Taxing the income of foreign workers in the GCC will help the region boost its revenues, but it will also reduce the attractiveness of the Gulf to skilled expats, the International Monetary Fund has said.
The GCC countries are currently preparing to impose value added tax (VAT), but some of them are also exploring other taxes and fees to raise revenues.
These include personal income tax on foreign workers, taxes on outward expatriate remittances and financial transaction taxes.
The revenue from an income tax on foreign workers could be substantial across the GCC countries, the IMF said.
As of 2014, five out of the six GCC countries employed about 11.8 million foreign workers with over 90 per cent working in the private sector.
Expatriate household income as a share of GDP ranges from 52 per cent in the UAE to around 7 per cent in Saudi Arabia.
If a 15 per cent tax on foreign workers’ income is introduced without any allowance, it could generate revenues ranging from about 4.7 per cent of GDP in the UAE to 0.6 per cent of GDP in Saudi, the report said.
Proponents for the tax have also argued that expats are using public goods and infrastructure and receive public services and should contribute to their costs.
“A progressive tax on higher paid foreign workers could also boost opportunities for nationals to take those jobs as foreigners are likely to demand higher wages making these less competitive relative to similarly skilled nationals,” the IMF said.
However, it also warned that an income tax on expats would reduce the region’s attractiveness in the short term.
“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,” the report said.
Also, if the tax results in higher gross wage levels, this would raise labour costs and could reduce the competitiveness of firms unless offset by higher productivity.
A personal income tax could also breech some of the double tax agreements signed by the GCC countries.
“These agreements typically include a non-discrimination clause precluding the imposition of different income taxes on national and foreign workers, and therefore may prevent GCC countries from imposing an income tax only on foreign workers,” the IMF said.
In terms of taxing outward remittances, the IMF cautioned that that the move may not prove very beneficial.
Outward remittances from the GCC countries are estimated at $84.4bn.
Hence imposing a 5 per cent remittance tax in all GCC countries would yield a maximum revenue of 0.3 per cent of the region’s GDP or $4.2bn in 2015.
“This appears small relative to the needed fiscal adjustments in the region. In addition, imposing this tax would entail operational and administrative costs which would reduce further the net revenue gains,” the IMF said.
Other disadvantages include reputational risk; reducing the competitiveness of the private sector by increasing production costs; financial disintermediation; exchange restrictions and multiple currency practices; and conflict with the international agenda on remittances.
“Most of expatriate workers in the GCC have relatively low incomes and remittances tax would be highly regressive as high-income and low-income workers would be taxed at the same rate,” the report said.
The tax would also be difficult to administer as it would result in a migration of remittances out of the banking system.
“To avoid being taxed, remitters would resort to unofficial channels of money transfers (cash transfers through friends, relatives or simply carrying money themselves),” the report warned.
International experiences show that taxes on remittances have been rare and short-lived, the IMF added.