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02 October 2023

GCC-wide VAT could be a reality in 2 years: World Bank report

By Vicky Kapur

The GCC countries continue with their endeavours to introduce a VAT system with a target for doing so in the next two to four years, a new report from the World Bank, IFC, and PwC has said.

The Paying Taxes 2013 study maintains that the preparation for VAT implementation across all Gulf nations includes an intention to harmonise the VAT laws that will be introduced by adopting a VAT framework law that will be adopted by all GCC countries, much like the GCC Customs Union law which existed prior to the introduction of a national VAT law.

“The question and the challenge will be whether the Middle East countries will be able to remain easy places to pay tax,” the report probes. “With a slowing world economy and the potential for stagnating oil prices, governments in both oil and non-oil rich countries will have a need to increase tax revenues in order to balance their budgets, and at the same time still provide an attractive business environment for investors.”

Nevertheless, as the report highlights, firms in the UAE face the lightest administrative burden in the world in paying taxes. UAE firms must make only four payments a year and spend 12 hours doing so, the report concludes, followed by Qatar, Saudi Arabia, Hong Kong and Singapore.

The new report finds that governments continue to reform their tax systems despite global economic uncertainty, with 31 economies having taken steps from June last year through May 2012 to make it easier and cost less for small and medium businesses to pay taxes.

While firms in two of the other countries in the top 5, Hong Kong and Saudi Arabia, have to make only three payments a year compared with the UAE’s four, the fact that it takes the UAE firms 12 hours to make those payments compared with Saudi Arabia’s 72 and Hong Kong’s 78 hours propels the UAE to the top of the global ranking in ease of paying taxes.

The Paying Taxes 2013 study looks at tax regimes in 185 economies and finds that the most common tax reform is the introduction or improvement of online systems for tax compliance, which occurred in 16 economies.

“Electronic filing and payment reduces paperwork and complexity in tax systems and can help increase tax compliance and reduce the cost of tax administration,” said Augusto Lopez Claros, Director, Global Indicators and Analysis, World Bank Group.

“The report finds that over the last several years there has been a gradual reduction in the number of payments and in the number of hours spent by a medium-sized company to comply with its tax obligations. This reduction across all regions of the world in the burden of tax administration is a welcome development.”

In the Middle East, the average Total Tax Rate for the region is 23.6 per cent, well below the world average (44.7 per cent) and the lowest of any region. The element for labour taxes and social contributions is a common feature for all of the economies in the region apart from West Bank and Gaza where no labour taxes are levied on the employer.

It is also worth noting that a number of the oil-rich economies (Kuwait, Qatar, Bahrain, Saudi Arabia, and the United Arab Emirates) continue to have little or no corporate income tax applied to our case study company which explains why the overall average Total Tax Rate is so low. The absence of consumption and ‘other’ taxes also helps to explain this average rate.

The report finds that on average a medium company pays a Total Tax Rate of 44.7 percent of profits, making 27.2 payments, and spending 267 hours to comply with its tax requirements. In the eight years since the study began, the time to comply has fallen by 54 hours, almost seven working days, and the number of payments has declined by more than six, while the Total Tax Rate has fallen nearly 1 percent for each year.

“We are seeing tension between the need for governments to raise tax revenue and at the same time provide a system that encourages economic activity and growth,” said Andrew Packman, a tax partner at PwC UK.

“Governments seeking to create a more business-friendly tax climate need to focus not only on rates, but also on minimising the time and effort needed to comply.”

An economic analysis undertaken by PwC senior economic adviser Andrew Sentence and featured in the report shows that in economies where action was taken to reduce complexity in tax administration – both in terms of the number of payments and the time taken to deal with tax matters – there has tended to be higher economic growth.

Reforms continue around the world. However, the report finds that the number of economies reforming has fallen from 35 last year to 31 in the most recent study. The focus continues to be on reducing the administrative burden of the tax system. In 2011, the time to comply fell by an 8-hour day and the number of payments dropped by almost two, while the Total Tax Rate fell by only 0.3 per cent.

Paying Taxes 2013 measures all mandatory taxes and contributions that a medium-sized firm must pay in a given year. Taxes and contributions measured include the profit or corporate income tax, social contributions and labour taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and other small taxes or fees.