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 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.
But when a contraction or recession drives energy demand down, hydrocarbon revenues decrease.
“You have this double effect on the economy,” the chief economist at the Dubai International
Financial Center, Nasser Saidi,says. “And then you aggravate what is already the boom and bust cycle.”
Although many GCC countries have corporate taxes, their revenues come from a relatively small number of sources. “What we tend to see in this part of the world is a reliance on one or two taxes rather than a reliance on a whole range of taxes,” a partner for Pricewaterhouse Coopers’ Middle
East Tax practice, Dean Rolfe, says.
Studies undertaken by the IMF and championed by Dubai Customs – which faces significant losses under a trade agreement that eliminates or greatly reduces duties – showed that the VAT could double customs revenues.
Saidi also says that proving guaranteed revenue streams from a VAT will enable regional governments to more easily gain access to credit. As banks become more reluctant to lend based on implicit guarantees, this will become more important.
Ehtisham Ahmed, who works as an advisor in the U.A.E.’s prime ministers office, says he does not think the introduction of consumption based taxes will lead to personal taxes. “That’s not going to happen with the current environment.”
More importantly, companies and consumers frequently encounter what Ahmed calls “nuisnace fees,” or charges for services from government agencies. The economic impact of these disparate charges
is largely unknown.

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