PHOTO
11 October 2016
By Yasmine Saleh
The United Arab Emirates (UAE) is likely to announce official procedures within weeks to manage the introduction of a 5 percent value-added tax (VAT), ahead of a push by Gulf Arab states to implement the revenue-generating taxation scheme by 2018, tax experts said.
All six Gulf Cooperation Council (GCC) countries agreed last February to introduce VAT, a direct response to the sharp fall in oil prices over the past two years and as part of a wider bid to diversify their revenue sources and decrease their reliance on hydrocarbons.
While regional governments have not yet issued any details or regulations for the VAT scheme, several tax experts interviewed by Zawya said the UAE may decide to start alone and announce details in October.
“From previous experiences, the UAE has proven to be very efficient and it needs this (VAT) more than the other countries that have a lot of oil,” said tax expert Rakesh Pardasani, partner at consultancy firm RSM.
“There is some talk that a draft legislation is expected in October and we need to wait and watch if that happens. But if the GCC countries did not agree to a VAT framework until then, I think, if the UAE is serious, it may go ahead and just introduce a draft legislation and then alter it once the GCC agreement gets in place,” Pardasani said.
A UAE finance ministry official has been quoted by media as forecasting that revenue from VAT in the first year of implementation could reach up to 12 billion dirhams ($3.266 billion).
All aboard the VAT train
Saudi Arabia would likely follow the UAE, while other GCC states may take up to a year to follow suit.
“GCC states have similar systems, so now the situation is who wants to ride the train first or enter this battle first,” said Bassam Dahman, managing partner and regional leader for the MENA region at RSM consultancy firm.
“The UAE always takes a lead in everything and Saudi Arabia already has a functioning taxation system and is also a regional leader. They are the leaders now for the region. They are working now non-stop to implement the VAT, so we can have something from the UAE on the VAT this month,” he added.
GCC countries already have some form of taxation in place, ranging from 10-15 percent tax imposed on some corporations in Qatar, Oman and Kuwait, to taxes between 55-85 percent imposed by Saudi Arabia and the UAE on oil companies, according to a Thomson Reuters report on taxation in the GCC published earlier this year.
Dahman said other GCC states, like Qatar, were more likely to take a wait-and-see approach and analyse any problems faced by the first wave of countries. Kuwait is also likely to face delays, mainly because the government may encounter strong opposition from its elected parliament.
UAE, Saudi at the starting line
Saudi Arabia, the world’s biggest exporter of oil and the Arab world’s largest economy, is facing a record budget deficit near $100 billion due to the sharp drop in oil prices and the costs of a military intervention in Yemen. Riyadh has already taken measures to cut costs and cope with the budget deficit and carried out subsidies’ reforms as part of a wider economic reform drive, known as Vision 2030, to reduce reliance on hydrocarbons and diversify revenues.
Other GCC countries are also enacting reforms to diversify their revenue streams and attract more foreign investment into different sectors. The UAE has led its counterparts in creating a business-friendly environment and moving to allow 100 percent foreign ownership of firms.
“I think the UAE has all the ingredients it needs to make that a success, so I think they will just go ahead and implement it (VAT),” Pardasani said. This view was echoed by Jeanine Daou, PwC’s Indirect Tax Leader for the Middle East, who said the UAE appears to be at “advanced stages” in terms of its preparations for introducing VAT.
However, other GCC states are not as prepared even though they may be in more need of VAT revenues.
“Oman’s budgetary deficit has been increasing. They are increasing the corporate tax rate as well. Oman needs VAT probably more than its wealthy neighbours,” Dahman said. “Bahrain is no better.”
“Because of declining oil revenues, all countries have to look towards other sources of revenue and VAT is a way to get the tax revenues and not impact too many businesses too since it is an indirect tax and the burden flows to the ultimate consumer,” he added.
Oman is still working out a mechanism to collect VAT, and procedures would be introduced by mid-2017, a member of the sultanate’s advisory council, Tawfiq Al Lawati, told local media in January, which means that VAT will most likely be implemented in Oman by mid-2018 or 2019.
“Through the introduction of VAT, we estimate that Oman will be able to earn between 200 million and 300 million Omani riyals ($519.5 - $779.2 million) extra every year,” Al Lawati was quoted as saying by the Times of Oman.
Common market
The main challenge for the GCC is coming up with a unified VAT policy since the six member states all have different economic demands and targets. The absence of a unified policy could have a negative impact on cross border trading and activity across the region, which launched a customs union in 2003 and a common market in 2008.
Pardasani said a unified policy would include the types of products and services that are going to be exempted and sharing of VAT revenues across the countries. In the absence of such policy, GCC states which rely most on regional imports, such as Bahrain, would be at a disadvantage, he explained, because they would bear the brunt of the extra taxation.
Intra-GCC trade has jumped to around $100 billion by the end of 2012 from $67 billion in 2008, according to data gathered by the Oxford Business Group. The UAE is a main re-export hub in the wider region and accounts for the bulk of inter-regional trade, so any early move by the UAE would be watched closely by other Gulf Arab states.
PwC’s Daou believes the bloc would benefit from collective action. “The GCC is a common market and has created a customs union and I believe there is a certain need for harmonisation when it comes to implementing a new tax system across the GCC member states.”
Businesses are also anxiously awaiting clarity on VAT plans, Daou said, since companies would need at least a year to put the necessary infrastructure in place and prepare for changes to their accountancy systems.
“From a business perspective, there will be an important compliance requirement and there is a necessity for businesses to start thinking of the implications of VAT on their operations and what they need to do to get ready now as the implementation effort will take time,” she said.
