An aerial view of Kaaba at the Grand mosque in the holy city of Mecca, Saudi Arabia, August 12, 2019.

Business, Economics and Jobs

Saudi Arabia raises taxes at home while making big investments abroad

Saudi Arabia, one of the richest countries in the world, has announced a 15% value-added tax on all goods and services. It is also cutting down some benefits for state employees. Meanwhile, the kingdom has been on a shopping spree with its Public Investment Fund, dropping roughly $7.7 billion on stakes in Facebook, Boeing and Starbucks, among other companies.

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An aerial view of Kaaba at the Grand mosque in the holy city of Mecca, Saudi Arabia, August 12, 2019.

Credit:

Umit Bektas/Reuters 

One of the world's richest nations, Saudi Arabia, is calling for shared economic sacrifice.

The announcement came earlier this month when the Saudi finance minister, Mohammed al-Jadaan, went on state media.

He told the nation that starting July 1, they will have to pay a 15% tax on all goods and services in the kingdom.

“This [pandemic] is a crisis we haven’t seen before,” he said. “The changes will be painful, but are necessary for public financial stability.”

Related: Saudi activists allege a tribesman was killed over megacity plans

Saudi Arabia’s economy has been hit hard by the coronavirus, according to Jim Krane, an energy expert at Rice University and author of the book, “Energy Kingdoms.”

That’s because it relies so much on one commodity: Oil.

“You’ve got something like a third of the world’s people not moving around, not traveling like they normally do. When you have people on lockdown, you basically have oil demand on lockdown.”

Jim Krane, Rice University

“You’ve got something like a third of the world’s people not moving around, not traveling like they normally do,” Krane said. “When you have people on lockdown, you basically have oil demand on lockdown.”

The price of oil has dropped to dramatically low levels. At the same time, since the pandemic, Saudi Arabia has had to shut down its major religious sites. That has dried up income from its robust tourism industry. And then, there are thousands of businesses that have had to close down as the disease spread.

Related: WHO director-general vows to continue fighting the coronavirus

Officials in the kingdom acted quickly when the pandemic hit. They closed down major religious sites like the Kaaba and screened and isolated passengers when they arrived. Strict curfews were put into place. Still, so far, there have been around 60,000 cases of COVID-19 reported in the Persian Gulf country.

Krane said the tax hike took many by surprise. “It’s really unusual. I mean, the Saudis basically abolished almost all taxes in the 1970s after the big oil boom.” 

The last time that the Saudi government imposed new taxes was in 2018. And that was just 5%. Typically, autocratic countries are cautious about raising taxes, according to Krane.

“It gives people who are contributing to the government budget an incentive to say how their contributions should be spent.”

In Saudi Arabia, it’s the royal family who is in charge. So, the public doesn’t have a say on how government money is spent.

Related: US officials blast Apple for not unlocking Pensacola gunman’s phones

Joanne Clarke, a Dubai-based tax expert with the Pinsent Masons, an international law firm, says the Saudi government signaled a tax increase before.

“Everybody expected it would be maybe 7%, 10%. Nobody, I would say, expected it to jump to as high as 15%."

Joanne Clarke, Pinsent Masons

But “everybody expected it would be maybe 7%, 10%. Nobody, I would say, expected it to jump to as high as 15%,” she said.

Some business owners are worried about losing customers to other Gulf countries that have lower taxes, such as Oman or Kuwait, Clarke said.

Crown Prince Mohammed Bin Salman has been aggressively pushing for a diversified Saudi economy — one that doesn’t rely on oil. In his Vision 2030 plan, he announced plans to expand the kingdom’s tourism sector, for example, among others in order to diversify the economy.

Another move has been to invest in diverse companies. Saudi Arabia’s sovereign wealth fund reportedly invested $7.7 billion in European and US stocks in the first three months of 2020. It acquired shares in Facebook, Bank of America, Citigroup, Walt Disney, Marriott, Pfizer and Starbucks, according to reports.

Related: Saudi Arabia is selling a portion of its most profitable company

The huge drop in oil prices left the Saudi government wondering how it can compensate for the loss in revenue, said Abdullah Alrebh, who teaches sociology at Grand Valley State University in Michigan.

Alrebh explained that even with these new taxes, Saudis are well cared for. Health care is free, so is education, and there are government plans that support the poor, he said.

Since the pandemic, the government has been paying up to 60% of public sector employees’ salaries.

Yet, the new taxes are making some people reconsider big purchases.

Alrebh said one of his relatives in Saudi Arabia was planning to buy a house but changed his mind after the taxes tripled.

Meanwhile, for Deemah Fetyani, a business consultant in Jeddah, a city in western Saudi Arabia, the new taxes make good financial sense. In fact, they are long overdue.

“We’ve been spoiled for decades,” she said. “We need to take action and take responsibility and be a real part of this country.”

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