The Middle East is a diverse and dynamic region, with a rich history and culture, as well as a strategic geopolitical and economic importance. The region is home to some of the world’s largest oil and gas producers, as well as emerging markets and sectors, such as tourism, technology, and renewable energy. The region is also undergoing a rapid transformation, as governments seek to diversify their economies, modernize their infrastructures, and enhance their social and environmental sustainability.
One of the key aspects of this transformation is the reform and development of the tax systems in the region. In recent years, several Middle Eastern countries have introduced new taxes, updated their tax laws and regulations, and improved their tax administration and compliance. These changes are driven by various factors, such as the need to increase fiscal revenues, reduce dependence on oil and gas, align with international standards and best practices, and foster a more competitive and attractive business environment.
However, these changes also pose significant challenges and risks for businesses and individuals operating in the region, as they have to cope with the complexity, uncertainty, and diversity of the tax regimes, as well as the potential impact on their profitability and cash flow. Therefore, it is essential to have a clear and comprehensive understanding of the tax landscape in the Middle East, and to be prepared for the opportunities and challenges that it presents.
In this blog post, we will provide an overview of the main features and developments of the tax regimes in the Middle East, focusing on the following aspects:
- The types and rates of taxes applicable in the region, such as corporate income tax, value added tax, excise tax, withholding tax, and personal income tax.
- The recent and upcoming tax reforms and initiatives in the region, such as the introduction of corporate tax in the United Arab Emirates, the implementation of electronic invoicing in Saudi Arabia, the adoption of transfer pricing regulations in Qatar, and the participation in the OECD’s global tax reform project.
- The implications and considerations for businesses and individuals operating in the region, such as the tax compliance and reporting obligations, the tax risk and dispute resolution mechanisms, the tax incentives and exemptions, and the tax planning and optimization strategies.
Types and rates of taxes in the Middle East
The tax regimes in the Middle East vary significantly from country to country, depending on their legal, economic, and social characteristics. However, some general trends and patterns can be observed, such as the following:
- Corporate income tax (CIT): CIT is levied on the profits of companies and other legal entities, such as branches and permanent establishments, that are resident or have a source of income in the country. The CIT rates range from 0% to 55%, depending on the country, the sector, and the type of entity. For example, Bahrain, Oman, and the United Arab Emirates have a CIT rate of 0% for most businesses, except for those engaged in oil and gas, banking, and insurance activities, which are subject to higher rates. On the other hand, Egypt, Iraq, and Yemen have a CIT rate of 20%, 35%, and 55%, respectively, for all businesses, regardless of their sector or type. Some countries, such as Jordan, Kuwait, and Saudi Arabia, have a dual CIT system, where different rates apply to domestic and foreign entities, or to entities owned by nationals and non-nationals.
- Value added tax (VAT): VAT is a consumption tax that is imposed on the supply of goods and services, as well as the importation of goods, in the country. The VAT rates range from 5% to 15%, depending on the country and the type of goods and services. For example, Bahrain, Saudi Arabia, and the United Arab Emirates have a standard VAT rate of 5%, but Saudi Arabia has recently increased its VAT rate to 15% as a temporary measure to cope with the economic impact of the COVID-19 pandemic. Oman and Qatar are expected to introduce VAT in the near future, following the framework agreement signed by the Gulf Cooperation Council (GCC) countries in 2016. Some countries, such as Egypt, Iraq, and Lebanon, have a similar tax to VAT, called general sales tax (GST), which has a lower rate and a narrower scope than VAT.
- Excise tax: Excise tax is a selective tax that is levied on the production, importation, or sale of certain goods that are considered harmful to health or the environment, such as tobacco, alcohol, energy drinks, and sugary drinks. The excise tax rates vary from 50% to 200%, depending on the country and the type of goods. For example, Bahrain, Saudi Arabia, and the United Arab Emirates have an excise tax rate of 50% for energy drinks and sugary drinks, and 100% for tobacco and tobacco products. Oman and Qatar have also implemented excise tax in 2019 and 2020, respectively, following the GCC framework agreement. Some countries, such as Egypt, Jordan, and Kuwait, have a similar tax to excise tax, called special tax, which applies to a wider range of goods, such as cars, luxury goods, and telecommunications services.
