Saudi Arabia imposes new taxes on foreigners' income
Saudi Government imposed tax on the earnings of non-Saudi workers during the last month.
In today s Value Seeker, we present the impact of the said taxation on remittances from this country. Saudi Arabia the largest market for overseas employment for Pakistanis Country s remittances have been quite robust so far and proved to be prime supporter in helping Pakistan to maintain its current account balance in check.
However, going forward the changing paradigm in the Saudi Arabia s tax regime is likely to negatively impact inflows towards Pakistan, at least in the medium to long term. During last month, government announced that Saudi Arabia-based private sector companies that employ more foreigners than Saudi nationals will have to pay SR200 (USD52) a month for excess each non-Saudi.
The measure aims to help provide Saudi nationals with more employment opportunities. It is interesting to note that, there are more than 1.5 million Pakistanis in Saudi Arabia and the number is consistently increasing.
According to the Bureau of Emigration & Overseas Employment (BEOE), the Kingdom has become the largest market for Pakistani workers in the world. Therefore, remittances from the Kingdom grew by 10-Year CAGR of 24% annually and reached to USD3.7bn in FY12.
The imposition of tax on non-Saudis hints that immediate impact on remittances flow may not be very significant unless the all stakeholders (foreign companies in Saudi Arabia) reach any consciences.
FY14: Taxation impact reaches to USD370m
We believe this decision is going to directly impact the remittances to the motherland. Some facts that one can research on are; 80% of Pakistani in Saudi Arabia earn less than SR 2,500 per month and under the new tax regime are more likely to have 10% negative impact on their earnings which resultantly will hurt their ability to remit funds.
If we take USD3.8b as proxy for FY13, during the aforementioned period estimated decline in the amount to be remitted from Saudi Arabia settles at USD184mn. While for FY14, the remittance figure is seem to trim down by USD370mn.
Low remittances are expected to hurt the current account balance in a more dire manner going forward as during 5MFY13 the deficit reached to USD365m in 5MFY13 (falling by USD638 during Nov-12).
