Gulf states introduce VAT
The UAE and Saudi Arabia are the first two Gulf Cooperation Council countries to introduce VAT to help boost government revenue.
The six Member States of the Gulf Cooperation Council (GCC) – Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Bahrain, Oman and Qatar – ended their decades-old reputation as being taxfree in 2016 by announcing their intension to implement a unified value added tax (VAT) system, in an attempt to revitalise their economies.
The decision to implement VAT across the region suits the GCC’s long-term strategy to enhance economic stability and diversify revenue streams away from their past dependency on oil profits. VAT is touted as being an ideal revenue instrument for the GCC – a modern consumption tax that effectively mobilises tax revenue while avoiding economic distortions. It is estimated that VAT revenues will generate 1.5% to 3% of non-oil GDP, and Saudi Arabia and the UAE alone could raise as much as US$21bn in the first year.
The UAE and Saudi Arabia led regional fiscal reforms by introducing VAT on 1 January 2018, while Bahrain intends to follow suitlater this year and Oman from 1 January 2019. Political resistance has delayed VAT in Kuwait, while Qatar is not expected to introduce VAT due to the closing of diplomatic ties with other GCC countries.
Despite the scepticism surrounding the implementation of VAT being achieved by Q1 of 2018, both the UAE and Saudi Arabia rolled out VAT six months after the legislation was finalised. Most comparable VAT-enforcing jurisdictions take 18 months to achieve the same aim. While this has given businesses little time to prepare, the authorities are offering amnesty in the form of extensions to deadlines for registration and filing returns to relieve pressure on firms struggling to comply.
As VAT is being adopted, friction between VAT legislation and commercial practices are emerging. In particular, family-owned businesses, characteristic of the region, face many challenges. A lack of segregation between private and business wealth is complicating the implementation of VAT beyond the conventional dilemma of simply offsetting input and output tax. Teething problems are common when tax systems are first launched, but the introduction has been more challenging in the GCC, where many businesses have been less than proactive in understanding the significance of VAT.
However, the cultural shift that this recent tax procedural legislation has instigated should promote improved recordkeeping across the value chain and encourage businesses to take advantage of technological innovations to fuel business growth.
A developing challenge
As VAT systems in mature jurisdictions continue to evolve, so will VAT in the GCC, as both regulators and businesses negotiate the unforeseen complexities of the new rules. Despite the abundance of guidance, changes to the legislation are likely as the system continues to be tried and tested.
For more information, contact:
Sajjad Haider Group, Dubai
T: +971 508 400735