Middle East moves towards VAT
By Dean Rolfe, Special to Gulf News
17 March 2007
The taxation environment in the GCC may be on the cusp of significant change.
One of the primary drivers is the impact of entering into free trade agreements (FTAs) resulting in the reduction of customs duties and consequently significant reduction in revenue for regional governments. Another is the desire to reduce susceptibility to oil and gas price trends.
Where not already in place, a broad-based VAT is an obvious revenue substitute. It is worth noting that it is a tax not on businesses but on consumers. Thus, while businesses need to collect it, and have an additional compliance burden, they do not generally incur it as a business cost.
Lebanon introduced a 10 per cent VAT in 2002 as the country entered into FTAs. At the same time, it changed its tax administration. In particular, it moved to a self-assessment system supported by risk-based auditing techniques. That benefits law-abiding Lebanese businesses, enabling them to diminish their compliance costs. Syria is looking to make similar structural changes.
Jordan introduced a general sales tax (VAT) in 1994, but imposed it only on goods at the manufacture and import level and certain services. By the early 2000s, VAT applied to goods at the retail level and a broader range of services. Customs duties were also reduced substantially. The income tax law was amended. Rates were reduced and tax holidays abolished. The administration of both taxes continues to improve.
Egypt introduced a GST (VAT) at the import and manufacturing level for goods in 1991. By 1995 it applied to a broad range of goods and services. There are currently two rates of GST, five and 10 per cent. Again the reason was FTAs. Egypt is currently modernising its system to attract foreign investment and improve compliance.
Yemen has announced that it will implement a VAT. It was due to commence in 2007 but has been deferred until 2009.
In fact, many countries make several attempts to introduce a VAT before it actually applies.
In Australia, a VAT was proposed at least four times over 20 years before it was finally implemented in July 2000. Malaysia announced a VAT before deferring it indefinitely. Hong Kong withdrew it during a public consultation process. Iran announced in 1990 that it would implement a VAT. The legislation has been drafted but implementation deferred.
While these examples suggest VAT is not uncommon in the Middle East, it is worth noting that the region is the last in the world to consider the introduction of a VAT or GST. Almost all developed countries have added some form of consumption tax in the past 30 years.
It’s also worth bearing in mind that the discussion of a five per cent VAT rate in the GCC, if correct, would make it one of the lowest VAT rates in the world.
The writer is Middle East Tax Leader, PricewaterhouseCoopers.