Middle East: Taxes could be the next step in fiscal reforms

Value added tax (VAT) is being actively considered in many GCC countries and Egypt, reports Gulf News.

A number of governments in the Middle East and North Africa (Mena) region have undertaken various forms of subsidy reforms to boost government finances in the context of sharp decline in oil prices and subsequent contraction on government revenues.

According to analysts, the introduction of an efficient tax regime and some amount of spending retrenchment could be the next step in fiscal reforms across the region.

To preserve economic and social stability and continue with development plans, Mena governments are considering tax measures to broaden their revenue base and increase tax yields, according to experts from consulting firm EY [formerly Ernst & Young].

“Fiscal policy initiatives are now focusing on ways to broaden the revenue base, promote investment in projects that create value-addition to existing oil and gas export projects and stimulate investment in the non-oil and gas sector. Most of the countries in the region have embarked on large-scale infrastructure development projects, including rail, seaports, electricity and water generation and improvements to transport networks and industrial facilities,” said Sharif Al Kilany, Mena Tax Leader, EY.

Governments have recognised the importance of tax policy as a conduit to incentivising multinational companies to establish in the region.

“The impact of falling oil prices and the expected new norm of oil prices at lower levels is creating challenges for countries that are committed to large capital expenditure programmes. Countries in the region have reported budget deficits due to lower oil and gas revenues and have recognised the need to further broaden their revenue take from taxation and are now focused on introducing indirect taxation regimes,” said Asim Shaikh, EY Mena Business Tax Services Leader.

Value added tax (VAT) is being actively considered in many GCC countries and Egypt. The UAE has recently said the country is working on draft of the corporate tax law and the value-added tax law has been discussed with the local and federal governments.

GCC countries have been working towards the introduction of a common VAT system for a long time. Many analysts say the process could gain momentum in the context to deterioration of fiscal balances and growing deficits as a result of sharp decline in oil revenues.

“These regimes will be introduced over the next two to three years and whilst the standard tax rates are likely to be low in the initial years after implementation, the rates can be increased over time, thus contributing positively to government revenue collection,” Finbarr Sexton, EY Mena Indirect Tax Leader.

One of the biggest concerns for regional governments in introducing taxes will be their impact on competitiveness and investments. But experts say the introduction of indirect taxes is unlikely to deter investments.

“Indirect tax will be a tax on consumption and will inevitably be borne by the end-consumer of the goods and services. As a result, the taxes will be passed on by businesses to the end consumer, therefore it is not expected to be a deterrent to businesses planning to establish in the region,” Sexton said.