IMF warns against income tax plans for gulf expats

The IMF has warned against taxing the income of expatriates following some Gulf states, including Saudi Arabia, stating they were considering the idea.

IMF warns against income tax for gulf expats
The International Monetary Fund (IMF) has warned that taxing the income of expatriates – as some Gulf states, including Saudi Arabia, are contemplating – would reduce the area's appeal to foreign workers.After the half-dozen Gulf Cooperation Council (GCC) members agreed to introduce five per cent VAT on sales from 2018, some of the states are now looking at other taxes, including charges on expat earnings, financial transaction taxes and taxing overseas remittances, in a bid to offset revenue losses caused by the fall in the price of oil. 

IMF report

A report from the IMF accepted that taxing foreign workers in the GCC would boost regional revenues. “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 report added.However, the IMF said the introduction would make the region much less appealing to expats, at least 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.

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Additionally, the IMF said that, if a new tax resulted in higher wage levels, labour costs would rise and could only be offset by increased productivity.And, the report added, personal income tax might breech some of the double tax agreements signed by the GCC states. “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." 

IMF sceptical about the effectiveness of imposing tax

The IMF was also sceptical about the effectiveness of imposing taxes on overseas 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 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."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)," the report warned, adding that international experiences show that taxes on remittances have been rare and short-lived. Reacting to the report, Younis al-Khouri, under-secretary at the UAE Finance Ministry, told the Al Bayan newspaper said the Emirates had no plans to impose new taxes or fees on individuals.However, on the question of corporation tax – which Kuwait is planning to introduce at a 10 per cent rate – Mr al-Khouri said the had been studying its potential social and economic impact, and was now taking the results to the UAE cabinet, with a view to building a comprehensive tax regime.

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