Guiding Principle

As Saudi Arabia entered into a recession caused by the drop in the global oil prices – the main source of revenue for the country – which in turn led to a deficit at its budget, the Government enforced several measures to cut spending and generate income from other sources. This included reducing subsidies on electricity, water and petroleum product, increasing fees on several services and imposing new fees. A selective tax was introduced in June, followed by family levy on expatriates, which started, from the beginning of the current month. Additionally, VAT will be enforced also from 1st January 2018, simultaneously with the rest of the Gulf States, which are facing similar challenges.

A. Recession in Saudi Arabia

The Saudi Arabian oil-based economy is the largest amongst the Arab countries. Possessing about 16% of the world proven petroleum reserves, the Kingdom is ranked as the largest exporter of petroleum. With such reserves, the petroleum sector accounts for 87% of country budget revenues, 42% of the GDP and 90% of export earnings.

The oil revenues has helped the country over the years to build an attractive environment for its citizen and for expatriates in the first place. Residents do not pay income tax and gets most of services and other commodities at highly subsidized prices.

Yet, the Saudi government, realizing the risk of relying on one source of income and aiming to reduce unemployment rates amongst its citizens, has been encouraging the growth of the private sector to diversify its economy and employ more Saudis.

The need to privatize and diversify the economy became more vital as the oil prices declined in 2014 causing a deficit at the country budget estimated in 2016 by $ 87 billion. The drop in the oil prices by about half had badly affected the Government ability to pay the private companies its entitlements for the projects that were already implemented, leading to mass layoffs.

Accordingly, several major enterprises, laid off thousands of expats. Many oil refiners, banks and shipping firms were slashing thousands of jobs. Several companies have defaulted wages to their workers.

B. Enforcing New Taxes

No taxes are imposed over the personal income in Saudi Arabia. Only corporate taxes exists with low rates. In the International Monetary Fund (IMF)'s1 2016 report "Diversifying Government Revenue in the GCC: Next Steps"2. It was disclosed that the IMF has advised the Gulf States to increase their non-oil tax revenues. The IMF views tax revenues in the region as low taxes by international standards. Tax reforms, however, as seen by the IMF, can raise new revenues, provide an opportunity to remove existing less productive taxes and fees, and build the required institutions and tax culture of a modern tax system.

In light of the above developments, Saudi Arabia has imposed several new taxes while maintaining that they have no intention of enforcing taxes over income. The new taxes are:

I. Selective Tax3

Starting from June 11th, a selective tax is imposed over tobacco by 100% of its retail sale price and over soft drinks by 50% of its retail sale price, being commodities harmful to the health.

II. Family Levy

Following the selective tax, a new levy over expatriates in the Kingdom came into force by the start of the current month. The fee will be 100 Saudi Riyals4 per each dependent of expatriates for 2017. The fee will be doubled from July 2018, then tripled in 2019 and quadrupled from July 2020.

III. Value Added Tax (VAT)

The final tax would be a value added tax with a ratio of 5% the value of products and service as agreed with the rest of the Gulf States starting from January 2018.

A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of general consumption tax that is collected incrementally, based on the surplus value, added to the price on the work at each stage of production, which is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer. VATs raise about a fifth of total tax revenues both worldwide and among the members of the Organization for Economic Co-operation and Development (OECD). As of 2014, 160 of the world's approximately 193 countries employ a VAT, including all OECD members except the United States

The respective law was already approved by the Consultative Assembly of Saudi Arabia "Majlis al-Shūra" i.e. the Saudi Parliament and now it is raised to the Saudi Council of Ministers before finally issued in the name of the Saudi King.


[1] For more information about the IMF, kindly revert to:

[2] The full text of the report is published at the following link:

[3] Imposed by the Saudi Arabian Statute (law) for the Selective Tax, promulgated by the Royal Decree No. M/86 dated 27.08.1438 A.H. corresponding to 23.05.2017

[4] € 1 = SAR 4.30

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