Heading for the exits?

Saudi Arabia’s income tax proposals could be a boost for the country’s efforts to ‘Saudise’ the private sector workforce, but it may not necessarily be foreigners that end up paying the bill.

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By  David Ingham Published  June 6, 2002

A blow to the wallet?|~||~||~|Saudi Arabia’s Shoura Council shocked everyone in April when it announced that it was considering levying a 10% income tax on expatriate workers, a figure far above the 2.5% that was originally mooted. The plan under discussion in the Shoura proposes that the 10% tax should be levied on all those expatriates earning more than SR3000 ($800) per month.

However, before all you expatriates start heading outwards, perhaps you should think again. The tax hasn’t yet been approved and isn’t likely to be for some time and a close look at why the government is imposing it may also allay many people’s fears.

Experts tell Arabian Business that the primary motive behind the proposal is to promote workforce localisation and not to raise money to pay down the public debt. The government’s thinking is that of the 4.8 million working expatriates in Saudi Arabia, between 1.2 and 1.4 million are in ‘clerical’ jobs earning an average of around SR4000 per month, or SR48000 per year.

According to Dr Said Al Sheikh, chief economist at National Commercial Bank, a Saudi national will always expect a higher salary than an expatriate for the same job. So for the SR4000 per month clerical job, he might expect SR5000-6000.

However, if a 10% income tax is imposed, most people believe that employers will end up paying the tax. Should that happen, the wage gap between the expatriate and the Saudi will close, removing one of the reasons why private sector employers don’t like to hire Saudis. “Part of the 10% tax that will be levied on non Saudis will probably be shouldered by the employers, and if that’s the case it will narrow the gap between the average wage for Saudis and non Saudis,” explains Dr Al Sheikh. “That will help to localise the Saudi labour force.”

But is it really as simple as that? Will employers really be prepared to shoulder the burden of the income tax and is high wage expectation really the reason why companies don’t hire Saudis?

On the first question, most people agree that employers will probably pay the tax. “My view is that at the end of the day the employer is going to end up paying this,” says a senior analyst at a KSA university, who prefers not to be named. “The contracts for expats are negotiated, so if I’m coming here I will look at this and know that if he is paying me SR5000, he is actually paying me 4500.”

A computer network specialist with a major international IT company in the Kingdom, who also prefers to remain nameless, speaks for many. He already has confirmation that Canada will accept him if he chooses to move there and says that if he has to pay the tax from his own pocket he will most likely leave.

“It depends… whether it’s just on the basic salary or on the full package and our incentives. If it is payable on the indemnity, for example, a lot of people will decide to leave, especially those who have been in the Kingdom for a long time,” he says.

He probably doesn’t need to worry. A highly skilled worker like him is very difficult to replace locally and has to be taken care of by his employer. “For those with certain skills that are demanded and needed, and cannot be substituted, we will likely see employers shouldering that tax, raising the income to compensate for the tax,” says Dr Al Shaikh.

That’s alright for expatriates, but someone has to foot the bill. Will profits fall as companies pay income taxes from their own pockets, or will there be a surge in inflation as higher operational costs are passed through to consumers?
||**||Who pays in the end?|~||~||~|
Both Riyad Bank and NCB have predicted that up to SR6 billion could be raised by the income tax in the first year, or, put another way, the tax will cost KSA businesses and/or consumers SR6 billion. That figure was arrived at by multiplying 1.2-1.4 million by SR48,000 and dividing it by 10. However, that figure assumes that the 10% tax is paid on all of an employee’s salary, and not on the income earned over the SR3000 threshold. If the tax works in the latter way, the burden to the economy will be much lower.

Even at the higher rate, National Commercial Bank’s Dr Al Shaikh isn’t too perturbed. “What will happen initially is that it may put pressure on the profitability of institutions, but gradually it will be passed to consumers,” says Dr Al Sheikh.

“The negative impact due to inflation might be felt through the first few years, but then it will be absorbed by the economy. It is a one time effect.”

Abdul Rahman Al Jeraisy, a prominent businessman in Riyadh, wasn’t as relaxed as Dr Al Sheikh when he heard about the 10% figure, however. He was surprised that the views of businessmen had not been canvassed prior to the announcement of the proposals.

“We are living in a world of intense competition,” Al Jeraisy told Okaz daily newspaper. “A number of neighboring countries provide various incentives to foreign investors to attract capital and technology. In my opinion, the introduction of this tax will definitely have a negative impact on the investment the Kingdom attracts from outside.”

As to the second question, whether or not the tax will close the gap between Saudi and non Saudi wages, higher wage expectation is not the only reason companies don’t hire Saudis. Because of the country’s labour laws, an employer cannot get rid of a Saudi employee if he doesn’t work out. That makes the company more reluctant to hire Saudis in the first place. If the Kingdom’s government is to achieve its Saudisation goals, without having to impose employment quotas on the private sector, the labour law has to be looked at.

The views of Joseph Braude, senior Middle East analyst at Pyramid Research, perhaps best sum up what people’s attitude towards the income tax will be. “People that have been [in Saudi Arabia] for a long time are generally not happy, because they are used to not being taxed,” Braude told Arabian Business. “On the other hand, others are saying that this tax is low and it is certainly much lower than in their home country.”

If you’ve been living in Saudi Arabia for a long time then the prospect of losing 10% of your income overnight certainly isn’t an enticing one. However, if you’re a European earning SR20-25,000 per month, taxed at a rate of 10%, that certainly beats 25% or more basic income tax back in Europe and a 7.30am commute into the office on a cold, dark December morning.||**||

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