IMF Says (P)GCC Should Impose Up to 15% Corporate Tax

The (Persian) Gulf Coopertion Council countries should consider introducing a corporation tax on business profits as part of measures to boost non-oil revenue in the coming years, the International Monetary Fund has urged.

An IMF policy paper said that an overhaul of the taxation of business profits in the (P)GCC Arab states (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman), for instance a 10-15% corporation tax, “would contribute to improving non-oil tax revenue collection”, Arabian Business reported.

The paper noted that non-oil corporate taxes apply for the most part to foreign companies only and range up to 20% in Saudi Arabia. Oman is the only country that has a broad-based business profit tax, it said.

However, extending these taxes to domestic businesses–together with the planned introduction of other fiscal reforms such as value added tax by 2018–would help (P)GCC Arab states as they grapple with falling oil revenues and an uncertain global economy.

The report said: “Over time, the (P)GCC countries, which have intensified their efforts to diversify budget revenues as part of their broader fiscal consolidation strategies, should also move to introduce or expand the tax on business profits.

“This, together with the VAT and excises will help ensure efficient and progressive tax systems in the region and generate the bulk of non-oil tax revenues for most countries’ budgets.”

The IMF urged any business tax to “start simple and be levied at a single (relatively) low rate for all businesses”.

“This rate could be in the range of 10 to 15%…a relatively low rate when compared globally,” the report said.

“A rate lower than 10 to 15% range is likely to yield too little revenue and may not be cost-effective, while a rate higher than this range may make the (P)GCC economies relatively less attractive as a business domicile.”

The revenue from the new tax will likely vary across countries in the GCC, according to the IMF. It is expected to be higher in Bahrain, Oman, the UAE and Saudi Arabia, and lower in Qatar and Kuwait where the hydrocarbon sector contributes a larger share in GDP.

The revenue yield will also be affected by existing exemptions and deductions and depend on how effectively the tax is administered.

However, the IMF said the Persian Gulf Arab states would do well to introduce the reforms as early as possible–or at least once VAT has been successfully introduced.

“Experience from other countries shows that it takes time to build tax administrations or revenue agencies and to develop relationships with taxpayers that encourage self-compliance,” the report said.

“This is why the reform process should be started as early as possible.”