Finances and Taxes of the United States and Saudi Arabia
The main difference between countries with the Islamic economy and economies of other world countries consists in the fact that they are based on the theological and legal postulates. The actual behavior of economic entities is built not only on the precepts of the law put in the legislation of the stateб but also on the rules of conduct stated in the Quran. The religious and ethical postulates, having a considerable impact on the behavior of economic entities, predetermine the purpose of the Islamic economic model – the achievement of wide public benefits contrary to the narrowly taken financial welfare. It explains the specifics of the financial architecture of the Islamic type, as well as forms and methods of functioning of the financial institutions of the Islamic countries. The given research paper represents a complex analysis and comparison of local and state finances and taxes of Saudi Arabia and the USA.
The Financial Market of Saudi Arabia
The Kingdom of Saudi Arabia (KSA) is the largest state on the Arabian Peninsula. The country borders on Jordan in the North, Iraq, Qatar, Kuwait, and the United Arab Emirates in the East, and Oman and Yemen in the South. It is washed by the Persian Gulf in the Northeast and the Red Sea in the West. Saudi Arabia is often called “the country of two mosques”, meaning Mecca and Medina, which are two main sacred towns of Islam. Saudi Arabia with its enormous reserves of oil is the main state of the OPEC. The oil export makes 95% of export and 75% of the income of the country, giving the chance to support the general welfare of the country (Latham & Watkins, 2010).
Saudi Arabia follows Sharia laws. There is a ban on investments into some branches of the economy on the market. These spheres include tobacco production, alcoholic production, gambling, and arms production. Moderation is the next principle of financial activity in the country. Participants of the financial market have to make operations with a certain restriction without exceeding opportunities. In the market, the number of possible operations and their cost assessment for each category of participants are precisely defined. The excess of the financial opportunities is strictly forbidden as it can lead to considerable losses at the micro-level and finally to the crash of the financial system, i.e. to the macroeconomic crisis.
The professional ethics of behavior is one of the most important requirements of Islamic norms. According to this principle, the use of insider information in the financial market, implementation of manipulative transactions, and other methods, which contradict the requirements of honest behavior in the market, are strictly forbidden. Thus, the religious norms in Saudi Arabia have an impact on the financial sector, including taxes and the banking sector. As a result, the Islamic tradition proves itself in the form of Islamic finance as the form of the financial market based on the observance of a ban on percent collection by investors (Latham & Watkins, 2010).
The fixed capital in Saudi Arabia is concentrated in the hands of a narrow group of owners, namely, in the hands of public authorities. It defines the dominating influence of the state on all spheres of public life. In Saudi Arabia, the religious power represented by the state has the strongest impact on public relations. Construction and functioning of the financial system of Saudi Arabia completely correspond to the principles of Sharia. Therefore, there are completely no debt tools and derivatives in the market and investors of an Islamic banking system can be compared to investors or shareholders who receive dividends from investment activity. However, the fact that the governmental bodies of Saudi Arabia concentrate not only political and economic systems in their hands, but also subordinate the religious force of power under themselves is the essential difference of the creation of the financial relations in Saudi Arabia if compared to those in the USA. The control of economic and political relations from the side of the government has turned out to be the consequence of it (Bland, 2013).
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The role of the state in the national economy and its influence on the value and volume of the stock market in the analysis of the number of the addressing sovereign securities is estimated as high and reaches 50-70 %. The structure of the financial market of Saudi Arabia can be characterized as simplified as the banking sector reaches 70% of the entire financial system. It should be noted that the banking services market is oligopolies. More than half of the market capital is concentrated in the hands of several commercial banks (Latham & Watkins, 2010).
Commercial banks are the main participants in the stock market of the country. About 60% of the market is occupied by banks and broker-dealer companies affiliated with these banks. The remaining share of the market – about 40% – is distributed among smaller banks and other investment companies. The total number of broker and dealer organizations in Saudi Arabia makes 35, while only 8 of them are full-size investment banks: HSBC Saudi Arabia Limited; Rana Investment Co.; EFG Hermes KSA; Audi Saudi Arabia Co.; Falcom Investment Company; MEFIC; Forsah Investment; and Amoal for Security Advising Ltd. (Bland, 2013).
Moreover, only 50% of these broker and dealer companies are Saudi organizations. Being affiliated structures of foreign organizations, the other half of the organizations only carry out professional activity in the stock market of Saudi Arabia. About 75% of the data of the companies are registered on the territory of the Persian Gulf and the remaining 25% are representatives of the American and European companies. The first place in the size of assets and shares in the market is occupied by the HSBC Saudi Arabia Limited.
