Saudi companies fail to make payrolls, Gulf states weigh taxes as oil prices strain economies

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Sinking oil prices are weighing heavily on Mideast economies.

In Saudi Arabia, the construction sector has been hit hard by low oil prices as several firms with government contracts are failing to make payroll. The Riyadh government has significantly cut spending on building projects as it seeks to reduce a budget deficit of $100 billion.

Some Saudi Arabian construction companies are struggling to pay their staff on time. /Reuters
Some Saudi Arabian construction companies are struggling to pay their staff on time. /Reuters

The Saudi Ministry of Labor revealed this week that employees at a “major institution” said they had not been paid for months.

“The pace of execution on some of the existing projects has slowed down, so a project that would take six months to complete may now see an extended execution time line,” said Murad Ansari, analyst at EFG-Hermes in Saudi Arabia.

“Moreover, government payments have slowed down. As a result, contractors which normally rely on short-term funding for projects are feeling an impact on their working capital, so their ability to repay debt is not as strong as it was before.”

“It’s not just us, it’s several construction companies that work on government projects,” one construction company executive told Reuters.

Meanwhile, Gulf states that enticed foreign workers with low – or no – income tax rates are considering raising taxes to ease the burden from low oil prices.

According to the World Bank, tax revenues in the UAE and other Arab Gulf countries with minimal taxation are among the world’s lowest. Dubai has no income tax.

With crude oil prices seemingly stuck in reverse, several Mideast nations are looking for new sources of income to pay for major projects and meet the demands from growing populations of young people for better housing, hospitals and schools.

Six members of the Gulf Cooperation Council (GCC) — Saudi Arabia, UAE, Qatar, Kuwait, Bahrain and Oman — have agreed to “introduce a value-added tax across the region in 2018,” Younis Al Khoori, UAE’s undersecretary of finance, told The Wall Street Journal.

Khoori said the tax of 3 to 5 percent would “hardly be noticeable” to consumers because food purchases would be exempted from the charge.

Oman plans to raise corporate income taxes, and Kuwait is drafting new tax proposals.

Along with considering new taxes, UAE authorities have increased fees for government services, including visa extensions and business licenses which account for nearly three quarters of all Dubai government revenue.

Dubai residents are required to pay an “innovation fee” to fund the $136 million Museum of the Future and a hotel occupancy tax to help defray the costs of hosting Expo 2020.

“Dubai, it’s a great place to live, but I doubt anyone will come here to launch their organization,” said Vicente Munoz, co-owner of AirCrewClub, which operates a website that helps pilots and cabin crew find restaurants and bars during layovers.

“Increased taxes have made the business risks “too high,” he said.

Unless economic reforms are quickly put in place, Mideast oil exporters face a $1 trillion budget shortfall if crude prices remain low, the International Monetary Fund recently warned.

“Because of the budget gaps, there is no doubt that tax policies will significantly change in all of the Middle Eastern countries,” said Sherif El Kilany, who oversees Ernst & Young’s tax services department for the Middle East and North Africa.