Why Gulf VAT could be bad news

19 August 2015

Imposing value-added tax (VAT) across the Gulf seems likelier than ever

The tax-free brand has held the GCC states in good stead for several decades now.

Nearly all executive expatriates who relocate to the GCC do so, in part, to escape punitive tax regimes in their home countries, and subsequently improve their capacity to save money. Accumulating savings essentially moves the control on how to spend disposable income from the state to the individual, which appeals to many.

This major incentive was further enhanced over the past few years, especially for Dubai-bound expatriates who relocate to the emirate not just to save money but to enjoy a lifestyle they could not otherwise afford back home. Again thanks to the tax-free, or more aptly low-tax, regime in the UAE.

So far, the numbers do not lie. The UAE emerged for the second consecutive year as the top destination for executive expats in 2015, according to a survey carried out by business social networking service LinkedIn. Most GCC states also fare well in global competitiveness and ease of doing business rankings, thanks in no small part to uncomplicated tax processes.

It is unlikely that implementing VAT alone will cause a major exodus among expatriates, let alone erode the GCC states’ global competitiveness ranking in a significant way. While it will increase the cost of living, it will not likely cause expatriates to immediately head back to their home countries or to other destinations that have a high demand for their skills.

However, introducing VAT could have a compounded effect on the growing frustration among residents. Nearly everyone appreciates the need to achieve green objectives, but the appreciation usually wanes as soon as they start paying for it through the removal of subsidies whether on fuel oil or electricity. Add this to the valid question that goes: “If we were to be taxed, what do we get in return other than a dismal end-of-service benefits?”

It should be remembered that the discussion on taxation regulatory policy across the Gulf started when the oil price plummeted in 2008. The reliance of the Gulf’s economies on the oil sector resulted in tight liquidity amid long-term economic diversification commitments.

The discussions were discontinued in 2011 when the Arab uprisings erupted. In certain states, particularly Saud Arabia, Bahrain and Kuwait, there were concerns within certain sections of their populations about the inequitable distribution of wealth. Introducing taxation was definitely not the best way to appease such negative sentiments. Instead, Saudi Arabia moved to inject $10bn for housing programmes. It also ordered the creation of 1,200 jobs in supervision programmes, and made permanent a 15 per cent cost-of-living allowance for government employees.

If the regional implementation of VAT and other types of taxation, as strongly suggested by the IMF, goes ahead, governments will have to deal with growing frustration among consumers, both expatriates and locals alike, and a potential contraction in GDP as consumers cut their spending.

Balancing this risk with the necessity to raise added revenues to finance their economic diversification programmes as oil revenue slows is a new challenge they must learn to carefully address. What is clear is that losing talent that is vital to executing those programmes is a risk they cannot take.

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