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As the oil price crisis catches up with Saudi Arabia, residents of the oil-rich Kingdom will have to start paying taxes on services and products as of next year, after the Cabinet gave final approval to a region-wide tax plan for members of the Gulf Cooperation Council (GCC) on Monday.
The Cabinet’s decision represents final approval of the measure signed by GCC members in June of last year, and backed by the International Monetary Fund (IMF).
The measure—the Unified Agreement for Value Added Tax—will levy a five-percent tax on all services and products, with the exception of 100 primary commodities.
The new tax will go into effect in the first quarter of 2018.
Selective taxes—or ‘sin taxes’—will be levied on tobacco, carbonated drinks and energy drinks. Presently, the tax on tobacco is at 50 percent, but with the new measure it will be raised to 100 percent. The selective taxes will take effect in April this year.
The Saudis froze major building projects, slashed the salaries of their cabinet ministers' salaries, and imposed a civil servant wage freeze amid the struggle to deal with last year's record budget deficit of US$97 billion. The Kingdom has also made significant cuts to fuel and utilities subsidies.
The new tax measures were recommended by the IMF to the GCC as a way of adjusting to slower regional growth as a result of low crude oil prices.
It will be a major change for the residents of Saudi Arabia, who have long enjoyed a highly subsidized lifestyle with tax-free services and products.
In the meantime, the Kingdom is broadening its investment base and boosting other non-oil income as part of economic diversification efforts and aims to balance its budget by 2020. The Saudis are also hoping that the OPEC deal struck in November to reduce output will result in a rebalancing of the market, giving a boost to oil prices that have crushed its budget and forced the new tax package into existence.
By Damir Kaletovic for Oilprice.com
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Damir Kaletovic is a veteran investigative journalist covering Europe and the Middle East, and a senior consultant for Divergente Research.