Do tax laws written when companies operated in a brick-and-mortar environment still apply in a modern global economy? The answer from more than 100 members of the Organization for Economic Co-Operation and Development is a resounding no. With technology making it possible for multinational enterprises to shift profits to low or no-tax jurisdictions, global companies have been able to establish bases in countries that offer the greatest tax advantages while reaching out to their target markets in other parts of the world.
The result is an uneven — and unfair — set of tax laws that ultimately benefit the large companies doing business internationally instead of the jurisdictions where they operate. In response, OECD took on the challenge of creating what it calls a “predictable, efficient and sustainable international tax system.” As of October 2021, more than 135 countries have indicated support for the reform to the international corporate tax system. What does this mean for the Middle East? We’re still sorting that out, but here’s what we know.
The new tax rules
OECD’s work on tax reform dates back to 2015 with BEPS Action 1, and the development of the current two-pillar plan started in 2019. The new guidelines, which should reduce the influence of corporate tax rates on investment decisions, will go into effect in 2023. Here are the highlights:
• Redistribute tax revenue by forcing companies to pay taxes in the countries where they have sales.
• The redistribution rule applies to companies with more than €20 billion in revenue and a profit margin of at least 10 percent.
• The new rules exclude oil, gas and mining companies as well as companies in the financial services sector.
• Establish a global minimum tax of 15 percent.
• This global minimum tax applies to companies that have at least €750 million ($819 million) in revenue.
• The rule allows exemptions for excluding income that is 5 percent of the tangible assets carrying value and 10 percent of payroll. This decreases each year by 0.2 percent for five years. For the last five years, this changes to 0.4 percent for tangible assets and 0.8 percent for payroll.
Effects in the Middle East
To date, 137 countries have agreed to the new set of tax rules. This includes Bahrain, Oman, Qatar, Saudi Arabia and the UAE (who have already announced their new corporate tax law scheduled to start on June 1, 2023). However, opinions about the new minimum tax remain divided. Supporters may be applauding the efforts to distribute tax wealth more evenly, but opponents warn that poor countries stand to lose what leverage they currently have to attract corporate investment.
The new tax rules may create an even better economic environment in the Middle East with more sustainable streams of revenue and a more balanced relationship between governments and corporations.
Currently, general corporate tax rates vary greatly in the Middle East, ranging from 0 percent in Bahrain and part of the UAE to 22.5 percent in Egypt. Iraq, Kuwait, Oman, Qatar and Palestine currently have corporate tax rates at or below the new 15 percent minimum. Egypt, Israel, Jordan, Lebanon, Saudi Arabia and Yemen have tax rates above the new minimum. However, Iraq, Kuwait, Lebanon, Palestine and Yemen are not members of OECD and have no obligation to adjust their tax rates.
Benefits beyond revenue
Supporters of the revolutionary tax reform initiative point out benefits that extend beyond the gains and losses governments expect to see after implementing the new tax rules.
Countries like UAE and Israel that have traditionally traded tax breaks for corporate investment will have to find other ways to attract business to their borders. For example, a country may no longer keep regional offices in UAE while marketing to the more profitable Saudi market.
In the end, the new tax rules may create an even better economic environment in the Middle East with more sustainable streams of revenue and a more balanced relationship between governments and corporations. Companies will have to shift their focus to improving their services to businesses and residents. This may include digitizing their services or implementing local reforms to improve the quality of life for the people living there.
The end result is a more balanced relationship between governments and corporations — and a better quality of life for people.
• Muna AbuSulayman is a well-known talk show host. She was named a Young Global Leader by the World Economic Forum in 2004. In 2007, she became the first woman from Saudi Arabia to be appointed by the UN Development Program as a goodwill ambassador. Twitter: @MunaAbuSulayman