Impacts of Unequal Compliance Between Saudi, GCC Citizens and Non-Saudi, Non- GCC Investors in Income Tax

Abstract

This dissertation offers a study of the Kingdom of Saudi Arabia’s evolving tax regime and its implications for the differential legal treatment and obligation of foreign versus Saudi and Gulf Cooperation Council – Kingdom of Bahrain, State of Kuwait, Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia, and the United Arab Emirates (“UAE”), (“GCC”) investors. The purpose of the study is to examine substantive aspects of the Kingdom’s tax rules, with a focus on the existing dual system of income tax regulation and administration that applies, rules for GCC and non-GCC investors. Situated in the context of the Kingdom’s economic modernization agenda, and wider foreign investment reforms, the central question of the study will be to assess whether the regulatory design and continued application of the Kingdom’s two-tier tax regime - one in which foreign natural and corporate persons are subject to higher tax burdens and regulatory requirements than GCC nationals – offers a legitimate and effective resolution to the Kingdom’s competing commitments to market liberalization, on the one hand, and economic nationalism and traditionalism, on the other.

To unpack these issues, the study will proceed by situating the Kingdom’s framework for the selective application of taxes in its social and historical context. Among the many novelties of the Saudi legal system is constitutionally mandated application and enforcement of uncodified norms and requirements of Islamic religious law, known as Sharia. Under the Saudi legal system all citizens are obligated to pay the flat charitable tax known as Zakat. However, as this study explores, the application of this uncodified religious tax obligations has been applied and administered inconsistently under the current tax administration regime in Saudi Arabia. A more telling, and substantively significant, aspect of the Saudi model of fiscal governance is the historic aversion of past ruling regimes to impose and enforce direct and indirect taxes against citizens. As the literature substantiates, the Kingdom’s longstanding policy of excluding citizens from income and corporate tax obligations is commonly adopted by all GCC states. Even today, all GCC citizens, under the operation of the GCC common market and economic policy, are exempt from paying any corporate income tax, outside of the religious charitable tax of Zakat.