Few GCC nations may opt to hike VAT rate to 10%, says S&P

Some of the Gulf Cooperation Council (GCC) nations could potentially increase value-added tax (VAT) rate to 10 percent driven by the disparity between five percent statutory and effective tax rates, global ratings agency S&P claimed in a new report.

"The discrepancy between statutory and effective tax rates will likely influence policymakers’ discussions of future VAT rate increases - potentially to 10 percent - in some GCC countries," said Trevor Cullinan, an analyst with S&P.

"With a VAT increase of this magnitude, the effective tax rate would likely rise to 5-6 percent and government revenues would likely advance by an additional 1.7 to 2 percent of GDP on average," he added.

According to the report, the regional VAT rollout would push up government revenues on average by about 1.7-2 percent of GDP, based on a collection-efficiency ratio of 50-60 percent. The ratio reflects an effective tax rate of 2.5-3 percent, lower than the 5 percent statutory rate, partly due to the administrative burden of handling VAT and many taxable supplies being either zero-rated or exempt from tax.

Saudi Arabia and the United Arab Emirates introduced 5 percent VAT from January this year.  Bahrain is expected to launch VAT later this year, while Oman may levy the tax only in 2019 due to administrative capacity constraints. However, the report does not state on when the GCC governments could increase the VAT rate.

Meanwhile, S&P noted the rollout of more corporate, personal and remittance taxes in GCC countries could boost the government revenues up to 4.5 percent, stating the region has some room to broaden the tax base due to low tax revenues by international standards.

"We estimate that even if the GCC authorities were to significantly expand the tax base, for example by implementing a 15 percent corporate tax, a 15 percent personal income tax, and a 5 percent remittance tax, this would increase government revenues only by about three to 4.5 percent of GDP," Cullinan said.

The new corporate tax or income tax on expats and locals will be “only gradual” because of the economic and social pressures that could ensue, he added.