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Wed 19 Aug 2015 01:38 PM

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VAT 'best way to raise money for Gulf', says Deloitte

New report outlines benefits of introducing value added tax to the region as GCC talks slow on disagreements

VAT 'best way to raise money for Gulf', says Deloitte

Deloitte has urged the GCC to introduce a value added tax (VAT), as reports on Tuesday claimed discussions had stalled as a result of disagreements between the countries involved.

The GCC has been examining proposals to introduce VAT on goods and services for several years, but a series of talks held in recent months were designed to reach a definitive agreement between Gulf states.

However, Reuters reported that discussions had stalled because country leaders had been unable to agree on the terms and details of such a tax, and because it is politically sensitive. UAE state news agency WAM confirmed the talks were still ongoing.

The latest study by the Big Four professional services firm insists that a broad-based VAT remains the most effective way to generate new revenue to fund economic development initiatives across the Gulf.

VAT is more efficient, cheaper to operate, less open to fraud and less likely to distort investment decisions by businesses than any other form of tax because the majority of the cost falls on the consumer, the report, VAT in the GCC – Old news or new chapter? states.

Falling oil prices since last year has reduced governments’ incomes and placed them under pressure to find new revenue – the UAE is expected this year to post its first budget deficit since 2009.

Nauman Ahmed, partner and regional tax leader at Deloitte Middle East, said: “Faced with a need to raise additional government revenues, implementing a VAT would be a rational response by government.

“That is not to say that the implementation of corporate or personal income tax can be ruled out; rather it is a reflection on the fact that a VAT seems to 'tick more of the boxes' than the others.”

He continued: “Compared to a VAT, a corporate income tax is more likely to act as a disincentive to businesses considering investment in the region and hence more negatively impact GDP growth.

“On the other hand, a personal income tax presents an obvious challenge to the ‘tax-free’ branding that has served the region so well in the past.”

On August 1 the UAE scrapped fuel subsidies, reigniting the debate on tax reform in the GCC. In the case of VAT, analysts believe that to limit competition within the GCC the tax would have to be introduced regionally rather than by individual countries – which is why the talks are so crucial.

Deloitte’s report says that while no government has committed to implementing a VAT to date, the “status quo will need to change because of persistently low oil prices, increasingly large fiscal break-even gaps for most GCC countries, and the need to find sufficient revenue to fund ambitious growth plans in the long term.”

A conclusion is likely to be reached within the next six months, the report added.

Stuart Halstead, Indirect tax leader at Deloitte Middle East said: “The significant move by the UAE to slash fuel subsidies will, aside from anything else, bring fiscal planning into sharp focus around the region.

“Looking purely at what we know about the economic impact of a Value Added Tax, implementing such a tax does appear to be an appropriate approach given the range of needs that need to be balanced.

“Policy makers do not necessarily want to trade any economic growth for public revenues, but if you have to do it, a VAT is more likely to offer more bang for its buck.”

In a report this month, the International Monetary Fund suggested the UAE consider imposing VAT at a 5 percent rate, a 10 percent corporate income tax, and a 15 percent excise tax on automobiles.

This would generate revenue equal to 7.4 percent of non-hydrocarbon gross domestic product, it said.