Fiscal Reforms in the Middle East

Fiscal Reforms in the Middle East

VAT in the Gulf Cooperation Council

Edited by Ehtisham Ahmad and Abdulrazak Al Faris

Although oil windfalls have opened a window of opportunity for the Gulf States, at the same time they have created numerous problems. In particular, the uncertainty associated with periods of boom and bust in the oil market has made the formulation and implementation of sound fiscal policies a formidable task. This insightful book focuses on the role of fiscal policy in common markets, especially in the context of the supranational constructs in the Gulf Cooperation Council, comprising Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman. It draws on the experience of the EU and the importance of VAT, and reflects on the other main common market in Central America.

Chapter 1: Design of a VAT for the GCC Common Market

Ehtisham Ahmad

Subjects: economics and finance, public finance, public sector economics


Ehtisham Ahmad INTRODUCTION A Why should the oil-rich GCC countries introduce a VAT, or any other tax system for that matter? Some highly influential experts and politicians argue that there is no need for a modern tax system—but this argument is short-sighted and misleading as oil-producing countries in all other parts of the world have a full panoply of tools at their disposal for macroeconomic policy-making. First, GCC countries already have a system of taxes, but these are a limited and inefficient subset of non-oil taxes—based on customs. There is a common external tariff (CET) of 5 percent. Second, customs duties are being gradually removed with free trade agreements (FTAs) with all major trading partners. Indeed, this is the main driving force for the VAT as a replacement for customs. Third, not all the GCC countries have the oil reserves of Saudi Arabia or Abu Dhabi, and there are significant revenue needs for infrastructure and social programs in all countries. Fourth, the gyrations in petroleum prices during the past year, hence also of non-oil revenues, together with the need for stimulus packages and credible exit strategies has led to fiscal stress in several cases. Finally, the effective development of a common market, as in the case of the EU (see Waerzeggers, Chapter 5) leads to a need for a coordinated system of indirect taxes that does not obstruct the free movement of goods and services. The GCC countries are now looking, individually and collectively, to develop a modern...

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