The Impact Of Saudi Arabia’s 30-Year Tax Relief Plan On National And Regional Development

The Impact Of Saudi Arabia’s 30-Year Tax Relief Plan On National And Regional Development

Submitted by guest authors

If a lesson was ever learned about the UAE’s demonstrable success, then Saudi Arabia’s announcement of a 30-year tax exemption package for foreign companies establishing their regional headquarters in the Kingdom would be it. Declared in a statement released through the Saudi state press agency, “The Ministry of Investment of Saudi Arabia, in coordination with the Ministry of Finance and the Zakat, Tax and Customs Authority today announced a 30-year tax incentive package for The Regional Headquarters (RHQ) Program, to further streamline the process for multinational companies (MNCs) to establish their RHQ in Saudi Arabia”.

Falling under the announcement, headquartered MNCs won’t just benefit from a zero per cent rate for corporate income tax, but a further zero per cent for withholding tax related to approved RHQ activities.

Elaborating on the program, the statement went on to confirm its long-term goals of attracting “MNCs to set up their RHQ in Saudi Arabia and position the Kingdom as the leading commercial, industrial and investment hub for the MENA region, by offering a range of benefits and premium support services that complement the Kingdom’s globally competitive value proposition.

Emerging as one of the fastest growing regions in the past 20 years, the GCC has widely capitalized on its hydrocarbon wealth by diversifying into a broad range of sectors, while attracting many of the world’s biggest brands to cater to its burgeoning populations. As a result, its increasing competition towards foreign direct investment, acquisitions, and events, has meant a more calculated look at taxation, and striking a balance between diversification and competition.

Prior to the announcement, only one of the six GCC countries – Bahrain – remained widely tax-exempt, while Saudi Arabia, Oman, Kuwait, Qatar, and the UAE imposed general corporate tax rates of twenty, fifteen, fifteen, ten and nine per cent respectively; however, this wasn’t always the case, most notably for the UAE.

As the GCC’s second largest economy, the UAE’s leadership demonstrated a clear understanding of what it wanted to develop and how to do it at an early stage. By the turn of the millennium, the country had already carved out its place as a destination for global tourism, while investing in long-term infrastructure committed to transforming the Emirates into a trade and economic powerhouse, most notably through organizations such as DP World, ADGM, the DIFC and DMCC. As a result, expatriates gravitated to the country’s world class lifestyle and higher-than-average salaries, while major corporations such as Procter & Gamble, Siemens, General Electric, Nestlé Middle East, and Schlumberger were drawn to its business-friendly, tax-efficient climate.

Fast forward to today, and the UAE is officially ranked as the 16th largest FDI recipient in the world, according to the UN Conference on Trade and Development’s World Investment Report 2023. Attracting $23 billion in 2022; or 61 per cent of the GCC’s regional investment, His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai commented,

We express our appreciation to all regulatory, legislative and service entities who contributed to strengthening the position of the UAE as one of the best international investment hubs.

Our aim during the coming year is to achieve more historic milestones.”

As a highly diversified economy, with a large proportion of its infrastructure already developed, the decision to introduce a nine per cent corporate tax rate on 01st June 2023 was justified by aligning with international efforts to combat tax avoidance, while addressing challenges arising from the digitalization of the global economy. Quoted at the time of tax roll-out, Shabana Begum, the Ministry of Finance’s executive director for tax policy said, “The regime has been designed to ensure strategic sectors will thrive in the free zones. Some level of migration may happen, but the overall objective is ensuring the UAE remains attractive.” 

For the longest period, the UAE stood out as a clear diversification front-runner, however, under the leadership of Crown Prince Mohammed bin Salman, Saudi Arabia’s strategy to move away from its hydrocarbon reliance has drastically accelerated. Through giga-projects such as Neom to the Red Sea, Qiddiya to ROSHN, the country’s investment into globally popular sports such as football, most notably through Al Nassr’s acquisition of Cristiano Ronaldo, have thoroughly put Saudi on the international map.

In addition to its extensive list of confirmed international events including the 2027 AFC Asian Cup, 2034 FIFA World Cup and most recently 2030 Expo, the timing of Saudi to remove its corporate tax in a bid to attract a lion’s share of the regional market is certainly reminiscent of the UAE’s development decades earlier.

In a further gambit, its ruling to prevent international companies from eligibility for public sector contracts, starting in 2024, unless equipped with regional headquarters in the Kingdom has also added considerable pressure for MNCs to forgo their previously comfortable ‘cake-and-eat-it’ arrangement of enjoying the UAE’s cosmopolitan environment, while reaping the rewards of Saudi’s mega-contracts.

Certainly, from a macroeconomic perspective, outside of hydrocarbon companies, who would unlikely benefit from a move to compete with state-owned Aramco, Saudi’s appeal as a base for MNCs in what is essentially two decades of massive infrastructure and socioeconomic development is now a lot sweeter. As with any major decisions, the timing should not be overlooked.

While Saudi’s tax announcement has changed the dynamic for both existing and potential corporates in the region, its social evolution still has some way to go before it can compete with the UAE’s world class brand, infrastructure, and its ranking in the international community. Particular highlights for the UAE include, most ‘competitive’ country, according to the International Institute for Management Development (IMD), 16th in the World Bank’s ‘Doing Business’ 2023 Rankings, and 24th in the Heritage Foundation’s 2023 Index of Economic Freedom.

Additionally, Saudi also has to contend with balancing its policies on Saudization, which will include finding work for two thirds of the country who are under 35 (just over 20 million), while relaxing some of its conservative social values in order to attract highly skilled expats. To date, just five per cent of regional HQs are based in Saudi, however, with companies such as PepsiCo already signed up, and more than 200 qualifying companies already operating their RHQs in the Kingdom since 2021, Saudi is now, at the very least, a highly competitive alternative to the UAE’s established hegemony. To date, additional major deals that have either been announced or under discussion include Boeing’s $37bn deal to sell aircraft to Saudia Airlines and Riyadh Airlines, HSBC expanding its personnel by 10 – 15 per cent, and Oracle’s announcement to invest $1.5bn.

Needless to say, none of this considers the impact of the OECD/G20 Inclusive Framework on BEPS for the implementation of the global minimum tax which would see MNEs becoming subject to a 15 per cent effective minimum tax rate, however, since this has yet to be implemented it remains a moot point.  

While the GCC-wide introduction of VAT in June 2016 was surprising to many, its status as an indirect tax meant an emphasis on consumption, ultimately to be borne by the consumer, meaning a negligible impact on the region’s investment appeal.

The application of corporate tax, however, has been a different balancing act, with each nation weighing up the correct strategy between anticipating OECD policy, generating additional revenue and / or maintaining appeal as the “regional hub” for MNCs, entrepreneurs, and overall foreign direct investment.

While it is impossible to predict future domestic, regional, or international policy, Saudi’s decision for a 30-year tax exemption not only follows the UAE’s proven recipe for success at a strategic point in its evolution, but will ultimately be a long-term win for the GCC as an increasingly influential region in global economics, politics, and culture. 

Tyler Durden
Thu, 01/11/2024 – 03:30

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