Arabian Business Weekly Update 6th July 2004

The Middle East has long attracted foreign workers through its promise of sunshine and tax-free wages, but is it now time for GCC countries to introduce VAT?

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By  Neil Denslow Published  July 4, 2004

Editorial Leader|~||~||~|

Vat's the way to do it?

The Middle East has long attracted foreign workers through its promise of sunshine and tax-free wages, but is it now time for GCC countries to introduce VAT? The International Monetary Fund (IMF) certainly thinks so, having recommended that the UAE extends its corporate tax base, considers introducing a property tax and brings in VAT in coordination with the rest of the GCC. The IMF made its recommendation as a way of cutting the region’s reliance on oil & gas revenues, but it is unlikely that the GCC countries will introduce taxation anytime soon. Their arguments against doing so are two-fold. Firstly, they will say, so what if the country is reliant on oil & gas revenue? This isn’t a problem provided that there is lots of oil and that there is no sign of a slump in the market. At present, it is hard to see any significant drop in demand for oil in the near future — in fact, quite the opposite seems more feasible — and there is clearly more than enough oil in the region to keep most countries going for sometime. (Only Dubai has a notable lack of oil, which it has more than compensated for through diversification.) The second argument against is competition. All the countries in the region will fear that if they introduce a tax and no one else does, then all foreign investment — and tourists — will go elsewhere. This is clearly a compelling argument against being first, especially in such a small region where almost anywhere is just an hour or two away by plane. Introducing a tax on a region-wide basis would negate this problem; however, as the problems surrounding the customs union show, the idea of all the countries in the GCC agreeing on a tax, fixing it at the same level and then all consistently enforcing it is somewhat fanciful to put it mildly. As such, despite what the IMF and other economists say, it is all but impossible to foresee taxes be introduced in the region anytime soon. This may not make economic sense and it will do little to relieve the countries’ reliance on oil & gas, but it will certainly keep workers and other residents happy.||**||

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