Saudi Post-Oil Plan Weighs Income Tax on Expat Workers

Saudi Post-Oil Plan Weighs Income Tax on Expat Workers (3)
Vivian Nereim, Wael Mahdi, Zainab Fattah and Ahmed FetehaJun 09, 2016 3:39 am ET

(Bloomberg) -- Saudi Arabia is considering taxing millions of foreign residents as the kingdom seeks to reduce its reliance on oil revenue after the plunge in crude prices.

The proposal was included in the country’s National Transformation Plan, an ambitious multi-year program released this week. But the tax element is only “an initiative that will be discussed,” Finance Minister Ibrahim al-Assaf said on Tuesday at a news conference in Jeddah.

Economists said the proposal is unlikely to see the light soon because it could hamper the kingdom’s ability to attract the foreign investment it needs to revive growth hit by the oil slump. Still, raising the possibility of income tax in the blueprint -- even if only on foreigners -- shows the readiness of its architect, Deputy Crown Prince Mohammed bin Salman, to consider steps that past Saudi rulers have shunned.

Prince Mohammed, the king’s son and second-in-line to the throne, has already cut fuel and utility subsidies and proposed reducing the public-sector wage bill. The kingdom is also joining other members of the six-nation Gulf Cooperation Council in imposing value-added taxation starting from 2018.

Less Competitive

“Deepening the taxation base will be an important step in increasing non-oil revenue, which will likely start with VAT first, but the discussion of income tax is notable,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. Introducing the tax could support efforts to create more jobs for nationals, but if it’s not done in coordination with other GCC countries then it will also “reduce the competitiveness of Saudi Arabia to attract labor,” she said.

The status of Gulf Arab monarchies as tax-free havens has helped attract millions of foreign workers. The revenue wasn’t missed when oil prices were high, but some economists say introducing income tax may be inevitable now.

There are nine million foreigners living and working in Saudi Arabia, Mufrej Al-Haqbani, the country’s labor minister, said. Assaf said the government has no plans to tax Saudi nationals.

Mohammed Alsuwayed, the Riyadh-based head of capital and money markets at Adeem Capital, said he doesn’t expect expats to be taxed any time soon, either.

‘Attractive Prospects’

“I don’t believe it’s wise to introduce such a thing at a time when the kingdom is trying hard to attract direct foreign investments and not having income taxes was one of the most attractive prospects here,” he said.

Not everybody agrees.

“A 10 percent tax take would be very low by global standards, and wouldn’t in itself drive expatriates away given the much greater tax burden they face elsewhere,” said Simon Williams, HSBC Holdings Plc’s London-based chief economist for central and eastern Europe, the Middle East and North Africa.

“I’d take it as a clear positive,” Williams said. “But I’d hope to see it coupled with reform to the status of expats in the country, and ultimately I’d want to see it rolled out to include nationals as well.”

Slowing Growth

As oil prices plummeted from more than $100 a barrel in 2014 to below $30, the government cut spending, delayed payments to contractors, drew down on its foreign reserves and turned to the domestic bond market. Economic growth will likely slow to 1.5 percent this year from 3.4 percent in 2015, according to the median estimate of a Bloomberg survey.

Al-Assaf reiterated the government’s target to balance the budget by 2020 and confirmed current discussions to sell international bonds. The International Monetary Fund expects the world’s top oil exporter to post a shortfall of 13.5 percent of economic output this year.

The NTP sees public debt climbing to 30 percent of economic output by 2020 from 7.7 percent currently.

The increase suggests that the kingdom may raise an additional $200 billion in debt in the coming five years, the current year included, said Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes.

(Updates with economist comment in the 11th, 12th paragraphs.)

--With assistance from Deema Almashabi To contact the reporters on this story: Vivian Nereim in Jeddah at vnereim@bloomberg.net, Wael Mahdi in Kuwait at wmahdi@bloomberg.net, Zainab Fattah in Dubai at zfattah@bloomberg.net, Ahmed Feteha in Cairo at afeteha@bloomberg.net. To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Amy Teibel

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