GCC states seek to introduce VAT to diversify revenues

Economists in the UAE suggest that the country and the GCC region as a whole will soon have to explore a common taxation model.

During a special forum at the Dubai Financial International Centre (DIFC) experts explored ways on how to introduce taxation in the region, as governments look into ways of diversifying their respective economies and have less dependence on oil and gas revenues.

Levying personal income tax and increasing corporate tax has a few challenges to implement, but the best form of tax to bring to the economy is Value Added Tax (VAT), officials concurred.

Dr Nasser Al Saidi, Chief Economist of the DIFC Authority said: “Government finances in GCC countries are highly dependent on revenues from hydrocarbon exports, which makes them vulnerable to the volatility of oil and gas prices.”

Volatility in state revenues affects expenditure

He explained further that volatility in government revenues affects expenditure plans and investment spending in development projects, which in turn threatens the sustainability of economic growth.

“To address these financial and economic vulnerabilities, the GCC countries need to understand public finance reform and diversify their government revenue sources by considering various sources of taxation, including sales taxes and value added taxation,” said Al Saidi.

Ehtisham Ahmad, adviser in the Office of the Prime Minister of the UAE, and a senior fellow at the Centre of Economic Research at the University of Bonn and at the Asia Research Centre of the London School of Economics pointed out that Saudi Arabia has already put administration systems in place and is ready to implement VAT theoretically, while, Qatar, Bahrain and Oman are currently working on developing the system.

“UAE and Kuwait are lagging behind as of now. The problem of trying to get an integrated VAT by 2012 when the free trade agreements kick in is going to be very tight," he said.

To start from scratch to prepare administration for VAT in very optimistic circumstances need a minimum of 18 months.

However, Ahmad says, “three years is more like it. So if we start now, it looks like 2013, when VAT can come into being in UAE.”

According to Ahmad, Dubai Customs had plans in 2008 to go ahead with VAT, but it has pulled back since, possibly due to administrative and revenue distribution issues.

Economists emphasised that VAT doesn’t tax investment and gives additional revenue stream to the government who are dependent on oil and gas revenue or customs duty.

UAE residents have been paying indirect taxes

VAT’s advantages are that it’s only on consumption and there’s an immediate refund as well.

With regards to customs duty Al Saidi elaborated that as governments sign trade treaties, causing revenues from customs to fall, an alternative revenue source is needed.

He also believes that with 80 per cent of its population being expatriates, UAE residents have been paying indirect taxes, custom duties and several other charges and VAT would consolidate the various fees thereby lowering the overall burden.

“Each and every fee takes time, effort and money. So VAT would save on administration costs and burden on people," Al Saidi said, adding, “The general consensus is that VAT is the best way forward, since it encourages savings and taxes consumption.”

Speaking about the changing tax landscape in the region, Dean Rolfe, Tax Partner – Middle East Tax Leader, PricewaterhouseCoopers said: “The tax environment in the Middle East is evolving rapidly. This evolution is being driven partly by a need to compete for foreign direct investment and partly by a need to diversify revenue streams.”

Rolfe added that reform of tax systems in the region is gathering pace with Qatar, Oman and Kuwait recently rewriting their corporate income tax laws.

With some GCC countries already putting taxation administration in place, it looks like an integrated VAT regime will take till 2013 to be integrated in the Gulf Corporation Council countries.