Value added tax is less likely to distort investment decisions by businesses than any other form of tax in the region, an excerpt from a report by audit firm Deloitte showed.
The statement comes after a representative of the Gulf Cooperation Council revealed how the governments are planning to implement VAT. The regional governments said that they will exempt 94 food items from VAT while sectors such as healthcare, education and social services will have zero tax.
Deloitte noted that the plans appeared “to ensure that certain social-economic distortions often associated with VAT are minimised.” The audit firm said that the GCC’s decision to exempt certain food items showed many vital products will not be impacted by VAT.
Officials are yet to agree on how VAT should be implemented in the financial sector where Deloitte noted applying indirect tax was difficult"That negotiations around financial services are ongoing is, to some extent, to be expected,” said Deloitte Middle East indirect tax leader Stuart Halstead.
"The first is that financial services are notoriously 'difficult' to apply VAT to from a technical perspective; precisely identifying the value added of a financial service can be difficult for institutions themselves, let alone tax authorities charged with checking that the institutions got their sums right."
“In addition, policy makers are generally concerned about unnecessarily taxing investment and savings products. From the perspective of many, such instruments do not represent consumption per se, but rather the creation of wealth for the purposes of enabling consumption in the future. Taking that analysis one step further, there are those that feel that applying VAT to any financial instrument that merely enables consumption (e.g. lending) is also potentially harmful.”
Implementation of VAT in the region will most likely come in 18 to 24 months, a senior ministry official from the United Arab Emirates said this week. Tax experts the timing of VAT implementation will in the region will determine the intensity of the impact.
"The UAE Ministry of Finance reiterated its commitment to an 18-24 months decision-to-implementation timescale, a move that should be welcomed by the business community,” said Deloitte Middle East partner and regional tax leader Nauman Ahmed.
“Providing businesses with adequate time to prepare is an important factor that contributes towards the successful implementation of a tax, particularly given the vital role that businesses play when collecting and remitting VAT to the authorities."
As oil prices continue their bearish run, the GCC is turning towards indirect taxes like VAT for fiscal revenues. Governments have been discussing the tax for years, but officials had previously been unable to arrive at an agreement for a region-wide framework, fearing discontent from the populace.
By Mary Sophia
