Paying Taxes 2015Middle East

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Executive summary

Taken as a region the Middle East continues to be the easiest place in which to pay taxes according to the 2015 Paying Taxes study, a joint publication of PwC and the World Bank Group.

The Middle East continues to have the least demanding tax framework, with the lowest average Total Tax Rate and time to comply; Qatar and UAE share equal first place globally, with Saudi Arabia in third position.

Nevertheless, one of the key areas the MiddleEast region could consider improving, is the use of electronic filing and payment mechanisms.

The Paying Taxes study helps inform the discussion around tax reform. This is very relevant for governments in the region needing to respond to relevant megatrends; such as rapid urbanisation and demographic changes in addition to achieving sustainable government fiscal positions.

The study also shows the importance of consumption taxes for many countries around the world, underlining the merit of governments in this region considering broad based VAT systems.As we have seen with the recent and substantial tax reforms in Egypt, governments in the Middle East are very much engaged in discussions concerning tax reform, not just in terms of fiscal balances, but also with broader policy objectives such as encouraging economic growth.

We believe that regional economies in general will need to put in place ambitious agendas in order to stimulate their economic activity and enhance growth. At the same time, they need to remain highly attractive to businesses and foreign investments.

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Middle East Creative Design Centre 869/12014

Recent developmentsin Egypt Fiscal reform agendaEgypt has recently introduced new tax measures as part of the Government’s fiscal reform and growth agenda, with the objective of increasing revenues and addressing budget deficit.

The main changes cover the introduction of a 10% withholding tax on capital gains on privately owned shares or listed shares of Egyptian companies, as well as 10% withholding tax on dividends paid by Egyptian companies (with a possibility to reduce the rate to 5% in certain cases). The stamp tax imposed on the sale of shares for both the seller and the buyer has also been abolished.

The new measures will also broaden the tax base as Egyptian tax resident individuals will be taxed on their income from foreign sources in addition to their Egyptian sourced income.

A General Anti Avoidance Rule (GAAR) has also been introduced effective July 1st 2014 with the primary objective to deter taxpayers from entering into abusive arrangements.

Egypt has been discussing the introduction of a VAT system for several years and it seems this is high on the agenda of the current Government as part of their reform agenda. It has been suggested recently that the introduction of VAT seems imminent as the head of the Egypt’s Income Tax Authority has made it a priority, with the implication that the VAT rate will be in the range of 10% - 12%, and will be higher for alcohol, cigarettes and cars. The new VAT will replace the current sales tax and will apply to all goods and services with only a few exceptions.

A new VAT system could prove to be a key stepping stone in improving the economic outlook of Egypt.

Main challengesIn designing any tax policy measure emphasis mustbe placed on having simple, efficient and broad based systems. This is the case when implementing a VAT system, as it should avoid having cascading effect and all goods and services, both local and imported must be treated equally.

A main challenge is the implementation of the tax policy measures. There is a need for clear compliance requirements for taxpayers, tax administration processes should be in place to enhance voluntary compliance and increase collection notably through e-filing and e-auditing.

It is recognised that there is a need for engaging stakeholders to have their buy-in and communicate clear messages to taxpayers and citizens on the objectives and the application of the tax measures.

Fiscal developments in the Middle East regionDespite the strengthening of some of the Middle East region’s economies in line with the global recovery, challenges remain in both oil importing and exporting countries.

The challenge for oil exporting countries is to reduce reliance on oil revenue due to its price volatility. Declining oil prices have resulted in a decline in oil revenues and contributed to a downward trend in fiscal surpluses in recent years accompanied with increased spending. Many of these countries are rethinking their fiscal agenda and have made progress exploring alternative sources of revenue but the share of non-oil revenues in total revenue is still low.

In oil importing countries, the fiscal position remains vulnerable due to weak tax revenues large subsidies and public wage bills. Many of these counties like Egypt and Jordan have engaged in fiscal reform, but more is needed in terms of reviewing public spending policy and enhancing tax revenue collection to allow them to address the economic and social objectives.

It is recognised that there is a need for economic diversification for Middle East countries along with a diversification of fiscal revenue source in order to strengthen the economic growth.

During crisis and when there is a decrease in national tax revenue, Governments tend to work on redesigning their tax systems with the main objective of easing and reducing the cost of paying taxes for businesses. This could be translated by cutting tax rates (e.g. cut in Corporate Tax rates in the period from 2008 to 2010), introducing electronic tax filing and payment, enhancing the tax deductibility and depreciation rules. The need for additional revenue may lead to the introduction of new taxes or an increase in the rates of existing taxes, which will imply a potential additional burden for businesses that are required to comply with the new system and tax cost.

In the case of the Middle East, most countries look at enhancing their existing tax systems and explore alternative sources of revenue, notably through a broad based tax system. Amongst the available options, it is widely recognised that VAT is one of the most serious and efficient choices.

Jurisdictions with broad based tax systems tend to draw heavily from relatively few revenue sources. For instance, the UK derives approximately 73% of its tax revenue from just three sources; income tax, national insurance contributions and VAT which raises around 20% of total tax revenue.

UAE and Qatar are in joint first place in the ranking with the following results with a Total Tax Rate of 11.3%, time of 41 hours and 4 payments for Qatar, and a Total Tax Rate of 14.8%, time of 12 hours and 4 payments for the UAE. Saudi Arabia is third with a Total Tax Rate of 15.5%, time of 64 hours and 3 payments.

