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VAT in the Gulf Cooperation Council

The oil-dependent economies of the Gulf Cooperation Council (Saudi Arabia, the UAE, Bahrain, Kuwait, Oman, and Qatar) are planning to introduce a 5% value-added tax (VAT) on 1 January 2018, in order to diversify their tax bases given the low price of oil.

Map of GCC countries

All the member states have agreed to the standard 5% rate; however, the agreement is flexible in that members may choose to apply nil and reduced rates for certain goods and services. What effect will this tax have on the cost of living for expatriates living abroad in the GCC states?

Firstly, the cost of living index is affected not only by price changes but also exchange rates, so once the new tax is in place indices could even fall if GCC currencies weaken. Even if the cost of living index does fall, the buying power of the assignee will be protected. ECA’s recent blog gives more information on how prices and exchange rates impact cost of living adjustments (COLAs).

One might expect that a 5% tax increase would result in an increase in the cost of living index, or at least a 5% increase in all prices. This is unlikely to be the case – at least initially.

When a new tax is introduced or there is a large change in taxation prices do not always rise overnight. Typically, supermarkets, restaurants and shops will try to limit all or some of the price increases to keep market share. Alternatively, retailers might have already increased some prices in anticipation of the introduction of VAT. Also, not all items will be covered by the tax change so even if all items affected increased by the full rate of the tax the overall inflation figure would be lower due to those exclusions. 

Malaysia, for instance, increased its average consumer tax rate in 2015 to reduce its reliance on oil revenues. It implemented a full goods and services tax (GST) of 6% on 1 April of that year, to replace a sales and services tax. In the year following this change, official inflation figures remained similar to those reported in the previous two years. 

Australia is another interesting case. A GST was introduced there in 2000 at a rate of 10%. It became clear that retailers had absorbed at least some of this tax increase when, 12 months later, annual inflation was measured by ECA at only 8.5%. Inflation had been around 2% before the tax rise so only about two-thirds of the tax increase was passed on to consumers in the first year.

It is important to be mindful of the fact that the impact of changes in VAT can be long, complex and, sometimes, opaque. Their effects can be diluted or augmented by other developments, such as government policies, as well as exchange rates, as already mentioned. ECA’s March 2018 cost of living indices will track the initial impact of the VAT introduction on prices in the GCC. 

Sales tax and cost of living indices

The effects of consumption taxes, like sales taxes or VAT, can, however, be quite significant. In Denmark, for example, the standard rate is 25%. ECA always includes these taxes when calculating indices even when the tax is not included in the advertised shelf price, as in Canada and the United States. 

Qatar

The rift between Qatar and its fellow GCC members has the potential to upset the plans to introduce the new tax. It has been suggested that Qatar could be expelled from the GCC, and if that were to happen, it might scrap the VAT implementation. Furthermore, the blockade of the country’s land border is likely to have had an impact on availability and prices of goods as shops transition to new sources and brands. ECA will measure the impact of these changes on cost of living in our forthcoming September 2017 Cost of Living Survey.

Other VAT news

India has recently implemented a new sales tax regime too. It has standardised rates and coverage across the country for the first time to simplify the system. Previously, each state set its own rates. India has also switched from a 15% flat rate to a multi-band system whereby different goods and services can be taxed at 5%, 12%, 18% or 28%.  

Egypt introduced VAT on 1 July 2016 at 13%, replacing a 10% sales tax, as part of the requirements of its IMF bailout. The plan had originally been to raise VAT to 14% in October of this year, but a worsening fiscal environment forced the rise to be brought forward. 

Ecuador returned its VAT rate from 14% to 12% on 1 June 2017. The country temporarily raised it in 2016 to help raise extra funding in the wake of an earthquake.

Many other countries have announced plans to adjust VAT in the coming years but such changes are often revised at the last minute. For example, Peru had planned to decrease VAT this month but has had to backtrack after a poorer than expected economic performance. 

  FIND OUT MORE

ECA publishes Cost of Living data for more than 460 cities around the world. It is available from ECA in several forms: as part of a subscription in a calculator which allows you to experiment with different types of index and review the outputs; in reports, providing background detail for specific indices; and as part of the Build-up Calculator for performing balance-sheet remuneration calculations. Cost of living data is also pre-populated in ECAEnterprise, our Assignment Management System, and in our Net-to-Net Calculator.

  Please contact us to speak to a member of our team directly.

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