The Gulf new (tax) era
10 January 2018

This year marks a new fiscal era in the Gulf, as of 1 January 2018, for the first time in their history, Saudi Arabia and the United Arab Emirates introduced VAT. Other countries will now follow this trend. The decision was taken collectively within the Gulf Cooperation Council to increase tax revenues and make up for the lack of revenues resulting from the downturn in oil prices and to revive the economy, which has been dependent on crude oil exports. All of this is in line with the IMF’s recommendations.

Since the beginning of the year, petrol, tobacco, food and beverages, hotels and telecommunications services have had to integrate the tax into prices, which will affect the cost of living. Health services, public transport and financial operations will be exempt from VAT. The rate is set at 5% and, according to analysts’ estimates, will bring in additional revenues of approx. USD 21 bn for the two countries in 2018, the equivalent of 2% of their GDP.

In the last three years, with the crisis in oil prices worsening, the region’s countries have been discussing the possibility of introducing an effective system of taxation. VAT represents a real revolution for these two rich countries, where shopping centres dominate. For some time now, Dubai has been organising an annual shopping festival to attract bargain hunters from all over the world. The dream of a tax-free paradise in the Gulf, which for so long has attracted workers and tourists from all over the world, is now coming to an end.

Saudi Arabia, which generates 90% of its income from “black gold”, has already introduced a tax on tobacco and reduced some forms of subsidy. It was recently announced, for the second time in two years, that fuel prices will be raised, this time by 83–127%. However, this will not change the fact that the price of petrol in the Wahabi kingdom, which is the world’s biggest oil producer, will remain the lowest in the world: with an increase of 127%, high-grade petrol will go from 24 to 54 cents a litre, whereas low grade petrol will go from 20 to 36.5 cents per litre, a rise of 83%. The prices of diesel and kerosene remain unchanged. Last month, Riyadh also cut electricity subsidies, resulting in higher bills. In recent years, Riyadh’s budget deficit totaled USD 260 bn, which will not be balanced out until 2023. To manage this public debt, the Kingdom has drawn around USD 250 bn from its reserves over the last four years, reducing them to USD 490 bn. A further USD 100 bn has been raised by the Kingdom on the domestic and global markets.

The Emirates, 80% of whose budget derives from oil, have raised highway tolls and tourist taxes, although no income tax is planned. However, the Emirates’ Minister for Financial Affairs has excluded any increase in wages to offset the impact of VAT, which according to government calculations will have a socio-economic impact of at least 0.68%. The UAE’s Central Bank has asked domestic banks to not increase existing commissions for customers. A note sent by the Central Bank to local banks reports: “Banks and financial companies will not be able to exceed the structure of commissions for individual clients due to VAT”. The note also instructs banks not to increase the structure or levels of commissions for non-individual customers, due to the VAT tax rate of 5%.

Other Persian Gulf states have also decided to introduce VAT but not this year. Oman’s government announced that it will not introduce VAT until 2019, having decided to allow the public and private sectors to complete the required procedures. The country should impose a new tax on soft drinks and tobacco, which is expected to be introduced by mid-2018. The IMF estimates that a 5% VAT rate in Oman could increase its GDP by approx. 1.7%, corresponding to an additional USD 1.3 bn for the state’s coffers. In the next few days, Kuwait might also announce the postponement of a VAT introduction following Oman’s example, and Qatar is expected to officially introduce VAT in the second quarter of 2018. However, the Ministry of Finance has not yet formally announced a date, and VAT is not included in the 2018 state budget, which was presented in the beginning of December.