Goodbye sunshine

27 August 2004
Following a visit to the UAE in July, the chairman of the British Conservative Party, Liam Fox, sent a letter to Gordon Brown, the Chancellor of the Exchequer, asking a singular question. Was the government preparing to introduce worldwide income taxation in its next budget? While, in a statement to MEED, the UK Treasury denied that any technical review was under way it did not rule out the introduction of global taxation in the future.

For the 200,000 UK nationals resident in the GCC, there are few policy issues more likely to cause sleepless nights. Equally, for the economies of the Gulf, the imposition of income tax on expatriate workers has serious - and complex - ramifications. The imposition of income tax on UK nationals at prevailing UK rates could hoover $2,000 million a year out of the region.

'Gordon Brown will not rule out changes to non-residents' tax arrangements and I fear no taxpayer is safe from the government's addiction to tax,' UK shadow chancellor Oliver Letwin told MEED in a statement on 23 August. 'The rumours of further tax-grabs by the British government will not go away. There is no doubt that if Labour wins the next election they will have to raise taxes to fill the black hole in the public finances. What isn't clear is just who will be subjected to these third-term tax rises.' With a general election likely to be held in the UK next year, the heated rhetoric is unsurprising, but the lack of a statement saying such a move would be reversed by any new Conservative government is significant.

Senior businessmen in the region are taking the threat seriously. 'It is by no means certain that legislative changes will be made, although options are definitely being considered,' says David Hodgkinson, deputy chairman of HSBC Bank Middle East. 'Such a step would have an adverse impact on one of Britain's key invisible exports - the provision of expertise to international markets. It may encourage a number of British residents in the UAE to consider a change of domicile, given the attractiveness of long-term residence there.'

If the chancellor does decide to tax worldwide income it will set a precedent which other finance ministers in the EU and the Organisation of Economic Co-operation and Development (OECD) will find hard to resist. At present, almost all OECD countries grant tax exemptions for nationals working abroad for a minimum period. The stark exception is the US, which has taxed the worldwide earnings of its citizens since 1976. However, if Australia, Germany, France and Italy were to follow a move by the UK to impose expatriate income tax - as is likely - up to 400,000 workers in the region could be affected.

Few tears will be shed at home if these governments decide to tax high-earners overseas in order to fund social programmes and essential services at home. Expatriates can reasonably expect to enjoy a 50 per cent increase in living standards bymoving to the Gulf, where many receive sizeable housing and vehicle allowances. Any move to introduce universal EU worldwide income tax, especially for those working in the oil-rich Gulf, is likely to prove popular with voters in Europe who are struggling to come to terms with high energy prices and rising costs of the welfare state.

The EU's aim to align tax policy is moving slowly forward and a co-ordinated move by the member states is possibly within reach. The GCC and the EU have been at loggerheads for almost two decades about a free trade area, with a major European objection being the discriminatory treatment of local firms in the region. The absence of personal income and corporate taxation throughout the GCC in designated free zones has also drawn critical attention. Developments such as the Dubai International Financial Centre, which will offer lucrative incentives for some of the highest earning professionals in the financial services industry, could suck wealth

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