Saudi Arabia and the UAE to introduce VAT on January 1, other GCC members lag
Washington - On January 1, two of the six Gulf Cooperation Council (GCC) members — Saudi Arabia and the United Arab Emirates — will be fully prepared to implement a 5% value added tax (VAT). That leaves the GCC short of a commitment for all members to roll out the new tax at the start of 2018.
Politics and slow-moving bureaucracies have derailed the introduction of a Gulf-wide VAT. It is conceivable that some GCC members will not implement the consumption tax until 2019.
The International Monetary Fund (IMF) has long called on GCC governments to find revenue streams other than those deriving from oil and natural gas sales, including the introduction of taxes — a financial measure Gulf leaders have avoided for decades. IMF Managing Director Christine Lagarde estimated in early 2016 that implementing the VAT within the GCC could raise revenues equivalent to 2% of the gross domestic product.
The fact that it is the GCC’s two largest economies that will be putting the VAT into practice first could ease major economic disruptions arising from the delayed action from the other countries.
IMF Middle East and Central Asia Department Director Jihad Azour has suggested that, because Riyadh and Abu Dhabi will introduce the VAT at the same time, regional trade flows shouldn’t be distorted even though the other Gulf countries will levy the tax at different times. “The speed of implementation of it will vary. Some will come in 2018. Some may need more time,” he said.
GCC officials downplayed any disparity in the timing of when the VAT is introduced. In August, UAE Director-General of Federal Tax Authority Khalid al-Bustani announced that: “The UAE and Saudi Arabia will be the first countries to roll out VAT from early 2018 while other Gulf countries have time until the end of next year to implement the new tax system.”
A GCC Supreme Council treaty in December 2015 called for a “uniform imposition” by the GCC members of a 5% VAT. The council authorised that the “Unified Agreement for Value Added Tax” (GCC/ UVAT) would “establish a unified legal framework for the introduction of a general tax on consumption in the GCC… levied on the import and supply of goods and services at each stage of production and distribution.”
As part of this broad framework, the members were to enact laws to implement the terms of the treaty. The common framework allowed for certain supplies of goods and services to be zero-rated or exempt from the VAT. Sectors such as health care, education, food and financial services would receive special treatment and how they are taxed would vary from country to country.
Though it wasn’t specified in official language, there was an informal understanding that GCC members had leeway on when to implement the VAT. In February, the Saudi cabinet approved the GCC/UVAT, followed in May by the UAE’s ratification. The second GCC country approval put the agreement in effect legally across the six states, though the remaining four GCC countries subsequently signed off on the deal.
Both the Saudi and UAE governments have worked speedily to institute the necessary domestic regulatory foundations for implementing the VAT and to educate businesses and citizens on what to expect come January 1.
The Saudi government is intent on the VAT going into effect at the beginning of 2018 and has sought to dispel any confusion surrounding the new tax. In response to an online question regarding the VAT and one of the most common purchase concerns Saudi citizens may have, the kingdom’s General Authority of Zakat and Tax (GAZT) said the VAT rate of 5% for petrol will be applied starting January 1.
Although Qatar’s cabinet approved its draft VAT law in May, Doha recently announced that it would not implement it to avoid further financial burden on its citizens already feeling the effects of the 6-month-old boycott by Saudi Arabia, the UAE, Bahrain and Egypt. Bahrain indicated that it would not implement the tax until mid-2018.
Oman’s Consultative Assembly recently passed its VAT law but there is domestic regulatory work that must be completed before the tax can be applied, most likely in late 2018.
In August, Kuwait’s cabinet approved VAT draft bills but the legislation has languished in the Kuwaiti parliament, where there is typically strong opposition to the tax. Given the nature of drawn-out politics in Kuwait, it is conceivable that the VAT will not be implemented in Kuwait until 2019.