Gulf governments gear up as focus shifts further to non-oil economy

A mix of new direct and indirect taxes could be levied in the UAE and GCC in the near to medium term because oil prices are expected to remain low, necessitating the creation new sources of revenues to fund budgets, say tax experts.

They said new taxes could be levied on wealth and property, as well as corporates, while income tax will also surely come but it will be introduced at the far end in the UAE and GCC. More importantly, new taxes will come in phases rather than being implemented in one go.

"Looking at the budgets and oil prices, GCC governments will have to introduce new taxes but they cannot bundle it in one go. They have to break down slowly. For example, in Kuwait, they mentioned about corporate tax and then on the far end it will be income tax," said Dr Rasheed Al Qenae, head of tax at KPMG Middle East and South Asia and managing partner at KPMG Kuwait.

He said the GCC region is at the elementary stage of tax education and the governments will have to look at other sources of funds.

"In 10 years, we expect wealth, property and asset taxes can be levied in the region because it is not that the governments want to impose but because they will have to. They will come gradually and take time. Now governments are focused on introducing value-added tax across region. Once that is stabilised, they will think about others," Al Qenae said in an interview with Khaleej Times.

He said luxury tax could be also be introduced in the medium term.

"First it is going to be VAT and then on top of that will be luxury tax. This is very clear in developed markets and it is called luxury tax," he said, adding that the contribution of taxes to the GCC budget will substantially increase in the next five to 10 years.

The UAE, Saudi Arabia and Bahrain has levied 5 per cent VAT on goods and services. The UAE has also levied 100 per cent tax on tobacco and energy drink and 50 per cent on carbonated drinks. From December 1, this sin tax will be expanded to shisha and other drinks that will contain sugar.

Jihad Azour, director for the Middle East and Central Asia Department at the IMF, also called on the regional governments to diverse revenue sources including introduction of new taxes. The fund had earlier asked Riyadh to double VAT to 10 per cent.

Jane McCormick, global head of tax and legal for KPMG International, said it seems inevitable that VAT is likely to rise for a lot of reasons. "It is tax easy to collect. You can automate a lot of processes."

Surandar Jesrani, managing partner and CEO of MMJS Consulting, said GCC governments do recognise revenue from oil would be under immense pressure over the next few years.

"The introduction of GCC-wide VAT and excise laws may only be a prelude to introduction of further tax measures in line with global initiatives," Jesrani said. "I believe that the advent of such further tax laws are on the horizon for UAE and Bahrain in the form of corporate taxes, withholding taxes and retention regimes since a majority of GCC member states do have direct taxes through corporate and withholding taxes."

Jesrani believes that regulating production and sale of cooked food, such as fast food, may pose significant administrative challenges. However, extension of laws to include such products within the ambit of excise cannot be ruled out.

In the space of direct taxes, Rajiv Hira, director at RHMC Management Consultants, expects federal level corporate income distribution tax - i.e. tax on distribution of income/profit, dividend, etc - could be levied in the UAE with a larger and expanded tax base.

"Corporate tax creates a stagnant source of income at the country level and facilitate in uplifting the compliance environment with international best practices. We should be expecting the rate of tax in the range of 5 to 10 per cent, to maintain the competitive advantage and also align with global environment for growth and sustainability," Hira added.

"In the space of indirect tax, we should be expecting an expansion of industry [based on global presence], for example, gaming, racing, exotic clubs, etc, and resultant expansion of sin tax on those products/services. It's too early to say by when, however this is a balancing act of being global and connected with the roots," he added.

- waheedabbas@khaleejtimes.com