According to news reports, in a statement issued by the Saudi state news agency, Mohammed Al-Jadaan, the Finance Minister of Saudi Arabia, has announced an increase in the rate of VAT from 5% to 15% in Saudi Arabia from 1 July 2020.
The announcement comes after Saudi Arabia posted a budget deficit of USD 9.07 billion in the first quarter of 2020 and is reported to have cancelled/postponed certain operating and capital expenditure and also cut allocations on projects worth USD 26.6 billion.
The austerity measures are intended to help Saudi Arabia stabilize non-oil revenues and cope with public finances currently pressured by low oil prices and Covid-19. This, however, comes as an unexpected move after the recent tax announcements by the General Authority for Zakat and Tax easing tax return filing, tax payment and penalty provisions to help businesses navigate the impact of Covid-19.
The move also seems to be a deviation from the Common VAT Agreement of the States of the Gulf Cooperation Council (GCC Common VAT Framework Agreement) that only empowers member-states to levy VAT at the standard rate of 5% on taxable supplies that are not specifically exempt or zero rated (Article 25).
To access our detailed tax alert on the implications of the increase in the VAT rate in Saudi Arabia please click here.
Development in the UAE
The United Arab Emirates (UAE) introduced VAT on 1 January 2018, the same time as Saudi Arabia, and is faced by similar economic pressures. However, according to recent news reports, in an official statement issued after the announcement by Saudi Arabia, UAE’s Ministry of Finance has confirmed that they have no current intentions to increase the rate of VAT.
Budgetary Challenges in Oman
Oman, like many other countries in the region and outside, is significantly challenged with the sharp slump in international oil prices and the economic instability created by Covid-19 that continue to impact the country’s credit rating. Since the beginning of 2020, the Ministry of Finance has issued many circulars and a set of directives to government units to reduce the volume of spending. In April 2020, the Ministry of Finance announced a cut of OMR 500 million in the State Budget.
Oman has been preparing for the introduction of VAT for quite some time. This includes drafting the VAT law and executive regulations, as well as having systems in place to implement VAT when the government takes a decision on the implementation date. In an interview with Bloomberg at the World Economic Forum 2020 in Davos earlier in January this year, His Excellency Ali bin Masoud Al Sunaid, Minister of Commerce and Industry in Oman, confirmed that Oman would introduce VAT “sometime during the beginning of 2021”.
Given recent unexpected challenges, Oman may consider the possibility of implementing VAT more quickly, in a phased manner. In this case, businesses may not have a long period of time to prepare for implementation.