Expats face higher tax bills as Gulf States need to shore up government revenues as oil prices keep falling.
Christine Lagarde, head of the International Monetary Fund (IMF) told a forum of oil exporting country politicians and business leaders that their governments need to cut spending and diversify how they raise revenue as oil prices are predicted to stay low for years to come.
Speaking Abu Dhabi, she cautioned against waiting too long to impose taxes on income and property while finally agreeing to charge VAT on goods and services.
Lagarde explained that in 2015, the Middle East and North Africa lost £250 billion in oil revenue, which added up to a fifth of the region’s entire GDP – and no replacement was sourced for the lost income.
Instead, governments were digging into cash reserves to finance budget deficiencies.
Rescue plan from IMF
Some Gulf countries, such as Saudi Arabia and United Arab Emirates (UAE) have slashed fuel and utility subsidies for expats and nationals.
Lagarde told the forum that they need to agree a three-point plan to rescue their finances:
Bring in VAT – the Gulf States have considered a multinational single rate of 5% for years without agreeing a start date. Lagarde reckoned this could provide 2% of GDP immediately
Tax companies and property, while considering excise duties on fuel and other commodities
Develop a revenue agency that will raise income tax on expats and nationals
The Gulf States agree about introducing VAT in principle, but the start date has been put back until 2018 after lengthy negotiations and disagreements about the tax rate.
Companies cheating on tax
“Multinational companies are playing the system by using low tax countries as hosts to avoid paying the right amount of tax to the countries where they earn their profits,” said Lagarde.
“Research suggests a third of Africa’s wealth is held offshore in tax havens and that the figure is even higher for oil-producing nations.
“New tax swapping agreements will hopefully put a stop to this and allow governments to levy taxes to fund services and infrastructure.”
Lagarde told the forum that her main message was a successful economy needs a government to collect tax revenues fairly from everyone – and to spend the money on developing prosperity for everyone, not just a select few.