Strategy Note /

Oman personal income tax a precedent for others in the GCC

  • Faced with fiscal deficits of almost 20%, Oman is introducing high-earner income tax in 2022 (as well as VAT in 2021)

  • Slow non-oil diversification (reliance on public sector, subsidies, and expats) means others in GCC follow (ultimately)

  • But, along the way, there will be competition over tax rates (as well as visa and foreign ownership regulation)

Oman personal income tax a precedent for others in the GCC
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
2 November 2020
Published byTellimer Research

Oman will introduce income tax on high earners in 2022 (the rate is unspecified at this stage), according to the 2020-24 economic plan (published on 1 November). This is in addition to the introduction of 5% VAT in April 2021 (announced in mid-October).

It should be no surprise that Oman is attempting to increase fiscal revenue from tax given persistent low oil prices is pushing its fiscal deficit to 18% and 17% in 2020 and 2021, respectively, according to IMF forecasts. The government aims to get close to fiscal balance in 2024 (compared to a 9% deficit forecast by the IMF).

We reiterate our views that:

  • The GCC has a difficult adjustment to low oil prices ahead of it (lower growth, higher fiscal deficits and government debt, pressure on government subsidies and tax, questions over currency pegs, albeit with considerable variation between individual countries);

  • Equity valuations arguably reflect this more where trailing PB is at a discount to 5-year median (Oman, Qatar, and UAE ) rather than where it is at a premium (Bahrain, Kuwait, and Saudi); and

  • Qatar is able to maintain the old model (eg public sector and expatriate reliance, high subsidies and low taxes, currency peg) for longest (because of its relatively low fiscal breakeven oil price and very deep sovereign wealth reserves, with over US$1mn per citizen of wealth and FX reserves).

Oman's decade of deficits

Oman's burgeoning burden of debt

Tax not an issue for Oman alone in the GCC

Given the difficulty in driving growth in non-hydrocarbon sectors across the GCC and the likelihood of persistent low oil prices, the introduction of higher government taxes is inevitable across the GCC.

Liberalising regulations for foreign ownership and residency (eg longer-term visas), extracting greater government fees and taxes from foreigners (and, via sales taxes, from domestic citizens too), greater targeting of subsidies for domestic businesses and citizens, and privatisation of state enterprises (eg Aramco in Saudi) are all parts of the policy to increase fiscal revenues.

But the pace of introduction will be varied, mirroring different fiscal breakeven oil prices and sovereign wealth reserves. For example, Qatar may be the last to go down this path of tax introduction. VAT at 5% was already in place in Bahrain, Saudi, and the UAE at the start of 2020 and Saudi hiked VAT to 15% in July 2020.

GCC Fiscal Balances: Qatar surplus vs others' 9-18% deficits

GCC Fiscal breakeven oil prices: Qatar (42) to Oman (104)

Related reading

Oman: New Sultan faces serious challenges (Jan 2020)

Saudi and GCC ugly fiscal truth from low oil prices (Oct 2020)

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GCC-Levant equity strategy slide pack (Aug 2020)

GCC-Levant equity strategy: Old models under stress (Jul 2020)

GCC blockade 3 years on: Qatar is best for those who doubt the GCC can diversify(Jun 2020)

Saudi and GCC currencies: Drop the pegs while FX reserves still comfortable? (May 2020)

Saudi pares fiscal deficit, hits consumer, prepares for long oil war, splits GCC (May 2020)

GCC: The Gulf is not a safe haven unless (at least) oil prices recover (Apr 2020)

GCC: Sovereign wealth warning from the IMF (again) (Feb 2020)