Taxation key to stable economy in Middle East

As the world emerges from severe recession in decades, the desire of governments globally to rebalance their books and guard against future downturns has rarely been stronger. And, according to a new report from KPMG International, across the Middle East and South Asia (Mesa) region, all eyes are on taxation as a key component of the drive to create strong and stable economies.

The traditional image of the Middle East as a region where tax is a low priority for companies has rarely seemed more outdated, says Ashok Hariharan, KPMG's head of tax for Oman and the UAE.

"Although corporate tax rates have fallen precipitously over the past decade, stricter enforcement of filing and collection regulations has become a recurring motif."

The report titled 'Mesa Tax Report: A Mesa perspective on global tax trends' was released last week to coincide with KPMG's Mesa Tax Conference, held at Doha, Qatar, yesterday. The report shows that although the last few years have witnessed a steep drop in Gulf Cooperation Council (GCC) corporate tax rates, the rates themselves still vary across borders.

In Kuwait, for instance, the rate is now 15 per cent (with Kuwaiti and other GCC nationals exempt), down from 55 per cent prior to 2008. Oman charged foreign companies 30 per cent until 2009, but slashed its rate to 12 per cent this fiscal year and exempted all taxable profits up to RO30,000.

In Qatar
In Qatar, the tax rate was reduced from 35 per cent to 10 per cent in the last 12 months (with Qatari and other GCC nationals exempt).
Saudi Arabia has embraced a more gradual approach, lowering rates from 45 per cent to 30 per cent in 2001 and again to 20 per cent from 2006 onwards, payable only by non-Saudi/GCC shareholders (Zakat, an assets-based religious tax of 2.5 per cent, is otherwise levied).
Bahrain, meanwhile, is generally considered an income tax-free country, but oil and gas companies undertaking exploration, drilling or refining activities are still taxed at a rate of 46 per cent. A more complex system has evolved in the UAE, where there are no corporate income taxes at a federal level, but foreign oil companies and banks are taxed at locally set rates within certain emirates.

Direct tax policies
Accompanying varied rates and the new direct tax policies is a fundamental shift towards indirect taxes such as Value-Added Tax (VAT) or Goods and Services Tax (GST). Globally, even before the onset of the financial downturn, indirect taxes had steadily been extending their influence as an increasingly important source of government revenues. Driven by stagnant economies and falling direct tax rates, more countries than ever are embracing VAT as a key component of their tax policies.

No significant rate adjustments are predicted in the near future for the Mesa region, although streamlining of exemption categories could emerge as one possible solution to tax avoidance and cumbersome administration.

In Bangladesh, which has a basic VAT level of 15 per cent, reduced rates operate between zero per cent and nine per cent across a number of industries, from advertising and engineering to security and auditing. In Egypt, which has a basic rate of 10 per cent, variances exist across the spectrum, from the export of goods (zero per cent) to high-powered cars (45 per cent). Sri Lanka actually bucked the trend by registering a small cut in VAT rate.