Rationale of VAT for the Gulf Cooperation Council

he economies of the Gulf Cooperation Council (GCC) countries rely to a very large extent on oil production, although the exposure to global oil pricing differs significantly between the member states.

This is also the case for government revenues and, due to the volatility of oil prices, this dependency makes government revenues vulnerable to strong and sometimes swift fluctuations. In turn, revenue fluctuations compromise the ability to accurately plan economic development and invest in development programmes.

The strong decline in oil prices since 2015 had led to a strong reduction in government spending and a slowdown in economic activity.

The GCC countries now face annual budget deficits. Effectively, there is no room for further spending cuts in an environment of economic investment and diversification. Therefore, the GCC countries need to develop other sources of revenue.

Because of the availability of oil revenues, the GCC countries have had little need for developing comprehensive tax systems until 2015.

Foreign direct investment and foreign labour were the chosen engines of economic growth. There are hardly personal income taxes.

There is a unified tariff of 5 per cent of imports from third countries, but there exist many exemptions. Both employers and employees pay social security taxes and in Bahrain and Saudi Arabia foreign workers pay a monthly fee to finance training for nationals.

A wide variety of stamp duties and similar fees are charged for government services, and some of the GCC countries levy consumption taxes (excises) on specific products (such as gasoline) and services (e.g., hotel accommodation). Because of limited taxation, both governments and local businesses have also limited experience with tax compliance matters and tax administration.

The choice for VAT seems a logical one for several reasons. Compared to income taxes, a well-designed VAT is a simple tax that can generate large amounts of revenue without requiring too much of businesses in terms of compliance and of tax agencies in terms of administration. That are two arguments for VAT: revenue potential and low administrative burdens for businesses and government. In other words, VAT can be a very efficient tax. And VAT, of course, has a proven track record of global success.

In addition, VAT does not distort the competitive balance between businesses. All products are taxed on the final consumer price regardless the length of the distribution chain.

Also, the VAT is levied on the importation of goods from outside the GCC and therewith a level playing field is created with domestically produced goods. Other taxes have been considered, and may still be implemented at some point in the future, but these have disincentives that a VAT avoids.

For a region that, to a considerable extent, is dependent on foreign capital and labour for realising its mid-term economic development plans, levying VAT seems to be a wise policy.

So, VAT it is. The six GCC member states will implement this tax during the 2018 calendar year. Although VAT can be characterised as a relatively simple tax, it would be a mistake to underestimate its technical complexities and the challenges of properly preparing for managing the tax.

Dr. Robert F van Brederode is of counsel to Horwath Mak Ghazali in Oman. He is a tax lawyer, practitioner and scholar with over 30 years of experience in global VAT.

He served Crowe Horwath International as the global indirect tax leader, and was the national practice leader of the US member firm. Robert is the author of dozens of academic journal articles and 8 books. He can be reached at Robert.brederode@crowehorwath.om.