Tax & Accounting Blog

VAT is a New Hot Commodity for GCC Members

Blog, Indirect Tax, ONESOURCE, VAT Tax Rates, VAT-GST Management March 7, 2016

After years of much talk and very little action, the UAE will become the first member of the Gulf Cooperation Council (GCC) to levy Value Added Tax. This will take effect in January of 2018 and is a move that will be followed by the rest of the countries in the GCC by the end of 2018. All of the countries of the council have agreed on a common rate of 5% and that essential food items, healthcare, education, and social services will be exempt from the tax.

The GCC was formed in 1981 in order to create unity and stability among the member nations, which shared most core cultural, religious, and political values. Bahrain, Kuwait. Oman, Qatar, Saudi Arabia, and the UAE also share the vulnerability of highly oil and gas dependent economies. GCC has been working hard to ensure the economic stability of all its member states. Certain members are wealthier than others due to the extreme bounty of natural resources. For example Saudi Arabia has the world’s second largest oil reserves and has put away enough money for the government to operate for several years without any income from oil sales. Obviously they are less worried about the future and finding measures to fight budget deficit. Bahrain, on the other hand, has almost no oil resources left and has experienced political turmoil.

With the prices of oil and gas stubbornly hovering below break-even prices, each of the member countries are under considerable economic pressure to remedy their budget deficits, which seem to be the new norm. The lack of economic diversity and the “tax-free” branding associated with the GCC countries has left members with difficult and unpopular options moving forward. Despite attempts to diversify revenue sources within the region, member governments are exceedingly reliant upon oil and gas revenue to provide basic public services. Due to projected long-term low crude prices, the International Monetary Fund has strongly advised the GCC countries to consider the introduction of taxation. Without the injection of tax revenue the governments of the council will risk a deep financial crisis.

The IMF Managing Director, Christine Lagarde addressed the GCC in Abu Dhabi on February 21, asserted that oil prices may remain at low levels for longer than expected. She also called on Gulf countries to cut costs and increase revenues through the introduction of new taxes, reports Reuters. She suggested that all six countries of GCC should introduce value added tax. This measure, along with corporate income tax and property tax will increase the revenues of governments and reduce dependency on energy for general fund revenues.

UAE will be the first country to introduce VAT. A government spokesman said that the introduction of tax reforms in the UAE is necessary, as the country is experiencing difficulties with income and needs extra nourishment for the budget. All this is done to maintain a stable level of life and continue to invest in infrastructure.

In order to protect low income families, the UAE government is making exempt all essential commodities and imposing VAT on luxury items at first. Impact of VAT on consumers often depends on their income level and how they spend their money, as well as the desire to buy certain products.

With regard to the purchasing power of residents of the UAE, the VAT tax of 5% will be barely noticeable to the ordinary citizen, but will affect more conspicuous consumption.

In any case, the government will introduce tax innovations very gradually, so as not to lose the low-tax or tax-free benefits for UAE investors. Officials understand that the introduction of tax could complicate the country’s competitive edge against the developed markets.

Details on the VAT regime have not yet been laid out and the common framework has not been developed by the GCC countries.

The Council will need to think about an overall tax structure, returns, computerization, registration, tax payer services, and many other basic components of the tax system.

The truth is, we won’t fully understand the implications and effects of the proposed measures until the countries are in agreement and the new tax system is functional.