I'm not sure what the specific issue was but I'm chocking it up to redundant bureaucracy. A lot of the responses I got from Microsoft support and the Middle East offices over the past years were basically "We can't do it because we aren't allowed" or along those lines. One representative went so far as to tell me it was due to legal issues between countries and regional permissions.
My argument, at the time, was that such issues are pointless because it is possible to create a US based account (or any region for that matter) from the Middle East, so that nullifies the whole regional permissions issue.
The bigger problem was that when my Xbox Live account was first created back in 2005 from a friend's Xbox, it was just a profile on the Xbox for my save files, it somehow made it based in a region that did not support Xbox Live at all, I had no choice in what region I wanted but it decided we're going to do it based on IP address or something. Anyway, I wasn't aware there was a problem until I played my first Games For Windows Live game, where my account refused to log in, always giving me some 800x#### error, which was revealed to be the error code for "GFW/Xbox Live is not support in your region." Why the F would you allow me to create an account for a region that you don't support?? The solution seemed simple, create a new gamertag and link it to my Hotmail account and just forget about the old gamertag, right? Wrong, apparently because the service is "not available in my region" it is now impossible to log into the Gamertag account even from an Xbox or a X360. So I can't even log into it in order to remove the e-mail address. Other people started to notice such problems and all Xbox/360 owners in the Middle East would take caution to specifically create US/UK/Canada based accounts and just use those. So most of the people you see online with US regions are often not in the US.
Anyway, getting to the point: this whole problem has essentially been rectified by simply providing the services universally as they should have been from the start.
It's completely pointless to make region-based accounts, instead keep them as preferences. All people should have universal accounts with regional preferences like weather or currency. Unfortunately the only way to do that seems to be by qualifying the "Internet" as its own jurisdiction independent of nations and localized regulations. A pipe dream, I'm sure, but something we can strive for.
