GCC steadily moves towards greater tax regulation

AUNALI MERCHANT
Senior Manager – Tax
MMJS Consulting, UAE

For most of the twentieth century, the Gulf Cooperation Council (GCC) region, comprising six Arab nations, has relied heavily on revenue from fossil fuels and natural gas to support economic growth. Since the beginning of this millennium, global trends have indicated a move away from reliance on hydrocarbon energy sources to alternative and renewable energy resources.

In response to this shift in long-term global outlook, the GCC nations have been developing various industry sectors to augment fiscal needs and achieve growth – including power, real estate, tourism, logistics, trade and manufacturing. However, recent volatility in oil prices owing to decreased global demand has increased the emphasis GCC nations must place on tax revenue to maintain fiscal stability, build investor confidence, attract foreign direct investment, and support economic growth.

Implementing tax regimes can be a complex task, one that has taken decades in developed economies. Also, since most GCC businesses are unaccustomed to being subject to extensive taxes and allied regulations, governments must tread carefully to maintain the delicate balance between ease of doing business and tax regulation.

Though most GCC countries have historically had taxes in the form of corporate, payroll and withholding taxes, along with a common customs code, there have been rapid tax developments across the GCC since 2017. In 2016/17, the GCC collectively agreed on the introduction of VAT and excise tax based on common frameworks.

The United Arab Emirates (UAE) and Kingdom of Saudi Arabia (KSA) introduced VAT regimes from 1 January 2018, with the Kingdom of Bahrain following suit from 1 January 2019 in a phased manner. Currently, the Sultanate of Oman is set to introduce VAT with a go-live of April 2021. These GCC nations, including Qatar, have also introduced excise tax targeting tobacco and allied products along with energy/aerated/sweetened drinks.

Though the general rate of VAT agreed between the GCC nations is 5%, KSA increased its general VAT rate to 15% from 1 July 2020. Kuwait has indicated the implementation of VAT and excise tax by 2022.

As part of the inclusive framework on the OECD’s BEPS initiative, most GCC nations have introduced recommendations through domestic legislation, which is significantly changing the tax regulatory landscape in the region. Such measures – including transfer pricing, economic substance and country-by-country reporting requirements – will assist the move towards greater tax transparency and exchange of tax information.

Oman has also indicated a tax on high income earners by 2022 to bring down fiscal deficit, which could be seen as a paradigm shift in tax policy for the region.

Though greater tax regulation and transparency offers much-needed economic and fiscal stability in the region, businesses looking to establish or expand presence in the GCC should take heed of the changing tax landscape and plan carefully to minimise their exposure to any unfavourable tax outcomes.