The Financial System of the USA
The financial system of the USA, which has been gradually developing throughout several centuries, remains the most powerful in the world. In the USA, the banking system is engaged in issues, concentration, and redistribution of the money supply. The role of the central bank, which is the intermediary between the state machine and the country’s economy, is fulfilled by the Federal Reserve System. It exercises the supervision of banks and regulates their activity, protects the credit rights of consumers, as well as being engaged in the monetary issue and ensuring the stability of a financial system. The US banking system consists of two main types of banks: commercial and investment. Commercial banks occupy the leading place in the US financial market. By means of commercial banks, short-term financing of trade and turn of payments, including operations with credit cards and checks, are carried out.
In total, in the USA there are more than 10 000 commercial banks that, in fact, are the engine of the entire financial system of the country. Two-thirds of them are the banks of states. Therefore, they carry out the activity in compliance with the laws of each state. The others act in accordance with federal institutions and are considered to be national banks. Besides, stock exchanges represent one of the main elements of the US financial system and the sign of its power. The stock and commodity exchanges carry out a huge number of transactions on the purchase and sale of securities and various goods.
In the USA, the market is substantially focused on the direct interaction of supply and demand, which is shown in high direct investments and revealed in shares and bonds of corporations and government. Thus, direct investments of the population into the stock and bonds of corporations and the state make 2/5 of their savings. Besides, in the USA there is a more developed insurance and pension sector (8%). The outside world can play an opposite role in general: the USA is the pure borrower as assets of the outside world make 6% of the capital market (Bland, 2013).
Taxes in Saudi Arabia
Taxation in Islam plays a very important role. During the Arab raids in the 6th-8th centuries, there was an opportunity to choose one of three alternatives: to die, to pay taxes, or to change religion given to the conquered people. Thus, the people occupying the conquered territories and passing into the Muslim religion paid less burdensome Islamic taxes. The most important feature of the taxation in the Islamic world was that it was based on the sacred primary sources, including the Quran and Sunnah. Therefore, Islamic taxes had not only economic but also religious value. Moreover, Islamic taxes are taxes approved by the Sharia: zakat, ushr, hums, haradj, and dzhizja (Latham & Watkins, 2010).
Zakat is the major Islamic tax mentioned 60 times in the Quran and 27 times among the duties of devout Muslims. The payment of zakat representing an obligatory annual tax in favor of needing people is considered as a good act of the Muslims. By means of zakat, the Muslims clear up their souls and property. The ayat in Koran most accurately reflects the religious value of zakat because the Muslims who do not pay zakat neither receive clarification nor deserve an intercession prayer of the Prophet Muhammad in front of Allah. Certainly, such a spiritual component going directly from the God distinguishes zakat from other ever-existing types of tax (Deloitte, 2015).
The payment of zakat assumes the use of a certain free minimum – a nisab, which just as zakat rates depends on the type of property from which zakat is paid. Zakat paid on the agriculture products is called ushr. At the same time, some categories mentioned in the Quran are rather general and uncertain owing to the fact that their application demands the formation of the general opinion of Muslim jurists. This feature is the only possibility of the emergence of any innovations in the functioning of zakat institute (SantanderTrade, 2015).
The tax system of Saudi Arabia is the system of taxes and fees established in the Kingdom of Saudi Arabia, as well as a set of principles, forms, and methods of their collection. The Saudi tax system is considered to be one of the most favorable in the world; it takes the 7th place in a rating of 10 most favorable tax systems. The system of taxation of Saudi Arabia is characterized as protectionist as it is directed at the maintenance of a standard of living of the population and protection of the interests of national business companies.
The foundation of the tax law in Saudi Arabia started with Decree No. 3321 dated as of 3.11.1950. At that time, the income tax was imposed. According to this decree, the taxation was imputed to the KSA Ministry for Finance. For this purpose, the Zakat and Income Tax Department was created in the structure of the ministry. Zakat, which is one of the Islam pillars, is equal to 2.5% of the net income except for the capital invested in real estate and long-term investments (Table 1). In 1951, a new royal decree, according to which zakat had to be imposed on the Saudi natural and legal entities, was issued. Zakat was also imposed on citizens of other member-countries of the Cooperation Council for the Arab States of the Gulf (CCASG) and commercial structures belonging to them registered in the territory of the KSA (SantanderTrade, 2015; Deloitte, 2015).
