Gulf countries could introduce minimum corporate taxation

The Gulf Cooperation Council (GCC) countries are expected to follow the example of the G7 and introduce a globally recognised minimum corporate tax. The agreement reached by the G7 finance ministers in London involves setting a global minimum rate for large companies at 15%. This measure aims to prevent tax dumping by those countries that regulate low rates, in order to eliminate unfair competition.

British Finance Minister and host of the meeting, Rishi Sunak, said: "This is the first step taken by the G7, but we still need to meet with the G20 and reach agreement with a wider group of countries". The G7 comprises the United States, Japan, Germany, Britain, France, Italy and Canada. The G20, made up of industrialised and emerging economies, also includes Saudi Arabia, the only Gulf country in the group.

This historic agreement could mean higher tax revenues for GCC countries as, according to analysts, the adoption of these new rules could change the regional tax base. This measure will affect some economies more than others, depending on the number of multinational companies operating in them.

For many years, Gulf economies have maintained low or zero taxes in order to attract foreign companies. However, a number of reforms are underway to provide more stable government revenue streams and less dependence on hydrocarbon revenues. In addition, in countries such as the United Arab Emirates and Saudi Arabia, value-added taxes have already been introduced.

The United Arab Emirates (UAE) and Qatar are also expected to support the agreement. Scott Livermore, economic adviser to ICAEW and chief economist at Oxford Economics said that this agreement also changes the competitive landscape for foreign direct investment, "it will now be much less about tax rates, but more about other costs and the ease of doing business in different jurisdictions. Many of the recent reforms in the GCC have focused on improving the business environment and this should make countries stand firm if tax competition is to play a less important role in business location decisions". So, the adoption of the corporate tax might not harm the possibility for GCC countries to receive more foreign investment.

OECD General Secretary Mathias Cormann welcomed the G7 agreement and stated: "The combined effect of globalisation and the digitisation of our economies has led to distortions and inequities that can only be effectively addressed by a multilaterally agreed solution".

"There remains important work to be done. But this decision adds important momentum to the upcoming discussions among the 139 member countries and jurisdictions of the OECD/G20 Inclusive Framework on BEPS, where we continue to seek a final agreement that ensures multinational enterprises pay their fair share everywhere," added Mr Cormann.

Who benefits from this agreement? Most countries would benefit, especially now that there has been an unprecedented increase in public spending due to the pandemic. This spending has been financed by massive public debt issuance that has unbalanced the already deteriorating public accounts of many states.

Tax havens and large multinationals lose out, because they will have to adapt to the single tax rate. Despite this, large technology companies such as Facebook have viewed the agreement positively, as an important progress.

This pact has not yet been put into effect, as it needs to be adopted by more countries. It will be discussed at the G20 meeting next July in Venice (Italy). For the moment, Saudi Finance Minister Mohammed al-Jadaan welcomed the agreement this week. Emirates NBD chief economist Khatatija Haque pointed out on Bloomerang TV that what could really trigger regional change in the Gulf countries is the broad adoption of the agreement. So that the 15 % rate would apply not only to multinationals, but also to smaller foreign-owned companies.