VAT in the GCC: How will new taxes affect you?

With the Gulf getting closer to implementing VAT, EDGAR examines the effect a new tax would have on GCC businesses and residents.

Peter Iantorno August 31, 2015

With the cost of living on the rise, the recent deregulation of petrol prices and the news that the GCC is close to agreeing a deal to bring in VAT, the entire region's economy is facing a seismic shift.

But how will the change in a dynamic that has attracted so many expats to the GCC affect both businesses and residents in the region? We asked Cathryn Vanderspar, Partner and Head of Tax for international law firm Eversheds, who says that when it comes to the introduction of a new tax system in the UAE and GCC as a whole, as always, the devil will very much be in the detail.

“At a governmental level it is hoped that the introduction of a tax base in the UAE will reduce dependency on subsidy and exposure to the oil price and the dollar,” she says. “However, the economic and social impact of a corporation tax and VAT implications will depend on exactly what and who the taxes apply to and the rates imposed.

“Clearly the choice of goods and services that VAT is applied to will matter. Will it be reserved for luxury items and ‘unhealthy’ products like tobacco, or will it be rolled out across everyday consumables, which could hit everyone including families on middle and low incomes? Will there be exemptions for medical supplies and food?”

VAT in the GCC luxury items.jpg It is likely that VAT will be imposed initially only on luxury items, alcohol and tobacco.

At the moment there is no clear indication of exactly what products and services any new VAT would apply to, however it is likely that everyday consumables will be exempt and the tax will instead be levied on luxury goods, alcohol and tobacco.

What will the new tax rate be?

Vanderspar expects that the initial rates of tax will be low, with VAT predicted to be introduced at between 2 and 7 per cent – far less than the 20 per cent charged in the UK, for example.

However, according to Vanderspar, low introductory rates won’t necessarily last. “Experience elsewhere in the world shows that, once established, rates tend to rise,” she adds.

One point worth noting is that if and when VAT is introduced, it will be brought in as part of a GCC-wide customs union, meaning that no GCC country would be held to a disadvantage.

“This is based on a previous agreement between the UAE and all GCC states to impose a VAT law simultaneously,” said the UAE Ministry of Finance in a public statement last week.

VAT in the GCC GCC sumit.jpg GCC leaders met at a summit in Saudi Arabia earlier this year.

Will the GCC introduce corporation tax?

As well as the likely introduction of VAT, it has also been mooted that the GCC may, at some point in the near future, introduce corporation tax, payable by companies on their profits.

According to Vanderspar, corporate tax is generally accepted as a cost of doing business in any particular region, and as long as the rate is not too high, it shouldn’t have too much of an adverse effect on business in the GCC.

“If corporate tax is too high then it can decrease the competitiveness of the region, and companies are more likely to try to find ways around it,” she says. “But if investment opportunities are good enough and returns attractive enough, corporation tax (at the right rate), should not be a deterrent.”

VAT in the GCC luxury items shopping.jpg The new taxes are likely to be felt more by businesses than consumers.

So what effect will new taxes actually have, then?

If VAT is introduced and subsequently raised to a rate higher than the mooted 2 to 7 per cent, there is a concern that some people may opt out of paying into pre-arranged savings and protection plans in favour of maintaining their current lifestyle.

However, according to Marcus Gent, Managing Director, Middle East and the Rest of the World at FPI, people should "think long and hard" about doing so. "In the absence of a pension system for expatriates, individuals have to make adequate provision for a comfortable retirement - or for whatever they want in life," he says. "The importance of safeguarding your financial future should outweigh most other considerations, if you find yourself in a situation where you have to economise.

But according to Vanderspar, the biggest effect of any introduction of VAT in the GCC is likely to be on businesses, not necessarily due to the taxes themselves, but due to the extra time and money they will have to spend to ensure that they are compliant with the new rules.

“Leaving rates aside, the business impact of these new taxes is likely to be significant,” she explains. “Systems, technology, personnel and training will need to be introduced to enable businesses to comply with the new taxes. Experience shows that even if the tax itself is not a significant cost, the compliance burden may be significant indeed.”