Earlier this week, Christine Lagarde, managing director of the International Monetary Fund, urged the Gulf states to reverse years of resistance to taxation in order to make up for plummeting oil revenues.
While Lagarde said this should eventually include income and corporate taxation, she said the first step should be to introduce a value added tax (VAT) on goods and services.
“Start by putting in place a simple system that initially focuses on VAT – ideally, a harmonized regional VAT,” Lagarde told delegates at the Arab Fiscal Forum in Abu Dhabi. “Even at a low single-digit rate, such a tax could raise up to 2 percent of GDP.”
This is the second time in a matter of months that the IMF has put pressure on the Gulf Cooperation Council (GCC) – comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates – to introduce a VAT. In November, Lagarde told GCC states that plummeting oil prices would require them to expand “non-oil tax revenues”.
A local view
According to Nick Wilson, chairman of the Qatar Investment Fund, the London Stock Exchange-listed fund that is the only investment vehicle that gives foreign investors exposure to Qatar’s economy, the introduction of a 5% VAT in the region by 2018 looks increasingly likely.
International Investment asked Wilson what effect such a tax would have on the regions’ economy, its investors, the financial services industry and, finally, the region’s appeal as an expat destination. Here is what he told us.
International Investment: How will this affect the sectors you’re invested in? What might the impact be on the profits of QE-listed companies?
Nick Wilson: If VAT is introduced, the major sectors that could be affected are consumer and telecom. Luxury clothing, jewellery and watches would be an obvious target for VAT along with cigarettes, fuel and cars, which are very cheap in the GCC. Imposition of VAT would have a significant impact on the buying power of both the residents and tourists. Higher prices may lead consumers to shift to cheaper alternatives or or postpone or cancel purchases.
Since the financial services and industrials sectors majorly contribute to about 70% of the Qatar Investment Fund’s (QIF’s) sector allocation every quarter, QIF would not be impacted much by the introduction of VAT as these sectors are likely to be exempted from VAT/tax.
With regard to profits of QE-listed companies, there would certainly be a direct impact. However, the degree of impact cannot be determined unless the Qatari government comes up with actual announcements on VAT. Considering the anticipated low rate of 5%, VAT should not pose any major impact on overall profitability. For now, we cannot gauge the actual impact on bottom lines of companies as every sector would have its own exemptions and regulations which are difficult to predict at this moment.
International Investment: Are sectors such as financial services and fuel likely to be exempt from the tax?
Nick Wilson: Financial services sectors are typically exempted from VAT as it is difficult to tax this sector, particularly in relation to interest income. However, fees and commissions earned by the financial services sector are normally subject to VAT. As discussed earlier, the GCC could agree on giving an exemption to this sector, since GCC nations are seeking to grow their financial services market presence. It is highly likely that the majority of the services in the financial sector would be exempted from the tax.
Fuel prices in the GCC countries are heavily subsidized as compared to other countries around the globe. Lower fuel prices make it a likely target for VAT.
International Investment: Do you think this would have an impact on the number of expats moving to Qatar?
Nick Wilson: Cost of living in Qatar is relatively higher compared to other GCC nations. Moreover, introduction of VAT of around 5% would further increase the cost of living in Qatar. Introduction of VAT would further increase employee costs incurred by corporates and attracting an employee to come to work and live in Qatar would further inflate costs in Qatar compared to other countries.
International Investment: What impact might it have on overall economic growth, both for Qatar and the region?
Nick Wilson: The potential revenue raised from VAT will depend primarily on the main design parameters, namely the rate and structure, the base, and the threshold. It will be also be affected by other defining elements including tax exemptions, efficiency of the tax administration, tax-payer compliance, and more generally the ease and transparency of administration.
The level of readiness of GCC member countries from a political, tax administration, and regulatory standpoint to introduce a VAT may differ. In this regard, important questions arise as to how long it may take from the time a decision is made to introduce a VAT to its actual implementation and whether all six countries should move simultaneously.