The decline and partial recovery of oil prices in the global market has emphasised to the Arabian Gulf nations the value of a diversified economy, while simultaneously highlighting the need for alternative revenue stream to drive economic development. Consequently, the Gulf Cooperation Council (“GCC”) has formally reached a unified agreement on the implementation of a Value-Added Tax (“VAT”) to be introduced during the first quarter of 2018. VAT will impose a 5 percent tax on a wide range of services and goods. Principally, the VAT is a form of indirect tax wherein the tax burden is transferred by manufacturers, suppliers, and retailers to end consumers. In other words, VAT is borne by the consumers through the increased costs of services and goods.
Although the introduction of a VAT system should provide supplementary revenue, it can be replete with difficulties and complex repercussions at the policy implementation stage. This scheme will require additional reportorial requirements on the part of business owners and sellers in the form of additional invoicing and record keeping. In addition, corporations would have to assess the impact of this tax on existing business operations not only in individual countries but throughout the region.
In addition to regional legislation, transitioning to this new tax regime requires a streamlined legal framework at the domestic level, as it would be difficult to find a “one-size-fits-all” formula to address the varying needs and tax practices within the region. Domestic legislation will also play a crucial role in ensuring that VAT aligns with existing legislation as may be necessary. National governments will be in charge of classifying goods, services or transactions that could have different tax treatments (e.g. zero-rated and VAT-exempt transactions and entities). In this regard, the new system necessitates training programs for the government agencies that will enforce the law as well as information dissemination to stakeholders with respect to their compliance requirements and liabilities.
Although VAT has been introduced in other jurisdictions in the world, it is a novel concept in the GCC. However, this step by the GCC is in many ways a paradigm shift towards fiscal reform. According to the International Monetary Fund, it is estimated that the 5 percent tax will result to a 1.5 increase of the countries’ GDP. Supplementary revenue will help the GCC states further improve their infrastructures, businesses, and ultimately lessen their dependence on oil. However, the need to diversify more revenue sources is still a looming challenge as Qatar continues its efforts to become a knowledge and technology driven economy.
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