Saudi Arabia: A Closer Look At GCC's Tax Reforms: Implications For Multinational Enterprises

KSA

Saudi Arabia's RHQ Potential Tax Haven – Pillar Two and the Top-Up Tax – Opportunities and Risks

"KSA introduced a tax exemption package for regional headquarters for a period of 30 years includes a zero percentage of income tax on regional headquarters entities and withholding tax."

It appears that the new framework for Saudi Arabia's Regional Headquarters (RHQ) is strategically positioned to serve as a potential tax haven. With Saudi Arabia anticipated to achieve its most robust economic growth in a decade, it's clear that the country is actively working to improve its business tax environment to attract foreign investments. This favorable environment is expected to generate numerous business opportunities. However, it is crucial for Regional Headquarters to carefully assess the implications of Pillar Two and the Minimum Tax Rate, as these factors play a pivotal role in the decision-making process for companies considering Saudi Arabia as their regional hub. Regional Headquarters falling within the purview of Pillar Two may see their advantages significantly offset by the additional top-up taxes they may be required to pay. Other factors that RHQ should pay great attention to are the CFC rules and the application of the DTT's provisions with other countries.

Kuwait

The Kuwaiti government is in the process of broadening the scope of corporate income tax application to encompass all entities operating within Kuwait, levying a 15% tax rate, while granting exemptions to small businesses. This initiative aligns with the guidelines of the Organization for Economic Cooperation and Development (OECD). As of now, Kuwait imposes a 15% corporate income tax exclusively on entities with foreign ownership.

The expansion of corporate income tax to encompass all entities is a response to the global minimum tax, known as Pillar II, and will be implemented gradually, commencing in 2025. This pillar's purpose is to ensure that multinational enterprises (MNEs) pay a minimum level of tax on the income generated in each jurisdiction where they operate. The tax, which operates under the GloBE Rules, serves as an additional tax calculation and enforcement at the jurisdictional level. The GloBE rules utilize a standardized framework and definition for the taxes covered to identify jurisdictions where an MNE encounters an effective tax rate below 15%.

Reflecting on the mid-20th century, the taxation systems in some GCC have been notably inefficient and have consistently produced low revenue levels. This update is part of a broader context of tax reform within the GCC, with the objective of introducing modern and efficient tax systems to the region. Some of the existing tax systems in the GCC are characterized by very low tax rates and limited tax bases.

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