Dubai: The International Monetary Fund (IMF) has cautioned against plans to impose taxes on remittances and incomes of expatriates in the UAE and the rest of the Gulf Cooperation Council (GCC) region.
A policy paper published recently by the global organisation said that imposing extra charges on money transfers in the Gulf would be “highly regressive,” given that the majority of expatriates have relatively low income.
It will encourage expatriates to resort to unofficial channels, to send money back to their home countries and pose “reputational risks” for GCC states.
Besides, even if a 5 per cent tax is implemented in all GCC countries, the biggest aggregate revenue - estimated to be around $4.2 billion or 0.3 per cent of the region’s gross domestic product (GDP) in 2015 – would not be enough to solve the budgetary deficits.
The GCC region is one of the biggest employers of expatriates in the world, and consequently, a large source of remittances, which hit more than $80 billion in 2015. As of 2014, five out of six GCC states had about 11.8 million foreign workers on their payroll, with over 90 per cent working in the private sector.
With oil revenues on decline, Gulf states have been looking for ways to raise funds. The GCC governments have recently agreed to implement value-added tax (VAT) which will come into effect in 2018.
There are no specific proposals on the collection of remittance tax yet, but the Gulf states have already been warned of the negative implications of such a move.
“The imposition of a remittance tax could raise production cost if it leads to higher pre-tax wages and production costs. This would lower competitiveness of the private sector, ” the IMF paper noted.
It would also be “inefficient and difficult” to administer as it would result in a migration of remittances out of the banking system and encourage “financial disintermediation.”
“This would result in deadweight losses as remittances are highly cost-elastic. To avoid being taxed, remitters would resort to unofficial channels or monetary transfers (cash transfers through friends, relatives or simply carrying money themselves).”
Personal income tax
Some GCC countries are also considering the idea of imposing taxes on personal incomes of foreigners. Given that the combined earnings of expatriates are significant, about 52 per cent of the GDP in the UAE and 7 per cent of the GDP in Saudi Arabia, the revenue from personal income tax could be substantial.
However, the IMF warned that the move could lower the region’s attractiveness as an expatriate destination and breach double tax agreements.
“This may be more of a concern in the case of higher-skilled workers who are likely to have more employment options. This could lead to a skills-shortage if nationals with similar skills are not available.”