In December of 2015, the six member states of the Gulf Cooperation Council (GCC) – Saudi Arabia, Kuwait, Bahrain, Oman, Qatar, and the United Arab Emirates – agreed in principle to implement a regional Value Added Tax (VAT) system, intended to bolster and diversify Gulf Coast state economies following a drop in global oil prices. Media reports indicate that the agreement allows each member state to introduce VAT between January 1, 2018 and January 1, 2019. In order to reduce the impact on consumers, roughly 95 to 100 food items will be exempt from taxation, along with education and health care. The official framework agreement is expected in June of 2016, which is right around the corner.
VAT Expected to Strengthen Flagging Gulf Coast Economies
The six GCC countries have long been able to fund government spending through oil and gas exports, without needing to impose income or corporate taxes. Recently, however, the GCC has been hit hard by falling oil prices, with Saudi Arabia withdrawing as much as $70 billion from global investment funds to plug budget deficits.
A VAT system, while a radical shift in policy, is seen as the most manageable way to quickly raise revenue on nation-wide scales. According to Christine Lagarde, Managing Director of the International Monetary Fund, “It is time people are made to understand that public services need to be priced…. Even with a low tax rate of five percent, with the introduction of VAT, it will not be difficult for GCC states to generate tax revenues up to two percent of gross domestic product.”
UAE Leads the Way
The UAE has announced that it will introduce VAT at the rate of 5% for all non-exempt goods on January 1, 2018, making it the first GCC country to put forward a specific plan for implementation. Obaid Humaid Al Tayer, UAE Ministry of State for Financial Affairs, has stated that the two-year grace period is meant to give the private sector time to prepare for the new tax rules. The UAE expects to generate up to $3.2 billion from VAT revenues in 2018, and officials are also studying the potential impact of corporate income and personal income taxes, though Al Tayer has stated that these taxes “are not on our immediate agenda.”
Major Challenges Ahead
Businesses in the Gulf Coast region have already voiced concern about the compliance costs associated with VAT. For small and medium enterprises in particular, complying with VAT will require an overhaul of nearly every operational department, from IT to procurement to finance and marketing.
Sovos is actively tracking the GCC VAT agreement, and our international team can offer solutions for businesses seeking to remain compliant amidst this shifting institutional framework. Further developments in the Gulf Coast are certain to come in the next few months, so please stay tuned. Sign up to the Sovos blog as we track these and other important changes happening throughout the world.
