Opportunities and Challenges for South Asian Enterprises South Asian Tax summit 2008 Farooq M. Ladha Head of Tax, Middle East

1 Today’s Gulf Economies Economic boom due to high oil prices. This is apparent from the following amounts reported by the GCC countries recently. CountryGDP $ bnReserves $ bn Saudi Arabia U.A.E Kuwait Qatar 6360 Oman 412 Bahrain 18N/A

2 Financial strength The financial strength is driving the need to invest to:  Improve overall living standards of citizens and residents  Diversify economies from oil & gas sectors  Diversify investments to areas other than the USA and traditional countries of the Europe  Develop infrastructure projects  Create employment and business opportunities for nationals.

3 GCC Government’s strategy The GCC governments are :  Investing in strategic projects  Reforming fiscal and tax laws  Creating investor friendly environment to attract foreign investors  Undertaking outbound investments to diversify and benefit from opportunities outside the GCC region.

4 Major investments During , US $ 500 billion would be invested in Oil & Gas projects; 50% of these would be in Saudi Arabia GCC’s construction projects breaking through the $ 2.5 trillion mark. Of these, $ 1 trillion would be in real estate projects. UAE is leading the pack with a 40% share in investment in real estate projects. As improvement in and expansion of healthcare facilities are a priority, there are projects in progress and under consideration estimated at approximately $ 25 billion. New healthcare cities are planned in Dubai, Oman and Qatar.

5 Major investments Islamic banking institutions:  Several new Islamic banking institutions to manage investment in accordance with the Islamic Shariah.  Islamic banking institutions are managing funds worth $300 billion globally. 125 Islamic equity funds are based in the GCC out of around 320 globally. Some of the major investments outside the region:  Saudi Arabia’s National Industrialization Company acquired Lyondell Chemical Company  Kuwait's Investment Dar acquired stake in British luxury carmaker Aston Martin  Dubai Ports (DP) World acquired world’s number-four container port operator P&O and acquired stake in Warner Brothers film studios  Dubai's DIFC Investments acquired stake in Deutsche Bank and Dubai International Capital (DIC) acquired stake in Airbus, HSBC Holdings and ICICI Bank of India.

6 Fiscal reforms Unprecedented fiscal reforms through out the region such as:  Reforms in Tax laws »Reduction in tax rates »Expanding treaty net works »Exemption of capital gains on profits earned from dealings in stocks  Property laws to handle foreigners’ investment in real estate and curb speculation  GCC Customs Union: Customs duty is levied at 5% only at the point of entry in the GCC in line with the Union  Allowed foreign investment in several sectors with 100% foreign ownership in the fields of Health, Tourism, Telecommunication, Information Technology etc.  Opened local stock markets to foreign investors in GCC states

7 Saudi ArabiaKuwaitQatarOmanBahrainUAE Maximum tax rates applicable to foreign companies on profits 20% and withholding 5% 15% 35% (expected to reduce to 12%) 30% Nil (Except oil & gas companies – 46%) Nil Tax rates applicable to nationals2.5%1%Nil12%Nil Tax rates applicable to GCC nationals on profits 2.5% withholding 5% 1%Nil12%Nil Taxability of global income of a domestic corporation Taxable Taxable Not taxableTaxableNot taxable Rigors of tax investigationHigh Medium Minimum Withholding /deemed profit tax/ disallowances on payments to abroad Yes NoYesNo Tax treaty with South Asian Countries India Pakistan India Pakistan India Pakistan Sri Lanka India Pakistan N/A India Pakistan GCC Taxation Overview

8 GCC’s Economic relationship with South Asian countries Historical trading partners; currently trade volume stands at $ 50 billion. Largest trading partner after USA. South Asian Countries are involved in:  Export of textile, edible goods, low tech industrial products and household items  Contracting. India is the major player with Pakistan as a distant No. 2  Manpower supply, business process outsourcing and information technology. South Asian Countries import oil, gas and other energy related products from the GCC Approximately 30% entities operating in the Free Trade and Special Industrial Zones of the UAE are from South Asia.

9 Opportunities for the South Asian Entrepreneurs in the GCC Entrepreneurs from South Asia are well positioned to participate in projects in energy, construction, real estate, hospitality, healthcare and Industrial sector. Supply of skilled manpower. The days of unskilled manpower are numbered. Hospitality and tourism business offer tremendous opportunities both in the GCC and South Asian Countries. Currently only budget tourism is targeted by tour operators. Huge opportunities for the South Asian construction companies to be involved in the unprecedented activity real estate.

10 Opportunities for the South Asian Entrepreneurs in the GCC (Contd) GCC Stock Markets The GCC Stock Markets have shown tremendous growth during 2007: It is now possible to invest in these stock markets to benefit from the economic boom prevailing in the region. Stock MarketGrowth % Bahrain Stocks Index 26.5 Kuwait Stocks Index30 Oman Stocks Index61.9 Qatar Stocks DSM Index40.4 Saudi Arabia Stocks Index40.9 UAE Stocks Index33.6

11 Opportunities for the South Asian Entrepreneurs in the GCC (Contd) GCC investors are hungry for investments outside their region, particularly South Asia. They would invest in well structured and potentially profitable ventures, particularly in:  Energy and utilities projects  Retail, mega hypermarkets  Real estate  Industrial units  Hospitality business

12 Challenges for South Asian Entrepreneurs Inability to pre-qualify for large projects because of low technical and financial standing Inadequate financial and technological resources Inadequate government support Strict investment laws requiring local participation in most economic activities Limited sophistication Increasing cost of living and maintenance of business Potential introduction of VAT and other indirect taxes

13 How to overcome these challenges Undertake projects in consortiums Get foothold in major projects as subcontractors Amalgamate like minded business enterprises to work in joint ventures Investment and trade shows to attract funds in local businesses Creation of technical training centers for skill development of our workers

14 Work with sophisticated and top quality professionals as partners and advisers Government agencies should support local business enterprises. Ministerial visits should include trade initiatives as a necessity rather than in passing. Reform local laws and practices, particularly in respect of taxation and customs laws, to encourage investment Non-resident citizens should not be the only target for business in the Gulf. The Gulf Sovereign Wealth Funds and Entrepreneurs should be the target. How to overcome these challenges

15 Thank You