Expat taxes to raise costs for Saudi private sector

Saudi Arabia’s plans to increase taxes on foreign workers from 2018 and introduce a new fee for expatriate dependents next month will raise costs for the private sector, with the impact to be felt most on labor-intensive industries like construction and retail, analysts told Argaam.

Companies in the Kingdom currently pay a levy of SAR 200 per month per expat worker, but only for foreign employees exceeding the number of Saudis employed. From 2018, however, this fee will be doubled to SAR 400 per month, which will be gradually increased by SAR 200 annually to SAR 800 in 2020, according to the government’s Fiscal Balance Program.

Meanwhile, the fee will no longer be waived for firms where the number of expat employees is less than or equal to the number of Saudi workers. Instead, it will be levied at a discounted rate of SAR 300 per month, to be increased to SAR 700 in 2020.

Moreover, starting next month, Saudi Arabia will impose a monthly fee of SAR 100 per expat dependent. This will increase gradually by SAR 100 every year until 2020, amounting to SAR 400 per dependent per month in 2020.

As a result of the new fees, payroll costs for the private sector will increase, particularly towards 2020 when they hit their maximum, said Hans Peter Huber, senior vice president and chief investment officer at Riyad Capital.

“The sector most negatively affected will be construction, followed by wholesale & retail trade and manufacturing,” he added, noting that expat labor costs will also rise for Saudi households.

While it is yet to be publicly announced how the new taxes will be implemented and collected, analysts expect that Saudi Arabia’s General Authority for Zakat and Tax (GAZT) will not be involved in the administration.

“The expat levy is not so much a direct tax on individual income, but is more akin to a visa-related fixed charge. Although not confirmed, we anticipate that payment would be collected at the time of iqama (residency permit) application or renewal, and by the authority responsible for iqama issuance – the Jawazat (passports) office,” said Amir Mayo, senior manager for global employer services, tax at Deloitte, Middle East.

Deloitte anticipates that the party applying for the iqama will have to pay the levy, he added.

For the principal employee’s fees, the employer typically applies for the iqama, and would have to pay the levy. For dependents, the employer or employee would apply for the iqama, and therefore, either party could be asked to settle the fee, Mayo said.

Meanwhile, the extent to which companies would agree to shoulder the cost of the levy on behalf of employees and dependents will likely vary depending on the employer.

“It will be mixed. Some companies will try to pass it completely/partially while some will completely absorb it at their end. It’s not going to be uniform,” said Nishit Lakotia, head of research at Bahrain-based SICO.

However, analysts agreed that some companies might agree to cover the costs for highly skilled or paid workers in order to retain them.

By making it more expensive to hire foreign workers, the new tax will help Saudization efforts, said James Reeve, deputy chief economist at Samba Financial Group.

“It makes Saudi labor a bit more attractive on a relative basis,” he added.

Currently, the Saudi-expat employment cost ratio is 400 percent, said Riyad Capital’s Gruber. According to the Kingdom’s National Transformation Plan, this figure should be reduced to 280 percent by 2020, he added.

In terms of how much revenue will be generated as a result of the taxes, it is widely expected they will raise $17 billion by 2020, said Deloitte’s Mayo.

“But this will depend on how the levy is implemented, and the extent to which increases are effected over the next three years,” he added. 

Write to Jerusha Sequeira at jerusha.s@argaamnews.com

Source: Saudi Fiscal Balance Program