Gulf plans to launch VAT remain at technical stage

Gulf plans to launch VAT remain at technical stage

Timing of VAT not decided, countries to be given grace period; VAT rate of 5 pct considered; Tax expected to generate revenue of 2-3 pct of GDP

September 8, 2011 4:33 by Reuters

Plans to introduce a value-added tax for Gulf Arab oil exporters remain at a technical stage with the timing of the long-considered project still undecided though 2012-2015 have been tentatively discussed as potential launch dates, officials said.

Six Gulf Arab crude producers have been mulling the joint VAT plan over the past five years, aiming to trim their budget dependence on volatile oil prices, expand tools to steer hydrocarbon-reliant economies and reform their low-tax systems.

“It is only at the discussion stage,” Younis al-Khouri, undersecretary and director general at the United Arab Emirates finance ministry, told Reuters on the sidelines of a meeting of Arab finance ministers in the UAE capital on Wednesday.

“There is no specific period defined but there is a grace period to be given to every state, so each country will have a period of 2012-2015.”

Besides the UAE, Saudi Arabia, Kuwait, Qatar, Oman and Bahrain are members of the GCC, a loose political bloc emulating the European economic integration. The UAE and Oman have withdrawn from a Gulf single currency plan in the past.

“A number of countries need at least one to two years to be technically ready should the decision (to introduce the VAT) be made,” Abdel Aziz Abu Hamad Aluwaisheg, Director General for international economic relations at the Gulf Cooperation Council Secretariat General, told Reuters.

Oil is a major revenue source for most Gulf crude producers, making their budgets vulnerable to price falls given the absence of taxation of individuals. A jump in social spending this year triggered by revolts sweeping the Arab world has exacerbated that tension.

Khouri said no agreement had been reached yet on the VAT rate in the Gulf and that the plan still needed a lot of analysis and preparation.

“The UAE is not ready. A lot of homework is required it’s not just a date,” he said.

5 PERCENT RATE
The VAT rate considered at the technical level is 5 percent, Aluwaisheg said, saying that would not cause large price pressures in the Gulf, which had been struggling to contain record, double digit inflation in the oil boom year of 2008.

“The goal is to generate budget revenue worth 2-3 percent of GDP (gross domestic product),” he said. “That would be around 6-9 percent of the budget.”

He also said there would be more leeway for national variations in “non-tradable” sectors such as real estate. The aim was to have unified treatment especially for highly tradable sectors, including exports and imports of goods and services.

A threshold for compulsory registration in the Gulf, where most countries peg their currencies to the US dollar, is being considered as turnover of $1 million, he said.

The International Monetary Fund said in June Kuwait, which depends on crude income for around 93 percent of its budget, planned to introduce a value-added tax in 2013.

Some countries such as Kuwait has for years also been considering introducing an income tax for individuals but nothing concrete has happened as some analysts said such a move would hit plans to attract foreign investment.

Some Gulf countries tax corporate and bank profits and impose municipal and land-transfer taxes, including social security deductions. (Reporting by Martin Dokoupil; editing by Patrick Graham)