Taxation has never been a prominent feature of life in the wealthy Gulf states – unlike many other countries. But that is changing. Last year Saudi Arabia introduced a "sin tax", doubling the price of tobacco products and sugary drinks. Then, earlier this month, Saudi Arabia and the UAE went a step further with the introduction of Value Added Tax (VAT).
At present, the tax is a modest 5% though it's probably safe to assume it will increase as time goes on. In EU countries, where it has been operating for years, VAT has become a major source of government revenue and the standard rate ranges from 17% in Luxembourg to 27% in Hungary.
For Gulf States, though, the amount of money raised at present is less important than the principle. It's intended as part of a gradual shift away from rentier economies, so the first step is to get people accustomed to VAT and develop effective ways of collecting it.
The first few weeks have brought some confusion, partly because of misunderstandings about how the tax operates. In Saudi Arabia, for example, there were claims on social media – denied by the authorities – that people would be charged VAT for withdrawing their own money from ATM machines.
There have also been reports of traders without VAT registration certificates raising prices and blaming the new tax. Saudi authorities have warned the public to beware of fake VAT receipts.
In the Emirates there have been complaints about the gym chain Fitness First where people who paid membership fees in advance – before the tax was introduced – are now being asked to pay VAT on the 2018 portion of their fees. There are differing opinions over whether the law requires them to do so.
In both Saudi Arabia and the UAE there are practical difficulties with VAT on low-priced items. Shopkeepers say a shortage of low-value coins can make it impossible to give customers the correct change. The UAE's Central Bank says it is willing to mint more small coins if necessary, though that would be contrary to the trend in many other countries.
In the UAE, a potentially more serious problem involves self-employed people earning less than 187,500 dirhams ($51,000) a year. Currently, they are not allowed to register for VAT – which is making VAT-registered firms reluctant to use their services.
This is because they are fearful of colluding with possible tax evasion. The Emirati newspaper, The National, quotes Steve Ashby, a business consultant:
“I have spoken to a couple of tax experts and accounting firms and they are saying that almost all of the companies their clients are coming into contact with are telling them if they don’t have a TRN (tax registration number) then they cannot work with them.
“A freelancer can say ‘I don’t have a TRN and I don’t need one,’ and they will say ‘You are telling us that but we don’t know. We don’t know what will happen to us if we work with you without a TRN and we pay you’ ...
“Put yourself in their shoes. They could be colluding with you and breaking the law. For all they know, you could be earning a lot more than 375,000 dirhams.”
Experience in other countries suggests many of these initial problems may be ironed out over time as people become more familiar with VAT and how it operates. But a bigger question is whether Gulf states have the administrative systems to make it work smoothly.
As the World Bank has pointed out, raising taxes effectively requires the development of a competent bureaucracy. And the accountancy firm PricewaterhouseCoopers says: "From our experience in other markets, the establishment of clear regulations and efficient administrative processes is vital for VAT introduction to be a success."
This may explain why other Gulf states are holding back. The original plan was that all six GCC countries would introduce VAT around the same time, but so far only the Saudis and Emiratis have done so.
Meanwhile Qatar's intentions are even more unclear. According to latest reports it is "unlikely" to introduce VAT "in the short term".
Predictably, Qatar's apparent recalcitrance in this matter has provided more fuel for the squabble that has been raging in the Gulf since last May. It came under attack from the Emirates-based Gulf News which said:
"The problem with Qatar, which has announced that it will not apply VAT, comes, first, from childish obstinacy. Secondly, it tries to take advantage of the emotions of people, saying it does not want to place further burdens on consumers – even though it had previously approved the agreement."