Introducing the VAT System into the GCC

The Gulf Corporation Council (GCC) countries have come together to reach an agreement regarding implementing the VAT (Value Added Tax) system by the end of 2018. This agreement may come as a surprise to many people, since the GCC region was known for its tax-free perks and massive income from oil. However, the circumstances now prove to be otherwise. The plunge of oil prices since last year has immensely reduced government revenues, making it a necessity for the GCC countries to find new sources of revenue and diversify their portfolio.

Economists and financial organizations all recommended that the GCC countries implement a tax system. More specifically, the International Monetary Fund urged the GCC nations to re-engineer their tax systems in order to bolster growth and job creation. The GCC countries reached the decision of a 5% rate after negotiations of a single digit rate between 3% and 5%. Also, they agreed that certain industries such as education and health will be exempted from VAT. Additionally, VAT will not apply to staple foods.

Ernst & Young and PricewaterhouseCoopers, two leading audit and consulting firms, have both advised companies in the GCC to prepare for this change in tax policy. Even though the policy will be implemented in 2018, businesses should start thinking about how it will impact their operational models. The United Arab Emirates (UAE) will start the implementation of VAT through 2 phases. Phase 1 would require companies with annual revenues over 3.75 million dirhams to register under the VAT, and a second phase will force companies with revenues between 1.86 and 3.75 million Dirhams to register. Eventually, it will become obligatory for all companies to register under the VAT system. The undersecretary of the UAE’s Ministry of Finance stated that the UAE is expected to generate around 10 to 12 billion Dirhams from the VAT system in the first year of implementation.  The rest of the GCC countries are all on the same page planning and preparing for life with VAT.