The government continues to pursue economic reform and diversification and promote foreign investment in the kingdom, a strategy that has stepped up significantly since Saudi Arabia’s accession to the World Trade Organization (WTO) in 2005. Its main concerns are coping with a burgeoning population, depleting water supplies and an economy largely dependent on high petroleum output and prices.
The government is expanding the oil and gas industry, while trying to diversify the economy into non-oil sectors, including manufacturing and services. It is encouraging development of the private sector – notably in services and utilities – raising social spending and creating more public sector jobs. One major priority is to reduce unemployment among Saudi nationals, with government quotas (which vary by sector) on the employment of expatriates.
Local Saudi economic regulations are largely based on free market principles, qualified in part by Shari’a (Islamic law), with the exception of a few protected industries. Some industries are protected by import duties and price differentials on tenders. Saudi Arabia eliminated tariffs on pharmaceuticals, as well as for products covered by the WTO Agreement on Trade in Civil Aircraft. Tariffs on computers, semiconductors and other information technology products were also ceased. No antitrust legislation or formal definition of monopoly exists in Saudi Arabia. All mergers require approval from the Ministry of Commerce and Industry. Islamic law forbids price controls; hence, they are illegal in the kingdom.
Saudi Arabia has transitioned from a relatively closed state dominated by hydrocarbons and opposed to FDI, to an open economy that welcomes foreign capital. It is still a volatile investment target, reflecting the kingdom’s dependence on oil. However, a number of trends since 2005 have significantly improved prospects for overseas investors: better security; the removal of some investment barriers following its 2005 accession to the WTO; a rapidly expanding domestic consumer market; and major investment projects encouraged by government incentives. The US Securities & Exchange Commission (SEC) has now approved several economic sectors that were previously barred to majority-foreign-owned companies outside the Gulf Co-operation Council (GCC) countries. Foreign companies have been slow to enter these sectors, largely because of continuing concerns over regulatory and labor issues. During 2014–2015, the kingdom should continue to pursue reforms aimed at pushing the country into the top 10 of the World Bank’s Doing Business rankings (from 22nd). There will be new focus on improving access and services for foreign investors, although property ownership will remain restricted. In the period 2016–2018, the building of four economic cities is likely to proceed slowly, with only the King Abdullah Economic City and the Jazan Economic City reaching completion.
Exports are dominated by oil and, to a lesser degree, petrochemicals and plastics. The government prevents the export of any Saudi and non-Saudi goods that receive a state sales subsidy. Saudi Arabia forbids imports of certain items for religious or security reasons, and it taxes other goods to protect domestic industries. There are no significant restrictions on the inward or outward movement of funds by companies or individuals. The existing currency peg will remain during 2014–2015. It is uncertain whether the GCC will reach free trade agreements with Asian countries. Between 2016–2018, little progress is expected on legal harmonization, despite the existence of the GCC common market.
In 2014–2015, stock market activity should be lifted by a revival in initial public offerings, and several banks are beginning to offer mortgages. The period 2016–2018 should see slow improvements in standards of corporate governance, while bond and mortgage markets are likely to develop from a low base.
Saudi citizens and businesses pay no tax on income and are only liable for zakat (an Islamic tax on wealth) of 2.5 percent of net worth per year. Non-Saudi businesses are subject to corporation tax up to a maximum of 20 percent (with the exception of profits in the hydrocarbons sector, which are taxed on a sliding scale between 30 percent and 85 percent). There is no value-added tax (VAT). Despite pressure to increase the employment of Saudi nationals, no new income taxes are likely to be introduced for foreign workers. Tariffs for power and water are expected to rise between 2016–2018, but probably only for industry, with the government set to avoid new direct taxes. Corporation tax (capped at 20 percent) should continue to apply only to non-Saudi firms.
In Saudi Arabia, KPMG has approximately 550 professionals and three offices.