Why Saudi may regret its expat tax

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The “Final Exit Sale” is a trending #catchphrase in the Kingdom. Stumbling upon this issue on social media got me thinking about the consequential magnitude of the infamous expat tax. Although the announcement was made earlier this year, the pinch has only been felt now and it has been felt by the masses.

So what’s the deal with the tax? Why have the 10 million happy expat beams turned to fuming steams?

First, let’s try to understand the government’s point of view and the agenda behind the policy. The fee on the dependents of expats will jump to SR 200 and SR 300 per month per dependent in two and three years, respectively, and by 2020, it will be SR 400. According to the Saudi cabinet, the general budget for the fiscal year 2020 targets generation of about SR 65 billion in revenue, only through the levy. Well, that sure seems a rather simple statistic and a smart way to cash in quickly. However, statistical data require a strong backing of economic meaning.

So let’s brush up on our fluency with some economic factors of growth with the help of the following points.

1. The rate of economic growth is measured by the rate of increase in the economy’s productive capacity.

2. The forces driving economic growth include (a) quality and quantity of labor, (b) supply of capital, (c) technological expertise, (d) workforce age and (e) talent.

3. There is a high correlation between long-term economic growth and rate of investment. It is a tried and tested recipe for economic growth (Tip: For best results, a mix of domestic and foreign spices is ideal).

Now, let us candidly view the cause-effect relationship of the decision to tax the dependents of expats.

What caused the imposition of these taxes? Here we go again, with the latest lullaby sung to every child in the Kingdom.

Since 2014, the drop in global oil prices has been about 50 percent, which has left the Kingdom with a huge budget deficit and billions of dollars in debt. Clearly, the nation is dependent upon its oil income.

The Kingdom is not agriculturally self-sufficient and cannot cash in on other natural resources. These are all significant causes for the drop in GDP growth. Hence, the country is forced to look for other sources of income. With utility and fuel subsidies slashed, and the tourism sector being tapped, little did the members of the expat community think that their turn would be next and that they would be identified as another source of income. However, with the launch of the Fiscal Balance Program (FBP) and National Transformation Plan (NTP), the concept of an expat tax was introduced and was imposed at the beginning of July.

As governments work in the best interest of the welfare of their people, we must respect the decision. However, the numbers following the implementation of this tax do not quite add up. With the present expat population in the Kingdom, the projected revenue from the new fees is about SR 65 billion by 2020. However, for this dream to come true, it is crucial that the number of expatriates remains the same till 2020.

So the SR 65-billion-riyal question now arises: Will all of these expats choose to remain in the Kingdom?

With the rising number of “For Rent” and “Final Exit Sale” signboards, it seems hard to imagine that even half of this revenue will be realized. The number of expats is certainly going to be dramatically reduced. This is the first blow to Vision 2030.

Moreover, an average six-member expat family spends around SR 10,000 a month for basic living expenses (rent, transport, grocery, shopping, medical expenses, etc.). The new taxes increase the monthly costs to SR 10,000 this year, and SR 11,000 next year. For the breadwinner, it is significantly cheaper to send his family home and rent a smaller flat. The monthly expenses then drop to around SR 2,000 for the single expat breadwinner.

Furthermore, the family back home can live a lavish lifestyle with the SR 8,000 money transfer each month. The businesses and commercial markets of the Kingdom will lose. This is the second blow.

Older expats whose skills are outdated will remain, while young and talented expats who would have played a crucial role in the fulfillment of Vision 2030 will leave. That is the third blow to the economy.

Everyone would agree that to reduce the fiscal deficit and boost revenues, just like other countries, expats should not refuse to pay the taxes, provided the money spent out of their hard-earned wages reaps them certain benefits. After all, they never refused to pay the many fees for maintaining their residence permits. Then why the reluctance now? Perhaps because of behavioral economics – people want to see value for their money, a return on investment.

Let expats be given a plan that outlines how their money will be spent and how it will benefit everyone and only then will the Kingdom experience its Eureka moment.

What surprises me the most is the timing. It comes at a time when the Kingdom is trying to move away from its dependency on oil. This requires the creation of jobs in other sectors, for which expats and foreign companies are needed. But all this seems unlikely, as talented young expats are packing their bags.

To add to the above, companies are now taxed for maintaining a certain number of expats within their firms. Many companies have already started reducing the number of expat workers. This storm has hit businesses, as they have had to reduce their manufacturing, shut down marginal profitmaking segments or increase the prices of their products.

In such times of turmoil, how will Saudi businesses cope? How do they plan to reorganize their commercial businesses and attract customers? How do citizens (and the remaining expats) plan to deal with the probable hike in prices due to the slowdown in commercial activities? What will happen when many skilled and semi-skilled laborers close their shops and leave for good? Does the Kingdom have enough people to fill the void? Is the nation ready for an economic downturn when the cash flow fades, public spending crunches and rentals drop? At the end of the day, the domino effect will have an impact on everyone.

As things now stand, the nation, home to many Saudis and expats, must prepare for the possibility of a failed revenue stream, the exit of foreign investors, depletion of oil reserves, recession, and inflation. Thus, every house may have a “Final Exit Sale”.

Source credit – Saudi Gazette

Full article: http://saudigazette.com.sa/article/514386/Opinion/Voices/Final-Exit


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