Gulf nations were for long decades considered among the wealthiest countries in earth as a result of the exceptional oil revenues that reached tremendous amounts in mid-2014. These significant revenues allowed citizens of these countries to benefit from various government aids in the form of subsidies permitting the reduction of prices of electrical energy, food products, administrative services, oil, schooling …
Currently, with the severe fall of oil prices, governments can no longer support this spending trend and it is up to the citizens to support national accounts in order to overcome the intense budget deficit for this year and the coming ones.
The ideal and fair solution to this issue is the establishment of a modern fiscal system that allows the participation of every citizen in the efforts to maintain the equilibrium of the national budget.
The fiscal system in these nations can be partitioned into two central categories of taxpayers: natural persons (individuals) and legal entities (corporations).
1- Natural persons: various forms of taxation can be adopted by golf countries in the category of personal tax. The first and principal type is income tax. This kind of taxation is a progressive tax rate on the annual revenue (or revenues) earned during a fiscal year. The rates must take into consideration the specificities of each and every country (number of employees, percentage of foreigners, nature of commercial activities…). The amount of the tax can be collected in two ways: for employees, it will be withheld on salaries or wages by employers who are in charge to deposit the total amount in a required time. For commercial activities, managers should declare their total revenues at a specified date (generally before April the 1st) and pay the due tax at the same time.
The second form concerns real estate or property taxes. In this frame, multiple contributions can be implemented. For instance, the taxation of operations involving the buying and selling of properties with differences depending on the nature of the sold estate (land, commercial or residential). Moreover, a yearly tax on properties can be implemented according to the estate and its destination (commercial, residential, rented, vacant). The revenue of this contribution can be devoted to financing the budgets of municipalities or regions, which will constitute an important financial source for local communities to spend on development programs (public services, infrastructures, waste management…) in order to minimize government participation on local budgets.
2- legal entities: the first and primary tax in this category is corporate or company tax. In several countries this tax is usually in the form of one rate (generally around 25 to 35%). Gulf countries can adopt this same principle or implement a progressive corporate tax rate based on the annual corporate profit or turnover.
Furthermore, corporations should pay a second tax which relies on the amount invested on equipment and properties. The income of this tax can be allocated to municipalities and regions considering the fact that the profit of enterprises is derived from the exploitation of city’s infrastructure. Nevertheless, the rate of this tax should not be very high to the point of negatively impacting firms’ investments.
In addition, gulf countries can implement the widely adopted system of the Value Added Tax. The VAT, or consumption tax, is a neutral tax paid without taking into account the revenue or activity of the payer. This tax could reduce the burden on the national budget in light of the fact that gulf communities are known for their consumption habits allowing the collection of significant amount. In this regard, the countries can start, at the beginning, by taxing only some luxurious merchandises and then progressively include other products into VAT scope.
Whatever the selected system is, it should take into consideration some exemptions and incentives in all types of taxes in order to encourage investments, hiring national employees, creating new companies, maintaining adequate economic growth…
The gulf governments have for long time supported local communities by redistributing oil revenues which allowed the population to benefit from various advantages, but now it is time for population to participate in the development of their countries and help government diversify budget sources. A modern fiscal system is, for these countries, a source of development for both the government and citizens.