Corporate tax: What is it and how are business owners in the GCC impacted? Image Credit: Pixabay

Dubai: For many years, Gulf economies have maintained low or zero taxes in order to attract foreign business owners and their investment. The GCC remains an attractive jurisdiction for foreign investment due to favourable tax regimes in most countries in the region.

However, a number of reforms have been underway to create new revenue streams while reducing dependence on mainstream sources of revenues in the region. In some countries value-added taxes have already been announced, while in other countries different forms of taxes are being introduced.

Why is there a rampant move in favour of taxes?

Although personal income tax is still unheard of in the Gulf, many countries have introduced value added tax on consumption, with Saudi Arabia tripling the rate to 15 per cent last year.

What is corporate tax? How does it impact expats?
Corporate tax is a direct tax levied on the profits of business entities. Business owners pays taxes on production, people, property and environmental impact, as well as income. Non-residents that conduct business in a GCC country through a permanent establishment are subject to corporate tax.

Corporate tax is also payable by entrepreneurs or business owners in a range of industries — notably oil and banking — in many GCC countries. And there are a wide range of government fees and levies imposed across all business sectors throughout the region.
Why is there a rampant move in favour of taxes?

Which GCC countries have a corporate tax regime?

Corporate tax rates have been dropping around the world, from highs of over 50 per cent to around the 20 per cent range, as economies compete to attract inward foreign investment. However, the GCC is an exception as these taxes are being introduced for the first time.

Four out of the six GCC countries have corporate tax regimes, ranging from 10 per cent in Qatar, through 15 per cent in Kuwait and Oman, to 20 per cent in Saudi Arabia. The UAE, on Monday, announced that it will introduce 9 per cent corporate tax on business profits from June 1, 2023. Bahrain is also in talks to introduce it in 2023.

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While there is currently no corporate tax in the UAE, some individual Emirates impose a limited corporate tax on enterprises engaged in exploration and production of oil and gas at rates up to 55 per cent and on branches of foreign banks operating in the UAE at the rate of 20 per cent.

Why is corporate tax important for GCC economies?

Corporate tax rates vary widely by country, with some countries considered to be tax havens due to their low rates.

Corporate taxes can be lowered by various deductions and so the effective corporate tax rate, the rate a corporation actually pays, is usually lower than the statutory rate; the stated rate before any deductions.

Paying corporate taxes can be more beneficial for business owners than paying additional individual income tax. The money collected from corporate taxes is used as the source of revenue for a country.

Why is corporate tax important for GCC economies?

What is the difference between corporate tax and VAT?

Taxes are the main source of revenue for most countries globally. While taxes generally help governments to generate additional revenue and fund public expenditure, there is a major difference between direct taxes such as corporate tax and indirect taxes like VAT and excise tax.

VAT and excise tax are indirect taxes collected by businesses on behalf of the government and are intended as taxes on consumption that should be borne by the final consumer.

The absence of a corporate tax is very attractive for businesses operating or seeking to invest in the country. It is for these reasons that the implementation of VAT and excise tax was a popular choice and historically limited direct taxes on businesses.

How do tax treaties help mitigate corporate tax for non-residents?

GCC countries have a growing double taxation treaty (DTT) network to eliminate double taxation — the UAE has treaties with 112 countries, Kuwait 82 countries, Qatar 60, Saudi Arabia 51 countries, Oman 31, and Bahrain with 44 countries. The tax treaty network is expected to expand even further.

Tax treaties play a crucial role in mitigating corporate tax for non-residents forming permanent establishments in other countries, or reducing their withholding tax exposure in the four GCC countries. (The UAE does not levy withholding tax or other forms of non-resident taxation.)

What is withholding tax (WHT)?
Withholding tax (WHT) is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient.

In most jurisdictions, tax withholding applies to employment income. Many jurisdictions also require withholding taxes on payments of interest or dividends.

Governments use tax withholding as a means to combat tax evasion, and sometimes impose additional tax withholding requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.

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Taxpayers or business owners should seek to aptly prepare tax-related documentation in advance.

How are GCC countries monitoring corporate tax?

The GCC countries have introduced and are actively using technology for corporate tax compliances whereby business contracts, tax returns and declarations are being filed online into portals.

This allows tax authorities to cross verify information easily and initiate tax audits where there are discrepancies versus acceptable standards.

Bottom line?

As tax reforms in the GCC region rapidly evolve with economic diversification into the non-oil sector, wealth managers opine how taxpayers or business owners should seek to aptly prepare tax-related documentation in advance.

One of the main reasons for taxpayers being asked to be cautious in tax-related compliances is because many jurisdictions do not allow tax returns to be revised.