While the decrease in oil prices is negatively impacting the GCC economy, it has also created an opportunity for governments to broaden their revenue sources through new fiscal policies like taxation. It is confirmed that Value Added Tax (VAT) will be introduced in several GCC countries from 2017 onwards.
This is a necessary move in order to strengthen fiscal positions and achieve long-term economic stability.
Right now the GCC countries are in discussions to agree a common tax framework. However, each country will have the choice to implement its own tax legislation and system. Committees and task forces have been formed by GCC governments to study the anticipated socioeconomic impact of VAT and the proposed rates.
Such committees have suggested a VAT of between 3-5 per cent for the various sectors, with the exception of health care, education and essential food items on which there will be no VAT. This is far less than the 20 per cent charged in the UK, for example.
This makes the proposed tax among the lowest in the world so the impact on prices will be minimal. Once introduced, VAT could potentially generate up to 4-5 per cent of GDP, according to members of ICAEW’s Corporate Finance Faculty in the UAE. The countries confirmed to introduce VAT are the UAE, Saudi Arabia and Oman.
Other GCC countries are also expected to follow, with the exception of Qatar, which is unlikely to introduce it at this stage owing to their strong fiscal reserves from liquefied natural gas.
Each country is having to put in place a domestic tax law structure before the implementation of VAT. The biggest challenges they face are from the lack of necessary infrastructure and expertise. It is critical that this infrastructure is designed to mitigate the risk of aggressive tax avoidance, as has been seen in some countries in the West.
The GCC governments will also need to educate businesses about compliance and reposition themselves globally since they will no longer be tax-free domiciles.
In the UAE, the tax law is in a preparatory stage and has been approved by the local authorities. The draft law has been sent to the Technical Committee for Legislation at the Ministry of Justice and is planned to come into effect from January 1, 2018. The UAE Ministry of Finance has said it expects to make around $2.7 billion in revenues collected from VAT in the first year of implementation alone.
Saudi Arabia has also confirmed it is expediting the implementation of VAT with plans to introduce it in 2017. Similarly, Oman’s Shura Economic Committee has said VAT will be introduced in the Sultanate by the middle of next year.
The proposed VAT has incited a level of public criticism, mostly over concerns that it could deter consumer spending. Prices are likely to increase as businesses will be unwilling to absorb the extra cost and so will shift the burden onto consumers.
As long as VAT is implemented in phases, starting with a low value of 5 per cent for example, the negative effect is not expected to be significant. What is more, redistribution of revenue from international visitors is likely to bring further benefits.
These are usually wealthy individuals travelling to the country for leisure or business, purchasing expensive goods. They are not likely to be majorly affected by VAT introduction as a slight increase in prices will not put them off paying for goods and services they require. Redistribution of income could help close the gap between rich and poor.
The biggest impact of any introduction of VAT in the GCC is likely to be felt by businesses. This is not necessarily from the taxes themselves, but as a result of the extra time and money they will have to spend to ensure they are compliant with the new rules.
Systems, technology, personnel and training will need to be introduced to enable businesses to comply with the new tax regime. Experience shows that even if the tax itself is not a significant cost, the compliance burden may be substantial.
However, considering the GCC countries need to diversify their economies, the implementation of VAT is a positive move overall. More money means greater investment possibilities in other projects, employment opportunities and further development of the infrastructure.
Long term VAT should have a positive economic impact on the GCC countries, as long as it is replicated region-wide.
The writer is ICAEW’s Regional Director for the Middle East, Africa and South Asia.
Source: Gulf News