Taxes: GCC discussing imposing VAT, says PwC

The UAE has been ranked among the Top 5 nations in the world on the ease of paying taxes, according to a study from PricewaterhouseCoopers, the World Bank and the International Finance Corporation.

The study, titled ‘Paying Taxes 2011,’ measures the ease of paying taxes across 183 economies worldwide covering both the cost of taxes and the administrative burden of tax compliance.

Overall, the Gulf countries feature prominently in the rankings, with five of the six GCC countries among the global Top 10. Regionally, the UAE ranks second, after Qatar, which is ranked No. 2 globally. The other Gulf economies too rank higher globally, with Saudi Arabia (No. 6 globally), Oman (No. 8), Kuwait (No. 9) and Bahrain (No. 14).

The UAE ranked No. 2 globally in the sub-ranking ‘Time to comply’ while its bagged the No. 7 rank on ‘Total tax rate’ subranking.

“To comply with profit, consumption and labour taxes can take as little as 12 hours a year in the United Arab Emirates and 58 in The Bahamas,” the report highlights. In Brazil, on the other extreme, it takes businesses a staggering 2,600 hours a year – over 108 days – to comply with taxes, data from the report shows.

The UAE has a total tax rate of just 14.1 per cent, lower than 176 countries in the world. Maldives is ranked No. 1 globally while Belarus brings the bottom of the 183-country rankings.

However, the report maintains that with governments across the GCC nations mulling the introduction of new taxes – especially Value-Added Tax (VAT) – they could move down the rankings in the future.

“Governments in the GCC… are discussing fiscal policy and the need to introduce new taxes – specifically consumption taxes,” Dean Rolfe, Tax Partner, PwC – Middle East, writes in the report.

“The subject of tax in the GCC is emerging as an area of focus for governments. So far, the GCC countries have maintained their lower rankings in Paying Taxes 2011. The challenge however is whether governments in the GCC can remain internationally competitive given the reform agenda that appears to be developing,” Rolfe writes.

“Recent rewrites of corporate tax laws in Qatar, Kuwait and Oman are examples of change in the region. These rewrites are resulting in an expanded tax base and the collection of taxation on cross-border transactions via the introduction of withholding taxes. These developments are likely to continue and may include the introduction of new taxes,” reckons Rolfe.

In the Middle East and North Africa (Mena) region, businesses must comply with only 22 payments a year on average, the second lowest among regions. Yet, there is great variation, with up to 44 payments in the Republic of Yemen and as few as three payments in Qatar, the report maintains.

The Middle East region is considered by many to be a tax-free environment. While this may be true with respect to the absence of personal income tax, in most GCC countries, it is certainly not true when considering the broader subject of direct and indirect taxation, the report points out.

“The subject of taxation in the Middle East is increasingly of interest to the business community, especially as governments attempt to develop and maintain economic and fiscal policies that promote foreign direct investment.

“This challenge is complicated by the fact that some jurisdictions in the GCC levy corporate income tax on the business activities of foreigners operating in the GCC, but not on those of their nationals or other GCC nationals. That is to say, taxation can be dependent upon citizenship in some jurisdictions within the Middle East region,” Dean Rolfe, Tax Partner, PwC – Middle East, writes in the report.

Rolfe adds that a number of international government agencies have highlighted the need for GCC governments to diversify their revenues via the development of a comprehensive fiscal policy to bring a reliable and sustainable level of government revenue (from taxation) throughout economic cycles.

“The absence of such a policy poses serious risks to a government’s ability to manage its individual economy when free trade agreements may result in the elimination of existing forms of government revenue (specifically customs duties) and where governments rely on the sale of commodities, specifically oil and gas (which are subject to volatile price movements), as a supplementary source of revenue,” Rolfe adds.

“With this in mind, governments in the GCC are now looking at these challenges and are discussing fiscal policy and the need to introduce new taxes – specifically consumption taxes,” Rolfe maintains. “The challenge, however, is that governments want to maintain a competitive fiscal landscape while at the same time generating additional tax revenue. GCC governments are not sure how to address this objective, especially when they are keen to preserve a tax-free environment.”

Among the other notable findings of the report is the fact that nearly 60 per cent of the world’s economies have made significant business regulatory changes to ease paying taxes, despite the impact of the downturn and the sluggish global recovery.

The report finds that in the past year, 40 economies have made it easier to pay taxes, with Tunisia improving the most. For economies that are included in both the 2006 and 2011 Paying Taxes studies, the time needed to comply has declined by a week, the tax cost has fallen on average by 5 per cent, and the number of payments has dropped by almost four.

In all, 90 economies have reduced taxes on corporate profits since 2006.

“Governments have continued to improve and simplify their tax systems for local firms, and are seeing positive results,” said Neil Gregory, Director of the Global Indicators and Analysis department at the World Bank Group. “Best practices such as having one tax per tax base and the use of technology can simplify the compliance burden faced by firms.”

The Paying Taxes 2011 report measures the ease of paying taxes by assessing the administrative burden for companies to comply with tax regulations, and by calculating companies’ total tax liability as a percentage of pre-tax profits. According to the study, the typical company measured pays nearly half of its commercial profit in taxes, spends seven weeks dealing with its tax affairs and makes a tax payment every 12 days.

"Taxes on company profits have fallen each year as governments around the world have reduced their corporate tax rates in an effort to encourage business investment and stimulate growth," said Susan Symons, Total Tax Contribution Leader, PwC UK. “However, easing the compliance burden is also important for business and there is potential for more focus on this area”.

The study shows that paying taxes is easiest for business in high-income economies that have the lowest tax cost and the lowest administrative burden. These economies tend to have more mature tax systems, a lighter administrative touch, and greater use of the electronic interface with tax authorities.

Regional details – Middle East

There tend to be fewer taxes in the Middle East region than in any other region in the study – on average, 5.5 taxes are levied on the case study company in the Middle East (world average is 9 taxes).

The Paying Taxes results for the Middle East are lower than the world averages, with 155 hours for compliance time (world average: 282), 20 tax payments (world average: 29.9) and a TTR of 25.6% (world average: 47.8%)

In the Middle East, 3 out of the 13 economies do not levy corporate income tax on the domestic case study company. Where corporate income tax is levied, it is only part of the tax burden, accounting on average for 13 per cent of the tax payments, 30 per cent of compliance time and 49 per cent of the tax cost (Total Tax Rate).

Labour taxes and social contributions are the biggest burden for the case study company in the Middle East in terms of tax cost and compliance burden. They equate to 14 per cent of commercial profits (54 per cent of the TTR); require 86 hours for compliance comply (55 per cent of the time to comply); and 12 payments per annum (62 per cent of number of payments).

Consumption taxes, including VAT, do not generally add to the tax cost for our case study company but they do add to the compliance burden. The time needed to comply with VAT varies considerably around the world as administrative practices vary. Currently only five economies in the Middle East have a VAT system.

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