Michael Armstrong: Low-oil era seems a good time for Gulf to develop revenue streams

Lower oil prices are expected to slow down the GCC economies. Rather than an imposition, this should be considered an opportunity for countries to restructure and broaden revenue sources.

GCC countries benefit from having more than US$2.5 trillion in reserves and very low percentages of debt. For long-term economic sustainability, there is a pressing need to raise taxes in GCC countries to diversify revenues and strengthen their fiscal positions. Other approaches, such as cutting subsidies or spending, will be difficult to implement at this stage.

GCC countries have been discussing a common tax framework for 10 years. The debate is now reaching its final stages. Based on the core principles of the framework, 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 the imposition of a value added tax (VAT) and the proposed percentages. Such committees have suggested a VAT rate of between 3 and 5 per cent for the various sectors, with the exception of health care, education and 94 food items on which there will be no VAT. This rate is far less than the 20 per cent charged in the UK, for example.

The proposed tax rate is among the lowest in the world, so the impact on prices would be minimal. There is no doubt that VAT is a positive move for the GCC counties as it would diversify governments’ sources of income without putting too much burden on the retail sector.

Once introduced, VAT could generate from 4 to 5 per cent of GDP, according to speakers at a panel discussion organised recently by ICAEW’s Corporate Finance Faculty in the UAE. The countries most likely to impose VAT are the UAE and Oman. Other GCC countries are also expected to follow, with an exception, Qatar, which is unlikely to introduce it at this stage owing to strong fiscal reserves from liquefied natural gas.

Each country would need to put in place a domestic tax law structure before the GCC-wide implementation of VAT. In the UAE, the tax law is in a preparatory stage and has been approved by local authorities.

The draft law has been sent to the Technical Committee for Legislation at the Ministry of Justice.

GCC countries are not ready to start imposing taxes at this point as they are currently at different stages of preparation. The biggest challenges they face are from the lack of necessary infrastructure and expertise.

According to the UAE Ministry of Finance, GCC countries have agreed on key issues for VAT implementation in the region, which is expected to be completed in 2018. The leaders of the GCC have tentatively approved the plan and are expected to meet this quarter to discuss which industries will be subject to tax. The UAE Ministry of Finance expects to make about $3.3 billion in revenue collected from VAT in the first year of implementation alone.

Most recently Saudi Arabia’s deputy crown prince, Mohammed bin Salman, confirmed that the country is gearing up for the introduction of VAT. However, he ruled out the country imposing taxes on income or wealth. He said that the kingdom is trying to speed up the implementation of VAT and plans to introduce it by the end of 2016 or 2017.

While tax will generate revenues for GCC countries, it is essen­tial that they are designed to reduce the potential for aggres­sive tax avoidance, as has been seen in some countries in the West. The GCC governments would need to educate businesses and reposition themselves globally, since they will no longer be tax-free domiciles.

The concern is whether introducing VAT could deter consumer spending. Prices are likely to increase as businesses will be unwilling to absorb the extra cost shifting the burden to the consumers. However, if it is implemented in phases, starting from a low value of 5 per cent, for example, the negative effect is not expected to be significant.

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 as an increase in prices would not put them off from paying for the services and goods they require. Redistribution of income could help close the gap between rich and poor.

The biggest impact from any introduction of VAT in the GCC is likely to be felt by businesses. This is not necessarily because of the taxes themselves but as a result of the extra time and money they would have to spend to ensure they are compliant with the new rules. Systems, technology, personnel and training will need to be introduced to help businesses comply with the new tax regime. Even if the tax itself is not a significant cost, the compliance burden may be substantial.

Clearly, implementing new taxes is likely to attract a certain degree of criticism as no one wants to pay more tax. However, considering that GCC countries need to diversify their economies, the move is a positive one. More money means greater investment possibilities in other projects, employment opportunities and further development of the infrastructure. In the long term, the move should have a positive effect on the GCC countries, as long as it is replicated across the region.

Michael Armstrong is the regional director for the Middle East, Africa and South Asia of the Institute of Chartered Accounts in England and Wales.

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