(MENAFN- The Peninsula) The Peninsula
DOHA: The introduction of a 5 percent VAT rate across most of the GCC will take place in 2018-2019, S & P Global Ratings said yesterday.
Saudi Arabia and the United Arab Emirates introduced VAT on January 1, 2018, while Bahrain will wait until later this year and Oman until 2019, likely because of administrative capacity constraints. However, Qatar has announced that it will not introduce VAT at this time, the global ratings agency noted.
S & P projects the regional VAT rollout would push up government revenues on average by the equivalent of 1.7 percent-2.0 percent of GDP. It based its estimate on a collection-efficiency ratio of 50 percent-60 percent, which measures how efficiently the tax can be applied to the consumption base. A ratio in this range would reflect an effective tax rate of 2.5 percent-3.0 percent, lower than the 5 percent statutory rate, owing to expected administrative inefficiencies and the ability countries have to exempt and zero-rate selected sectors.
The discrepancy between statutory and effective tax rates will likely influence policymakers' discussions of future VAT rate increases--potentially to 10 percent--in some GCC countries. With a VAT increase of this magnitude, the effective tax rate would likely rise to 5 percent-6 percent. Government revenues would likely advance by an additional 1.7 percent-2.0 percent of GDP on average.
Low tax revenues by international standards suggest that GCC sovereigns have some room to broaden the tax base. The region's tax structure includes no personal income tax and no corporate tax on domestic-owned non-hydrocarbon companies, except in Oman. The challenges of higher taxes to the region's social structure and business model could slow further substantial tax reforms.
The rollout of VAT should support the diversification of GCC government revenues away from their dependence on hydrocarbons. However, we estimate that even if the GCC authorities were to significantly expand the tax base, for example by implementing a 15 percent corporate tax, a 15 percent personal income tax, and a 5 percent remittance tax, this would increase government revenues only by about 3.0 percent-4.5 percent of GDP (excluding taxes already applied on foreign-owned companies). This would reduce GCC sovereigns' central government deficits, but government revenues would still rely heavily on hydrocarbon revenues.
The constraints to broad tax reform due to GCC sovereigns' economic and social models make the implementation of such measures unlikely in the short to medium term, in our view. GCC economies' expatriate workers galvanize their private sectors, while public sector employment underpins the living standards of GCC nationals. A sharp hike in income tax on imported labour, for example, could make the region much less attractive to expatriates. If local nationals were also subject to such a tax increase it could upset the social contract. Moreover, costs of doing business would climb, dampening corporate profitability. S & P, therefore, expects any widening of the tax base will be only gradual.
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