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Expat Briefing Editorial Team, 17 March, 2014
In recent decades, countries in the Middle East and the Gulf have tended to welcome foreign workers with open arms, and the millions of expats who have worked and lived there have contributed substantially to economic growth in the region. Signs of discontent are stirring however, and recent reports suggest that local populations are unhappy at the presence of vast armies of expats taking their jobs, while governments are increasingly viewing expats as cash cows for their expenditure needs.
Expats from all over the world have been lured to the Middle East and the Gulf by a combination of high pay, low taxation and year-round sunshine, and they have been going there ever since the first major oil reserves were discovered in the 1930s. The influx accelerated following the 1973 oil crisis, with countries in the region, restricted by limited pools of labour, unable to fully exploit their vast mineral wealth without the help of foreign workers and expertise. More recently, the creation of financial and business hubs, notably in the United Arab Emirates, has drawn thousands of companies and millions of foreign professionals from Europe, North America and Asia-Pacific to places like the Dubai International Financial Centre and the multitude of other tax-free zones.
The level of immigration into the region, temporary or otherwise, is such that the expat workforce often outnumbers the indigenous populations by a substantial margin. In the UAE for example, local emiratees make up only about one-fifth of the population, the rest being expats from all over the world, although mainly from the Indian sub-continent, the UK, continental Europe and the USA. It is a scenario repeated in a number of countries in the region.
But in the past year or so there have been signals that locals are beginning to resent being marginalised, both socially and economically, in their own countries. In Saudi Arabia for instance, despite an official unemployment rate of 12% in 2012, 66% of jobs were filled by foreign workers. And as the reality dawns that the oil won't last forever, governments are eyeing expats, and the billions of dollars they send home every year – USD18bn in remittances from Saudi Arabia alone in 2012 – as a potential source of revenue.
Kuwait MPs Urge Expat Purge
Last month, the Kuwaiti government was urged by a Member of Parliament to deport 280,000 expatriates per year for the next five years.
The country currently has 2.5m expatriates, making up the majority of the population, and assembly member Khalil Abdullah says this number needs to be brought down to 1.1m. "We need to have a Kuwaiti population that is at least equal to the number of foreigners who live in the country," he said.
However, expats who make valuable contributions to the domestic economy would be excluded from deportation under Abdullah's plan.
The MP argued that reducing the number of foreigners would "help local Kuwaiti men and women find employment opportunities in both the public and private sectors," and ease the burden on infrastructure. "The fact that Kuwait is home to twice as many foreigners as locals is a dangerous indication about the social, economic and service conditions in the country," he said.
Earlier, Abdullah Al Tamimi, also a member of the Kuwait parliament, suggested that the government reduce the expat population by more than 1.3m in five years.
At present Kuwait's expat population includes 1.1m Arabs, 76,698 Africans, 14,641 Europeans, 21,512 North Americans, 1,706 Australians, and 1,431 South Americans. But Asians are the biggest expat group, with 1.5m people, accounting for 37.8 percent of the total expat community. Al Tamimi wants to ensure that no single group makes up more than 25 percent of all expats.
UAE Mulls News Taxes
In other parts of the region, the expat debate has been focussing on taxation, and numerous proposals have surfaced in recent months that could lead to the taxation of expat incomes, or a tax being imposed expats' remittances to their country of origin. The UAE is one such country.
In September 2013, the president of Dubai Chamber of Commerce and Industry, Hamad Buamim, revealed that the UAE Government was considering whether to tax remittances, and was seeking feedback on the proposal from relevant bodies such as banks and financial institutions.
The proposed tax is seen as a response to concerns that the UAE is losing too much money through foreign workers sending a portion of their earnings abroad in the form of remittances. Foreign workers sent a net AED45.1bn (USD12.3bn) abroad last year, an increase from AED41.2bn a year earlier.
Buamim said he believes expatriates in the UAE will continue to send money home even if the tax is imposed, although such a move wouldn't be without its economic consequences. "I don't think it will really impact the remittance business [but] it will impact the consumer, no doubt about that," he said.
It has long been suggested that the UAE will at some point have no option but to tax incomes, whether individual, corporate or both. However, that doesn't look like it's going to happen any time soon.
In February, Finance Minister Sheikh Hamdan bin Rashid Al Maktoum assured that the UAE does not plan to introduce an income tax for individuals. However, the country is exploring the possibility of taxing companies and introducing fees for newly introduced services at federal ministries and bodies, Sheikh Hamdan, who is also the deputy ruler of Dubai, has said. Companies in other Gulf Cooperation Council (GCC) states are subject to taxes, he pointed out. Aside from the UAE, the GCC includes Bahrain, Kuwait, Oman, Qatar and Saudi Arabia.
The UAE, seeking to broaden its revenue base away from oil, is also considering various forms of indirect taxation, such as a sales tax and duties on harmful commodities like tobacco. In fact, the introduction of a GCC-wide value-added tax (VAT) has been on the cards for several years, but the inability of certain members states to overcome the technical obstacles to a multi-state VAT seem to have frozen the plan indefinitely.
A plan to tax vehicles entering the UAE has met with opposition from neighbouring countries, including Oman and Saudi Arabia.
