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13 April 2024

Impose VAT, corporate tax, income tax: IMF tells UAE and rest of GCC

By Vicky Kapur

The International Monetary Fund’s (IMF) Managing Director Christine Lagarde reiterated the IMF’s taxation advice to the Gulf Cooperation Council (GCC) at a conference of Arab economic officials in Abu Dhabi today.

She said Mena oil exporters lost more than $340 billion in oil revenue from their budgets last year, amounting to 20 per cent of their combined GDP, and highlighted the need for oil exporters to increase government revenues.

Lagarde outlined a three-point agenda that GCC countries could follow to achieve this.

“Start by putting in place a simple system that initially focuses on VAT – ideally, a harmonised regional VAT,” she said.

“Even at a low single-digit rate, such a tax could raise up to 2 per cent of GDP,” Lagarde said, highlighting the potential impact of VAT on government revenues and economic growth.

“Add to this a greater emphasis on corporate income taxes, as well as property and excise taxes,” she added.

Finally, she advised the region’s governments to have the tax infrastructure ready for the imposition of personal income taxes in order to generate higher and more reliable revenue.

“…Continue to invest in building tax administration capacity that could eventually allow for the introduction of personal income taxes,” she said.

Lagarde said that one of the ingredients for successful 21st-century economies is international taxation. “This is an essential means by which governments mobilise their revenues in a globalised economy,” she said.

“We need a tax system in which ordinary citizens are convinced that multinational companies and wealthy individuals are contributing a fair share to the public purse, to the common good,” the IMF head noted.

She explained that “higher government revenues would create much-needed fiscal room for manoeuvre and allow for more spending on all the things that drive potential growth over the medium term, including infrastructure, healthcare, and education. In addition, more reliable sources of revenue would help avoid volatility in public expenditure and pro-cyclical fiscal policy.”

She highlighted that GCC economies have made large fiscal adjustments in the past, adding that she was confident that they can do it again.

“These economies need to strengthen their fiscal frameworks and reengineer their tax systems – by reducing their heavy reliance on oil revenues and by boosting non-hydrocarbon sources of revenues,” she said.

“This would help bolster growth and job creation and, at the same time, help to maintain debt sustainability and strengthen resilience. It also provides a unique opportunity to design tax systems that emphasise fairness, simplicity, and efficiency,” Lagarde said.

She also noted that the IMF had helped GCC’s Kuwait to study and design broad-based taxes.

“In Kuwait… the IMF has assisted in the study and design of broad-based taxes, such as VAT and business profit tax,” she said.

“This work has contributed to a national dialogue on why and how Kuwait should diversify its revenue sources. Proponents of reform argue – rightly – that this would allow the country to better manage the fiscal risks associated with volatile oil prices,” she said.