A Proposal to Unify Foreign Investment Tax Incentives in the Gulf Cooperation Council (GCC) Region
1 Sarah Alsultan
Law - Law - University of Virginia
Abstract
In recent years, Kuwait, as well as other GCC States have opened a wider door to foreign investments which resulted in competition over investments between the states. International experience shows that countries feel pressured to offer tax incentives that at least are as attractive as those offered by their neighbors. Several arguments were cited against the use of tax incentives, including that they could arguably distort economic activities, cause inequality between investors, undermine tax revenues, transfer revenues to the companies’ home country, promotes corporate blackmail and corruption, have unknown cost, and are ineffective and inefficient. Despite these arguments and mainly due to competition, the use of tax incentives has recently become popular in the GCC region. The primary form of tax incentives in GCC States’ foreign investments laws (FILs) is a tax holiday. Some states grant tax holidays as a matter of right, while others base it on the decision of investment agencies. Similar incentives can be found in Special Economic Zones laws or proposals in the region. In addition, the FILs specify that additional incentives can be granted based on authorities’ discretions, which suggests that further tax incentives can be obtained based on negotiations. The GCC, on the organizational level, has proposed to regulate investment tax incentives within a project to harmonize FIL. The latest proposal limits tax incentives to 5-year tax holidays which can be extended upon domestic authorities’ discretions. This proposal partly restricts competition between the states since they will be able to offer negotiated packages or incentives for investors operating in less developed areas. However, the proposal does not limit tax holiday extension period; thus, GCC States can still compete each other by offering longer tax holidays. Acknowledging that tax incentives will be utilized despite the mixed evidence on their effectiveness, in this paper, I propose a realistic solution—under my proposal: (a) a unified tax credit as a matter of right is granted to investments, (b) further individual tax incentives can be granted for less developed areas based on the newly established GCC judicial body’s approval. This proposal, together with the current low flat tax rates in GCC States ranging between 10% and 20%, has many merits and avoids most arguments against tax incentives: (1) it restricts competition between GCC States and avoids distortion within the GCC common market. (2) Maintains the region’s attractiveness in comparison to the rest of the world since it does not eliminate incentives, and tax credits are visible to foreign investors. (3) Easy to administer. (4) Transparent to the home states. (5) Closes the door to firms seeking to negotiate deals since additional incentives will be scrutinized at the GCC level. (6) Compensates for shortcomings in the GCC markets. (7) Unlike tax holiday, tax credit’s cost is easy to calculate. (8) Avoids corruption since the credit is granted as a matter of right. (9) Ensures equality between investors across the common market.
Keywords
tax incentives, GCC, Foreign Investment