The UAE's federal budget for 2014-16 is worth an estimated AED140bn (USD38.1bn), up from the AED122bn of the 2011-13 budget. The government will pump an estimated AED23.8bn into new projects between 2014 and 2016.
Oman Rejects Remittance Tax
In December 2013, Oman's State Council dismissed a proposal to impose a tax on the remittances sent by foreign workers to their home countries.
In November the Middle Eastern country's Shura Council suggested that the government tax remittances at the rate of two percent as a way of easing growing pressure on the state budget.
However, members of the State Council concluded after a meeting that the time is not right to consider such a tax, with one member saying it would "create a bad image of the country."
The State Council has not ruled out implementing a remittance tax in the future, but said further research is needed. "As Oman is strategically located, and considering the good relations that we have with other countries, whatever major decision we make will definitely have an impact. It is always good to conduct proper research before taking action," Salim al Ghattami, member of the State Council and head of its economic committee said.
Oman has about 1.5m expatriate workers, most of whom come from south and southeast Asia. Based on the OMR3.1bn (USD8bn) which expatriates sent abroad as remittances in 2012, the proposed tax would generate about OMR62m in annual tax revenue.
The proposal was discussed during the State Council meeting on the budget for 2014. The members also discussed a proposal to tax natural gas.
Oman's tax revenue accounts for only 1.5 percent of gross domestic product (GDP) International Monetary Fund (IMF) forecasted in October 2013 that Oman will face a budget deficit in 2015, with a funding shortfall of 0.2 percent of GDP which will widen to 7.1 percent by 2018. However, falling oil prices combined with recently announced higher social welfare spending and public servant wage increases could mean the shortfall is even bigger than the IMF's prediction.
Furthermore, the Sultanate needs OMR15bn for new projects, infrastructure improvement, human resource development and the creation of better facilities according to Davis Kallukaran, Managing Partner of Horwath Mak Ghazali, the audit and business advisory firm.
The IMF recommended last year that Oman consider implementing a VAT, but while the Omani government has indicated that such a levy may be introduced in the next few years no further developments have taken place.
Observers of Middle Eastern affairs and long-term expats in the region will know that all this talk about taxing expats or favouring locals in the workplace is nothing new. Indeed, two states in the region have already implemented taxes aimed at expats, much to the chagrin of employers.
Earlier in 2014, businessmen in Bahrain launched a petition for the removal of a tax on expatriate workers, saying that they are still struggling with the aftermath of the global financial downturn.
Public and private companies in the Middle Eastern country are required to pay a BHD10 (USD26.50) fee to the Labor Market Regulatory Authority (LMRA) for every foreign worker they hire. The fee is BHD5 if the company employs fewer than five expatriates.
The foreign worker fees were suspended in April 2011 to alleviate the effects of the financial unrest triggered by a Shia Muslim uprising. However, the fees were reintroduced in August 2013.
On February 4, 2014 a group of businessmen submitted a letter to parliament chairman Khalifa Al Dhahrani complaining that the government did not consult the business community before re-introducing the tax.
At the end of last year Bahrain's Shura Council rejected a parliament bill to overturn the tax for low-income expats. The chief executive of the LMRA warned that reducing the fees according to sector would create instability. He pointed out that requests for expat workers grew 21 percent during the period in which the fees were suspended, and argued that the new proposal would result in companies lying about the salaries of their foreign workers to take advantage of the tax break.
In January the LMRA warned businesses that it would revoke the visas of their expat employees if they fail to pay the tax within four weeks.
Saudi Arabia has a policy of “Saudization” stretching back as far as 1995, which is designed to increase the level of participation in the workforce by Saudi nationals, and commensurately decrease the country's reliance on expats.
In 2000, a decree was ratified requiring that a quarter of a company's workforce must be Saudi if they employ more than 20 people in total as part of the Saudization process. And in 2013, a SAR2,400 tax was imposed on companies per expat worker if foreigners represent more than 50% of their workforce.
The fact is however, companies in Saudi Arabia still find it more convenient to recruit foreign workers, because they are generally cheaper to employ than local workers in the low-skilled and semi-skilled positions, while there remains a shortage of skilled workers in the local labor market. The policy of Saudization has largely failed as a result.
While the threat of mass expat deportations, as has been mentioned in Kuwait, is a worrying development, it should be remembered that most of these 'anti-expat' initiatives aren't necessarily aimed at foreign workers in general. While it may be true that the presence of foreigners might be blocking access to the best-paying jobs for local people in some areas, resentment against expat workers is often directed at those taking the low-skilled, low-paid jobs. Indeed, it is these sorts of jobs that tend to be the majority; the 2004 census in Saudi Arabia indicated that only 15% of foreign workers can be considered “skilled”.
So if you already working in the region, or are intending to expatriate there, you shouldn't worry too much that you will be suddenly sent home in an expat purge, or that a large chunk of your largely tax-free salary will be portioned off to the government before you even see it. Concerns about the marginalisation of local workforces have been around for a long time, but governments in the region recognise the value that foreign workers provide to their economies. At some point, with governments in the oil-rich states so dependent on revenue from hydrocarbons, it is probably inevitable that they will impose new taxes. That seems a long time hence though, and it is hard to foresee a time when taxes in the region will be at the levels currently seen in the West, however.