With oil prices plummeting to below $50 a barrel, the need for Gulf governments to diversify their revenue streams and reduce their dependency on the hydrocarbons sector could become increasingly important.
Typically, the Gulf has not prioritised tax regimes as a means of generating revenues, with most government treasuries fed by strong oil and gas exports.

The region has positioned itself as a low-tax environment, with countries using the lack of personal income tax and low corporate taxes as a means of attracting investment and international expertise into the region.

New agenda

But if low oil prices continue, taxation and other state revenue-generating efforts could rapidly climb up the agenda. This is especially the case if governments want to maintain high levels of spending on multibillion-dollar infrastructure plans while not falling into serious deficit.

In 2008-10, when oil prices last slumped, the introduction of a GCC-wide value-added tax (VAT) was discussed, and most governments went on to draft their own VAT laws. Those plans fell to the wayside, however, in the wake of the 2011 Arab unrest, as governments shied away from implementing unpopular reforms that would raise the cost of living and doing business in the GCC.

But evidence is now emerging that certain governments are once again looking to bolster revenue-raising measures, with new taxes or other forms of levies, such as increased visa fees or road tolls, being considered.

Dubai example

Dubai provides the clearest example of this happening. The emirate’s 2015 budget forecasts that revenues from taxation will increase by 12 per cent compared with 2014, and will represent 21 per cent of total government revenues.

Dubai has long had to ensure its budget is not reliant on oil sales, given its limited hydrocarbons reserves. Although it has no corporate or personal tax, revenues from other sources such as customs duties, taxes on the oil industry and foreign banks already play an important role in propping up the budget. Dubai is relatively protected from the direct impact of declining crude prices, as oil revenues account for less than 5 per cent of government income. But the 50 per cent drop in oil prices since June 2014 is nonetheless eating into state funds at a time of renewed spending on infrastructure.

The emirate is raising fees for government services to boost revenues. The Roads & Transport Authority (RTA) increased the minimum charges on its taxi services at the end of last year. It has also sharply increased the number of parking meters. Revenues from such government services will represent 74 per cent of total state income in 2015 and rise by 22 per cent compared with last year.

Other indirect taxation measures already in existence include road tolls, housing fees on electricity and water bills, and municipality fees levied on restaurant and hotel bills. There was also talk in the past about placing a tax on remittances made by expatriates and other forms of taxation, but these have not materialised.

The government is acutely aware that Dubai’s appeal to investors and expatriates as a place to do business and set up home would be severely undermined by any new, overt taxation, and would threaten the foundation of the economy as a whole.

Undermining appeal

“In the UAE, while there have been some informal debates surrounding the introduction of federal corporate tax, this has not been converted into concrete proposals or timelines,” says Nilesh Ashar, a Dubai-based partner for tax at Dutch accountancy firm KPMG.

Abu Dhabi, as one of the world’s largest oil producers, is more exposed to declining crude prices. Currently, the emirate does not have personal or corporate taxes in place. But it did recently move to increase government revenues through reforming its power and water tariffs, raising prices from 1 January for expatriates and targeting nationals for the first time. The reforms are expected to significantly boost the emirate’s budget.

Bahrain and Oman are the Gulf countries most vulnerable to low oil prices, and are therefore under the most pressure to increase revenues. Bahrain’s breakeven oil price is currently nearly $120 a barrel. The country already levies income tax of 46 per cent on the oil and gas industry, a form of stamp duty, and social security for corporations and individuals.

There has been recent speculation surrounding the introduction of a VAT-type tax in the kingdom. Amal Abdulla, financial controller at the Finance Ministry, tells MEED the preparations for the 2015 budget, due to be published in March, include studies surrounding small taxes, although nothing has been confirmed as yet.

Oman strategy

Oman has a lower breakeven oil price of about $100 a barrel, but it too will suffer if there is a prolonged period of weak crude prices. Its budget for 2015 anticipates 25 per cent higher tax revenues of RO1.3bn ($3.4bn), compared with RO1.04bn in 2014, although no details are given on how this will be achieved. While Muscat is unlikely to introduce new headline taxes, there has been discussion about improving enforcement of current tax laws and tackling tax avoidance.

At present, corporate tax in Oman is levied at 12 per cent on income over a certain level, which encourages misreporting of results. Tax holidays are also available to companies engaged in certain sectors.
There is no capital gains, personal income, sales or stock market tax in the sultanate. The introduction of an expat remittance tax has also been discussed, but the idea has not been advanced.

The other GCC countries are better disposed to withstand a lengthy period of low oil prices. Saudi Arabia has already announced plans to support a budget deficit in 2015 by dipping into its vast foreign exchange reserves, estimated at $736bn. Likewise, Qatar is unlikely to have a knee-jerk reaction to low oil prices; gas sales account for a large share of government income, and most of its exports are tied into long-term contracts.

Corporate tax is limited in Saudi Arabia, with all locally wholly-owned businesses exempt from taxation and a 20 per cent charge placed on other companies. Wholly-owned local companies are liable for zakat, however.

Kuwait increases

Kuwait, meanwhile, has the lowest budget breakeven price in the region as well as significant oil reserves, making it one of the best-placed countries in terms of its resilience to low oil prices.

Years of underspending in the country have also buoyed state coffers and as such there are no concrete plans to increase or add new taxes. Efforts are under way, however, to boost the budget by cutting expenditure, targeting its large subsidy bill.

On 1 January, the Kuwaiti government raised the price of diesel to KD1.7 ($5.8) from KD0.6. The move has attracted criticism from some sectors of the population and is a clear indicator of how subsidy reform and taxation is received in the region.

“This is low-hanging fruit,” says Aziz al-Yaqout, a lawyer and owner of Kuwait-based Meysan Partners. “A lot of GDP is spent on subsidies. Remove that and you save a lot of money. The question is will the government be able to stand up to the uproar.”

Kuwait is also implementing forms of stealth taxes such as increasing visa fees and company registration fees. Such charges are more an annoyance than a cause for protest, but the government may inadvertently deter much-sought after foreign investment through such measures. “If you raise something like that, you ask yourself: is the government really interested in promoting Kuwait?” says Al-Yaqout.

The GCC relies on its business-friendly, low-taxation environment to draw in the people and money needed to ensure economic growth and development. In times of financial uncertainty, the region’s governments will be even less likely to want to upset this balance.

Stealth taxes

So the introduction of taxation in its traditional form via income or personal tax is unlikely to be governments’ main strategy to boost revenues. Rather, they are likely to employ other revenue-generating methods first, such as increased fees for government services, and tackling their budgets from the expenditure side by reducing subsidies.

“Personal income tax would have a direct negative effect on the individual - and could have political repercussions,” says Al-Yaqout.

“In general, the willingness to implement meaningful revenue measures such as implementing new taxes or raising existing taxes seems not very strong,” adds Steffen Dyck, vice-president, senior analyst, sovereign risk group at US ratings agency Moody’s Investors Service. “It is a balancing act between maintaining growth in the non-oil private sector and balancing the budget.”

But the stealth rise in fees for government services, be that utility bills, transportation costs or other, are set to significantly increase the cost of living and doing business in the GCC in 2015.

Follow Rebecca Spong on Twitter: @Rebecca_MEED