While some GCC countries are more exposed to the vagaries of the world oil markets than others, have a lower fiscal break-even point, or even more cash in the bank to finance short-term deficits, every GCC government understands the urgent need for fiscal-sustainability in the long-term.
Funding deficits from cash reserves is a short term strategy which all GCC countries want to avoid; all parties recognise the need to expand the share of non-oil government revenue. Greater levels of domestic taxation are one obvious means by which that can be achieved.
A general consumption tax such as a VAT is taking an increasingly larger share of the total tax take in many jurisdictions; more than 120 countries now operate a VAT system. OECD data indicates that in 2012 the total share of total tax revenues earned in member countries represented by corporate income tax was around 9% with VAT more than double that figure, at 20%.
VAT is a popular fiscal tool for a range of reasons. It is considered to be efficient, cheaper to operate, less open to fraud, and less likely to distort investment decisions by businesses than any form of direct tax. This latter point is significant; governments do not want to generate new revenue at the expense of investment by the private sector. The diverse socio-economic profiles of countries in the region make it difficult to take a one-size-fits-all approach, which in turn has given rise to the decade-long 'stop-go' debate on VAT in the GCC.
All GCC governments are fully aware of the fact that successful VAT implementation will depend on the ability of businesses (ultimately responsible for collecting it from their customers) to administer it. Therefore, any move to implement VAT in the GCC will be announced well in advance and combined with an extensive public communications programme. While a 12-month announcement-to-implementation timeframe should not be ruled out, an 18-month to two-year plan would be more likely.
It is looking increasingly likely that there will be a unilateral or multilateral move to implement VAT in the GCC in the relatively near term. While no government has committed to implementing any new tax at this time, there are signs that the status quo will change as a result of persistently low oil prices, the substantial fiscal break-even gap faced by most GCC countries, and the need to find sufficient revenues to fund ambitious economic growth plans. The momentous decision by the UAE to slash fuel subsidies is likely to drive the decade-long GCC tax debate to a meaningful conclusion within the next six months.
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