Supporting Economic Reform Through Taxation

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Diversifying Government Revenue in the GCC

For many years the nations of the Gulf Cooperation Council (GCC) have been heavily reliant on revenues from the hydrocarbon sector to fund government spending. Across the whole of the region, oil and gas revenues have typically constituted around 40% of GDP and have made up roughly 80% of government’s budgets.

Following the significant drop in oil prices globally between 2014-2016 however, GCC nations suddenly found their budgets shifting from healthy surpluses to heavy deficits. In 2015 and 2016, the average fiscal deficit across the region was about 10% of GDP.

For Saudi Arabia, the world’s biggest oil exporter and the largest economy in the region, 2016’s budget deficit of $97 billion led to a freeze of major building projects, a cut in salaries for cabinet ministers and a wage freeze for civil servants, on top of reductions in subsidies for fuel and energy.

The idea of increasing taxes across the GCC to diversify income is nothing new, but has previously struggled to gain momentum due to public and business opposition. In a region where the populace has enjoyed tax-free living for many years and is used to government providing free education and healthcare, subsidised living costs and lifetime employment, getting the public used to government becoming a demander of revenue instead of a source of it requires a significant attitude shift.

It may be that a series of public statements and interventions on taxation by the International Monetary Fund (IMF) helped to sway public opinion and increase understanding of the justifications for tax reforms. In February 2016, IMF Managing Director Christine Lagarde stated at a forum in Abu Dhabi that GCC economies needed to “strengthen their fiscal frameworks and reengineer their tax systems by reducing their heavy reliance on oil revenues and by boosting non-hydrocarbon sources of revenues”.

Ideally this would begin with the introduction of a regionally harmonised VAT, which even at a single-digit rate was estimated to raise as much as 2% of GDP. Just a few months later, GCC members agreed upon the GCC Tax Framework and the implementation of a 5% VAT on designated goods and services across the region, also publicly linking future taxation policy with IMF recommendations.

It was initially agreed that VAT would be implemented from 1st January 2018, however only Saudi Arabia and UAE succeeded in meeting this deadline with the other member states all requiring more time to fully implement VAT systems and processes.

Supporting Reformation with Technology

Taxes in the GCC have previously been few and far between, with low rates imposed on narrows bases of payees. No personal income tax is levied across the GCC, while corporate taxes are only payable by foreign-owned businesses.

Leveraging taxes in this way means that revenues are very limited and will not provide long-term financial sustainability. Additionally, the cost of administering such taxes can be disproportionately high due to the complexities of applying and collecting low-rate taxes across a variety of small qualifying groups. The opportunities for tax evasion are also increased, requiring further effort and intervention to resolve such cases and ensure compliance.

When introducing a new tax such as VAT, it needs to be integrated and aligned with existing taxes, including the systems and processes used to facilitate collection and administration. This presents an opportunity to redesign current revenue management solutions and create a more efficient and effective tax system by leveraging modern, state-of-the-art features, such as:

  • Advanced fraud detection mechanisms to minimise lost revenue
  • Detailed case management facilities to accelerate resolutions
  • Online taxpayer portals to improve usability and convenience
  • Integration with wider government agencies to enhance collaboration
  • Automated workflows to streamline data transfers and returns processing
  • Data validation tools to enhance record accuracy

On the Path to Success

Having made all the necessary preparations to administer and collect VAT before the 2018 deadline, including successfully implementing a set of effective systems and processes, Saudi Arabia has been one of the first to see just how much of a difference tax reforms can make to public finances.

The introduction of VAT has been so successful that in the first year, Saudi Arabia collected more than double the amount originally estimated, contributing 45.6 billion riyals ($12.1 billion) to public finances and helping non-oil revenues to grow by 48% over the previous period.

With VAT now contributing such substantial amounts to government budgets – amounts that will only continue to grow as the effects of wider economic reforms come into play – Saudi Arabia is well positioned to increase revenue diversity, helping it to continue building the Vision 2030 program and provide inspiration for its GCC partners.

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