29 November 2016
By Yasmine Saleh

“Yes and yes”, is the answer the CEO of Kuwait’s Amwal international investment company gives when asked if she expects a new value-added tax (VAT) to be imposed on the financial sector in the Gulf within the coming two years.

GCC countries had agreed earlier this year to introduce a 5 percent VAT by January 2018 to compensate for their losses from the steep drop in oil prices, but no details have been released on which sectors will be impacted and when exactly the new taxation will be imposed.

Unlike other sectors, financial service providers are usually exempted from VAT charges on margin-related activities like loans’ interest rates, but they could get taxed on other products and services.

When asked about how VAT could be imposed on the financial sector’s wide range of services and products, Fahmi Al Ghussein, CEO of Amwal, a firm specialises in private equity and development projects in the Middle East, said VAT could potentially get charged on brokerage, insurance and foreign exchange services, but not on mortgage, loans and credit cards.

“The process will take several years and there will be ample time for the banks to capture this in the fullness of time. Initially the impact will be felt as consumer/user understand the new tax and how it impacts them and the costs of VAT on the savings and consumption parties,” Al Ghussein told Zawya in an email interview.

According to consultancy firm KPMG’s global head of indirect tax for the financial services sector, Gert-Jan van Norden, the margins being already low, could pose a new difficulty for banks. “Consideration will also have to be given to the legal implications of potentially altering existing contracts, and the effect that raising prices on new contracts will have on competitiveness,” he said.

A KPMG report looking into the impact of VAT on the financial service in Qatar urged banks to start working on new measures to avoid potential drawbacks.

Difficult to tax

“VAT is happening and if banks are to maintain profitability, they must invest in understanding the impact of VAT on their business from a financial and operational point of view,” Craig Richardson, KPMG’s head of tax and corporate services said in the company’s report.

“Before implementation, financial institutions can build and test systems and mechanisms to help them comply with legislation and embed these within existing processes,” he added.

In general, tax analysts advise against the implementation of VAT on the financial sector and say it will be hard and complicated to execute.

“They (the financial services) are perceived to be difficult to tax,” Stuart Halstead, Deloitte’s VAT leader for the Middle East financial and insurance industries said in a research paper his firm issued on the VAT coming to the GCC.

“The value for VAT purposes, particularly in the context of margin-based transactions, is almost impossible to determine accurately and consistently on a transaction-by-transaction base. As a result, VAT exemption is often a preferred policy approach,” Halstead added.

One note of caution is a 2011 report by consultancy firm Pwc, which stated that removing the VAT exemption which applies to most banks in Europe would not lead to any “significant increase in EU VAT revenues”. Therefore, including the sector in plans by Gulf Arab states would not have a major impact either way on the overall revenues collected.

Click here to read Zawya's full Special Coverage on the introduction of VAT.

© Zawya 2016