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Gulf countries should introduce VAT as soon as possible, says IMF head

Gulf countries should introduce a regional value-added tax (VAT) as soon as possible, the managing director of the International Monetary Fund (IMF) has said.11 Nov 2015

Christine Lagarde said that even at a low rate, VAT would raise considerable revenues for countries including Saudi Arabia and the United Arab Emirates according to Trade Arabia news site. Lagarde was speaking at a meeting in Doha with the finance ministers and central bank governors of the Gulf Cooperation Council (GCC).

“At the moment, a large share of fiscal and export revenues in the GCC come from oil," she told the meeting.

"With oil prices having declined sharply since mid-2014, export revenues are expected to be nearly $275 billion lower in 2015 than in 2014. The fiscal and current account balances in the region are deteriorating sharply, with the fiscal balance projected by the IMF to be in a deficit of 12.7% of GDP in 2015. Growth is also expected to slow, with IMF projection suggesting 3.2% in 2015 and 2.7% in 2016, compared to 3.4% in 2014," Lagarde said in a speech.

GCC countries "face the challenge of lower oil prices from a position of strength", Lagarde said.

"Prudent policies over the past decade have enabled them to build up financial buffers which avoid the need for a sudden or disruptive adjustment in fiscal policy. Nevertheless, with low oil prices expected to persist for a number of years, all GCC countries need to undertake some degree of fiscal adjustment, although the size and urgency of this adjustment varies across countries. Well-planned fiscal consolidation strategies need to be put in place as soon as possible and communicated so that people understand how the adjustment will take place," she said.

“How best to carry out this fiscal adjustment will depend on each country’s specific situation. But the main elements are common across countries: an expansion of non-oil tax revenues; raising energy prices which are still well below international norms; firm control of current spending, particularly on public sector wages; and a review of capital expenditures. Reforms to strengthen the fiscal frameworks would support these consolidation efforts," she said.

Banking systems in the region seem well placed to deal with lower oil prices and weaker growth, but central banks must remain vigilant for stresses in the system, Lagarde said.

The focus of growth has to shift to the private sector. Two million people are likely to enter the labour force in the region by 2020 and "private sector job creation needs to be stepped up", she said.

The IMF will continue to visit the region and offer technical assistance and training, she said.

The UAE is rumoured to be drafting laws on VAT and corporate tax, to be complete by the end of this year.

Doha-based tax expert Ian Anderson of Pinsent Masons, the law firm behind Out-Law.com said: "Regardless of timing, companies operating in the GCC should be planning for the introduction of VAT. Operating models may need to be changed and existing and new contracts reviewed for where the tax cost will fall."