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26 Int'l Tax Rev. 52 (2015-2016)
VAT Implementation Challenges in the GCC

handle is hein.journals/intaxr26 and id is 610 raw text is: 

Spca etue         -           VAT


VAT implementation challenges



in the GCC


Gulf Cooperation Council (GCC) oil export revenues are expected to be nearly $275 billion lower in 2015 than in
2014 and with low oil prices set to stay, countries in the region are undertaking fiscal adjustments. Mark Lindley,
director of tax at the Qatar Financial Centre, explores the challenges.


T he GCC member states have developed rapidly in recent years,
     fuelled by revenues from the sale of the plentiful hydrocarbon
     commodities indigenous to the region. However, the recent
slump in oil prices, which has seen the price of oil fall below $50 per
barrel, has placed pressure on national budgets. Some GCC states
are experiencing their first budget deficits for many years.
   The GCC states are blessed with significant financial reserves,
which allow them to ride out the short-term effects of fiscal con-
straints, so there has been little noticeable change in the pace of
development. However, should oil prices remain low there may be a
question as to whether recurring deficits would be sustainable. GCC
states are already looking at ways to reduce costs, such as through the
removal of fuel subsidies, or to raise new revenues to reduce depend-
ency on hydrocarbons. It is in this context that the possibility of a
GCC-wide value-added tax (VAT) system has again surfaced.
   The spread of VAT and GST systems has been the most impor
tant development in taxation since the 1950s. VAT or GST has
been introduced in more than 150 countries, and now contributes
more to tax revenues than any other tax.
   The benefits of VAT are not limited to revenue. For example:
* VAT is recognised as an efficient tax. If a single rate of VAT is
   applied uniformly across all goods and services in the economy,
   it allows the government to raise revenues without distorting
   the relative price of inputs in the economy.
 VAT is neutral towards international trade. Exports are typically
   taxed at 0%, so that VAT is collected only in the country of corn
   sumption. Therefore there is no disadvantage for the country in
   the context of competitiveness in the international market.
 Invoice and reporting requirements can be the means to
   encourage improved booldeeping and compliance practices for
   small businesses.
   VAT should also provide governments with a robust and buoy
ant source of revenues. VAT contains self-policing features that
should help minimise tax leakage. Ifra taxpayer 'opts out' of the tax
base, the government will still collect most of the possible revenue
from other members of the supply chain. This can be seen from the


                                                 If the GCC
                                                 adopts a
                                                 regional VAT,
                                                 lessons can
                                                 be learnt
                                                 from
                                                 experiences
                                                 in Europe
example shown in Diagram 1, using a 5% VAT rate. A product is
imported at a cost of $200, sold by the importer for $300 + VAT,
and finally sold to the end-consumer for $380 + VAT.
   The objective of VAT is to impose the tax on the end-consumer
- in the above example at 5% embedded in the purchase price. The
value-added mechanism is a convenient way to collect the tax, and
also reduce the risk of lealage as the tax applies at each stage in the
supply chain. Under a single-stage retail tax - one imposed only on
the final sale - the government would lose $19 revenue if the final
retailer is outside the tax base. In the example above, the revenue
loss would be only $4 provided the importer is in the VAT system.
   Given the potential benefits of VAT, it is understandable why
adoption of VAT has been so widespread, and why VAT has also
been recommended for the GCC.

VAT mechanism and exemptions
VAT has its critics. One of the more serious complaints is that VAT
is regressive in nature; because low income earners tend to con-
sume a larger portion of their income than high-income earners,
their tax/income ratio will also be higher.
   One policy response to this may be to provide relief in the form
of exemptions or reduced VAT rates for basic necessities such as
food, health care and services of a public nature. Care will be
required when determining whether particular items should be taxed
or exempted to avoid distorting spending patterns. Policymakers will


Diagram 1


      200 (including import dutes

Non-resident-]

                         10


I    I           ]300 +15 VAT1            1380 + 19VAT



           I5                      4         Retailer
                                             Output VAT   19
              Input VAT                                   15

                                             Net payment   4
        Total: 19


WWW.INTERNATIONALTAXREVI EW.COM


52    December/January 2016

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