Middle East’s tax reforms are in step with the times

As economies evolve, so do tax philosophies, principles, and regimes. Several factors influence this transformation – political ideologies, economic theories, social values, and technological advancements being some of them. In other words, shifting tax philosophies reflect the changing ideas and beliefs underpinning how governments design and implement tax policies over time. A combination of these factors is unfolding in the Middle East.

Following the 2008 global financial crisis, countries in the region strengthened their tax structures and increased revenue, focusing on reducing reliance on oil revenues and diversifying the economies. They also understood the value of raising taxes, especially in non-oil sectors. This approach resulted in Saudi Arabia and the UAE introducing a 5 per cent value-added tax (VAT) in 2018.

Middle Eastern countries have also recently reformed their tax systems to improve efficiency. Measures such as introducing electronic tax filing and payment systems, simplifying tax procedures, and improving tax administration have gathered momentum. Steps have been taken to combat tax evasion, improve compliance, and enhance tax audits.

There has been an overall shift toward strengthening tax structures, increasing revenue, and diversifying economies away from oil dependence. Considering how regional and global economies have evolved since 2008 and how they align, the region had to flow with the tide and balance its books accordingly.

Despite the divergences, Europe’s tax experience provides an interesting parallel for the Middle East. Since the second half of the 20th century, European governments have relied heavily on taxes to support and fund public spending. Francesco Parlatore, Tax Managing Associate at BonelliErede, cites post-1995 Eurostat data to suggest that tax revenues accounted for approximately 40 percent of the EU’s GDP (41.7 percent in 2021).

Parlatore argues that the revenue generated by different taxes varies considerably across the EU because of differing national tax systems. “The 2007-2008 financial crisis and subsequent fiscal measures adopted to stimulate the economy drastically affected the level and composition of tax revenue, with the lowest ratio of tax revenue to GDP in the EU seen in 2010 (39.1 percent of GDP),” he says.

Parlatore points out that the 2007-2008 financial crisis and subsequent fiscal measures drastically affected the tax revenue’s level and composition across Europe. “The lowest ratio of tax revenue to GDP in the EU was seen in 2010 (39.1 percent of GDP),” he says, adding that this project brought about the two-pillar solutions, particularly the 15 percent global minimum tax. It’s a trajectory the Middle East would be better off observing.

“Despite some major differences, GCC countries share some tax trends and dynamics,” Marco De Leo, Managing Partner of BonelliErede’s Dubai Office, sets the premise for a regional overview. “GCC countries historically relied on the hydrocarbon industry and the related revenues to support public spending, with very limited or zero taxation for businesses,” he says. The GCC’s oil and gas revenues account for approximately 50 per cent of the GDP.