Saudi Arabia may tax expats to reduce reliance on oil revenues after fall in crude prices

Saudi Arabia is considering taxing its foreign residents as the country wants to reduce its reliance on oil revenue after the fall in crude prices.

According to Bloomberg, the proposal was included in the country's National Transformation Plan (NTP), an ambitious multi-year programme released this week. But the tax element is only "an initiative that will be discussed", Finance Minister Ibrahim al-Assaf said on Tuesday at a news conference in Jeddah.

However, the proposal is unlikely to be implemented as it could affect foreign investments the kingdom needs to revive growth, hit by the oil slump. Still, even the possibility of income tax in the blueprint -- even if only on foreigners -- shows the readiness of its architect, Deputy Crown Prince Mohammed bin Salman, to consider steps that past Saudi rulers have shunned.

Prince Mohammed, the King's son and second-in-line to the throne, has already cut fuel and utility subsidies and proposed reducing the public-sector wage bill. The kingdom is also joining other members of the six-nation Gulf Cooperation Council (GCC) in imposing value-added taxation starting from 2018.

"Deepening the taxation base will be an important step in increasing non-oil revenue, which will likely start with VAT first, but the discussion of income tax is notable," said Monica Malik, chief economist at Abu Dhabi Commercial Bank. Introducing the tax could support efforts to create more jobs for nationals, but if it's not done in coordination with other GCC countries then it will also "reduce the competitiveness of Saudi Arabia to attract labor", she told Bloomberg.

According to some economists, as the status of Gulf Arab monarchies as tax-free havens has helped attract millions of foreign workers, introducing income tax may be inevitable now.

There are nine million foreigners living and working in Saudi Arabia, Mufrej Al-Haqbani, the country's labor minister, said. Assaf said the government has no plans to tax Saudi nationals.

Mohammed Alsuwayed, the Riyadh-based head of capital and money markets at Adeem Capital, said he doesn't expect expats to be taxed any time soon, either.

"I don't believe it's wise to introduce such a thing at a time when the kingdom is trying hard to attract direct foreign investments and not having income taxes was one of the most attractive prospects here," he said adding that taxes on expats won't be levied any time soon.

"A 10 percent tax take would be very low by global standards, and wouldn't in itself drive expatriates away given the much greater tax burden they face elsewhere," Bloomberg quoted Simon Williams, HSBC Holdings's London-based chief economist for central and eastern Europe, the Middle East and North Africa.

"I'd take it as a clear positive," Williams said. "But I'd hope to see it coupled with reform to the status of expats in the country, and ultimately I'd want to see it rolled out to include nationals as well."

As oil prices plummeted from more than $100 a barrel in 2014 to below $30, the government cut spending, delayed payments to contractors, drew down on its foreign reserves and turned to the domestic bond market. Economic growth will likely slow to 1.5% this year from 3.4% in 2015, according to the median estimate of a Bloomberg survey.

The NTP sees public debt climbing to 30% of economic output by 2020 from 7.7% currently which would mean the kingdom may raise an additional $200 billion in debt in the coming five years, the current year included, said Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes.