Gulf governments have been urged to show caution on proposals to impose income tax on expats.
States in the Gulf are considering a tax on earnings or remittances sent home in a bid to raise revenue to plug budget deficits triggered by the massive fall in oil prices over the past two years.
But economic experts from the International Monetary Fund (IMF) warned that public finances in the Gulf states of Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Qatar and Bahrain are finely balanced.
A policy paper from the IMF explained that most expats were poorly paid workers and taxing their income would open a black market for remittances sent home through unofficial channels and lower the attraction of the region for workers.
The IMF also calculated that even raising taxes from zero to 5% would only generate around $4.2 billion a year across the region – which would account for just 0.3% of the regional GDP and would hardly dent the budget deficit problem.
One in four Gulf workers are expats
The Gulf states are one of the world’s leading expat employers.
The latest data estimates around 12 million expats worked across the region out of a population of 50 million.
In the policy paper, the IMF also argued that more jobs should be offered to women, which would involve a major culture shift by some governments.
“A challenge holding back talent utilization in the region pertains to the low female labour force participation rate. Though the gender gap in education has diminished and cultural norms also play a role, there is scope to improve labour regulations affecting educated women,” says the IMF.
Another suggestion was narrowing the wage gap between the public and private sectors.
Public sector pay gap
The IMF found that public sector workers are paid much more than private employees. This encourages nationals to take jobs in the public sector rather than start businesses which grow to create wealth.
“Labour market policies deserve special attention, with the large youth population facing the biggest challenge, given the expected slowdown in public sector hiring that has traditionally been the employer of first resort for nationals,” says the IMF report.
“A focus on labour market policies is particularly important, given that businesses consistently rank restrictive labour regulations and inadequately-trained workforces as their biggest barriers. These challenges have prevented the private sector from significantly expanding its national workforce.”
