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Abu Dhabi, UAEMonday 17 December 2018

GCC-wide VAT implementation likely to be delayed, IMF official says

Countries are not moving at the same pace

The UAE will implement VAT on January 1, 2018. Chris Ratcliffe / Bloomberg
The UAE will implement VAT on January 1, 2018. Chris Ratcliffe / Bloomberg

The implementation of GCC-wide value-added tax could be delayed due coordination and preparatory work requirements needed to introduce the 5 per cent tariff at the beginning 2018, an IMF official said.

All Arabian Gulf countries have committed to implement the Unified Agreement for Value Added Tax, but nations are moving at different paces of implementation, raising doubt about the possibility of a harmonious introduction of the levy. According to PwC each GCC state establishes its own separate national legislation with detailed compliance requirements and rules outlined in each respective legislation

“We are sceptical about whether this (implementation of VAT in the first quarter of next year) can be achieved in the sense that the preparatory and coordination work may not be completed on time,” said Abdelhak Senhadji, deputy director of the fiscal affairs department at the IMF in an interview.

“Countries should not necessarily rely on the laggards to delay the reforms that are necessary for them to restore fiscal sustainability.”

The IMF is supporting Gulf countries on the introduction of VAT through technical assistance.

Only Saudi Arabia and the UAE have published VAT laws and committed to implementing the levy on January 1, 2018.

Other states have yet to announce dates for introducing the tax or a timeline for publishing the VAT laws.

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A five per cent VAT rate is expected to raise one to 2 per cent of GDP, according to IMF estimates.

Average tax revenue of oil exporters in the Middle East and North Africa region (MENA) are quite low, representing about 7 per cent of GDP, which is half the level of 14 per cent of GDP in oil importers in MENA, said Mr Senhadji.

Gulf countries are introducing indirect taxes for the first time to create revenue streams as oil income dwindles.

In June, Saudi Arabia became the first country in the Gulf to introduce excise taxes at a rate of 100 per cent on tobacco and energy drinks and 50 per cent on sugary drinks. The UAE followed suit in October, introducing excise taxes at the same rates.

The IMF has also advised Gulf states to move on other tax fronts, such as the introduction of real estate taxes to help shore up government revenue.

“There are other forms of taxation that can be equitable and at the same time raise quite a bit of revenue,” said Mr Senhadji. “Taxes on immovable assets such as real state is not used enough in the region.”

Real estate taxes could raise 1 to 2 percentage points of GDP, considering that the average revenue from property tax in OECD countries is 1.75 per cent of GDP, he added.

Eventually Gulf countries will need to introduce personal income taxes, depending on a number of conditions.

“All of this (introduction of personal income tax) has to be feasible economically but also politically,” said Mr Senhadji.

“Eventually I think the introduction of personal income tax may be necessary depending on development in the oil markets and also in terms of reforms and what type of yields they provide and how the overall budget looks like.”

The IMF official, though, warned of possible political resistance to reforms and “reform fatigue” that may kick in if the populations are not educated about the benefits of these steps.

“The geopolitical factors are going to make the change in the Gulf quite difficult,” said Mr Senhadji.

“Most of the plans are adequate and certainly necessary. As time goes by reform fatigue may settle in and things may not proceed as quickly and as efficiently as they should.”