MENA governments considering new tax measures to meet budget expeditures

To preserve economic and social stability and continue with development plans, MENA governments are considering tax measures to broaden their revenue base and increase tax yields. The evolving tax landscape in the MENA region was discussed at the EY MENA Tax Conference held recently in London. The conference was attended by EY Tax specialists and senior finance and tax executives from major European companies with investments in the MENA region.

Sherif El-Kilany, MENA Tax Leader, EY, says:
“Governments in the region have faced a myriad of challenges arising from political, economic and social factors. The economic cost of the disruptions caused by the Arab Spring,  the urgent need for social reform and fall in oil price, represent challenges that Governments are tackling head on with new fiscal reforms. Fiscal policy initiatives are now focusing on ways to broaden the revenue base, promote investment in projects that create value addition to existing oil and gas export projects and stimulate investment in the non-oil and gas sector. Most of the countries in the region have embarked on large-scale infrastructure development projects, including rail, seaports, electricity and water generation and improvements to transport networks and industrial facilities.”

Investment incentives to increase foreign direct investment
Governments have recognized the importance of tax policy as a conduit to incentivizing multinational companies to establish in the region.

Asim Sheikh, EY MENA Business Tax Services Leader, says:

“Tax law reforms have led to a lowering of corporate tax rates and adoption of modern taxation principles aimed at providing greater certainty for taxpayers in how tax rules are applied. Most countries have also recognized the need to expand their double taxation treaty network aimed at enhanced cooperation with developed countries and improved exchange of information. The impact of these reforms has positioned MENA countries as being attractive locations to establish businesses and to operate trading hubs in the region.”

Whilst the reforms have created a competitive tax landscape in the region, such reforms should not be interpreted as Governments abdicating their right to collect their fair share of taxation. Although tax rates have fallen, most countries have expanded their withholding tax regimes, introduced modern definitions of tax residence and permanent establishment concepts and published transfer pricing guidelines aimed at bringing increased sources of income into the domestic tax net. 

“The impact of falling oil prices and the expected new norm of oil prices at lower levels is creating challenges for countries that are committed to large capital expenditure programs. Countries in the region have reported budget deficits due to lower oil and gas revenues and have recognized the need to further broaden their revenue take from taxation and are now focused on introducing indirect taxation regimes,” comments Asim.

VAT initiatives under consideration
Finbarr Sexton, EY MENA Indirect Tax Leader, discussed the VAT initiatives currently under consideration in Egypt and the GCC States at the conference. 

“These regimes will be introduced over the next two to three years and whilst the standard tax rates are likely to be low in the initial years after implementation, the rates can be increased over time, thus contributing positively to Government revenue collection. Indirect tax will be a tax on consumption and will inevitably be borne by the end consumer of the goods and services. As a result, the taxes will be passed on by businesses to the end consumer, therefore it is not expected to be a deterrent to businesses planning to establish in the region,” says Finbarr.

Key tax policy responses expected to increase tax yields 

The OECD initiatives on Base Erosion and Profit Shifting (BEPS) are expected to have an impact on tax policy and on tax payers operating in the region. 

Sherif El-Kilany, highlighted that the tax policy makers in the region will need to actively engage in debate with their counterparts in developed countries on the BEPS initiatives. 

“With countries in the region having significantly lower effective tax rates compared to OECD countries, the BEPS initiative is likely to see some friction between tax administrations seeking to assert their right to capture the appropriate amount of taxation that a multinational should bear in each tax jurisdiction, with developed countries reserving their right to tax income that may currently be declared in a lower tax environment. The adoption of country by country reporting would greatly improve transparency and highlight what operations, risks and income sources are being performed and undertaken in each country and hence provide clarity as to the taxing rights of Governments in each jurisdiction,” says Sherif.

“There is a need for tax administrations in the region to be better resourced and trained to deal with ever more complex taxation rules for the growing taxpayer population in the region that require tax assessments to be finalized on a timely basis. Taxpayers want to have greater certainty as to how tax rules are interpreted by tax assessors in the region,” concludes Sherif.