VAT in the GCC: not if but when

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Agreements reached by members of the GCC this week about Value Added Tax (VAT) systems mark an important step forward in the increasingly-important fiscal reform debate and provide a clearer vision as to what the future of tax in the GCC will look like, Deloitte says in a commentary released today.

“The big question now is “when” not “if” VAT will be implemented, and, importantly, by which country (or countries) first,” the commentary says.

A recent Deloitte says VAT is efficient, cheaper to operate, less open to fraud, and less likely to distort investment decisions by businesses than any other form of direct tax.

“The multilateral agreements which were revealed this week would appear to be those which are designed, primarily, to ensure that certain social-economic distortions often associated with VAT are minimized,” Deloitte says. “In particular, removing VAT from food products (94 items have been identified), healthcare and education would appear to reflect a broad desire to ensure that these vital household expenditure items are not directly impacted by a VAT in the GCC.”

Deloitte Middle East indirect tax leader Stuart Halstead says that the failure to reach a clear agreement about VAT on financial services is understandable for three reasons.

“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,” Halstead says.

In addition, policy makers are generally concerned about unnecessarily taxing investment and savings products. Most GCC members are also seeking to grow their financial services market presence to some extent – it is unlikely that they would want to enable significant tax and associated market distortions to emerge around the region.

“That being said there are some reasonably straight forward remedies to the issue of applying VAT to the financial services industry and we are confident that these will have been examined at length,” Halstead says.