Gulf states consider 10 per cent tax rate

16 May 2008
Qatari plans to reduce corporate rate could be expanded across the GCC ahead of currency union.

The GCC is considering plans to introduce a unified corporate tax rate of 10 per cent across member states in an ambitious attempt to build on plans for currency union by 2010.

Qatar’s Finance Minister Yousef Hussein Kamal says Qatar’s own plan of reducing company tax to 10 per cent from 34 per cent is now being studied as a flat rate option to be rolled out across all six GCC states.

“It is [the plan] among the GCC countries as well,” says Kamal. “We are about to be unified and each individual country in the GCC has a [tax] system, so it could make sense.”

Kamal says discussions within Qatar’s cabinet about implementing the cut are being replicated as part of wider GCC talks about monetary union.

“Everything is possible,” he says. “It could well be [a reality]. We are discussing these things.”

Kamal says any action on the GCC-wide tax cut is unlikely to be decided on this year, with much of the focus expected to remain on achieving currency union by 2010.

He adds that Qatar is likely to drop its own tax rate for companies to 10 per cent, rather than the 12 per cent rate that the Finance Ministry had also considered.

“We are having a discussion about 10 per cent,” says Kamal. “This is not an easy issue, given the inflation situation. It is a discussion within the [Qatari] cabinet.”

Abdulaziz Abu Hamad Aluwaisheg, director of the economic integration unit at the GCC secretariat in Riyadh, says the proposal is likely to be at the “seed stage” as he has yet to hear of an official study being commissioned. “It may be a new proposal,” says Aluwaisheg. “We are working on other projects but not this one.”

While finance ministers from the six GCC states have previously expressed solidarity on the goal of currency union by 2010, that enthusiasm has wavered over the past 12 months, with leading figures and economists questioning the benefits of implementing a single currency.

However, Gulf economists argue there is sound logic to implementing a GCC-wide tax structure to attract international investment and expertise to the region.

Simon Williams, economist at HSBC Middle East, says the issue of a common tax regime has been talked about at an official level as part of wider market talks.

“There have been some general discussions to explore the issue and form a policy as part of a move to have a closer union,” he explains.

However, Williams says, several related GCC economic initiatives have been sidelined because of the buoyant economic climate.

“A number of proposals have been on the backburner with oil prices so high, so the fiscal impetus in broadening the tax net has slowed,” he says.

Williams adds that the idea is unlikely to be top of the GCC’s immediate agenda.

“I am not sure that all of the work has been done to secure political approval and there would be technical difficulties too in harmonising different frameworks,” he says. “I think it is a proposal that is more long term than short term.”

Several other economists argue that the policy behind such a move is essentially well founded, despite the uncertainty over the GCC’s drive for currency union. Marios Maratheftis, Dubai-based regional head of research for Standard Chartered Bank, says there are common drivers in the GCC market that make the idea of a unified tax rate sound in theory.

“It would be easy for each country to go its own way in terms of tax, but really these countries are all looking for much the same thing,” says Maratheftis.

“A stable financial environment with low tax rates would ensure the focus remains in the Gulf, especially given the deterioration in the international [economic] environment.”

Mushtaq Khan, Gulf economist at investment bank Citigroup, says the move would prove popular given the appetite Western companies have shown for investment in the Gulf over the past few years.

“It will obviously make a lot of multinationals very happy to have a harmonised rate across the region,” says Khan.

“Countries in the region are not lacking money so much now, but they are lacking people and expertise. Anything that can help that would presumably be welcomed by GCC governments.”

Khan says there may be issues if Qatar were to take unilateral action and opt to decrease its own tax rate separately.

“You would have all sorts of dissatisfaction in the region if one country took the lead on this,” he adds. “It is a political decision as well as an economic one.”

Maratheftis agrees that there could be discontent if one country were to take the lead.

“Each country could go its own way, but if this is being spoken about in the same breath as currency union, then I am not sure that would happen,” he says.

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