Dubai Government

VAT in the Gulf Cooperation Council

October 17, 2012

Author: Edited By Ehtisham Ahmed and Abdulrazak Al Faris
Classification: Books

 

Fiscal Reforms In the middle East Front Page.jpg

Executive Summary

In light of their known vast oil and gas revenues, the GCC countries have seen little need to seek revenues from other sources including taxation.  Except for low levels of custom tariffs, foreign corporate taxes and different fees, most GCC member states have been known to have almost tax-free systems. Indeed, custom tariffs are the major generator of tax revenues for the GCC governments after oil. However, as a result of the recent movement towards the GCC common market and joining a number of free trade agreements (FTA’s), revenues from such taxation themes have witnessed a steady decline, and projected to decrease further in the near future.

The impetus to revise taxation policies arise from the need to make up for revenues lost through GCC common market and FTA’s. Furthermore, the GCC governments have realized the risk involved in an almost complete dependence on oil and gas revenues given the recent extreme volatility of international oil prices. In addition, revising the taxation system reflects the need to complete the panoply of macroeconomic instruments of a modern economy.

Given that the member states of the GCC are linked with a common market, it is not practical for any country to reform its own system in isolation. Therefore, the member states are recently negotiating elements of a new unified VAT system taking into account all economic and political consequences of such a system.

Dubai Economic Council, in its role as the think tank for Dubai Government in designing economic policies, launched in 2009 a major research project on fiscal reform in the UAE with emphasis on Value Added Tax. The project included several consultation meetings, workshops, commissioned working papers, and an international conference which took place on 26th October, 2008. The recent book, “Fiscal Reforms in the Middle East: VAT in the Gulf Cooperation Council”, is one outcome of that project, and is a collection of eleven carefully-selected papers discussing the VAT system and its applicability to the GCC block. The book is organized in two parts. The first part of the book, containing seven papers, discusses international experiences on VAT systems in common markets as well as individual countries, and draws lessons learned for GCC countries. The four papers in the second part discuss the possible introduction and consequences of VAT in the GCC as a block, and the UAE as a federal state.

Major recommendations and lessons for the GCC, drawn by task forces and researchers from theory and international experience, and customized for GCC, include:
1. It is in the best interest of the GCC in general and the UAE in particular to introduce, by 2012, a harmonized VAT system to largely replace the current custom duty and different stamp fees.
2. Building sufficient institutional and administrative frameworks, jointly with revenue-sharing arrangements, in order to guarantee the political and economic feasibility of the VAT system in the GCC countries.
3. In order to facilitate administration and avoid incentive for tax evasion and fraud, the VAT base and rate should be similar across the GCC members.
4. In setting the size of VAT exemption threshold, and whether it should be a single/common threshold, studies for individual countries of the GCC should be conducted.
5. The implementation of the VAT system should be gradual, starting with a low rate.
6. Building on the experience of the EU, introducing a single Tax Identifier Number System for simplifying the exchange of information and administration of the new system across the GCC members.
7. An introduction of harmonized legal arrangements that parallels the EU procedure but is modified to prevents procedural and legal problems common to the EU and other international systems. Legal issues include:
a. Creating common rules to key VAT issues.
b. Maintaining robust intra-GCC trade arrangements to prevent misuse and fraud.
c. Harmonizing basic rules on VAT administration across the GCC members.