Taxation and the Gcc States 2011 - 2017 by Martin Harrison
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TAXATION AND THE GCC STATES 2011 - 2017 BY MARTIN HARRISON GOLCER ECONOMIC REPORT SERIES OCTOBER 2017 GOLCER GulfOne Lab for Computational & Economic Research 2011 - 2013 The build up of political changes The author’s original paper, “Taxation and legitimating often domestically unpopular the GCC States”, was published in October measures, culminating in the 2016 agreement 2010. Revisiting the subject seven years later to implement Value Added Tax across the GCC reveals significant changes having affected in 2018. By mid-2017, amid varying degrees of and continuing to affect the region - the opposition to taxation, Kuwait and Bahrain’s most notable being the 2011 Arab Spring parliaments had not given their assent to VAT and its aftermath and, from 2014 onwards, legislation and it became clear that despite the the sharp downturn in oil prices. Both events regionally agreed January 2018 launch date, had significant impacts on the taxation issue some GCC states would not be ready in time. in terms of the relationship between rulers and citizens, and the increasingly urgent At the beginning of 2011, few could have requirement to implement economic reforms. predicted the profound political changes that The sustained downturn in oil prices from 2014 would sweep the Middle East and North Africa. onwards dramatically reshaped the regional In the Gulf, the effects were most evident in economic situation, further increasing the Bahrain and Oman, the two least affluent GCC pressure for reforms including taxation policies states. Subsequent increased government recommended by international organisations spending on welfare provision, particularly in such as the International Monetary Fund. In Bahrain, Saudi Arabia, and Oman, including implementing the recommendations, the six public sector job creation and pay rises was Gulf Cooperation Council states - Bahrain, arguably, even in the era of relatively high oil Kuwait, Oman, Qatar, Saudi Arabia, and the prices, financially unsustainable and potentially United Arab Emirates - publicly coordinated counterproductive by creating unrealistic 1 their policies with the IMF to assist in economic expectations amongst GCC citizens. 1 See for example, Michael Peel and Robin Wigglesworth “Arab rulers 2 Martin Harrison Bahrain The introduction of a tax on foreign labour was controversial and introducing other taxes proved problematic. The issue of taxation also became entangled proved problematic. Indeed as a sign of with protestors’ demands regarding the taxation’s importance, aspects of the country’s political and economic relationship between 2011 national dialogue process included rulers and their subjects. consideration of a corporate tax and VAT.5 The political complexity of taxation in Bahrain was In Oman in February 2011, protestors’ slogans reflected by the Shiite opposition movement, included “the abolition of all taxes”, such as Wefaq, giving its parliamentary support to the taxes on health care and on lands offered by foreign labour tax in the hope of increasing the state.2 In Bahrain, even before the 2011 Bahrainis’ employment opportunities, whilst upheavals, ratings agency Moody’s rationale Sunni and Shiite businesspeople across the for its August 2010 downgrade partly derived country opposed the measure.6 In April 2011, from government ability to generate revenues the labour tax was suspended and was not from the non-oil sector being “...hampered reintroduced until 2013 at a lower rate.7 by its narrow tax base”.3 The introduction of a tax on foreign labour in Bahrain4 was Generally in 2011, VAT implementation was controversial and introducing other taxes use handouts to ward off unrest”, Financial Times, London, 19 January regarded as being unlikely in the GCC before 2011; Steffen Hertog “The Costs Of Counter-Revolution In The GCC”, 8 2014. Regardless of its desirability, timing was September 2011, SciencesPo./CERI CNRS, www.ceri-sciences-po. org; Silvia Colombo “The GCC and the Arab Spring: A Tale of Double crucial for some states. The Omani Minister for Standards”, The International Spectator: Italian Journal of International Affairs, 2012, Vol.47, No.4, pp.114-115; Onn Winckler “The ‘Arab Spring’: Socioeconomic Aspects”, 2013, Middle East Policy, Vol.20, No.4, Middle 5 “Sunday’s dialogue session to discuss concerns”, Bahrain News East Policy Council, Washington D.C., www.mepc.org Agency, Manama, 17 July 2011. 2 “Oman protestors clash anew with police”, Agence France-Presse, 28 6 Steffen Hertog “State and private sector in the GCC after the Arab February 2011. For a detailed assessment of the situation in Oman, see uprisings” 2014, LSE Research Online, London School of Economics also James Worrall “Oman: The ‘Forgotten Corner of the Arab Spring”, and Political Science, http://eprints.lse.ac.uk/54399/ For a detailed Middle East Policy, 2012, Vol.19, No.3, Middle East Policy Council, assessment of the Bahraini situation, see Jane Kinninmont “Bahrain: Washington D.C., www.mepc.org Beyond the Impasse”, 2012, Chatham House, Royal Institute of 3 Robin Wigglesworth “Moody’s downgrades Bahrain”, Financial Times, International Affairs, London. London, 23 August 2010. 