Riyadh Al Najjar, Saudi Arabia Country Leader, PwC, on the tax policy transformation: Viewpoint

Riyadh Al Najjar, Saudi Arabia Country Leader, PwC

The sweeping reforms outlined in Vision 2030 are going to affect vast areas of the government and the economy. Tax policy will play a significant role in these reforms as part of the government’s efforts to diversify revenues away from oil and address broader social and economic objectives while maintaining a fertile business environment and continuing to attract foreign direct investment (FDI).

One of the targets of Vision 2030 is to increase FDI from 3.8% of GDP to 5.7% by 2030. There is a large pool of research demonstrating the positive impact that double tax treaties (DTTs) can have on FDI flows. Saudi Arabia should consider DTTs as a way of attracting foreign firms by reassuring them that income will not be taxed twice. DTTs already prevail over domestic tax rules and around 30 have been signed with countries including the UK, China and Japan. The next step should be to focus on other key trading partners, such as the US, Germany, Switzerland and Australia.

Another important development is the “white land” tax, which applies to landowners of undeveloped plots greater than 10,000 sq metres and is intended to spur housebuilding and address the shortage of affordable homes. Landowners will face potentially large additional liabilities that should convince many that they are better off developing housing or selling the land. The collected tax will be used to fund real estate developments. The tax is controversial and several details still need to be clarified – such as who will value the land and what qualifies as undeveloped – but in that it encourages property development, the tax is a step in the right direction.

The other key tax policy on the cards is the planned introduction of value-added tax (VAT) on January 1, 2018. Long advocated by the likes of the IMF, the introduction of VAT is part of efforts to minimise dependence on fluctuating global oil prices. Broad-based tax systems are vital tools for governments seeking to ensure a more sustainable revenue stream.

The introduction of new taxes would certainly impact investment attractiveness, but the way the new tax systems are designed will be as important as the level of taxes levied. The envisaged VAT rate in the GCC remains relatively low, and the fact that it is levied on an unburdened economy should not significantly affect the GCC’s global competitiveness.

However, this will need to be assessed in light of the new system’s features. From a business perspective, VAT is supposed to be neutral, as taxpayers are supposed to be collecting VAT on their operations on behalf of the government and will be entitled to recover the VAT incurred on their inputs. For businesses, there will of course be a compliance question, in terms of having the appropriate systems, processes and knowledge in place to efficiently and accurately fulfil compliance requirements.

Nonetheless, in light of a potential shift in demand and consumer spending, businesses should ensure their commercial strategies are prepared to anticipate changes and ensure a smooth transition to the VAT regime. The introduction of VAT will have a significant impact on consumer spending habits and disposable incomes, which should not be underestimated, and will to some extent limit additional measures the government can take to further broaden the tax base in the short term. In this regard, it is noteworthy that the government has said it is not planning to tax citizens’ income, wealth or basic goods.

Despite this, there are still some other additional tax initiatives open to the government, including a remittance tax and a personal tax on expatriates. Increasing the GCC Customs duty, taxing investment funds and changing transfer pricing rules could be other revenue streams that are easier to implement and have less direct impact on citizens. However, given the scale of the tax regime changes in the next few years, some caution in adopting new measures may be necessary to avoid adverse public reaction.

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Riyadh Al Najjar

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The Report: Saudi Arabia 2016

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