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Is the Oasis of Tax Free Income Drying Out?

Published on May 04, 2017

GCC (Cooperation Council for the Arab States of the Gulf) member states have been a big draw for the expatriate population for many decades now. Expats have been enjoying tax-free salary – surely a motivating factor for foreign workers to flock to the Gulf region. Tax-free salary provides an opportunity to save more, leading to an increase in the disposable income per capita.

Hence it is no surprise that the Gulf region is home to a large foreign workforce. The expats comprise around 30 million of the 50 million GCC populations.

Expatriate Population in Gulf Region

Need for exploring new revenue streams

Exports on the crude oil market constitute a major revenue source for Gulf countries. However, since its highs of approximately USD100 a barrel in 2014, the oil prices saw a significant drop. Oil prices have nosedived to around USD29 a barrel in January 2016 and recently recovered to hover around just USD50-55. The prolonged oil price slump since the summer of 2014 has hugely dented oil export revenues. Consequently,  the price slump prompted the GCC governments to explore new revenue-earning avenues.

The jitters grew within the expat population when Saudi Finance Minister Ibrahim Al-Assaf made a statement in mid-2016 that his ministry is intending to introduce an income tax on foreign workers, only to subsequently clarify that it was only a ‘proposal’.

Previous attempts on personal taxation

According to the IMF, Saudi Arabia had introduced a personal income tax on both nationals and non-nationals in 1950. Subsequently, the Kingdom had excluded the Saudi nationals within six months of its introduction. Later, the personal income tax on foreign workers was suspended in 1975 amid high oil revenues and the need to recruit expatriates to help build the Kingdom’s infrastructure as well as develop the economy.

The 1980s saw GCC countries introduce a personal income tax on foreign workers during the low oil price period. However, GCC governments had to back down as livid foreign workers, including military contractors, raised the banner of ‘strike’ grounding air force planes.

Due to its unpopularity, imposing personal income tax in the GCC region may be off the table for now. Nonetheless, GCC governments have realized the importance of looking for alternative revenue streams. GCC economies are feeling the pinch over the prolonged dip in oil prices. One has to take into consideration the fact that GCC governments are bracing up to impose a value-added tax (VAT) from 2018 onward in their bid to diversify their revenue base. However, the introduction of VAT is no guarantee that personal income tax will not be introduced in future.

GCC Economies facing challenges due to fluctuating oil prices

What happens if personal income tax becomes a reality?

So, what could be the likely ramifications if GCC governments indeed impose a personal income tax on both foreign workers as well as locals? As learned from history, the most immediate consequence might be that foreign workers may just pack up. Such a move can precipitate a labor crunch. This is because foreign workers are still a ‘must-have’ for certain jobs in the GCC region largely for two reasons. Firstly, the local population in the GCC region do not appear to be keen on taking up menial jobs. Secondly, the local population at times, lack requisite skills required for various semi-skilled and skilled jobs performed by expats.

It is pretty clear that a lot will hinge on how oil prices shape up in coming years and how successful GCC governments are enhancing their non-oil revenues that will eventually determine whether expats can continue enjoying tax-free salary in the Gulf region.