Overall Ranking:

Middle East findings

Regional details:

Central Asia & Eastern Europe is still the fastest reforming region with a major focus on improving administrative systems. All three sub-indicators have fallen with the number of payments and time to comply both now below the world average.

Global findings

All three sub-indicators have continued to fall following a trend seen during the nine years of the study.

-1

-2

-3

-4

-1Number of payments

-1.3%

Total Tax Rate

-4hours

Time to comply

2013*

The compliance sub-indicators continue to fall; labour taxes and consumption taxes drive the reduction in time.

Only 15% of the economies in the Middle East region have implemented electronic systems for filing and payment of taxes for at least one type of tax that are used by the majority of companies. This is second lowest result across all the regions.

15%

The global picture

41.0%

176hours payments

12.3

34.7%

245hours

23.3payments

36.3%

229hours

25.4payments

24.0%

160hours

16.8payments

46.6%

317hours

36.2payments

38.9%

213hours payments

8.2

North AmericaDiverse tax systems where all sub-indicators are below the world averageThe three economies in North America have very di�erent systems. They all use electronic filing and payment. Regional improvements are marginal.

42.9%

211hours

33.8

Central America & the CaribbeanReducing time to comply is the main focus Electronic filing and payment still not used by the majority of economies. The number of payments has increased along with the Total Tax Rate.

payments

55.4%

620hours

23.7

South AmericaHas the most time consuming tax systemSouth America is the only region to show a significant increase in Total Tax Rate. The region continues to have the highest average time to comply and this average has increased.

payments

EU & EFTA Total Tax Rate is above the global averageElectronic filing and payment reforms continue to reduce the payments sub-indicator while time to comply and the Total Tax Rate remain stable.

Central Asia & Eastern EuropeThe fastest reforming regionStill the fastest reforming region with large falls for all three sub-indicators. All are now below the global average.

Africa Big reductions in the Total Tax Rate The replacement of cascading sales taxes means the region no longer has the highest rate. Marginal improvements in the time to comply continue, but electronic filing and payment provides the largest opportunities for the region.

Middle East Easiest region in which to pay taxesThe Middle East continues to have the least demanding tax system. It has the lowest Total Tax Rate and time to comply. Electronic filing and payment is still a challenge.

Asia PacificLittle movement in the sub-indicatorsThe three sub-indicators have remained broadly stable from last year. All three sub-indicators are below the global averages.

On average it takes our case study company 264 hours to comply with its taxes, it makes 25.9 payments and has an average Total Tax Rate of 40.9%.

43% of economies now have electronic filing and payment systems which are used by the majority of companies.

Labour taxes and mandatory contributions, and profit taxes continue to be equally important in the profile of taxes borne for the case study company.

Reforms continue to be made in Africa, while progress is less evident in South America. South America now has the highest average time to comply and Total Tax Rate.

The pace of reform accelerated during the financial crisis, slowed in more recent years, but improvement continues. 379 reforms making it easier and less costly to pay taxes have been recorded since 2004, 105 of these relate to electronic filing and payment.

The average Total Tax Rate fell by 1.3%. Excluding the replacement of cascading sales taxes in Africa with VAT, the Total Tax Rate still falls by 0.2%. This is made up of an increase in profit taxes of 0.1% and a fall in 'other' taxes of 0.3%.

0%

20%

40%

60%

80%

100%

120%

140%

160%

Qatar UAE KSA Bahrain Oman Kuwait Lebanon Jordan ThePalestinianTerritories

Iraq SyrianArab

Republic

IranIslamic

Republic

YemenRepublic

EgyptArab

Republic

Distance to frontier (reverse order)Rank

1 1 3 810 11

4551 52

117124

135149

40

Number of paymentsTime to comply

160 hours

24.0%

16.8

Total Tax Rate

The case study company has an average Total Tax Rate of 24.0% in the Middle East region; it takes 160 hours to comply with its tax affairs and makes 16.8 payments. It has the least demanding tax system for our case study company.

2013

The three Paying Taxes sub-indicators have remained fairly stable throughout the ten years of this study.

16.8

Number of payments

24.0%

Total Tax Rate

160hours

Time to comply

2013

In the Middle East region labour taxes and social contributions are particularly significant for all three sub-indicators accounting for approximately 60% of each.

There are only two of the 13 economies in the Middle East where the Total Tax Rate and number of payments sub-indictors are higher than the global average and three economies where the time to comply is higher than the global average.

At 24.0% the average Total Tax Rate for the region is well below the world average (40.9%) and the lowest of any region.

Labour taxes and mandatory contributions account for 14.1% of the average Total Tax Rate and this is a common feature for almost all the economies in the region. Profit taxes account for 9.4% while other taxes account for just 0.5% of the region’s average Total Tax Rate.

The average profit tax Total Tax Rate has decreased marginally since 2005 while the other taxes have remained largely flat.

The average time to comply across the Middle East is 160 hours, which is below the global average (264 hours) and the lowest for any region.

The average time to comply for the region has remained virtually flat since 2004 but with an increase of just 2 hours. This region has required the fewest number of hours throughout the study period.

The average number of payments sub-indicator for the region is 16.8, which is below the world average (25.9). This is largely because of the low average number of taxes in the region for the case study company. The number of payments has remained relatively stable throughout the study period, with the average falling from 21.5 in 2004 to 18.3 in 2013.

* The data for Paying Taxes 2015 relates to the calendaryear to 31 December 2013.