Cheap oil will force Gulf states to levy VAT

VATLow oil prices and large deficits will force the Gulf states to introduce taxes, with value-added tax (VAT) – a tax on consumption – the preferable option, according to consultancy Deloitte.

Gulf states need tax income to fund ambitious infrastructure plans in the coming years, says the consultancy, a fact highlighted by the UAE’s decision to slash fuel subsidies in July.

“Whilst no government has committed to implementing any tax at this time, the signs indicate that the status quo will change because of persistently low oil prices, increasingly large fiscal break-even gaps faced by most GCC [Gulf Cooperation Council] countries, and the need to find sufficient revenue to fund ambitious economic growth plans in the long term,” says Deloitte in a statement announcing a report on VAT in the region.

Deloitte says VAT is cheaper to operate, less susceptible to fraud and less likely to distort investment decisions by businesses than other forms of direct tax.

In contrast, introducing corporate taxes could cause the private sector to reduce investment, while personal income tax “presents an obvious challenge to the ‘tax-free’ branding that has served the region so well in the past”, says Nauman Ahmed, partner and regional tax leader at Deloitte Middle East.

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