In Saudi Arabia, Controlling the Pace of Change

Saudi Arabia’s leaders want to modernize the country, but they softened a new tax to ease the anxiety over big change.

Saudi Arabian citizens and residents have been asked to accept a lot of major changes immediately—including letting women drive, looking for work outside the government and paying more for gasoline. But the country’s leadership has decided that another major change—paying taxes—has to be done at a slower speed.

On Jan. 1, the kingdom imposed a value-added tax (VAT), a 5% surcharge levied on a multitude of goods and services. But in an obvious step to mollify the move—something experts say can be a difficult but important decision by leaders—the government is providing a wide swath of citizens subsidies for a year. 

The VAT rate itself is relatively low, some European nations have VATs as much as 20%. “By setting the rate so low compared to other countries, leaders are hoping to get everyone to understand the new reality while also recognizing the financial discomfort that comes with it,” says Harish Bhatia, Korn Ferry’s regional head of Middle East Products.

The tax is part of a sweeping transformation plan by the country’s crown prince that includes finding new revenue sources besides energy, training its citizens and even building a megacity. Still, for millions of people who have never been taxed before, a 5% tax may be burdensome (Saudi Arabia tried an income tax in the 1950s and withdrew it within a year). The impact on spending and saving power from a psychological as well as financial perspective, particularly for Saudi Arabia’s large expatriate talent pool, could be significant. A new Korn Ferry Hay Group study estimates that this year wages in the Middle East will increase by 3.8%, lower than last year’s 4.5 percent gain.

So to help offset the new tax, the Saudi Arabian government will provide military personnel and public employers with roughly $300 per person per month living allowance for a period of one year. The “citizens benefit,” where the citizens earning less will get more relief in the interim, is similar to how Singapore’s government introduced its own VAT in the 1990s. By contrast, the United Arab Emirates, which also instituted the VAT at the beginning of the year, is not offering a similar benefit to its citizens. Instead, the UAE has pledged to distribute 70 percent of VAT revenue to local governments, with the aim of achieving better local services, greater community development, and wider support of its citizens.

From a talent perspective, Vijay Gandhi, regional director in EMEA for Korn Ferry, says that organizations, to recruit and retain employees, are focusing more on learning and development as opposed to simply increasing salary. He says that human resource departments are developing programs to retain high potentials and creating leadership training courses to highlight their investment in their people.

“Organizations are taking a longer-term view of how they assess their business and employees and communicating with them more transparently than ever before,” Gandhi says. “From the government perspective, the introduction of a one-year allowance does provide a short-term financial relief along with setting up committees to monitor profiteering and unjustified price increases to protect the residents.”