The Middle East and North Africa resembles Europe with a lack of reform and the richer parts of the region bailing out their troubled neighbours, says the chief economist of Saxo Bank.
Steen Jakobsen said the Mena region was losing momentum, despite strong growth in oil-producing countries.
"Mena is now divided into two halves: the north versus the south," he wrote in a research report that the Copenhagen-based bank released yesterday.
"This is not unlike in Europe, just with a bit of role reversal. In Europe, the north looks healthy and must figure out how to dig the south out of its economic woes. In Mena, it's the south trying to keep the north out of political trouble as they fear the risk of a spillover from the rising tide of popular demand for democracy and more political accountability for the predicaments of their economy and society."
Wealth in Mena has long been split between the oil producing GCC and the poorer parts of the region. The divide has been accentuated by a wave of instability from late 2010, evident most recently in unrest in Egypt and Syria.
The upheavals have created a region that is "highly flammable, both economically and politically," Mr Jakobsen wrote.
After the removal of Egypt's Islamist president Mohammed Morsi in July, the UAE, Saudi Arabia and Kuwait responded by offering US$12 billion in aid to the new government in Cairo. "To keep Mena afloat, the south - like Europe's north - will need to provide more money, guidance and mediation. History also tells us that long-term solutions need to be driven by respect, understanding and economic incentives coming from Mena - not from Europe or the US," he wrote.
The region was also struggling from having failed to reform, with an economic system dominated by transfer incomes, similar to the EU.
As an example, the UAE, Jordan and Iran are among the few countries to take steps towards easing subsidies in recent years by lifting energy prices closer to market levels. The International Monetary Fund has for years urged the region to peel back such subsidies, which cost Mena governments close to $240bn in 2011.
"The growth policy, more often than not, has simply been driven by oil prices, the need to hastily create jobs and satisfy the most basic material needs of the population," he wrote.
"This worked for a time for Mena when there was no political volatility. But with the opening of the political dimension, the game has changed and Mena governments aren't prepared for the challenges, having failed to reform economically or politically before their economies peaked in 2007."
Mr Jakobsen said the geopolitical risk attached to Egypt's troubles was adding about an extra $2 a barrel to the oil price.
"The real risk is not having the Suez Canal open, which all involved parties, including the US, want to secure. Should they fail, it would mean $20 to $25 of extra premium on top of the current geopolitical risk," he wrote.
tarnold@thenational.ae
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1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.
6. Further transfer pricing enforcement
Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.
7. Limited time periods for audits
Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