Taxes in Saudi Arabia
|Non-Saudi taxpayer’s share of a resident company or a Non-resident’s income from a permanent establishment in Saudi Arabia||20%|
|Businesses working in the exploitation of the natural gas sector||30%|
|Businesses involved in the production of oil and hydrocarbons||85%|
(source: SantanderTrade, 2015).
For several decades, the taxation system of Saudi Arabia did not undergo any changes and continued to operate on the former principles. Since the 1970s, the financial means received by the KSA from the export of oil and its products abroad allowed raising the standards of living of the local population due to subsidization of utilities and maintenance of low prices on some categories of goods and services (fuel, electricity, water, telephone services) in the domestic market.
In 1995, Saudi Arabia, compelled to consider the corresponding IMF recommendation, increased the prices for oil products, electricity, water, telephone services, visas, work permits for foreigners, and air transport in the domestic market. The increase in income from oil in 1996-1997 allowed Saudi Arabia to reduce the budget deficit. However, the fall of the world prices for oil in 1998 forced the country leaders to reconsider the budgetary policy and to start carrying out economic reforms, including in the sphere of taxation. In this regard, in 2000 the law on foreign investments lowering the rates of income taxes for foreign companies was adopted (Deloitte, 2015).
According to this law, taxpayers who lived on the territory of the KSA for 1 year are completely exempt from the payment of the tax for the first 6,000 riyals of their profit. Taxes in Saudi Arabia are paid by all categories of natural persons (Saudi and foreign) and commercial structures irrespective of the forms of their property (joint-stock company, open company, representations of foreign companies, contract organizations, etc.). The same level of taxes is imposed on Saudi private commercial structures. If a company belongs partially to the Saudi and to the citizen of the third country, zakat is paid in proportion to the share of the Saudi partner in this company (Table 1).
Citizens of third countries employed by contract in the KSA do not pay income taxes. There is a category of so-called “professionals” (foreign businesspeople who are engaged in business activity in the KSA) who pay income tax according to the special scheme. Income tax for foreigners engaged in business activity in the KSA is calculated by the following scheme: from 0 to 6,000 riyals – 0 or 5%; from 6,001 to 16,000 riyals – 5 %; from 16,001 to 36,000 riyals – 10 %; from 36,001 to 66,000 riyals – 20%; more than 66,000 riyals – 30 %). Other taxes like a tax on sales, the VAT, a real estate tax, or a tax on “gifts” in the KSA are not charged (SantanderTrade, 2015).
All commercial organizations belonging to the foreign capital or being partially foreign and partially Saudi are obliged to provide information on revenues and net profit according to financial documents checked by auditors. Companies, owners of which are subject to the KSA or CCASG member-countries, should provide the same documents calculated for the payment of zakat. The right to pay taxes on the basis of the “expected income” is given to branches of foreign companies registered in the KSA. The minimum tax rate in such cases amounts to 15 % (Table 1) (Latham & Watkins, 2010).
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Commercial structures with the participation of the foreign capital provide information on income and pay income tax or zakat not later than 2.5 months after the termination of the financial year. Companies completely belonging to the KSA citizens or CCASG member-countries are obliged to provide documents and to pay zakat within one month upon the completion of their financial year. Submission of documents after the established period, but no later than six months is allowed in certain cases. Companies paying taxes on the basis of “the expected income” are not provided with delays in payment. Fines up to a 15-day delay, including penalties up to 25% of the tax sum, are applied for the delay in income tax payment. However, there are no penalties for the delays in the payment of zakat (PwC, 2014; Deloitte, 2015).
Taxes in the USA
The U.S. tax system is considered to be one of the most developed taxation systems in the world. It has been improved many times, accepted a more branched character, and promoted the development of market relations. It corresponds to not simply fiscal tasks like to provide federal, state, and local budgets with income, but taxes also act as the instrument of the regulation of economic development. Formation and movement of budgetary funds take the central place in the realization of the U.S. economic policy. The main place in the financial system of the USA belongs to the budgetary mechanism of the federal government (Connolly, 2013).
The USA is the country guided by a liberal model of economy and is a federal state. There are a three-level tax system: federal, state, and local taxes. The main types of taxes are presented in Table 2.
The Structure of Tax Income in the USA, %
|Tax level||Income tax||Corporation tax||Social insurance||Excise tax||Property tax||Others||Total|
(source: Connolly, 2013).
Unlike the tax system in Saudi Arabia, the US current tax system is characterized by the parallel use of the main types of taxes by the federal government, state governments, and local authorities. Therefore, the population of the country pays two types of property tax, three types of income tax, and two types of a universal excise. Personal income taxes, which at the level of states include universal and special excises and at the local levels – a property tax, are the most widely used taxes in the modern tax system at the federal level (Sundberg, 2014).