7 Kristian Coates Ulrichsen “The Politics of Economic Reform in Arab 4 For further background on the Bahrain foreign labour tax, see Martin Gulf states”, 2016, Center for the Middle East, Rice University’s Baker Harrison “Taxation and the GCC States”, 2010, GOLCER Report, Gulf Institute for Public Policy, Houston, Texas, p.17. One Lancaster Centre for Economic Research, Lancaster University, 8 “Implementation of VAT unlikely before 2014 in Gulf, says KPMG”, p.14. Times of Oman, Muscat, 30 October 2011. Taxation and the GCC states: 2011 - 2017 3 Financial Affairs commented in 2013 that whilst being reversed,17 whilst highlighting the level VAT in the Sultanate was an ideal solution, it of governmental determination to implement could only be implemented at “a suitable time.”9 new taxation policies despite local opposition. Oman did implement a foreign labour taxation Before 2011, divisions within ruling GCC scheme similar to that in Bahrain but with fees political and economic elites had been evident determined as a percentage of the foreign regarding inclinations to implement economic labourer wage bill.10 In Kuwait by contrast, some reforms. It was therefore an argument still politicians disputed IMF recommendations that being played out but, post-Arab Spring, within the emirate should implement taxes on services a more complex political environment. at all, instead calling for government measures to encourage greater foreign investment. In December 2012, Dubai’s Gulf News ran a Others argued the Kuwaiti government had no chronological history of taxation in Britain need of additional revenue because of existing dating from 1512 to 1996, with particular surpluses.11 Such views contrasted with the emphasis on its introduction and development Kuwaiti Prime Minister’s 2013 warning that, in spite of opposition.18 This may have been a “the current welfare state that Kuwaitis are used means to prepare local opinion for the gradual to is unsustainable…It is necessary for Kuwaiti introduction of further taxation measures. society to transform from a consumer of the Another report noted a cautionary statement nation’s resources to a producer.”12 by the Dubai Economic Council, in response to federal UAE taxation proposals, that In April 2012, the Saudi Shura Council again implementing taxation should not be rushed. rejected a plan to impose tax on foreign “Imposing taxes, if any, should be performed on workers,13 as it had in 2003.14 However, this two stages. First: imposing VAT...provided that time the Saudi Ministry of Labour went ahead national institutions should be prepared for the with a tax on every foreign worker in the process in terms of technology, knowledge, private sector where their number exceeded human resources and material resources. In Saudi workers.15 The Shura Council challenged light of this and after considering the general the Labour Ministry’s introduction of the tax atmosphere and trends, other taxes mulled and was reportedly “working on finding a way 17 “Expat labor fee will finally hurt the consumers”,Arab News, Jeddah, for the ministry officials to reconsider their 24 December 2012. 18 “Income taxes in Britain”, Gulf News, Dubai, 12 December 2012. decision...”16 A subsequent commentary in the Jeddah-based Arab News was also critical, raising the possibility of the tax measure 9 “VAT GCC at an opportune time”, Gulf News, Dubai, 3 January 2013. 10 International Monetary Fund “Diversifying Government Revenue In The GCC: Next Steps”, 26 October 2016, GCC Annual Meeting for Ministers of Finance and Central Bank Governors, Riyadh, p.6. 11 B. Izzak “MPs slam govt ‘taxation plan’”, Kuwait Times, Kuwait, 25 October 2010; “Former MPs oppose IMF’s proposal to impose taxes”, Arab Times, Kuwait, 1 August 2012. 12 Sylvia Westall “Kuwait’s PM says welfare state is ‘unsustainable’, calls for cuts”, Reuters UK, 28 October 2013. 13 “Shoura: no taxes on expats”, Arab News, Jeddah, 2 April 2012. 14 Harrison op.cit. p.5. 15 “Labor Ministry promises to address problems caused by new tax”, Arab News, Jeddah, 18 November 2012. 16 “Shoura urges review of expat labor fee”, Arab News, Jeddah, 16 December 2012. 4 Martin Harrison by the government can be considered in line with developments”.19 That these measures were put forward in the UAE at a federal rather than emirate level also indicated a shift in the political balance following the Dubai financial crisis. Previously, Dubai appeared to be at the forefront of a possible VAT experiment. The 2012 GCC Supreme Council summit declaration mentioned a timetable commitment to various economic issues including tax measures,20 and the signs in some member states were that various new taxes, including VAT, were being actively considered. Measures introduced to increase efficiency of collection and administration of existing taxes to help increase state revenues, and raise levels of expertise in handling taxes more generally not only helped governmental revenues but gave greater legitimacy to the idea of taxation in a region unused and sometimes opposed to it.