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The UAE and neighbouring Gulf Cooperation Council (GCC) countries could increase their revenues and further diversify their economies by exploring new taxes, the International Monetary Fund (IMF) said.
“Exploring options such as property taxes, luxury taxes, or environmental levies would further support revenue mobilisation as the economy diversifies,” the Fund said in the latest report on the Gulf region.
The Gulf states are in the process of broadening their tax base in order to increase their revenues. The oil-rich bloc has already implemented introducing value-added tax, excise tax and corporate income tax to move away from petrodollars.
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The sharp decline in oil prices in the last decade prompted a wave of consumption tax reforms in the UAE and GCC. Currently, the value-added tax (VAT) is in place in four GCC countries – Bahrain, Oman, Saudi Arabia, and the UAE – and excises are adopted by all except Kuwait.
Similarly, Oman has announced a plan to implement an income tax, becoming the first nation in the region to announce a tax on individual income. While some countries have also announced a 15 per cent minimum domestic top-up tax on multinational companies.
However, the IMF said that reducing tax complexity would help boost tax collection.
Implementation of taxes is a complex task which took decades in advanced economies. Since oil-producing Gulf countries are relatively new to introducing taxes as compared to OECD and other larger economies, governments are still in the phase of updating laws and regulations around new taxes to ensure compliance as well as implementation of modern tax collection systems.
The IMF said in the report that the GCC countries have a large gap relative to the potential for mobilising tax revenues. The gap is much wider than other emerging, developing and advanced economies, therefore, the oil-producing Gulf countries have been introducing taxes for the past few years.
These policies are consistent with reducing dependency on hydrocarbon revenue and enhancing macroeconomic stability. Considerations for corporate income tax (CIT) reforms have recently come to the fore in the GCC, prompted by the changing international landscape of taxing multinational enterprises and the revenue diversification process.
According to the IMF, the GCC has been resilient to recent shocks and the economic outlook remains favourable.
“Spillovers from regional conflicts have been limited. Strong non-hydrocarbon activity supported overall growth amid reform implementation. The outlook is positive as the envisaged easing of oil production cuts and natural gas expansion spurs the recovery in the hydrocarbon sector while the non-oil economy continues to expand. Inflation is stabilizing at a low level while external buffers remain comfortable despite current account balances having narrowed,” the Fund said in the latest note on regional economies.
The conflict between Israel, Hamas, Iran, Syria and Lebanon has been keeping the Middle East on tenterhooks due to fear of escalation. However, GCC countries have been a safe haven in this whole conflict.
IMF added that tensions in the Red Sea have so far had a muted impact on GCC economies, with trade, investment, and tourism flows remaining largely unaffected. The daily export volume from major GCC ports has rebounded, albeit to the lower end of historical levels.
“In the UAE, real GDP growth remained robust – 3.6 per cent – as non-hydrocarbon growth, supported by continued rebound in tourism, ongoing policy support, capital inflows, and increased capital spending, more than counterbalanced negative hydrocarbon growth,” it added.
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