Viewpoint: Tareq al Sunaid

Saudi Arabia is the largest economy in the region and the only Middle Eastern member of the G20. Therefore, the continued development and success of the Saudi economy are key to regional economic growth.

The Kingdom continues to advance its social and economic transformation programmes within Vision 2030, despite the disruption of the Covid-19 pandemic. In some ways, the health crisis accelerated efforts to achieve fiscal stability and sustainable long-term growth. Notably, the Kingdom took swift action to support public revenue in 2020 by increasing the value-added tax rate from 5% to 15% going into effect July 2020, and increasing various Customs duty rates (ranging from 0.5% to 15%) for a list of products from June of that year. A new tax on property transactions, known as the real estate transaction tax, was introduced in October 2020 at a rate of 5%.

Total government revenue is expected to reach SR1.1trn ($293.3bn) in FY2022, with tax revenue representing approximately 27% of this figure. The budget deficit in 2021 is expected to be SR141bn ($37.6bn) – 4.9% of the estimated GDP that year, a significant improvement from SR298bn ($79.4bn) – which was 12% of GDP in 2020, on the back of domestic economic recovery and increased oil prices.

Taxation continues to play a key role in the economic development of the Kingdom. The 2020-22 period has witnessed major initiatives to create a tax environment that seeks to both encourage investment and raise revenue. One of these has been the merger of the General Authority of Zakat and Tax, and the Customs Authority to form the Zakat, Tax and Customs Authority (ZATCA) so that all taxes, Customs and zakat (religious charity) are administered by one regulator.

Among ZATCA’s aims are increasing taxpayer compliance and commitment, supporting economic development, facilitating trade, and improving the customer experience. This merger is expected to enable more consistency in terms of broader tax strategy and policy, leading to a more predictable tax environment for businesses and other stakeholders.

In addition to the re-organisation, ZATCA – in collaboration with the Ministry of Investment, the Commission and IT Commission, and the General Authority for Civil Aviation – has supported specific initiatives aimed at improving the business environment and attracting investment. Special economic zones have been created for this purpose and the tax regime has been a key component of the package of measures agreed upon.

One significant measure is the recent introduction of e-invoicing on December 4, 2021, following the global trend of the increasing digitisation of tax administration. E-invoicing is expected to have a major impact on tax collection and minimise tax avoidance. Another development is the global consensus on the launch of a global minimum corporate tax. As part of the G20, the Kingdom was involved in this process. This consensus is based on two key measurements, which are expected to become effective by 2023.

The first measurement forces multinational groups to allocate taxable revenue based on the market and customer presence. The effect of this will be additional tax revenue from such multinationals, given the market size of the Kingdom. The second measurement introduces a global minimum tax. The initial agreement is to fix the tax rate at 15%. Countries with a lower statutory tax rate will lose potential tax revenue, as companies subject to the global minimum tax will pay the tax differential in their home country. As such, introductions of corporate tax or a reassessment of current tax rates in countries across the globe can be expected. Since the Kingdom has a dual tax system – zakat at 2.5% and corporate income tax at 20% – the effective tax rate for companies operating in the Kingdom could be higher or lower than the minimum rate. Therefore, it will be necessary for the Ministry of Finance and other government stakeholders to make preparations for these fundamental developments.