The World Bank ranks Saudi Arabia as the 7th easiest country in the world for handling issues with respect to taxes. As with “company formation,” this is quite accurate: for a Saudi. Most foreigners, however, have a totally different tax regime.
The principle tax authority in Saudi Arabia is the “Department of Zakat and Income Tax.” Zakat is a Muslim obligation for a small payment intended for charitable purposes or maintenance of the public good, amounting to approximately 2.5% of income (actually the basis for determining zakat is more complex, but this is a helpful guide). A Saudi company that pays zakat effectively pays one of the lowest income taxes in the world.
However, non-Saudi companies seldom get such benefits, but instead pay “income tax,” which for most types of enterprises (outside petrol sector) amounts to 20%, or roughly 8x the burden.
As obtaining tax certificates is critical for any company (necessary to engage in bids and to maintain licenses needed to obtain visas and other operations), the disparate treatment raises certain problems. Consider: while taxes for foreign stakeholdings are supposedly passed through as in a partnership in the U.S., in practice, each entity will pay tax separately (and possibly file for a refund at a future date). Thus, a foreign company that owns shares in a Saudi-based entity, which in turn owns shares in another Saudi-based entity, will pay taxes twice in order to maintain the requisite licenses. If they remit funds to a parent company outside the kingdom (as in a management or licensing contract), they may pay a further withholding tax (ranging from 5 – 20%).
Thus, the 2.5% that the World Bank indicates can, for foreigners, quickly grow into 40-50% tax burdens, depending on the structure. Ouch.
Why does the Kingdom create an inherently discriminatory tax regime? Ostensibly, the system distinguishes “zakat” from “income tax” because zakat is a moral obligation for all Muslims, while income tax is an obligation for others. However, the vast majority of the world’s Muslims will still be treated as though they were any other non-Muslim enterprise (e.g., Indonesian, Indian, Pakistani, Bangladeshi, Nigerian, and Egyptian companies would all pay income tax).
Only Saudis, together with 100% GCC-owned enterprises (that is, 100% Bahraini, Kuwaiti, Omani, Qatari, and Emirati companies – and not mixed ventures involving foreign partners) pay zakat. That ought to call into question the “moral” basis for the disparate tax regimes.
The 20% basic rate in Saudi Arabia is certainly lower than the rates in many other countries, and the Kingdom should be recognized for its reasonable burdens. But it should not be unduly rewarded by ignoring basic facts that encourage discriminatory treatment.
Nice, I did not know that… 40-50%, I knew they made it actually harder after they said they were trying to encourage foreign investors, but not like this.
Thanks
You’re welcome. I’m not saying that the Department of Zakat and Income Tax is making things harder (they’re actually trying to do the opposite) – but rather, the World Bank is only telling 1/3 of the story (Heritage Foundation makes the same error). The DZIT does a much better job at handling advisory opinions and other issues than most government agencies, but tax is often tricky.
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