Middle East’s tax reforms are in step with the times

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As economies evolve, so do tax philosophies, principles, and regimes. Several factors influence this transformation – political ideologies, economic theories, social values, and technological advancements being some of them. In other words, shifting tax philosophies reflect the changing ideas and beliefs underpinning how governments design and implement tax policies over time. A combination of these factors is unfolding in the Middle East.

Following the 2008 global financial crisis, countries in the region strengthened their tax structures and increased revenue, focusing on reducing reliance on oil revenues and diversifying the economies. They also understood the value of raising taxes, especially in non-oil sectors. This approach resulted in Saudi Arabia and the UAE introducing a 5 per cent value-added tax (VAT) in 2018.

Middle Eastern countries have also recently reformed their tax systems to improve efficiency. Measures such as introducing electronic tax filing and payment systems, simplifying tax procedures, and improving tax administration have gathered momentum. Steps have been taken to combat tax evasion, improve compliance, and enhance tax audits.

There has been an overall shift toward strengthening tax structures, increasing revenue, and diversifying economies away from oil dependence. Considering how regional and global economies have evolved since 2008 and how they align, the region had to flow with the tide and balance its books accordingly.

Despite the divergences, Europe’s tax experience provides an interesting parallel for the Middle East. Since the second half of the 20th century, European governments have relied heavily on taxes to support and fund public spending. Francesco Parlatore, Tax Managing Associate at BonelliErede, cites post-1995 Eurostat data to suggest that tax revenues accounted for approximately 40 percent of the EU’s GDP (41.7 percent in 2021).

Parlatore argues that the revenue generated by different taxes varies considerably across the EU because of differing national tax systems. “The 2007-2008 financial crisis and subsequent fiscal measures adopted to stimulate the economy drastically affected the level and composition of tax revenue, with the lowest ratio of tax revenue to GDP in the EU seen in 2010 (39.1 percent of GDP),” he says.

Parlatore points out that the 2007-2008 financial crisis and subsequent fiscal measures drastically affected the tax revenue’s level and composition across Europe. “The lowest ratio of tax revenue to GDP in the EU was seen in 2010 (39.1 percent of GDP),” he says, adding that this project brought about the two-pillar solutions, particularly the 15 percent global minimum tax. It’s a trajectory the Middle East would be better off observing.

“Despite some major differences, GCC countries share some tax trends and dynamics,” Marco De Leo, Managing Partner of BonelliErede’s Dubai Office, sets the premise for a regional overview. “GCC countries historically relied on the hydrocarbon industry and the related revenues to support public spending, with very limited or zero taxation for businesses,” he says. The GCC’s oil and gas revenues account for approximately 50 per cent of the GDP.

“Given the expectations of a reduction in oil & gas revenues in the future and that other revenues are insufficient to cover public spending (also expected to increase), GCC countries need to adopt tax reforms to diversify revenue sources and buffer against the economic shocks from the volatility of the oil & gas industry,” he says. According to De Leo, the international tax landscape and the consensus against low-taxed jurisdiction have helped and will push GCC countries to revise their tax systems.

Policy watchers agree that more and more countries will follow the corporate income tax system – to be implemented in the UAE in June 2023 – or at least revise their corporate income tax system. “All the GCC countries (except Kuwait) are part of the inclusive framework on base erosion and profit shifting (BEPS) working on the global rules and are, therefore, committed to adopting the global minimum tax,” De Leo sums up.

Changes in political and ideological trends also become discernible amid evolving tax philosophies. For example, some governments may shift their tax policies toward a more progressive or redistributive approach, while others may prioritize lower tax rates to stimulate economic growth. Shifts in public opinion, leadership changes, or broader political movements may drive these changes.

With the thriving Middle East experiencing exponential change with ambitions of digitalising economies, we should also expect an evolution in compliance and taxation going hand in hand. Once known for its low tax rates, the region has increasingly moved toward more comprehensive tax systems. Several factors drive this trend, including revenue diversification, the desire to attract foreign investment, and pressure from international organizations.

With increasing focus on transparency and compliance, implementation of digital systems for tax registration and filing, and increased enforcement measures, the Middle East’s tax regimes reflect the region’s changing economic landscape. As countries look to diversify their economies and reduce their reliance on oil revenues, tax systems will play an increasingly important role in generating revenue.

- Ehtesham Shahid is an editor and researcher based in the UAE.