(Bloomberg) — Saudi Arabia is considering plans to increase an Islamic tax paid by local banks to as much as 20 percent, or double the current rate, according to people with knowledge of the matter, as the world’s biggest oil exporter seeks to bolster alternative sources of revenue.
The tax authority is in talks with lenders about raising the religious levy, known as Zakat, potentially bringing it in line with the 20 percent rate paid by foreign banks in the kingdom, the people said, asking not to be identified because the discussions are private. The talks are ongoing and the final rate could be lower, they said.
Local lenders started paying Zakat at 10 percent of profit after deducting returns on government bonds from last year as part of a settlement with the authority. They used to pay at 2.5 percent of equity and the new rate was applied retrospectively for many years, in some cases stretching as far back as 2002. A spokesman for the General Authority of Zakat and Tax declined to comment.
“Banks may still get the effective tax rate at the mid- to lower end of the corridor of 10-20 percent by returns generated on specific investments,” said Edmond Christou, a banking analyst at Bloomberg Intelligence in Dubai. “It’s unclear whether this will be charged against the bottom line or continue to be part of the equity reconciliation.”
Even if banks manage to lower the effective rate, they’re still likely to take a “cautious approach to dividend payouts” until there’s more clarity, he said.
The proposed tax increase comes as the biggest Arab economy seeks to shore up its public finances. While the government expects the budget deficit to narrow this year, economists say the projections were probably based on unrealistically high oil prices.
Last year, the tax authority also extended Zakat by including items that were previously exempt, while eliminating some deductions.
The Tadawul Banks Index has climbed 13 percent this year, while the benchmark Tadawul All Share Index has gained 9 percent.
Saudi Arabia’s banking landscape is changing with lenders exploring mergers. The kingdom’s biggest lender, National Commercial Bank, in December announced the start of merger talks with Riyad Bank. The potential deal would follow the combination of HSBC Holdings Plc affiliate Saudi British Bank and Alawwal, which was backed by Royal Bank of Scotland Group Plc.