“New taxes ‘essential necessity’ to support Saudi Arabia’s economy”. Discuss
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responses.:
1) Many countries in the world in which employees lost their jobs, and major companies declared bankruptcy and fought much more difficult scenarios than Saudi Arabia due to the repercussions of the Corona pandemic,” noting that raising the tax to 15 percent is the best option to achieve financial sustainability until the end of the crisis. Oil prices and the end of the Corona crisis, due to which many sums were spent to support the health sector and facilities, in addition to the strong revenues that may come from the Investment Fund, as well as work to improve the investment environment and attract investors who help in economic growth and increase the domestic product. When Saudi Arabia achieves these goals, then it will return to a 5 percent tax.
Saudi Arabia tripled value-added tax to 15 percent in July, aiming to mitigate the impact of lower oil revenues on state finances.
The increase, along with the suspension of the cost of living allowance, surprised citizens and businesses amid expectations of more government support, while economists said it could dampen growth.
The International Monetary Fund, which expects the Saudi economy to shrink 5.4% this year, said in July it had not recommended a tripling of the tax and warned against increasing consumption taxes in the Middle East amid an economic slowdown caused by the coronavirus.
2)Currently foreign companies operating in Saudi Arabia pay corporate tax at a rate of 20%. This has been around for a number of years. In addition, Saudi Arabia has a fully-operational tax department that was set up quite a number of years ago, the Department of Zakat and Income Tax. It was recently reorganized and is now referred to the General Authority of Zakat and Tax, GAZT. Taxation in the Kingdom only applies to foreign companies, local companies pay zakat, a religious donation. GAZT is responsible for the collection of tax and zakat. Companies that have Saudi and foreign shareholders, commonly known as “mixed companies”, pay both tax and zakat, based on the percentage basis of ownership.”
He further said: “ What is new is the implementation of value-added tax (VAT), and we now know for a fact that VAT will be introduced on Jan. 1, 2018. The basic rate is expected to be 5%. VAT is basically a consumption tax, which will ultimately be paid by individuals and not companies. 5% is very low compared to other countries where VAT was introduced many years ago. For example, in UK the VAT rate is 20%, and France 23%.”
Why tax?
Pease explained: “Countries are always looking for sources for revenues. These revenues support government expenditure to benefit the nation, for example, health care, defense, education, policing, infrastructure, etc. For many years Saudi Arabia’s revenues were dependent on the sale of oil. In other countries, such as the UK and Canada, the prime source of revenues for governments is taxation, in particular, personal taxation. Personal taxation is the tax that individuals pay on their income. This could be as high as 50%, depending on the level of income. The more one earns, the more one pay in personal tax. This is commonly referred to as a marginal tax system. The second source of revenue in the UK and Canada is VAT, or HST/GST as this tax is known in Canada. Many refer to this type of tax as a “fair” tax due to the fact that it is only paid on consumption, that is, if one does not spend, one will not pay the tax. VAT will be collected by companies, and, in turn, the VAT collected from consumers will be passed on the government. The company itself, in many cases, but not all, will not pay VAT, the consumer will. The 5% is one of the lowest, if not the lowest, VAT rate in the world.
Speaking of the possibility of this rate to increase, Pease said: “It depends on the economic growth, future oil prices, and what the government will need to finance its expenditure budget. The Saudi government has embarked on a number of significant projects that will support growth and development, for example, the Riyadh metro system, which will ultimately change the face of Riyadh when it is completed. We all need to understand that Saudi government’s revenues from the sale of oil have suffered due to the reduction in the oil price. It is time to introduce alternative sources of revenue to keep the standard of living where it is.”
Pease clarified: “Excise tax is a different tax than VAT. The government intends to introduce excise tax on certain products to discourage the use of these products due to the harm these products can cause to person’s health. Basically, the tax will be imposed on tobacco, energy and soft drinks. We expect to see excise tax introduced in April 2017. Then VAT will follow in January 2018. It seems that excise tax on tobacco, for example, will be at a rate of 100%. This means that the price of a packet of cigarettes will double. VAT will be imposed on most items, however basic foods, for example, flour, cooking oil, bread, rice, vegetables and water, medicine and health care are expected not to attract VAT.
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