(Editing by Shane McGinley)
© Zawya 2016
By Yasmine Saleh
The United Arab Emirates (UAE) is likely to announce official procedures within weeks to manage the introduction of a 5 percent value-added tax (VAT), ahead of a push by Gulf Arab states to implement the revenue-generating taxation scheme by 2018, tax experts said.
All six Gulf Cooperation Council (GCC) countries agreed last February to introduce VAT, a direct response to the sharp fall in oil prices over the past two years and as part of a wider bid to diversify their revenue sources and decrease their reliance on hydrocarbons.
While regional governments have not yet issued any details or regulations for the VAT scheme, several tax experts interviewed by Zawya said the UAE may decide to start alone and announce details in October.
“From previous experiences, the UAE has proven to be very efficient and it needs this (VAT) more than the other countries that have a lot of oil,” said tax expert Rakesh Pardasani, partner at consultancy firm RSM.
“There is some talk that a draft legislation is expected in October and we need to wait and watch if that happens. But if the GCC countries did not agree to a VAT framework until then, I think, if the UAE is serious, it may go ahead and just introduce a draft legislation and then alter it once the GCC agreement gets in place,” Pardasani said.
A UAE finance ministry official has been quoted by media as forecasting that revenue from VAT in the first year of implementation could reach up to 12 billion dirhams ($3.266 billion).
All aboard the VAT train
Saudi Arabia would likely follow the UAE, while other GCC states may take up to a year to follow suit.
“GCC states have similar systems, so now the situation is who wants to ride the train first or enter this battle first,” said Bassam Dahman, managing partner and regional leader for the MENA region at RSM consultancy firm.
“The UAE always takes a lead in everything and Saudi Arabia already has a functioning taxation system and is also a regional leader. They are the leaders now for the region. They are working now non-stop to implement the VAT, so we can have something from the UAE on the VAT this month,” he added.
GCC countries already have some form of taxation in place, ranging from 10-15 percent tax imposed on some corporations in Qatar, Oman and Kuwait, to taxes between 55-85 percent imposed by Saudi Arabia and the UAE on oil companies, according to a Thomson Reuters report on taxation in the GCC published earlier this year.
Dahman said other GCC states, like Qatar, were more likely to take a wait-and-see approach and analyse any problems faced by the first wave of countries. Kuwait is also likely to face delays, mainly because the government may encounter strong opposition from its elected parliament.
UAE, Saudi at the starting line
Saudi Arabia, the world’s biggest exporter of oil and the Arab world’s largest economy, is facing a record budget deficit near $100 billion due to the sharp drop in oil prices and the costs of a military intervention in Yemen. Riyadh has already taken measures to cut costs and cope with the budget deficit and carried out subsidies’ reforms as part of a wider economic reform drive, known as Vision 2030, to reduce reliance on hydrocarbons and diversify revenues.
Other GCC countries are also enacting reforms to diversify their revenue streams and attract more foreign investment into different sectors. The UAE has led its counterparts in creating a business-friendly environment and moving to allow 100 percent foreign ownership of firms.
“I think the UAE has all the ingredients it needs to make that a success, so I think they will just go ahead and implement it (VAT),” Pardasani said. This view was echoed by Jeanine Daou, PwC’s Indirect Tax Leader for the Middle East, who said the UAE appears to be at “advanced stages” in terms of its preparations for introducing VAT.
However, other GCC states are not as prepared even though they may be in more need of VAT revenues.
“Oman’s budgetary deficit has been increasing. They are increasing the corporate tax rate as well. Oman needs VAT probably more than its wealthy neighbours,” Dahman said. “Bahrain is no better.”
“Because of declining oil revenues, all countries have to look towards other sources of revenue and VAT is a way to get the tax revenues and not impact too many businesses too since it is an indirect tax and the burden flows to the ultimate consumer,” he added.
Oman is still working out a mechanism to collect VAT, and procedures would be introduced by mid-2017, a member of the sultanate’s advisory council, Tawfiq Al Lawati, told local media in January, which means that VAT will most likely be implemented in Oman by mid-2018 or 2019.
“Through the introduction of VAT, we estimate that Oman will be able to earn between 200 million and 300 million Omani riyals ($519.5 - $779.2 million) extra every year,” Al Lawati was quoted as saying by the Times of Oman.
Common market
The main challenge for the GCC is coming up with a unified VAT policy since the six member states all have different economic demands and targets. The absence of a unified policy could have a negative impact on cross border trading and activity across the region, which launched a customs union in 2003 and a common market in 2008.
Pardasani said a unified policy would include the types of products and services that are going to be exempted and sharing of VAT revenues across the countries. In the absence of such policy, GCC states which rely most on regional imports, such as Bahrain, would be at a disadvantage, he explained, because they would bear the brunt of the extra taxation.
Intra-GCC trade has jumped to around $100 billion by the end of 2012 from $67 billion in 2008, according to data gathered by the Oxford Business Group. The UAE is a main re-export hub in the wider region and accounts for the bulk of inter-regional trade, so any early move by the UAE would be watched closely by other Gulf Arab states.
PwC’s Daou believes the bloc would benefit from collective action. “The GCC is a common market and has created a customs union and I believe there is a certain need for harmonisation when it comes to implementing a new tax system across the GCC member states.”
Businesses are also anxiously awaiting clarity on VAT plans, Daou said, since companies would need at least a year to put the necessary infrastructure in place and prepare for changes to their accountancy systems.
“From a business perspective, there will be an important compliance requirement and there is a necessity for businesses to start thinking of the implications of VAT on their operations and what they need to do to get ready now as the implementation effort will take time,” she said.
(Editing by Shane McGinley)
© Zawya 2016
