The International Monetary Fund (IMF) has suggested that the value-added tax (VAT) should be doubled from five percent to 10 percent in Saudi Arabia in consultation with the other Gulf countries. Analysts expect the hike in the VAT rate will come only after 2021 once Kuwait and Oman will also be ready to implement it and as a customs union, the increase makes sense across the GCC countries. “The introduction of the VAT in January 2018 was a landmark achievement, with revenue collections exceeding expectations. The reduction in the registration threshold at the beginning of 2019 has also gone smoothly. Staff suggested that consideration be given to raising the VAT rate from 5 to 10 percent, in consultation with the GCC,” IMF said in a report prepared its staff after consultation with the authorities in the Kingdom.
The UAE and Saudi Arabia introduced the five percent value-added tax from January 2018 with both the countries surpassing their tax collection targets. Thaddeus Best, an analyst at Moody’s Sovereign Risk Group, said as a customs union, it is logical that GCC countries would seek to keep their VAT rates harmonized in order to prevent tax arbitrage opportunities emerging within the GCC. “However, as the hesitant implementation of five percent VAT across the GCC since 2018 shows, there is some scope for VAT differentials to be tolerated, so long as they are relatively small and temporary, as it is currently the case in the GCC with only three out the six countries having implemented the measure so far. Nevertheless, we think it is unlikely that Saudi Arabia, the UAE, and Bahrain would raise VAT rates further until the remaining GCC sovereigns have finalized their VAT frameworks,”.
“We don’t expect Kuwait and Oman will be ready to implement VAT until 2021 at the earliest, the earliest opportunities for any further increases to the VAT rate are likely to fall after that date. The only other catalyst we see for bringing forward any increases would be if oil prices decline sharply from current levels, although this is not our baseline view,” he said. The Kingdom’s non-oil revenues last year increased by 59 percent, buoyed by the VAT, excises, expatriate levy, and proceeds from the settlement agreements. IMF estimated that the VAT rate increase will add 2.0 percent to the Kingdom’s GDP in 2024.
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