SPECIAL REPORT
VAT
In Search Of Tax Efficiency
The introduction of VAT in Saudi Arabia and the UAE in January caused some teething problems, but now that it’s in place it’s unlikely to ever be withdrawn. The questions for the future are how quickly will other GCC states follow suit, and how long will it be before governments start to push the tax up from the current low rate of 5%? By Dominic Dudley
T
he need to develop a more diverse revenue base has long been recognised by governments in the Gulf, but it has been one of those things easier said than done. That is now starting to change. Over the past few years there have been a series of moves by GCC authorities to introduce charges where previously there were none. The efforts began cautiously but the trend is picking up momentum. Changes made to date have included the service fees for departing passengers at airports in Dubai and Sharjah, which was announced in the first half of 2016, and the excise duty on tobacco products and sugary drinks introduced by several countries in 2017. Arguably the most significant step so far came on 1 January this year, when the UAE and Saudi authorities took the plunge and introduced a value-added tax (VAT). The idea of VAT is hardly a new one for the region. As long ago as 2005 the UAE authorities were requesting the IMF’s assistance in designing a VAT system, and over the years it has cropped up on a fairly regular basis. Until now
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however, GCC governments have always shied away from going ahead with it. A fall in oil prices in late 2014 provided the trigger needed and, as oil revenues plunged and budget deficits soared over the following year, the GCC states finally agreed at a meeting in December 2015 to introduce a 5% VAT. In an echo of the sort of caution exhibited by the authorities over the years, however, the deal has only been partially implemented. Although all six countries were meant to introduce it at the same time, only two have done so far. The other four governments have indicated they will follow at some point, but there is no clear timetable at this stage. Announcing his government’s budget for the forthcoming fiscal year, Kuwait’s finance minister Nayef Al-Hajref said on 29 January that it would not impose VAT without first securing approval from the National Assembly (parliament). Bahrain and Oman have been unclear about their intentions, but there is a general expectation that all will