Arab Nations and Corporate Tax: A Fine Balancing Act

Madhusudan Rajagopalan
COO at Aranca

"Aranca was invited by Bloomberg Businessweek (Middle East) to contribute a feature on corporate taxes in the Arab countries and their attractiveness for businesses. We invite you to download the original article as published in Arabic language. You may also want download the English version of the same. Find the links for both versions below."

Governments globally use tax as a tool to manage fiscal balances as well as enhance the overall investment climate. Hence, their decisions to set corporate tax rates are driven by the twin goals of revenue generation and enhancing competitiveness to attract foreign investment. However, one has to view this factor differently while evaluating the Arab region, given the concept of corporate tax is relatively new to Arab countries, which were used to Zakat (Islamic fiscal duty). Also, many of the hydrocarbon-rich countries in this region never felt the need to impose corporate tax, as oil revenues allowed them to maintain positive fiscal balances.

Bloomberg-Business-Week-Arabic-EditionThe ongoing global economic crisis, however, is posing serious challenges to policy makers around the world, including those in Arab countries. The US, the world’s largest economy, lost its AAA credit rating in 2011, while the Eurozone debt crisis could continue to dampen the global economic climate in 2012. Though the US registering incremental quarter-on-quarter growth over the four quarters of 2011 is being viewed positively by markets, Europe remaining fragile in spite of the maneuverings by governments there to restore some degree of sanity continues to spook investors.

While everyone expects the Arab countries to perform better, they also acknowledge that the fortunes of these economies are largely tied to oil prices. Backing that belief is the plunging into deficit by some of the GCC countries, with a long record of surpluses, post the economic crisis broke. While Saudi Arabia slipped from a record budget surplus of USD155 billion in 2008 to a deficit of around USD23 billion in 2009, UAE fell from a surplus of around USD51 billion to a deficit of USD35 billion. Algeria also recorded a deficit of around USD8 billion in 2009, as against a surplus in 2008. Among other countries in the Arab region, while Egypt’s deficit widened in 2009, Lebanon, Morocco and Syria also reported deficits during that year.

Even as the Arab region copes with the challenges of managing its economy amid volatile oil prices, the effects of the Arab Spring that erupted in late 2010 continues to linger on in some countries. In these circumstances, the ability of governments to maintain a fine balance between revenue generation and enhancing competitiveness will be tested like never before. It is in this backdrop that we evaluated Arab countries and their corporate tax rates to determine their attractiveness for businesses.

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