After five years, VAT rate may need to rise, IMF official says

Any amendment to the 5 per cent levy in GCC depends on each country's revenue needs

GCC states may have to increase the VAT rate above the current 5 per cent, depending on the revenue needs of each country, but not within the next five years, an International Monetary Fund official said.

All six member states agreed in 2016 to introduce the levy, but so far only Saudi Arabia and the UAE have implemented it this year. The other four  states have yet to give a definitive timeline to introduce VAT.

Any increase in the rate would necessitate an amendment to the GCC-wide agreement.

“In our projection, we don’t assume any increase in VAT from the 5 per cent rate for the next five years, however, we have suggested that once VAT is successfully implemented and the people have got used to it, the rate could be increased in the future depending on the revenue needs of the [individual] country,” said Tim Callen, IMF mission chief to Saudi Arabia. “I think it is important to put it into perspective: a 5 per cent rate is extremely low in global standards so we would seek increasing VAT if need be at some point in the future.”

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GCC states are introducing taxes as part of reforms aimed at shoring up hydrocarbon revenue that has been dented by low oil prices. They have curtailed spending and raised energy prices to cope with the low oil price environment that started with the crash from the mid-2014 high of $115 per barrel before recovering somewhat to the current $70 per barrel.

The IMF, which has long advised GCC states to introduce taxes such as VAT, is so far pleased with the implementation in Saudi Arabia and the UAE, the two biggest Arab economies. The fund has estimated that the introduction of VAT in the region could generate new revenue of 1.5 to 3 per cent of non-oil GDP.

“The initial assessment is that the implementation has been very successful,” said Mr Callen. “The authorities in both of the countries over the last year or so put a lot of effort into carefully preparing implementation of the VAT including issuing the necessary laws, implementing regulations, registering of tax payers, [and] disseminating information through internet and seminars.”

Going forward past registration, the tax authorities in the UAE and Saudi Arabia will have to engage with businesses to make sure compliance is done the right way, said Mr Callen.

“There is undoubtedly going to be a lot of discussion and support for the businesses as they file,” he said. “What is going to be important is that the tax administration is strong from the start and [for] those companies that should be paying value added tax, the authorities need to make sure they are paying it.”

Although the other four GCC states have yet to implement VAT, the relatively smooth introduction in the UAE and Saudi Arabia may encourage them to do so, Mr Callen added.

“The introduction of VAT in the two countries really shows the way forward for the other GCC countries and gives two good models of the process and the preparations,” he said.

“A lot of effort is needed in making sure preparations are right before you move ahead with that VAT. What we find in most countries is that what you do in terms of the administration of the tax will have a long lasting effect.”