VAT in the Gulf Cooperation Council
Edited by Ehtisham Ahmad and Abdulrazak Al Faris
Chapter 1: Design of a VAT for the GCC Common Market
1. Design of a VAT for the GCC common market 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...
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