- Withholding tax (WHT): WHT is a tax that is deducted at source from certain payments made by a resident entity to a non-resident entity, such as dividends, interest, royalties, fees, and commissions. The WHT rates range from 0% to 30%, depending on the country, the type of payment, and the existence of a tax treaty. For example, Bahrain, Oman, and the United Arab Emirates do not impose any WHT on any payments, whereas Egypt, Iraq, and Yemen impose a WHT of 10%, 15%, and 20%, respectively, on most payments. Some countries, such as Jordan, Kuwait, and Saudi Arabia, have a lower or zero WHT rate for payments made to entities that are resident in a country that has a tax treaty with them.
- Personal income tax (PIT): PIT is a tax that is levied on the income of individuals, such as salaries, wages, pensions, and other benefits, that are resident or have a source of income in the country. The PIT rates range from 0% to 35%, depending on the country, the type and amount of income, and the personal status of the individual. For example, Bahrain, Oman, and the United Arab Emirates do not impose any PIT on any income, whereas Egypt, Iraq, and Yemen impose a PIT of 10%, 15%, and 20%, respectively, on most income. Some countries, such as Jordan, Kuwait, and Saudi Arabia, have a progressive PIT system, where higher rates apply to higher income brackets.
Recent and upcoming tax reforms and initiatives in the Middle East
The tax regimes in the Middle East are constantly evolving and adapting to the changing economic and social conditions, as well as the global tax developments and standards. Some of the recent and upcoming tax reforms and initiatives in the region are as follows:
- Introduction of corporate tax in the United Arab Emirates: On 31 January 2024, the Ministry of Finance announced that the United Arab Emirates will introduce a federal corporate tax on business profits that will be effective for financial years starting on or after 1 June 2025. The introduction of corporate tax is intended to help the United Arab Emirates achieve its strategic objectives and accelerate its development and transformation. The certainty of a competitive regime, together with the United Arab Emirates’ extensive network of double tax treaties, will cement the United Arab Emirates’ position as a leading hub for businesses and investments. The details of the corporate tax law, such as the tax rate, the tax base, the exemptions, and the incentives, are yet to be revealed, but the Ministry of Finance assured that the law will be fair, transparent, and simple, and that it will take into account the interests of the business community and the national economy.
- Implementation of electronic invoicing in Saudi Arabia: On 4 December 2023, the General Authority of Zakat and Tax (GAZT) issued the electronic invoicing regulation, which requires all taxpayers registered for VAT in Saudi Arabia to issue, store, and amend their invoices electronically through the GAZT’s electronic invoicing platform, starting from 4 July 2024. The implementation of electronic invoicing is aimed at enhancing the efficiency and effectiveness of the tax administration and compliance, as well as combating tax evasion and fraud. The electronic invoicing regulation sets out the technical and procedural requirements for issuing, storing, and amending electronic invoices, as well as the penalties for non-compliance. The GAZT also provides guidance and support for taxpayers to facilitate their transition to the electronic invoicing system.
- Adoption of transfer pricing regulations in Qatar: On 23 December 2023, the General Tax Authority (GTA) issued the transfer pricing regulation, which introduces the arm’s length principle and the documentation requirements for transactions between related parties in Qatar, in line with the OECD’s transfer pricing guidelines. The adoption of transfer pricing regulations is part of Qatar’s commitment to implement the OECD’s Base Erosion and Profit Shifting (BEPS) project, which aims to prevent the artificial shifting of profits to low or no-tax jurisdictions. The transfer pricing regulation applies to all taxpayers that are subject to income tax in Qatar, and that have transactions with related parties, whether resident or non-resident, exceeding QAR 3 million in a tax year. The regulation requires taxpayers to prepare and submit a transfer pricing disclosure form, a master file, and a local file, as well as to comply with the arm’s length principle and the methods prescribed by the regulation.
- The participation in the OECD’s global tax reform project, which aims to establish a fair and consistent international tax system, by addressing the challenges of the digitalization and globalization of the economy, and by ensuring that multinational enterprises pay their fair share of taxes.
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