In January 2018, the United Arab Emirates became the first of six states in the Gulf Cooperation Council (GCC) region to implement value added tax (VAT). Saudi Arabia, Kuwait, Qatar, Oman and Bahrain are expected to follow suit later in the same year, with the six applying a 5% point-of-sale tax on non-essential items including tobacco, beverages, jewelry and luxury. Vehicles.
The move could push inflation up to 1.4%, but it is expected to generate $ 25 billion in annual tax revenue. The new agreement will reduce the government’s dependence on energy revenues and follows ongoing recommendations from the International Monetary Fund to diversify revenue sources. The framework for the new tax laws was technically agreed in 2016, but given that there is room for deviation in national law between countries, what exactly this tax deal means for investors in the region has not yet been reached. yet been confirmed.
In an effort to clarify, the UAE Ministry of Finance (MoF) held a VAT briefing on March 21, 2017. Here it was confirmed that investments in gold, silver and platinum will be zero-rated; that is, VAT on these products will be charged at 0 percent in UAE. It seems likely (although this has yet to be confirmed) that the remaining regions will follow suit. GCC governments recognize the competitive advantage of countries considered low-tax or non-taxable, and will be keen to protect the interests of investors in the region. This is a strategy that will likely mitigate the impact that the introduction of the tax will have on business confidence and investor interest, with GCC states still benefiting from low VAT as a competitive advantage over developed markets. .
In regions like the EU, where VAT has been a mainstay for more than 40 years, investment instruments are exempt, including gold and gold jewelry. GCC regions may not follow exactly this pattern – we know gold jewelry will be subject to VAT in the UAE – but it is possible that governments will rely heavily on precedents like this, at least at the start of implementation. This news gives some hope to traders, who will be ready for reduced profits if a point-of-sale tax is added to instruments such as commodities. The pressing question for future investors, and those with a vested interest in the local business climate, will be whether gold jewelry is the first in a series of VAT inclusions.
Even though, like spot metals, commodity trading remains zero-rated or tax-exempt, the introduction of VAT will still have an impact on commodity markets. The agriculture, mining and energy sectors require significant capital for day-to-day operations and will likely cover the tax as a VAT input. For producers in a VAT refund position, cash flow issues could seriously affect performance. The resulting drop in yields will result in a decrease in supply in the spot and futures market. Consumers will also need to closely monitor the retail price of commodities, which could rise above the 5 percent level if sellers use the introduction of a point-of-sale tax to hide inflated costs.
Given the predominance of oil and gas in the region, current expectations suggest that some form of VAT relief will be extended to the energy sector. If this were to be the case, operators would still be faced with a number of new planning and process issues. This could lead to a drop in business confidence, which could have a knock-on effect on the hiring of oil and gas companies.
With the implementation of the new VAT agreement more than a year away for the majority of GCC countries, there is still very little information available on what the new rules will mean for investors, traders and businesses. the region. Press conferences like the one held in the United Arab Emirates in March and a similar event held in Bahrain in February will continue to bring clarity and allay the concerns of traders, but a number factors will need to be taken into account – including planning and processing processes and the impact they will have on yields and the commodity market. The news that spot metals investments will be zero-rated will be welcomed by investors, who are hopeful that other trading instruments will fall into the same category.
The author is Vice President of Business Development and Market Research at FXTM. The opinions expressed are his own and do not reflect the policy of the newspaper.