Wednesday 07, March 2018 by Jessica Combes

Saudi Crown Prince seeks solution to banks' Islamic tax row


Crown Prince Mohammed bin Salman has directed the Saudi government to resolve a dispute with banks facing higher Islamic tax liabilities, according to a Thomspn Reuters news report, in an attempt to avoid any damage to his push to diversify the economy.

The directive follows recent disclosures by major Saudi banks that the Government’s General Authority of Zakat and Tax (GAZT) as requested additional payments of Zakat, the name of the tax, for years going back as far as 2002. In some cases, the demands exceed half of a bank’s annual net profit.

Banks are contesting the extra payments, which are estimated at an estimated $2.6 billion across 11 of the Kingdom’s 12 listed banks. Although Saudi banks and other firms generally do not pay corporate tax, they are subject to Zakat, a 2.5 per cent levy on each bank’s net worth.

Lenders and the authorities have disputed the amount of Zakat they pay for over a decade, but the dispute has recently captured more attention from investors because the kingdom seeks to attract billions of dollars of foreign investment from global equity indexes over the next few years.

Bankers maintain the way the tax is calculated is opaque and the heavy financial demands on banks threaten the stability of the banking sector and capital markets.

Analysts have warned the liabilities could hurt liquidity at the banks, the majority of which are main financiers of the budget deficit through purchases of local bonds, and would also restrict banks’ ability to lend to the private sector, a key element in the government’s reform plan to move the economy away from reliance on oil and create jobs for hundreds of thousands of unemployed Saudis, Thompson Rueters said.

A committee, comprising of representatives from GAZT, the Central Bank, and other parties, was recently formed to investigate the issue at the behest of the Crown Prince, widely known by his initials MbS, the sources told Reuters.

The committee, chaired by former Central Bank governor Fahad al-Mubarak, currently an adviser to the Royal Court, has handed its recommendations to the court and they could be announced as soon as in the next few weeks, one of the sources said.

“MbS is keen on maintaining the banking sector’s solid position ... He is aware of the economic challenges and wants to make sure banks will continue to be able to support the economy and the private sector,” said one banker.

According to media reports Central bank officials were not immediately available for comment, and neither GAZT nor the government media office responded to an emailed request for comment, while another banker said a quick resolution of the issue was urgently needed.

Saudi Arabia is hoping to earn emerging market status in 2018 from index providers FTSE and MSCI, moves that EFG Hermes forecasts will attract up to $45 billion in total foreign inflows.



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