GCC region won't have VAT over the near term

Dubai: UAE consumers can breathe a sigh of relief for now because no Value-added tax (VAT) will likely be implemented in the country for over the near term, analysts have said.

The GCC finance ministers will be meeting in Doha, Qatar next month when a proposal to impose tax in the region will be submitted for review. A rate of four to six per cent is reportedly being proposed but not yet confirmed.

Ahead of the Doha discussions, analysts at the National Bank of Abu Dhabi (NBAD) have recently reviewed the proposal and drew up conclusions on the subject.

The bank’s Market Insight and Research Department said that plans to introduce a tax system will most likely be delayed because of a number of factors, including fears that it will reduce the competitiveness of the GCC economies.

Another reason is that the GCC nations, while still facing the possibility of having their revenues slashed due to the oil price decline, still have other options to balance their budgets.

The possible negative reactions from the residents in certain countries, particularly in Saudi Arabia, Oman, Bahrain and Kuwait, are also going to have an impact on the discussions.

Nevertheless, NBAD analysts said that the VAT proposal, along with the other forms of taxation, will remain on the radar of GCC governments so long as oil prices remain at low levels.

Alp Eke, director and senior economist at the NBAD economic department, told Gulf News that a tax system won’t be in place in the GCC until 2017, as the governments are likely to explore other options for making revenues first before imposing tax as a last resort.

Besides, there needs to be a lot of work and discussions to be done before a tax system can be implemented. The governments might also need to revise the current proposal to impose a 2 to 4 per cent VAT because it won’t provide enough income.

“In my opinion, VAT will not be applied in 2015 or 2016, or even 2017. We are experiencing a paradigm shift, a new normal where oil price (US Brent) will remain around $55-70 during the near term, possibly two to three years,” Eke told Gulf News.

What is likely going to happen during 2015 and 2016 is that the governments will attempt to bring down subsidies and expenditures, “and as a final resort, VAT might be introduced” later.

“Plus a mild VAT (two to four per cent) that is being discussed doesn’t provide a proper income. It is a very accounting/labour intensive process [and] it brings a lot of legal issues and discussions. The costs (labour, accounting, image and competitiveness downgrade) far outweigh the benefits,” said Eke.

Talks about the implementation of a VAT system, which started years ago, resurfaced at the end of February. If they go ahead with the proposal, the GCC governments are expected to implement different VAT charges for different types of products.

The bank, however, warned in a report that the tax system will likely reduce the competitiveness of GCC economies and appeal to international investors, and have political and social implications.

“The impact of a mild VAT would likely be totally different in the various GCC nations. For example, Saudi Arabia, Oman and Bahrain are much more sensitive to VAT and reduction in consumer expenditure, while UAE, Qatar are more resilient,” the bank said.

“Also, one should not underestimate the complexity of implementing VAT into economies such as those here in the GCC which have not administered and applied taxes before.

“The mechanics of the system and administration involved are very extensive indeed, and furthermore, it isn’t just done at the government level but virtually all businesses would need to be educated in terms of how to apply the levy and more importantly how to account for the VAT and submit the regular reports and filings regularly to the government.”