Tax is not a popular topic in the Gulf Cooperation Council (GCC). In fact, it is a little scary because we Arabs feel that this is where the government takes part of our money for no reason or right. Maybe it is not true, but this is the common perception, and it is possibly time to give this issue an ear to figure out what and why.
For decades, GCC countries have benefited from high oil prices until we all started to hear a new term called value added tax, or VAT. In January 2018, VAT will come into effect for the first time in the United Arab Emirates (UAE). This term is new to us in the GCC and has become a matter of concern to business people, and possibly will have consequences on the business environment and investments when implemented. VAT is a revenue source for the government to cover its needs and public demands.
VAT is a tax on the consumption of goods and services and has been set at five percent across GCC countries. This rate is the lowest in the world, with some countries charging VAT of more than 20 percent. I believe VAT is transparent method for GCC governments to increase revenue, boost their GDP and maintain their strong economies while continue to deliver their public service. I think it is a win-win situation for all.
I know that some Kuwaitis are doubting how much we benefited from the high prices of oil in the past, yet we need to admit that the high prices had allowed the country to at least keep the salaries’ scale and employees’ bonuses untouched. They also helped keep the government’s hiring policy safe, as the government has been able to accommodate more new employees, Kuwaitis and expats, in state departments, and also support citizens who work in the private sector with a monthly bonus.
All this is good. However, a drop in demand in oil prices with an increased global competition, from around $150 in 2008 for example to about $50 today, has pushed the GCC to confront a new reality where crude oil is no longer something you can keep as the only source of a county’s national income, but it should seek to diversify its economy while remaining globally stable and competitive.
I have to admit that so far I see that UAE and Saudi Arabia are moving in the right direction, as the former depends heavily on tourism, while the Saudi industry is also becoming a destination for safe investments with attractive returns. Meanwhile, Kuwait seems serious and moving in the right direction.
I think it is normal with any new system that there will be some implications and technical difficulties. Yet, there are a number of benefits that the VAT system will have on businesses and the economy, and we do need that in Kuwait. Certain sectors will be exempt from paying the VAT, such as healthcare and education, but these may differ between GCC member countries. Export of goods outside the GCC will be zero-rated, which means exporters can claim a tax refund.
VAT is not a business expense, but a cost that is passed on to the end-consumer when they buy a product. There are more than 150 countries that adopt VAT systems. The GCC is only doing it now.
According to some press reports, the Kuwaiti Ministry of Finance may postpone enforcing the VAT system for one or two more years after the scheduled date, which means it might not see the light until 2019. I think these reports will be confirmed or denied when 2018 comes.
I think businesses in Kuwait that need to be VAT-compliant should work with a trusted business partner and companies with international reputation and global experience to guide them through the implementation and operations phases.
By Muna Al-Fuzai