RIYADH: A jump in retroactive Islamic tax liabilities faced by Saudi Arabian banks is creating concern about damage to their earnings and the government’s motives in demanding the money.
While Saudi banks and other firms generally do not pay corporate tax, they are subject to an annual Islamic tax called zakat, a 2.5 percent levy on each bank’s net worth. Analysts say the way in which this is assessed can be complex and opaque.
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In the last couple of weeks, several major banks have disclosed that the government’s General Authority of Zakat and Tax (GAZT) is seeking additional zakat payments from them for years going back as far as 2002. In some cases, the demands exceed half of a bank’s annual net profit.
The banks are challenging the assessments, but analysts said the issue could weigh on share prices in the banking sector, which is expected to attract billions of dollars of foreign investment as Saudi Arabia joins global equity indexes in the next couple of years.
So far, only a few of Saudi Arabia’s 12 listed banks have disclosed retroactive zakat demands, but analysts predicted more would do so as they released full financial statements for 2017 in the coming weeks.
“The additional zakat demanded by GAZT is likely to impact all banks,” said Shabbir Malik, regional financials analyst at investment bank EFG Hermes. “Our understanding is that the final verdict on the zakat issue will be known later this year and we will then have a better idea of the scale of the impact.”
GAZT did not respond to an email from Reuters seeking comment. Analysts said it appeared the new demands stemmed from certain long-term investments, which were previously exempt from zakat, now being deemed liable for the tax.
Some bankers said privately they worried the demands might essentially be a money grab by the government, which wants to raise new revenues to cover a big budget deficit caused by low oil prices.
