The Gulf needs to raise taxes

06 June 2008

The UAE is to lead other GCC states with a tax on goods and services. Consumers will pay to ensure that the Gulf economies remain attractive.

Governments around the world have been lowering corporate tax rates for years, while gradually raising consumer taxes.

The same thing is now happening in the Gulf, another sign of how GCC economies are moving into line with the trends of the wider world.

In effect, consumers are paying the price of ensuring that the Gulf economies remain attractive to international companies.

With record oil revenues, it might seem a strange time for governments to be worried about raising revenue, but it is sensible in the longer term.

No one can say with certainty where oil prices will be a year from now, but the oil wells will certainly dry up one day and it is far easier for a government to raise taxes that are already in place than to introduce new ones.

Indirect taxes in the Gulf have often been aimed at expatriates in the past, but with no income tax, most have concluded that the region still represents a better deal than handing over 40 per cent or more of their income to governments in many other parts of the world.

But taxes are increasingly hitting everyone in Gulf societies. Value Added Tax (VAT) is the latest example of this. The UAE is making the first move early next year, when it brings in the tax on most goods and services, but all of its GCC neighbours are expected to follow within five years.

It is likely to be levied at just 3-5 per cent at first. If it comes in at the bottom of this range, it will match the lowest level in the world, in Aruba. However, the global average is closer to 16 per cent, and Gulf rates will rise in the future.

The immediate impact is likely to be a short-term increase in inflation, although that could be reduced if competition drives some retailers into absorbing the cost.

But over time, it is a clear that consumers not businesses will shoulder a larger burden of taxation. For governments it makes sense, for businesses it is attractive, but for consumers it is just something they will have to get used to.

Agenda: Economy - Increasing the tax burden

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