On January 1, 2018, Saudi Arabia and the United Arab Emirates (UAE) will introduce a new value added tax (VAT) in accordance with the terms of the Gulf Cooperation Council (GCC) Unified VAT Agreement. Four other members of the GCC—Bahrain, Kuwait, Oman and Qatar—have pledged to do the same, though their timeline for implementation remains unclear, and Qatar may abandon the VAT altogether.
VAT reflects a dramatic change in the relationship between rulers and citizens in the region, explained Dr. Jim Krane and Daan Arends in a Bloomberg Tax Webinar on A New VAT for Saudi Arabia and the United Arab Emirates, held on December 4, 2017.
Dr. Jim Krane, the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute, explained that traditionally, the autocratic Gulf States financed themselves with oil revenues, and redistributed part of the proceeds to citizens—effectively, providing their citizens with social welfare benefits in lieu of a say in government.
“In a twist on the slogan, ‘No taxation without representation,’ the rulers took the view that if they did not impose tax on their citizens, they could avoid accountability,” Krane explained.
However, various factors, including declining oil prices and citizens’ increasing concern about terrorism and instability have prompted a revised social contract. Citizens are now prepared to exchange some taxation for protection and political stability.
VAT is generally more palatable than income tax—which explains its global expansion as a means of revenue generation—and is set to be introduced in GCC Member States at the modest rate of 5%.
Although the rate is low, the complexity of the new laws can lay traps for the unwary, notes Daan Arends, an indirect tax partner with DLA Piper, Amsterdam, who has advised GCC Member States on the new legislation. He flagged the following challenges for entrepreneurs who do business in the Gulf:
Click here to listen to a recording of the webinar.
Daan Arends has authored summaries of the New VAT regimes for the VAT Navigator, available through Bloomberg’s International Tax Library. Click here to request a free trial.
By Joanna Norland, Technical Editor, VAT Navigator, Bloomberg Tax
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