Can GCC VAT hikes offset Covid-19's fiscal impact?

Tax

Economic News

2 Jun 2020
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Extensive fiscal measures have been in put in place across the GCC, with a view to offsetting the impact of the coronavirus on individuals, businesses and the broader economy. Measures have primarily been aimed at stimulating economic activity in the private sector and supporting entities that are struggling to manage their cashflows and tax compliance.

Emergency tax measures introduced in the region include the extension by several months of due dates for filing tax returns, the reduction or elimination of penalties for the late submission of tax returns, and the introduction of tax payments in installments.

While such changes are not specifically tailored to the smaller, more vulnerable businesses in the region, they will play a key role in keeping many small and medium-sized enterprises (SMEs) afloat. “Most of these measures do not differentiate between large and small businesses. However, they usually have a greater positive impact on SMEs than on big corporations,” Wadih AbouNasr, head of tax at the Saudi Levant cluster of KPMG, told OBG.

In Qatar several commodity classes – including food and medical items – have been exempted from Customs duties for six months.

A similar relaxation of Customs duties has been seen in Oman, where it is also possible for donations made towards fighting the Covid-19 pandemic to be treated as a tax-deductible expense during the 2020 tax year.

Meanwhile, the UAE has introduced a 20% refund on Customs fees on imported products sold in Dubai, a cancellation of the bank guarantee required when undertaking Customs clearances and a reduction of up to 90% on fees associated with submitting Customs documents.

Another move in the UAE was the easing of value-added tax (VAT) obligations for foreign businesses. A refund window has been opened by the Federal Tax Authority for all foreign businesses registered in the country to take VAT refund requests for the 2019 tax year. The window will remain open until August 31.

Saudi Arabia has also put in place several tax measures aimed at easing the burden for the local business community, among them extending the deadline for filing tax returns, amending fines on all late payments and waiving various expatriate levies.

However, in a significant regional divergence, Saudi Arabia announced in early May that it would be increasing the VAT rate from 5% to 15%, as of July 1.

Revised social contract

The GCC originally agreed to introduce a 5% VAT rate in 2016, with the UAE and Saudi Arabia the first to introduce the tax in 2018. To date only Bahrain has followed suit, introducing the tax in 2019.

The original 2016 agreement came amid pressure from international bodies such as the IMF to reduce state largesse and implement new fiscal mechanisms to broaden revenue streams across the region.

The timing was also significant: the social contract that traditionally existed in Gulf states ensured that oil wealth trickled down to citizens in the form of generous state salaries as well as subsidies on fuel and electricity. Governments found it difficult to cut these benefits or raise VAT on goods when oil prices were high. However, in the wake of the 2014 oil price collapse, reducing public expenditure became more urgent and justifiable, and the move was widely welcomed by many in the region’s business community.

This latest decision by Saudi Arabia once again coincides with significant turmoil in global oil markets as a result of the coronavirus pandemic, with muted demand coming up against oversupply.

Moreover, while it came as a surprise to many, it fits with the rapid economic and social transformation currently taking place in the Kingdom as part of Vision 2030.

The hike also places Saudi Arabia on roughly the same pegging as other G20 nations – although it is still below the global average VAT rate of 19.7%.

While some were initially concerned that the new tax rate will dampen business sentiment, AbouNasr is confident that the long-term trajectory of the Kingdom’s economy is positive enough to ensure that international capital continues to flow in.

“Foreign direct investment into the Kingdom will not be particularly impacted, as the decision to invest relies on other economic factors, such as the potential growth of the economy, government spending and market opportunities, which remain positive for Saudi Arabia at this stage,” he told OBG.

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