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A taxing delay for GCC firms

A taxing delay for GCC firms

The introduction of a value-added tax could be a financial blow to companies that are slow to update their contracts.

May 7, 2010 9:39 by

A GCC-wide value added tax slated to come online in the next few years could catch regionally based companies off guard, costing them millions.

The potential value added tax, or VAT, is part of economic diversification efforts by regional governments. The vice ministers of finance met in early April in Riyadh to discuss the plan, and while the six nations of the GCC have all agreed in principle to the tax (originally conceived of as a way to compensate for lost customs revenues), its implementation still may be years away.

One advisor with an international tax firm who works locally says that many companies were concerned several years ago when governments first started discussing a value added tax as compensation for falling customs revenues. But because action on the part of the governments has been slow, none of his clients have moved to ensure their contracts provide for potential taxes.

Contracts with foreign companies often include a standard provision for a VAT, but companies accustomed to operating in a tax-free environment often do not think to negotiate for more favorable terms. The VAT, which might take hold as early as 2012, could cost corporations operating under these old contracts.

The need for a VAT partially stems from a need for governments to diversify their revenues. When the economy is doing well, energy demand is typically high and hydrocarbon-rich countries have strong revenues. Fiscal spending on large infrastructure projects increases when these economies have surpluses, boosting the rest of the economy.

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