Income tax of 10 per cent under study

10 May 2002

The Majlis al-Shura (consultative council) is studying provisional recommendations that non-Gulf expatriate workers should pay 10 per cent income tax on earnings of more than SR 3,000 ($800) a month. The proposal is part of a wider piece of tax legislation, of which the foremost component is the reduction of corporate tax for foreign companies to 30 per cent from 45 per cent. Upon approval by the Majlis, expected by the end of June, the recommendations will be passed to the council of ministers for ratification.

The rate of 10 per cent is significantly higher than the 2.5 per cent that had been mooted in earlier press reports, but will not be imposed on all expatriate workers. The Majlis is not looking at the introduction of income tax on Saudi nationals or corporate tax on Saudi companies.

If the legislation is approved, the government stands to gain new income of about 2 per cent of last year's total revenues. 'As a very rough estimate, the government could gain about SR 4,000 million-5,000 million [$1,067 million-1,333 million] through these income tax proposals,' says Said al-Sheikh, chief economist at Jeddah-based TheNational Commercial Bank.

The proposals would support the government policy of Saudi-isation. 'On the one hand, the new funds can be used to finance training and employment programmes among Saudi workers,' says Al-Sheikh. 'On the other, the increase in tax will boost the cost of hiring expatriates, bridging some of the cost gap between hiring expatriates and local staff.'

If implemented, the new tax legislation will have a mixed impact on the kingdom's attempts to attract investment. The corporate tax reduction has been long awaited and foreign companies will be relieved to see it pushed through. However, expatriate workers can be expected to bridle at the reduction in their earnings and companies may have to carry some of the cost themselves.

There could also be implications for the ongoing negotiations to accede to the World Trade Organisation (WTO), which demands equal tax treatment of local and expatriate workers and companies. 'It is possible the legislation would have a bearing on the negotiations,' says Al-Sheikh. 'But I think there could be a grace period while the government tries to achieve some more movement in Saudi employment.' Unemployment among Saudi nationals is now estimated at about 15 per cent, with more expatriates than nationals holding full-time employment in the kingdom.

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