The element for labour taxes and social contributions is a common feature for all of the economies in the Middle East apart from West Bank and Gaza where no labour taxes are levied on the employer. Oil-rich economies such as Kuwait, Qatar, Bahrain, Saudi Arabia, and the United Arab Emirates continue to have little or no corporate income tax which explains why the overall average Total Tax Rate is so low. The absence of consumption and ‘other’ taxes also helps to explain this average rate.
A new report from the World Bank, IFC, and PwC finds that governments continue to reform their tax systems despite global economic uncertainty, with 31 economies having taken steps from June last year through May 2012 to make it easier and cost less for small and medium businesses to pay taxes.
The report titled The Paying Taxes1 2013 study looks at tax regimes in 185 economies, including 13 from the Middle East, and finds that the most common tax reform is the introduction or improvement of online systems for tax compliance, which occurred in 16 economies.
Paying Taxes 2013 found that on average a medium company in the Middle East pays a Total Tax Rate (the cost of all taxes borne) of 23.6%, making 17.6 payments (frequency with which the company has to file and pay different types of taxes and contributions), and spending 158 hours (time to prepare, file and pay three major types of taxes including labour taxes, mandatory contributions and consumption taxes). Labour taxes and social contributions account for the largest part of these three indicators in the Middle East, which is quite different to the average global profile.
The UAE and Saudi Arabia are ranked first and third respectively in 2013; up from sixth and 7th in 2012, while Qatar remains second for the fourth year.
United Arab Emirates – 1st; Qatar – 2nd; Saudi Arabia – 3rd; Bahrain – 7th; Oman – 10th and Kuwait – 11th
In the eight years since the study began in 2004, the region required the fewest number of hours to comply with tax systems. The number of payments has also remained stable throughout most of the study period but witnessed some reduction over the last year driven by the implementation of online filing and payment systems by Saudi Arabia and the United Arab Emirates, which are improvements related to social security contributions. The Total Tax Rate has fallen by only 2.5% for the region since Paying Taxes 2007 and has remained flat in the most recent years.
“Economies in the Middle East feature so prominently in the top jurisdiction of the Paying Taxes indicators. This can be largely attributed to the relatively few tax taxes levied and the reliance on other sources of government revenues. With increased spending requirements and populations demanding greater economic rights, governments in the Middle East will face a challenge to raise additional tax revenues in the future, either by introducing new taxes, expanding the tax base or increasing tax rates,” Dean Kern, Tax Leader, PwC Middle East, said.
“Electronic filing and payment reduces paperwork and complexity in tax systems and can help increase tax compliance and reduce the cost of tax administration,” said Augusto Lopez Claros, Director, Global Indicators and Analysis, World Bank Group. “The report finds that over the last several years there has been a gradual reduction in the number of payments and in the number of hours spent by a medium-sized company to comply with its tax obligations. This reduction across all regions of the world in the burden of tax administration is a welcome development.”
The average number of payments for the Middle East region is 17.6, which is well below the world average, with the exception of North America and the EU & EFTA that have lower averages. The number of payments in this region is kept low by the small average number of taxes which is the lowest of all the regions, but to some extent this is compensated by the general low use of electronic filing and payment facilities particularly for labour taxes and social contributions, and VAT systems. It is also to note that it is the high income economies that have the less demanding tax systems, as they place a greater reliance on other sources of revenue that the less well-off economies do not have.
The average time to comply across the Middle East is 158 hours, a figure which is well below the world average and the lowest for any region. For many of the economies, labour taxes and social contributions are the primary drivers of the time to comply, but in Yemen the goods and services tax takes the longest time to comply with, whilst in the Syrian Arab Republic it is corporate income tax.
Reforms continue around the world. However, the report finds that the number of economies reforming has fallen from 35 last year to 31 in the most recent study. The focus continues to be on reducing the administrative burden of the tax system.