Taxes giving the largest and the most stable incomes go to the federal budget. About 70% of income and expenses belong to the federal budget. However, local governing bodies possess considerable own sources of financial resources, primarily at the expense of local taxes. During the previous 10 – 15 years, in the USA as well as in European countries there has been a rapid growth of the volume of local finances, which increase in their specific weight in the general fund of the means mobilized through the financial system. At the same time, the essential part of expenses is shifted to local finance. In a number of branches of production and social infrastructure, the finance of states and local authorities act as the main sources of financial resources. Thus, their specific weight takes from 70 to 90% in financing of social security, education, health care, road construction, and maintenance of the police force at the expense of the state; and about 40% in financing of protection of surrounding environment, preservation of natural resources, as well as civil and housing construction (PwC, 2014).
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The US local finances include counties, municipalities, townships (settlements in rural areas), school districts, and special areas. The system of local finances includes local budgets, special funds, and finances of enterprises belonging to local governing bodies. At present, there are more than 83 thousand local governing bodies having their own financial base in the country. Direct taxes prevail in federal income. The income of states and local authorities is formed mainly at the expense of indirect taxes and property taxation (Connolly, 2013).
Income tax from the population is the biggest one. It is charged by an ascending scale. There is no taxable minimum of income and three tax rates. Either a person or a family can be charged with a tax. In the latter case, all types of income of family members in a year are summarized. The decrease of a tax rate after a certain high level of income is characteristic only for the USA. It is explained by a large absolute sum of payment. There were 14 rates of income tax, the size of which increased from 11 to 50% until 1986 in the country. During the tax reform, the scale of rates has been simplified, the maximum rate has been significantly lowered, and the free minimum has been increased. However, the quantity of tax privileges has decreased (Sundberg, 2014).
Social insurance tax is the second-large tax imposed on the federal budget income. They are charged both from employers and hired workers. Unlike Saudi Arabia, where the main part of this contribution is made by the employer, in the USA it is halved. The rate changes annually when forming the budget. In the early 1990s, the general rate was 15.02% of the wages fund, while both the employer and the worker brought 7.51%. There is a tendency to increase rates. The corporate income tax takes only the third place in the income of the budget. Its main rate is at the level of 34%. However, it is charged by a gradual scale. Corporations pay 15% for the first $50 thousand of a taxable income, 25% for the following $25 thousand, and 34% for the remaining sum. Such gradual taxation has paramount importance for medium-sized and small enterprises. Thus, the comparison of corporate taxation in Saudi Arabia and the USA is presented in Table 3 (PwC, 2014).
Comparison of Corporate Taxation in Saudi Arabia and the USA
|Saudi Arabia||The USA|
|Number of payments of taxes per year||3.0||11.0|
|Time is taken for administrative formalities (hours)||72.0||175.0|
|The total share of taxes (% of the profit)||32.3||46.7|
(source: SantanderTrade, 2015). Indirect taxes in the USA occupy a considerably smaller share in comparison with direct taxes. Among indirect taxes, the preference is given to the sales and excise tax. Excises are entered for certain goods. At the federal level, they are imposed on alcoholic beverages, tobacco products, telephone negotiations, air tickets, etc. The VAT is not used in the USA. In general, the U.S. tax system is a little bit progressive and does not play an essential role in the redistribution of income. In countries with the prevalence of a socially-oriented model such as Saudi Arabia, for example, tax rates are higher and the state plays a more active role in income distribution (Sundberg, 2014).
The carried out a comparison of the finances and tax systems in Saudi Arabia and the USA has shown that these two systems are absolutely different. The Arabic tax system is influenced by the regulation of religious norms on the development and the current state of the economy in general and finances and taxes in particular. The taxation system is rather simple in Saudi Arabia. Existing only in Islam, the zakat tax aimed at the provision of the poor population of the country with funds is widely spread. Saudi Arabia has one of the simplest tax systems in the Middle Eastern and Asian regions. The country is included in the top 10 most convenient tax systems in the world.
If compared to the tax system in Saudi Arabia, US taxation is subdivided into federal and municipal tax systems. For federal taxes, the ascending scale is characteristic; therefore, the main burden of their payment lies in the well-being population. On the contrary, local taxes have a flat or in certain cases a descending scale that promotes more or less uniform participation of inhabitants of this or that territory in the formation of revenues of its budget.