VAT’S indirect economic spinoffs: reduced cost of debt, job creation

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LONDON: Some of the world’s top economies could see their credit ratings cut or put on downgrade warnings in the coming months in a second global wave of coronavirusrelated revisions, S&P Global’s top sovereign analyst has warned.

S&P’S sovereign group managing director Roberto Sifon-arevalo told Reuters that the immense costs of supporting health systems, firms and workers through the pandemic was fundamentally altering some countries’ finances for the worse.

The rating agency has already downgraded or cut the outlooks on nearly 60 countries this year, but only relatively few have been higher-rated richer nations.

With some though piling on 1520 points of debt as a percentage of gross domestic product (GDP) — amounts that would normally take four or five years to accumulate — and locked into higher spending for the next 3-5 years, that could be about to change.

“You are talking about ratings in the EU, or in highly developed countries like Japan or the UK or in this part of the world, the United States, that have been able to implement pretty massive fiscal and monetary packages to defend themselves,” Sifon-arevalo said.

“The main point to see here is where do we see the trajectory going forward. If we see the trajectory as establishing more of a different structural pattern, then you are going to see some (rating) movements there.”

A total of 31 countries — almost a quarter of all those S&P rates — currently have “negative outlooks” on their ratings which more often than not get converted into downgrades.

Of the bigger economies it includes Australia’s prized triple-a rating, Italy and Mexico’s BBB scores and Spain’s A grade. However, a blizzard of new negative outlooks could be just as much of a worry at a time when many major economies are seeing a resurgence of the virus.

“We are going through the revisions. Now, and over the next few months we will continue to do so,” Sifon-arevalo said.

“I would say initially it’s going to be an outlook change. And again, there’s going to be those that maybe will come out of that and will come back to stable (outlooks) in a couple of years.”

“But then there will be those that will not come back to stable and they will keep going down the rating spectrum.”

The Oman government’s decision to roll out Value Added Tax (VAT) with effect from April 2021 will not only buoy the country’s constrained fiscals, but perhaps just as importantly, it will have beneficial and far-reaching socio-economic impacts as well.

For one, VAT implementation will contribute to a gradual, but significant, reduction in the government’s interest cost burden in financing its sizable debt. Secondly, the introduction of a new tax regime in the country will create potentially thousands of jobs for Omanis in a variety of accounting and tax related fields.

According to Muscat-based tax expert Alkesh Joshi, the benefits accruing to the national economy as a result of VAT implementation will far outweigh the cost burden on consumers once the new 5 per cent levy — one of the lowest VAT rates in the world — comes into force on goods and services next April.

“VAT implementation will unleash a number of beneficial spinoffs — direct and indirect — with positive ramifications for the wider Omani economy,” Joshi, Partner, Oman Tax Leader, MENA Energy Tax Leader at EY, said.

“We expect revenue collection from VAT, estimated to range from RO 250 – 300 million for the first full year of implementation, to offset Oman’s mounting budget deficit, albeit modestly initially.

But there’s a far more important spinoff as well: the implementation of a new tax regime will encourage international ratings agencies to issue more favourable outlooks for the Omani economy, as opposed to the relatively unflattering ratings that have been issued, of late. A positive ratings outlook will make it less expensive for Oman to borrow from international markets.”

Citing budgetary estimates, the tax expert noted that the 2020 State Budget has allocated a staggering RO 860 million towards the financing of the country’s outstanding debt for the year, up from RO 630 million in 2019.

“With positive ratings outlooks, this enormous interest burden will be progressively reduced in the coming years. Indeed, combined with collections from VAT, this saving on the cost of borrowings could result in a net benefit for the Omani economy ranging from RO 800 million RO 1 billion annually in a few years,” Joshi remarked.

Thus, while the VAT collection in itself is expected to be modest, the knock-on effects for the economy, notably in reducing the budget deficit, will be enormous, says the expert.

“Going forward, with a lower budget deficit, there will be less pressure on the government to withdraw from national reserves, which can be set aside for future generations.

Furthermore, the new revenue stream from VAT, as well as the savings accruing from reductions in the cost of borrowings, can be utilised for infrastructure development and social welfare.”

Employment generation is another promising spinoff from VAT implementation, he noted. With the VAT Law effectively requiring every tax-liable company to comply with the new tax regime and maintain their books accordingly, the requirement for qualified accountants and tax auditors, among related disciplines, such as IT and computing, will be significant.

“VAT has the potential to spark the growth of a whole new industry necessary to underpin the efficient operation of this new tax regime. We reckon that potentially thousands of new jobs will be created, mostly in the fields of accounting and tax audit, but also in hardware and software support, training services, and so on, as a result of this new tax.”

Joshi also sees the new tax as an opportunity for citizens and residents to contribute to nation-building at a time when the country is facing huge economic challenges.

“The modest 5 per cent levy on goods and services is a small sacrifice we should bear to help Oman at this juncture. In addition, VAT also has the potential to somewhat level the playing field between the economically weaker and affluent sections of the populations.

Experts have found that low income households make a relatively small contribution towards VAT because the bulk of their household expenditure, covering food, healthcare and education, is zerorated or exempt from the new tax. But in contrast, affluent households make a larger contribution towards VAT because the major share of their expenditure is on high-end goods and services which are all taxable.”