Value added tax to mitigate oil slump says EFG Hermes

Date

3/7/2016 11:48:57 PM

(MENAFN- Khaleej Times)

Dubai: Introduction of taxes in Gulf countries will mitigate oil slump and also bring stability in regional markets said EFG Hermes research director Simon Kitchen.

Kitchen explained that the planned introduction of taxes similar to the value added tax (VAT) by 2018 will lend oil-rich GCC countries increased fiscal flexibility to continue investing in infrastructure projects.

Last month GCC countries have agreed they would introduce Value Added Tax (VAT) at a rate of five per cent in 2018 though the decision is yet to receive final approval before being implemented.

The International Monterey Fund (IMF) has also suggested the GCC nations to introduce value added tax. Christine Lagarde managing director of IMF said the GCC region can raise revenues from corporate income tax as well as from property and excise taxes.

The oil producing region that lost $340 billion or 20 per cent of gross domestic product to oil prices plunge in 2015 should continue to invest in building tax administration capacity that could eventually allow for the introduction of personal income tax.

Kitchen said: "Nobody likes taxes however if as a company you are based in the GCC you would be more assured that additional roads bridges and infrastructure will be built in the future during ongoing low crude valuation and you may consider it worth the cost.

He mentioned that income and corporate tax may also be introduced. Some Gulf countries have reduced spending through cutting subsidies then taxing income and corporations will provide an ongoing fiscal income.

EFG Hermes he said does not foresee oil prices significantly recovering as Iran is now included in the global market Iraq is producing more oil and shale oil is already part of the global supply.

The IMF expects that the Gulf countries' combined accumulated budget surplus of $600 billion in the last five years will become a fiscal deficit of $700 billion in the next five years.

Kitchen revealed that some Gulf countries sell oil below global market prices. Giving example he mentioned that Saudi Arabia sells a barrel for $20 despite the fact that oil currently trades at prices ranging between $30 to $40 a barrel.

He said: "Stocks recovery will take longer this time around. We won't see a sharp recovery similar to the one in 2010."

He mentioned that GCC companies with strong balance sheets pricing power and free from subsidies will be the winners whereas inefficient low-cost producers firms dependent on government spending and highly leveraged firms will lose during the ongoing oil price slump.

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