Efforts by Gulf Cooperation Council (GCC) countries to further broaden their tax base following the introduction of value-added tax in Saudi Arabia and the United Arab Emirates earlier this month may not yield a significant amount in new revenues, while at the same time could face greater obstacles to implementation, according to a new report.
The report, published on Sunday by ratings agency Standard & Poor's (S&P), said that it expects the introduction of a 5 percent VAT rate to take place in "most" GCC states in 2018-19.
Although Saudi Arabia and the UAE introduced VAT on schedule, "Bahrain will wait until later this year and Oman until 2019, likely because of administrative capacity constraints", S&P's report said. (Read more here).
"However, Qatar has announced that it will not introduce VAT at this time. Kuwait's parliament has not yet approved the implementation of VAT, and is considering a progressive tax on corporate profits as a potential alternative," it added. (Read more here).
Even where VAT is being introduced at a 5 percent rate, government revenues are only likely to increase by the equivalent 1.7-2 percent of gross domestic product (GDP), as it estimates that the "collection efficiency rate", or the rate at which a tax can be applied to the consumption base, stands at 50-60 percent. This is due partly to the administrative burden of handling VAT, but also the to fact that many taxable supplies are either zero-rated or exempt from VAT.
The effective tax rate achieved will be closer to 2.5 to 3 percent, which "will likely influence policymakers' discussions of future VAT rate increases - potentially to 10 percent - in some GCC countries", it argued.
Given that this might only achieve an effective rate of 5-6 percent, other methods to broaden tax revenues could be considered, such as a corporate tax on non-hydrocarbon companies, income tax on expatriate workers or a remittance tax on monies sent back to home countries.
Yet a corporate tax could inhibit investment, and potentially slow wage growth to allow firms to maintain profits, while taxes on either income or remittances could curb consumption and diminish local investments by expats.
They could also convince workers to relocate elsewhere, and the loss of highly-skilled expatriates could lead to skills shortages.
"In our view, the low taxes in GCC countries are a key attraction for expatriates, who currently constitute about one-half of the region's total population," the S&P report said. "Moreover, GCC countries rely on expatriates for their business models, particularly for private-sector employment and output. As such, the negative economic impact from new taxes could be disproportionate, relative to the additional revenues that GCC governments could expect to raise," it said.
A quarterly survey of finance professionals published by the Association of Chartered Certified Accountants (ACCA) last week stated that confidence remained 'stable' in the Middle East region, despite fears of the short-term impact caused by the introduction of VAT.
Lindsay Degouve de Nuncques, head of ACCA Middle East, said: “At the moment, confidence is lower in the UAE than usual, whilst confidence in Saudi Arabia is in negative territory. Both countries have adopted VAT this month, which may be causing some slight concerns around increased consumer costs this quarter… Once the initial implementation period has waved, we should see consumer confidence return.” (Read more here).
For Zawya's Special Coverage on the introduction of VAT to the Gulf, click here.
Further reading:
(Writing by Michael Fahy; Editing by Shane McGinley)
© ZAWYA 2018
The report, published on Sunday by ratings agency Standard & Poor's (S&P), said that it expects the introduction of a 5 percent VAT rate to take place in "most" GCC states in 2018-19.
Although Saudi Arabia and the UAE introduced VAT on schedule, "Bahrain will wait until later this year and Oman until 2019, likely because of administrative capacity constraints", S&P's report said. (Read more here).
"However, Qatar has announced that it will not introduce VAT at this time. Kuwait's parliament has not yet approved the implementation of VAT, and is considering a progressive tax on corporate profits as a potential alternative," it added. (Read more here).
Even where VAT is being introduced at a 5 percent rate, government revenues are only likely to increase by the equivalent 1.7-2 percent of gross domestic product (GDP), as it estimates that the "collection efficiency rate", or the rate at which a tax can be applied to the consumption base, stands at 50-60 percent. This is due partly to the administrative burden of handling VAT, but also the to fact that many taxable supplies are either zero-rated or exempt from VAT.
The effective tax rate achieved will be closer to 2.5 to 3 percent, which "will likely influence policymakers' discussions of future VAT rate increases - potentially to 10 percent - in some GCC countries", it argued.
Given that this might only achieve an effective rate of 5-6 percent, other methods to broaden tax revenues could be considered, such as a corporate tax on non-hydrocarbon companies, income tax on expatriate workers or a remittance tax on monies sent back to home countries.
Yet a corporate tax could inhibit investment, and potentially slow wage growth to allow firms to maintain profits, while taxes on either income or remittances could curb consumption and diminish local investments by expats.
They could also convince workers to relocate elsewhere, and the loss of highly-skilled expatriates could lead to skills shortages.
"In our view, the low taxes in GCC countries are a key attraction for expatriates, who currently constitute about one-half of the region's total population," the S&P report said. "Moreover, GCC countries rely on expatriates for their business models, particularly for private-sector employment and output. As such, the negative economic impact from new taxes could be disproportionate, relative to the additional revenues that GCC governments could expect to raise," it said.
A quarterly survey of finance professionals published by the Association of Chartered Certified Accountants (ACCA) last week stated that confidence remained 'stable' in the Middle East region, despite fears of the short-term impact caused by the introduction of VAT.
Lindsay Degouve de Nuncques, head of ACCA Middle East, said: “At the moment, confidence is lower in the UAE than usual, whilst confidence in Saudi Arabia is in negative territory. Both countries have adopted VAT this month, which may be causing some slight concerns around increased consumer costs this quarter… Once the initial implementation period has waved, we should see consumer confidence return.” (Read more here).
For Zawya's Special Coverage on the introduction of VAT to the Gulf, click here.
Further reading:
- Charged but not taxed: No VAT on interest rates of credit cards, loans: UAE's finance ministry
- UAE cabinet issues decrees on VAT treatment of free zones, medical drugs and equipment
- Effects of VAT on individuals minimal: UAE Ministry of Finance
- Saudi Arabia exempts citizens from paying VAT on private healthcare and education
(Writing by Michael Fahy; Editing by Shane McGinley)
© ZAWYA 2018
