Saudi Arabia plans to introduce a 5% value-added tax (VAT) within two years to boost falling government revenues from lower oil prices. While a VAT is seen as a logical tax to implement, it may add pressure to Saudi Arabia's already complex tax system and negatively impact businesses and stock market liquidity. The Gulf Cooperation Council countries have agreed to introduce VAT by 2018, but have not completed draft bills yet. Saudi Arabia and other GCC states also plan to expand corporate income taxes applied to foreign-owned business portions.

1. Reproduced with permission from International Tax
Monitor, 10 [itm-bul], 1/15/16. Copyright ஽ 2016 by The
Bureau of National Affairs, Inc. (800-372-1033) http://
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Saudi Arabia
Analysts: Saudi Arabia VAT to Add
Pressure on Already Complex Tax System
A
s countries across the Gulf region look to prop up
falling oil tax revenues by introducing new levies,
Saudi Arabia will also follow suit, and introduce
within two years a value-added tax with a rate of
around 5 percent, Finance Minister Ibrahim Al-Assaf
confirmed.
While observers understand the government’s need
to bolster revenues, many warn that the new levy will
add pressure to an already complex and burdensome
tax system, and could risk trading on the Saudi stock
exchange, known as the Tadawul.
Apart from Saudi Arabia, a VAT will also be intro-
duced across the other member states of the Gulf Coop-
eration Council (GCC), including Bahrain, Kuwait,
Oman, Qatar and the United Arab Emirates, to boost
tax revenues falling due to plummeting oil prices. Most
are also looking to expand or implement a corporate in-
come tax regime. Saudi Arabia’s revenues from oil are
forecast to fall from 608 billion riyals ($162 billion) in
2015, when they accounted for 73 percent of the coun-
try’s income, to 514 billion riyals ($137 billion) in 2016.
VAT Called ‘Logical’ Move. Stuart Halstead, indirect
tax leader at Deloitte LLP in Dubai, told Bloomberg
BNA that with the plunge in oil prices, a reduction in
public spending and even the implementation of a VAT
system are natural steps that a number of countries
have undertaken.
Halstead said that while all taxes naturally affect
growth, ‘‘VAT is frequently considered one of the most
logical taxes to implement economically and one of the
least harmful to GDP and foreign direct investment.’’
Nevertheless, he noted the potential negative effects
from implementing such a tax in Saudi Arabia, particu-
larly in terms of margins and compliance for busi-
nesses. ‘‘Some businesses may find price pressure and
a lack of elasticity mean that VAT cost cannot be passed
on to consumers in full—thus squeezing margins,’’ he
added. ‘‘Other effects will be more complex and difficult
to measure—for example the impact of VAT on cash
flow but also, of course, the cost of implementation and
compliance.’’
While instituting a VAT would be a big change across
the GCC, Saudi Arabia-based independent economist
Fadl al-Buainain pointed out that a 5 percent VAT rate
would be ‘‘the lowest worldwide.’’
Currently, Switzerland and Liechtenstein have the
lowest standard rate of VAT at 8 percent, while the
highest standard rate is 24 percent in Hungary.
Liquidity Issues. Irrespective of the low rate, a VAT
will increase the price of products, argues Ali Al-
Tawati, an economic analyst and professor at the Col-
lege of Business Administration in Jeddah. This in-
crease will cause the ‘‘trading volumes on the stock ex-
change’’ to ‘‘decline greatly due to lack of liquidity,’’ he
told Bloomberg BNA.
At first instance, local trade and industry would cer-
tainly be affected, he said, especially with the removal
of subsidies and the increase in fuel prices, electricity
and water, all of which would be subject to the VAT.
Production costs would also be increased and we would
see a slowdown in the market, Al-Tawati said, adding
that this will affect international trade with local busi-
nesses feeling the brunt of the impact.
Al-Tawati warned that if careful consideration is not
given to the repercussions of introducing a VAT and
other non-oil taxes, then the Gulf region could suffer
from a similar financial crisis to that of the Western
world.
‘‘Adopting effective monetary and fiscal policy is very
necessary to recover from such situations, such as those
we witnessed in European countries,’’ he said, referring
to the European sovereign debt crisis that began almost
nine years ago. He explained that the market needs
time to adjust to these new measures. In addition, effec-
tive monetary and financial policies would need to be
adopted to achieve success.
COPYRIGHT ஽ 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., WASHINGTON, D.C. 20037 ISSN 0000-0000
International Tax
Monitor Bulletin™

2. The undersecretaries of the GCC countries have
agreed to formulate a general framework for introduc-
ing a VAT, with an implementation deadline of 2018.
However, none as yet have completed a draft bill for the
levy.
Corporate Tax Burden. In addition to adopting a VAT
across the board, the six GCC countries are planning to
expand their existing corporate income tax regime, or
introduce a corporate tax rate in some cases for the first
time.
Currently, only four nations in the Gulf region have a
corporate income tax regime, imposed only on the non-
GCC owned portions of businesses. Domestic owner-
ship is subject to the Zakat, an Islamic assessment
charged on the company’s Zakat base. Saudi Arabia
charges a 20 percent corporate rate, Kuwait a 15 per-
cent rate, and Qatar a 10 percent rate. Meanwhile,
Oman is planning to increase its 12 percent corporate
tax rate to 15 percent (09 ITM, 1/14/16).
The UAE and Kuwait are planning to introduce cor-
porate taxes in the coming years (183 ITM, 9/16/15)
(239 ITM, 12/3/15).
Deloitte’s Halstead said that compared to consump-
tion taxes like VAT, taxes on business profits are ‘‘more
likely to adversely impact investment behavior and sub-
sequent spill-over effects.’’
Nevertheless, he said, it was clear that expanding or
implementing a corporate income tax regime ‘‘is an at-
tractive proposition to governments operating within a
trading bloc simply due to the relatively simple means
by which profits can be unilaterally on-shored and
taxed.’’
‘‘When one considers that multinationals in the GCC
are, most likely, paying taxes on profits generated in the
region to their home jurisdiction to one extent or an-
other, there is also a potentially neutral impact associ-
ated with the local capture of those revenues. With this
in mind it is easy to see why governments might be
thinking seriously about broadening the CIT tax bases
and increasing rates,’’ he said.
Halstead suggested that businesses should ‘‘start to
consider what the likely impacts on their business are
going to be now, understanding current readiness to
adapt a business to a taxed environment is key, simply
as it will identify those areas which will need to be given
priority in the undoubtedly hectic build-up to imple-
mentation.’’
Complex Tax System. The impending introduction of
VAT and possible expansion of corporate tax in Saudi
Arabia will place an undue burden on an already com-
plex tax system, analysts said.
Although the country’s tax legislation is considered
stable overall, Al-Tawati said that the system is far from
simple. He explained that tax regulations are fairly brief
and although their provisions are relatively clear, many
areas are subject to interpretation, causing confusion
and varying application.
Al-Tawati and other analysts said that in light of the
country’s development needs, a thorough review of the
tax system is necessary before VAT or other non-oil
taxes are introduced.
BY RASHA FAEK
To contact the reporter on this story: Rasha Faek in
Amman at correspondents@bna.com
To contact the editor on this story: Rita McWilliams
at rmcwilliams@bna.com
2
1-15-16 COPYRIGHT ஽ 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., WASHINGTON, D.C. ITM ISSN 0000-0000