VAT is GCC countries’ preparation for the future

Most of the complaints in Saudi Arabia and the UAE come not from the consumers but businesses unsure about how to implement VAT on goods and services.
Sunday 06/01/2019
A view of skyscrapers in King Abdullah Financial District (KAFD) in Riyadh. (AFP)
Smooth transition. A view of skyscrapers in King Abdullah Financial District (KAFD) in Riyadh. (AFP)

When the price of oil bottomed out in 2015, Gulf Cooperation Council (GCC) countries knew it was time to face the future.

It wasn’t as if the commodity that had kept their economies vibrant for so many years had disappeared but the world was turning towards renewable resources and countries such as the United States had begun to produce more oil. Clearly, the days of $4-a-gallon gas in the United States and elsewhere would not return.

GCC countries had built their budget expectations around this higher price. Now, they faced something new: budget deficits. Yet this dire situation had a silver lining. GCC members realised they would need to find new sources of revenue and one of those sources of revenue would be something new: taxes.

In October 2016, representatives of each of the GCC countries signed the value added tax — VAT — framework treaty. It called for each member to impose a 5% VAT on designated goods and services. Those such as health and education would remain tax-free but people would start paying VAT on food, cars, movies and more.

The treaty called for the Gulf states to have VAT in place by January 1, 2018. Only two countries met the deadline — Saudi Arabia and the United Arab Emirates. The other GCC members said they needed more time.

Bahrain said it would launch VAT on January 1, 2019. Oman and Qatar indicated they would implement the tax sometime during the coming year. Kuwait appears to be the only GCC member unprepared for VAT.

Probably the biggest challenge for any of the countries implementing VAT is how they sell it to a populace that has never had to pay income taxes.

“It requires a real attitude adjustment,” admitted Jon Alterman, senior vice-president, Zbigniew Brzezinski Chair in Global Security and Geostrategy and director, Middle East Programme at the Centre for Strategic and International Studies.

“People are used to governments being a source of revenue rather than being a demander of revenue. These are countries where people are born and the government provides free education, free health care, subsidised housing and lifetime employment. The idea that you would owe the government something is very new to people because the presumption is that the government owes me.”

The implementation of VAT in Saudi Arabia and the United Arab Emirates has gone relatively smoothly but no one likes paying taxes and it is not uncommon to see tips shared on social media on how to avoid VAT on commodities such as cars. For instance, if a car is bought and sold privately, it is a transaction between two people and there is no VAT assigned so some car dealers sell cars as “private citizens.”

Most of the complaints in Saudi Arabia and the UAE come not from the consumers but businesses unsure about how to implement VAT on goods and services. Many businesses were confused over what rules may apply in these countries’ free trade zones.

While there can be severe penalties for not registering a business for the tax, the Saudi and UAE governments have practised a relatively lenient policy. They know it will take a while for people to understand how to implement the tax properly. No doubt the same strategy will be used in Bahrain, Oman and Qatar in 2019.

This lenient attitude, however, will probably end this year in Saudi Arabia and the UAE and they will move towards more punishment and fines for those who have not yet registered for VAT.

Alterman said the real goal of the GCC countries is preparing their citizens for the future.

“So there are some people who rather dramatically talk about how they can afford less because of the taxation but for the most part there is just the effort to get people to wrap their heads around the idea,” he said.

“In some ways this is similar to the Saudis deciding to ask for loans on the international market and the issue is not that Saudi Arabia needs cash. Saudi Arabia has a lot of funds but they wanted Saudi officials to know how to prepare the bond offering and they wanted the world (to get) used to buying Saudi bonds so when they actually did need it, they would have a track record.”

What was true about Saudi bonds is also true of VAT.

“They’ve known this day was coming,” said Alterman. “Really since the early ’90s and the feeling was that they needed to start asking before they needed it. Because if the only time that you ask is the first time you need it, you have a problem.”

Currently, the VAT is 5%, although it will probably rise. So far, Saudis and Emiratis have largely supported the tax but even if they don’t like it, Alterman said, they have little choice.

“All the GCC countries are very practised and very skilled at messaging to their own people. The problem is that this is a new and unwelcome message but people are not in the mood to fight. There is no question that fighting back is not going to get you very far in the Gulf these days,” he said.