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MENA Tax Regimes Increasingly Competitive

by Lorys Charalambous,, Cyprus

08 April 2013

The benefits of lowering corporation tax rates to secure Foreign Direct Investment (FDI) was the key topic under consideration at Ernst and Young's Middle East and North Africa (MENA) tax conference, which also looked at regional governments' efforts to close tax loopholes to ensure the efficiency of their low-tax regimes.

Attendees heard that while corporate tax collections are low in many MENA countries, tax authorities are actively considering and implementing key tax policy changes to mitigate tax avoidance. The conference's wide range of topics included transfer pricing, the importance of thin capitalization rules, withholding tax for non-residents, the interpretation of tax law, the pros and cons of tax exemptions, value-added tax (VAT), customs and sales tax in the region and tax treaty networks.

One of the most important trends in the GCC and MENA has been the increase in Foreign Direct Investment (FDI) as a result of attractive business opportunities and favorable lower taxation rates. This is particularly so in Gulf Cooperation Council countries, where between 2003 and 2011, these nations attracted over 79% of FDI projects in MENA, comprising over 62% of the value of business projects and over 65% of the jobs created. The GCC Trio (the UAE, Saudi Arabia and Qatar) maintain the lead, both in terms of numbers and investor expectations.

Sherif El-Kilany, MENA Tax Leader, Ernst & Young, said: “One of the factors defining the fiscal landscape in the MENA region is the low corporate tax rate prevalent in many countries, with the effective corporate tax rate in Qatar at 10%, Oman 12%; Iraq and Kuwait 15%, and Saudi at 20%. However, the need for effective taxation is creating an increasingly challenging tax environment in many countries, with more stringent tax compliance measures being introduced by tax authorities. GCC countries are collectively studying the possibility of VAT implementation by 2015 and this determination will influence the tax landscape of the entire region.”

Saudi Arabia is the largest recipient of FDI in the Arab world, despite its relatively high 20% corporate tax rate. 100% foreign ownership is permitted in the construction sector, and direct investment is permitted both in resident capital companies and through the establishment of branches of non-resident companies. Saudi currently boasts 24 double tax treaties (DTA).

The United Arab Emirates is the second largest recipient of FDI in the Arab World, having seen investment grow by 40% in the past four years on the back of a low corporate tax environment in many emirates, and the presence of several tax-free zones.

Meanwhile the taxation environment in Kuwait is steadily evolving to further facilitate trade within the region. GCC-owned companies are exempt from paying applicable taxation, while foreign companies are liable for a 15% tax rate, a significant drop from the previous 55% tax rate.

In Iraq, tax rates have been fixed at 15% for FDI. Progressive rates ranging from 3% to 15% are applied for individual employee's income tax. The country imposes indirect taxes on customs, property and sales ranging from 5% to 30% depending on the nature of the business and investment sectors. As foreign investment opportunities increase, tax exemption has also been introduced in Iraq for certain contracts that were signed after 2010.

“The region has witnessed fundamental shifts in the direction of taxation laws to accommodate further FDI. The region is set to witness a rise in infrastructure development resulting in higher FDI-based activity within the GCC specifically, and MENA in general,” concluded Sherif.

TAGS: United Arab Emirates | environment | compliance | tax | investment | business | sales tax | tax compliance | Kuwait | Saudi Arabia | tax avoidance | law | corporation tax | Iraq | Qatar | transfer pricing | tax rates | construction | trade | Oman

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