The recent action taken by the UAE to eliminate fuel subsidies has rekindled the debate on tax reform in the (Persian) Gulf Cooperation Council, with the focus on domestic implementation of a broad-based value added tax on goods and services.
While countries are facing an increasing amount of pressure on their national budgets, every (P)GCC Arab government understands the urgent need for fiscal-sustainability, added the report “VAT in the (P)GCC–Old News or New Chapter?” from Deloitte, a top provider of audit, tax, consulting, and financial advisory services, TradeArabia reported.
According to Deloitte’s report, VAT is considered efficient, cheaper to operate, less open to fraud, and less likely to distort investment decisions by businesses than any other form of direct tax. This latter point is significant, as governments do not want to generate new revenue at the expense of investment by the private sector.
Also since the majority of the cost of VAT falls on the consumer rather than on businesses, it is capable of balancing these potentially competing requirements.
“Faced with a need to raise additional government revenues, implementing a VAT would be a rational response by governments. That is not to say that the implementation of corporate or personal income tax can be ruled out; rather it is a reflection on the fact that a VAT seems to “tick more of the boxes” than the others,” said Nauman Ahmed, partner and regional tax leader at Deloitte Middle East.
“Compared to a VAT, a corporate income tax is more likely to act as a disincentive to businesses considering investment in the region and hence more negatively impact GDP growth as a result. On the other hand, a personal income tax presents an obvious challenge to the “tax-free” branding that has served the region so well in the past.”
Whilst no government has committed to implementing any tax at this time, the signs indicate that the status quo will change because of persistently low oil prices, increasingly large fiscal break-even gaps faced by most (P)GCC Arab countries, and the need to find sufficient revenue to fund ambitious economic growth plans in the long term.
The momentous decision by the UAE to slash fuel subsidies is likely to drive the decade long (P)GCC tax debate to a meaningful conclusion within the next six months.
