own economies.

“We’re going to see a variety of offerings in the digital currency space — central bank digital currency, stable coin issuances, and cryptocurrencies including Bitcoin,” Warren explained.

According to Atlantic Council, which tracks central banks’ participation in the space, 81 countries have already explored a digital currency with China leading the pack.

The Asian superpower recently announced it will allow foreign visitors to use digital yuan in the upcoming Winter Olympics.

Other major central banks in the race are the US Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England.

In the Gulf, Saudi Arabia and the UAE previously said they were working jointly on a digital currency plan — they called the initiative “Project Aber.”

The two countries aim to develop a cross-border payment system that will reduce transfer times and costs between banks.

Although every nation doesn’t necessarily have to “immediately jump in,” Warren said it is important to watch the evolution of the industry.

“If you're not doing that, you're going to be stuck, I think, with whatever the world decides, the direction of travel is going to be, and not have enough opportunity to help shape that,” she explained.

On decentralized cryptocurrencies, including bitcoin, Warren said it will continue to have a huge role in the global economy as well.

“We’re going to see an increase in market cap, an increase in market share of the suite of digital currencies,” she said.

The private sector will take advantage of this by developing some of a blockchain or distributed ledger, she added.


Tunisians hope for better times ahead

Tunisians hope for better times ahead
Updated 03 August 2021

Tunisians hope for better times ahead

Tunisians hope for better times ahead
  • The proceeds from selling the plastic, combined with limited financial assistance from the government

TUNIS: As day breaks over Tunis, Jamila Ghuili takes her two small children out into the streets to scavenge in waste bins for plastic bottles that she sells to buy food for her family.
Abandoned by her husband, the single mother lives in a poor part of Omrane Superieur, a neighborhood of the capital where Tunisia’s economic malaise is acutely felt.
“Everything has become expensive,” said Ghuili, as her children played next to her.
Exacerbated by the repercussions of the COVID-19 pandemic, economic grievances have fueled discontent in Tunisia, leading to protests that encouraged President Kais Saied to remove the prime minister and assume governing authority last month.
Ghuili, 55, gathers a few kilograms of dirt-covered plastic each day, foraged from heaps of garbage dumped at the roadside.
The proceeds from selling the plastic, combined with limited financial assistance from the government, amount to 190 Tunisian dinars ($69) a month, around half her monthly rent.
Hamza Ayari, who buys the bottles and re-sells them to factories, says many people are doing the same. “They don’t have any other job, they are poor people,” he said.
Desperate for better lives, some of Omrane Superieur’s residents are hopeful about Saied’s move.
“I salute the people who voted for him, he is a good person,” said Fakhreddine Wannas, 56, a resident. “I hope he can take us out of the dark and into the light.”
It echoes sentiment expressed by other Tunisians who are fed up with political bickering and want to see an improvement in the economy — which shrank by 8.8 percent last year — and more effective action against COVID-19.
Saied, who was elected in 2019, says he will not become a dictator and that the actions he took on July 25, including the 30-day suspension of parliament, were constitutional. He has yet to set out next steps.
Soumaya, who paints henna tattoos for a living, expressed relief about the situation, saying that for a long time Tunisians did not know where they were heading. “Now we are all happy,” said Soumaya, as she painted a child’s hand.