Minimum 15% Global Corporate Tax Could Harm Mideast Business Hubs in Short Run, but Lead to Growth, Experts Say
Impact on countries with tax systems and programs to draw multinationals will be impacted negatively, while their neighbors may benefit
In a landmark decision, the G-7 organization – which is made up of seven of the world’s largest economies – agreed on Saturday to work toward an international tax reform that will see a global minimum rate for corporate tax of 15%. The reform is intended to ensure that large multinational corporations cannot minimize taxation on their revenue by establishing centers of operation in countries where corporate tax is low, often precisely for the sake of drawing such companies.
The reform, first proposed by the US, also includes a commitment to reaching “an equitable solution on the allocation of taxing rights,” according to a statement released by the organization. The statement says that market countries will be able to tax “the largest and most profitable multinational enterprises” at least 20% of any profit which exceeds a 10% margin.
These companies would include Amazon and Facebook, US Treasury Secretary Janet Yellen confirmed to reporters after the G-7 meeting in Britain.
Yellen tweeted after the meeting that the G-7 finance ministers “have made a significant, unprecedented commitment today that provides tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%. That global minimum tax would end the race-to-the-bottom in corporate taxation, and ensure fairness for the middle class and working people in the US and around the world.”
The G7 Finance Ministers have made a significant, unprecedented commitment today that provides tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%.
— Secretary Janet Yellen (@SecYellen) June 5, 2021
The Middle East has several countries which employ tax benefits as a means to draw international companies to establish operations within their borders. The United Arab Emirates’ corporate tax rate, for example, is set at 0%.
Dr. Ibrahim Saif, a senior fellow at the Middle East Institute, Jordan’s former energy and mineral resources minister and an expert on regional economies, told The Media Line that the impact of the reform on economies in the Middle East “depends on the current situation and the tax factor that exists now.” Saif says Jordan and Egypt are examples of countries which have a corporate tax rate in place at present that is already higher than 15%, so “with very, very few exceptions it wouldn’t impact these industries.” However, GCC countries such as Bahrain and the UAE, with non-existent taxation on corporations, will definitely be impacted negatively, at least at first, says Saif.
Dr. Yossi Mann, a professor at Bar-Ilan University and an expert on economies in the region, told The Media Line, referencing the Persian Gulf specifically, that “if there is a country that will be hurt by this, it’s the UAE. On the other hand, I think that there are countries that will benefit from it and, of them, first and foremost is Saudi Arabia.” Mann explains that because of the non-existent corporate tax, as well as other benefits and a convenient business environment, many companies seeking to operate in the Gulf – with the Saudi market as their prime target – choose to base their operations in the Emirates, to the chagrin of their neighbors. With the small business hub losing its competitive edge under the tax reform, many will transfer their regional headquarters to neighboring Saudi Arabia, he predicts.
If they manage to absorb and digest this new corporate tax in the long run, then that would create a more sustainable stream of revenue for the government, and a different source of revenue
Israel, another Middle Eastern economy with deep ties to the global market, employs a policy of “Preferred Enterprise,” under which corporations can enjoy a corporate tax rate as low as 6% if they meet certain conditions. The country’s economy also is likely to be influenced by the reform. The Israeli financial newspaper Calcalist, citing a local analyst, reported that this may force the government to improve its services, advance necessary infrastructure, and work otherwise to retain its attractiveness to multinationals.
This is true not only for Israel. While the immediate impact on countries such as the UAE is expected to be negative, over time the reform may push them to employ measures that would be beneficial to their economies in the long run. In terms of the Gulf, Saif says that “if they manage to absorb and digest this new corporate tax in the long run, then that would create a more sustainable stream of revenue for the government, and a different source of revenue.” He also notes that countries will be forced to compete by improving their efficiency and the productivity they can promise businesses. If the governments in these countries manage to implement the necessary policy changes correctly, “that could create … more balanced relations between business and government in these countries,” according to Saif.
Mann says that this reform may actually be aligned with Gulf efforts to create “healthier” economies. “I think that these countries truly want to advance a significant change, and because of that, the issue of taxation isn’t as critical. On the contrary, I think that they want to appear to the world as economically healthy,” not just as tax havens, and “as being in line with the world so that large companies come to them.”