Last month, the International Monetary Fund reported that the Middle East and North Africa region should achieve 3.9 per cent growth growth this year, buoyed by the economies of Saudi Arabia and the UAE.
But while this is higher than the expected global growth of 3.3 per cent and far higher than 1.7 per cent expansion among advanced economies, it remains lower than in other regions.
The region can and must do better to meet the expectations of its people and the realities of unprecedented changes in the global economic landscape. Shocks from around the world are felt deeply in this region.
How can growth advance? It is my conviction that tax policy is a central answer to that question and broader challenges facing governments in the region. Why? For two principal reasons: first, taxation brings the revenue governments need to shape policies to better the lives of their people. Second, whether taxation is done well or poorly influences how successful governments will be perceived for that effort.
For governments to keep economic growth at the top of the agenda, they must refocus on core issues: taming inflation, keeping spending and debt under control - potentially through the adoption of a fiscal rule and attracting investment.
This leads to the question of how effective taxation is in achieving those goals. Both absolute rates and the mechanics of taxation, including whether it is seen as fair, predictable and transparent, play a major role in shaping a country’s appeal to foreign and domestic investors.
UAE's tax model
Within the region, several countries have acted on this advice and reformed their tax policies. The UAE, in particular, has built a strong track record, alongside its Gulf partners, of modernising its tax system and aligning it with international standards. At the same time, it has preserved a competitive investment climate across a wide range of sectors.
With oil accounting for 30 per cent of total gross domestic product, the UAE wisely decided to diversify its tax base. It takes a delicate balancing act to maintain pro-growth investment policies while expanding the tax base. The UAE has been successful in this effort. The introduction of corporate income tax offers greater sustainability of revenue and significant income. Now, the essential work of implementation continues. The Federal Tax Authority has communicated well with the corporate sector and the public on regulations. Other countries making major changes to their tax systems can follow this example.
The UAE has also refined its tax policy in important, pro-growth ways. For example, it reformed the taxation of sweetened beverages by introducing a tiered system based on sugar content. It has also encouraged manufacturers to reformulate their drinks to qualify for lower tax brackets.
A regional story
With Saudi Arabia adopting a similar approach, taxation is quickly picking up across the region.
Over the past four years, Saudi Arabia has become a regional leader in e-invoicing with the phased roll-out of its Fatoorah system for both business-to-business and business-to-consumer VAT transactions. Egypt has been active as well, implementing a range of modern technology solutions for tax administration and playing a leading role in the negotiations for the UN Framework Convention on Tax Co-operation. Iraq is working diligently to modernise its hydrocarbons tax regime through new regulations that reflect strong input from the production sector.
Now, governments throughout the region must redouble their efforts to promote sustainable growth. Lebanon’s growth last year was welcome, but recovery remains fragile. Syria faces daunting challenges as it rejoins the world economy, but the right economic policies and taxation reforms can set the conditions necessary for sustainable growth and attracting investment. Morocco is enjoying renewed growth, a model for the Maghreb region.
Globally, many questions remain in tax policy. Unprecedented changes over the past year have shifted trade patterns and raised questions for tax policy as well. As implementation of Pillars One and Two continues in many countries, the recent “side-by-side” agreement should calm tensions arising from the US’ withdrawal of commitments under the global minimum tax and prevent tax policy from becoming an incentive for further disruptions in global trade or even a weapon in trade disputes.
A simple system
The taxation of the digital economy and the need to avoid distortions in this vital sector is another area where fiscal and trade policy increasingly intersect. In this context, predictable and simple taxation systems will be crucial in helping Mena countries attract investment and strengthen their position as a regional hub for manufacturing and services.
So it will again be a busy year in tax policy as the region seeks to compete more effectively within the global economy amid a backdrop of trade tension and sluggish growth in the developed world.
Few issues align with that theme more than taxation policy. Sound fiscal policy is essential to generating the revenue governments need to invest in their people and build more diversified economies across both advanced and developing Arab economies. With that focus and stronger alignment between ministries of finance and tax authorities, Mena countries can seize this year as an opportunity to stand out in the global growth story.
Daniel A Witt is president of the International Tax and Investment Center in Washington, DC
