Income tax elements based on zakat

19 April 2002

The new tax law, now under review by the Majlis al-Shura (consultative council), will impose an income tax on expatriate workers of up to the rate of zakat, Majlis members were quoted as saying in mid April. The law is expected to be passed soon, and could be implemented by the end of the year. But the legislation's main thrust will be the reduction of corporate tax on foreign companies to 30 per cent from 45 per cent.

The rate of zakat, payment of which is obligatory under Islam, is defined as 2.5 per cent of wealth. But legal sources in the kingdom say that does not necessarily reflect a similar rate on income. 'It's like comparing apples and oranges,' says a Riyadh lawyer. 'Wealth is not the same as income. And it is not clear whether the tax will also include investment earnings.' An income tax would have implications for the relative costs of hiring Saudi or expatriate workers, giving a small boost to the Saudi-isation programme. The salary of Saudi nationals is on average SR 2,000 ($533) more than that of expatriates in skilled and semi-skilled jobs. 'I think it likely that in the case of highly skilled jobs, employers would find it hard to pass the new tax to their employees,' says Said al-Sheikh, chief economist at Jeddah-based National Commercial Bank. 'So it is possible that the corporates would shoulder that burden. However, a tax of 2.5 per cent would not bridge the cost gap between Saudi and foreign workers.'

Foreign workers now transfer about $15,000 million a year in remittances outside the kingdom. If that figure accounts for roughly one- third of total expatriate earnings, a tax rate of 2.5 per cent could yield government revenues of about $1,000 million a year.

However, the most significant part of the new tax law will be the reduction of corporate tax on foreign companies, including their share in joint ventures, to 30 per cent from 45 per cent of earnings. The reduction has been on the table since the foreign investment law was issued in 2000, but has not yet been altered in the kingdom's tax regulations. Saudi nationals will not be taxed under the new legislation on either an individual or corporate basis (MEED 22:3:02).

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