UAE - The five per cent VAT that came into effect in two GCC countries from the start of 2018 "is extremely low in global standards" and would be increased to 10 per cent after five years, an International Monetary Fund official said.

Tim Callen, IMF mission chief to Saudi Arabia, said GCC states might have to increase the tax rate above the current five per cent, depending on the revenue needs of each country, but not within the next five years.

"In our projection, we don't assume any increase in VAT from the five 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 Callen.

"I think it is important to put it into perspective: a five per cent rate is extremely low in global standards so we would seek increasing VAT if need be at some point in the future," the IMF official said.

All six GCC member countries agreed in 2016 to introduce the levy, but so far only Saudi Arabia and the UAE have implemented it from January 1, 2018. The other four states have yet to give a timeline to introduce VAT. However, any increase in the rate would necessitate an amendment to the GCC-wide agreement.

The IMF and World Bank have been pressing the GCC states to introduce taxes such as VAT as part of reforms aimed at shoring up hydrocarbon revenue that has been dented by low oil prices.

The fund has estimated that the introduction of VAT in the region could generate new revenue of 1.5 to three per cent of non-oil GDP.

"The initial assessment is that the implementation has been very successful," said 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 the Internet and seminars." Callen said the tax authorities in the UAE and Saudi Arabia would have to engage with businesses to make sure compliance is done the right way.

Ratings agency S&P said in a recent study that some GCC countries could double the VAT rate to 10 per cent mainly due to discrepancy between five per cent statutory and effective tax rate.

"We project the regional VAT rollout would push up government revenues on average by about 1.7-two per cent of GDP, based on a collection-efficiency ratio of 50-60 per cent. A ratio in this range would reflect an effective tax rate of 2.5 to three per cent, lower than the five per cent statutory rate, owing to expected administrative inefficiencies and the ability countries have to exempt and zero-rate selected sectors," Trevor Cullinan, an analyst with S&P in Dubai, said.

Economists predict that higher oil prices and surge in non-oil revenue following the introduction of tax reforms are prompting Gulf economies to ponder a shift away from austerity.

While the UAE is expected to raise around $3.3 billion from VAT, Saudi Arabia, which unveiled the biggest budget in its history, plans to spend $261 billion this fiscal year as the government forecasts a boost in revenue from VAT. As part of economic diversification efforts, the kingdom is broadening its investment base and boosting other non-oil income.


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