Introduction

Saudi Arabia’s Vision 2030 is an ambitious economic reform plan aimed at diversifying the economy away from oil dependency. As part of this initiative, the country introduced tax and regulatory incentives to attract multinational enterprises (MNEs) to establish regional headquarters (RHQs) in Riyadh. This article explores these RHQ incentives, examines their effectiveness, and assesses whether the global minimum tax introduced under OECD’s Pillar 2 will erode the attractiveness of Saudi Arabia as a base for RHQs.

1 Saudi Arabia’s RHQ Tax Incentives: A Key Component of Vision 2030

Saudi Arabia’s RHQ incentive regime is designed to draw multinational businesses to establish their primary regional operations in the kingdom. By doing so, Saudi Arabia aims to cement its status as the business hub of the Middle East, and specifically the Gulf Cooperation Council (GCC) region.

1.1 RHQ Tax Incentives Overview

The Saudi RHQ program offers a variety of incentives, including:

• Corporate Tax Benefits: Reduced corporate tax rates or tax holidays for a defined period.
• Withholding Tax Relief: Exemptions or reductions in withholding tax on dividends, interest, and royalties.
• VAT and Customs Relief: Exemptions on imports and cross-border services, which lower the operational costs for MNEs.
• Repatriation of Profits: Ease of transferring profits abroad without incurring excessive taxation.

These incentives have been designed to reduce the tax burden on MNEs, making it attractive for them to manage their Middle East operations from Saudi Arabia.

1.2. Qualifying for RHQ Status

To qualify for these incentives, businesses must meet certain criteria, such as:

• Establishing substantive operations in Saudi Arabia.
• Being part of an MNE group with a presence in multiple countries.
• Follow other requirements and conditions announced by Minister of Investment (“MOI”) and Zakat and Tax and Customs Authority (“ZATCA”)

These requirements ensure that the tax benefits are tied to actual economic substance, aligning with global tax standards under BEPS Action 5, which seeks to counter harmful tax practices.

2 OECD’s Pillar 2: Global Minimum Tax and Its Goals

Pillar 2, introduced by the OECD/G20 Inclusive Framework as part of its BEPS 2.0 project, proposes a global minimum tax rate of 15% for MNEs with global revenues exceeding EUR 750 million. The aim is to combat profit-shifting and base erosion by ensuring that MNEs pay at least this rate in each jurisdiction where they operate, reducing the incentive to shift profits to low-tax jurisdictions.

 2.1. Global Minimum Tax: Key Concepts

• Income Inclusion Rule (IIR): Ensures that the parent country of an MNE applies a top-up tax if profits in a subsidiary country fall below the 15% effective tax rate.
• Undertaxed Payments Rule (UTPR): Applies additional taxes when payments made to low-tax jurisdictions aren’t adequately taxed at source.
• Qualified Domestic Minimum Top-up Tax (QDMTT): A mechanism allowing a jurisdiction to collect the top-up tax itself, ensuring that local revenue isn’t lost to foreign jurisdictions.

Together, these rules create a level playing field, ensuring that tax competition among jurisdictions does not erode the global minimum effective tax rate for large corporations.

3 Potential Impact of Pillar 2 on Saudi Arabia’s RHQ Incentives

3.1. Could Saudi Incentives Fall Below the Global Minimum?

Saudi Arabia’s RHQ incentives often result in an effective tax rate below 15%, especially when combining corporate tax reductions, withholding tax exemptions, and VAT relief. In a pre-Pillar 2 world, this made Saudi Arabia highly attractive to MNEs looking to establish their regional operations at a low tax cost. However, under Pillar 2, any savings below the 15% threshold may be neutralized by top-up taxes imposed in the parent country of the MNE.

3.2. RHQs in Saudi Arabia and the Risk of Double Taxation

The interaction between the RHQ incentives and Pillar 2 could lead to a scenario where MNEs face double taxation: first, in Saudi Arabia at a preferential rate, and then through a top-up tax in the parent country. While mechanisms such as tax treaties may alleviate some of these concerns, the administrative complexity and the potential reduction in tax savings could deter MNEs from expanding in Saudi Arabia.

4 Saudi Arabia’s Response to Pillar 2: Refining RHQ Tax Policies

4.1. Adjusting the Incentives to Avoid Erosion

In light of Pillar 2, Saudi Arabia may look to adjust its RHQ incentives to remain competitive. One option is to introduce a “Qualified Domestic Minimum Top-up Tax (QDMTT)”, allowing Saudi Arabia to collect the top-up tax itself, rather than letting the parent country capture this revenue. This would preserve some local benefits while complying with the Pillar 2 framework.

• R&D Carve-Out: Saudi Arabia may also explore specific carve-outs for economic substance, such as investments in research and development (R&D), that are allowed under Pillar 2 to maintain competitiveness without triggering top-up taxes.

4.2. Maintaining Attractiveness through Non-Tax Incentives:

While tax incentives are a key attraction for RHQs, Saudi Arabia could focus on non-tax benefits to retain its appeal. These may include:

• Infrastructure Investments: Offering superior infrastructure and logistical advantages to regional headquarters.
• Regulatory and Administrative Ease: Simplifying processes for business setup and operations, making the overall business environment more attractive.
• Geopolitical Stability: Promoting Saudi Arabia’s strategic location as a gateway to both African and Asian markets, with strong ties to global supply chains.

5 Comparative Analysis: GCC and Beyond

To understand the broader impact of Pillar 2, it’s important to assess Saudi Arabia’s regional competitiveness. Other GCC countries, such as the UAE, Qatar, and Bahrain, offer similar RHQ incentives, but they too will need to adjust to the global minimum tax.

5.1. GCC’s Tax Landscape Post-Pillar 2

The UAE, for example, has already implemented a 9% corporate tax, which is closer to the 15% threshold, reducing its exposure to top-up taxes. Qatar, with its special economic zones, and Bahrain “already introduced”, with its free zones, may need to make similar adjustments to maintain their appeal under the Pillar 2 regime.

5.2. Global Competition: Singapore, Hong Kong, and Ireland

Outside the GCC, global competitors like Singapore, Hong Kong, and Ireland have traditionally used low corporate tax rates to attract RHQs. Under Pillar 2, these countries may pivot towards non-tax advantages such as ease of doing business, infrastructure, and access to talent, similar to Saudi Arabia’s potential strategy.

Conclusion

The introduction of Pillar 2 presents a significant challenge to Saudi Arabia’s RHQ tax incentives. While these incentives have been key to attracting MNEs, the global minimum tax may erode their effectiveness, especially for large MNEs subject to top-up taxes. To maintain its competitive edge, Saudi Arabia may need to rethink its tax strategy and introduce mechanisms like the QDMTT, while enhancing non-tax advantages such as infrastructure and regulatory ease. The broader regional and global context also suggests that while tax competition is shifting, there are still ways for Saudi Arabia to remain an attractive destination for RHQs.