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PORTFOLIO | Road To VAT


“VAT Would Change Perception of GCC Region”


Trevor Cullinan, Director, Sovereign Ratings, Standard & Poor’s, Dubai, says there’re various administrative issues with regards to implementing the VAT that need to be in place


What steps GCC sovereigns will likely take to reduce their budget deficits — will they trim sovereign expenditure, cut down on projects in the pipeline, issue bonds/sukuk, or they can manage from their own reserves? Regional governments can finance their deficits either by issuing bonds/sukuk, trimming sovereign expenditure, raising revenues or liquidating their assets. It’s not very clear what choice will they make with regards to these financing options – probably it will be some combination of them all. Regional governments will try to cut expenditure, largely through reducing subsidies, as we’ve seen over the past few months, and cutting investment at the margins. Regarding increasing fiscal revenues, there’s been discussion around taxes such as value added tax (VAT) being


February 2016 | www.wealth-monitor.com


implemented from 2018 in the UAE and possibly across the GCC region.


Will the dip in oil prices push local economies toward a more imminent implementation of VAT, unilateral or multilateral, than planned earlier? Possibly, but it’s unlikely to be implemented before 2018 because there’re various administrative issues with regards to implementing the VAT that need to be in place. Regional governments would need to sort these issues out and get the administrative capacity built up before VAT is rolled out.


How do you assess the overall impact of VAT on the UAE economy? One positive impact of VAT is that it would diversify government revenue which all


GCC states are quite focused on as the dip in crude oil revenue is the single biggest cause of budget deficits. The negative aspect however is related to the rise in living cost. It’s expected that the VAT rate would be low (around 3-5%) which is not likely to impact cost of living much. Nevertheless, the imposition of VAT could impact residents’ overall consumption pattern in the UAE and the region. A related impact is that introduction of VAT would change the perception of the GCC region as a zero-tax region, which might put off international investors, job seekers and some expats living in the region. All in all, nevertheless, the impact would be net positive in our view.


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