How taxation can plug a $2 trillion blackhole in the budgets of the GCC

06 May 2019 5 min. read

The states of the GCC could require an extra $2 trillion to rebalance the budget by 2030 according to a new Oliver Wyman report on the future of taxation in the region.

With government debt on the rise and budget deficits elevated across the GCC, the UAE, Saudi Arabia, Bahrain, Oman, Kuwait and Qatar could be facing a collective $2 trillion budget black-hole in a little over a decade. That’s the conclusion from a new report conducted by global management consultancy Oliver Wyman, which looks into the taxation landscape in a region where tax revenues are relatively lacking.

While the tap hasn’t exactly run dry, the dramatic dive in global oil prices five years ago hastened efforts among the GCC nations toward economic diversification – including significant regional investments made into the downstream petrochemical industry. Yet, with the wide-scale spending, government debt continues to rise and deficits widen. The most commonly leveraged revenue raising tool by governments worldwide: taxation.Govt. revenue comparison for the UAE, Saudi Arabia and other countries“The GCC states are at an economic crossroads with significant efforts already in place to diversify revenue streams and maintain economic stability,” states Ibrahim Ghoul, a partner with Oliver Wyman based in Dubai. “There is huge potential for tax-related initiatives to provide a strong platform for supporting these initiatives and a once in a generation opportunity to transform public administration in the GCC.”

The long-time reliance on natural resources in the GCC is starkly illustrated when comparing a 2016 government revenue breakdown of the two major local economies against others worldwide, taxation contributing less than 25 percent in both Saudi Arabia and the UAE compared to greater than 75 percent in Australia, the US and UK. The tax landscape, as such, remains largely underdeveloped in the GCC.

Since 2016, the GCC has seen the steady roll-out of VAT – Bahrain becoming the third state following the UAE and KSA to implement the goods tax at the beginning of this year – but with peak oil widely predicted to occur some time around 2030, and prices now plateauing at below break-even levels for most GCC countries, Oliver Wyman contends that further urgent measures must be taken now to address the future revenue shortfall.Balancing government budgets in the GCCWith as much as $2 trillion required to balance their budgets by 2030, addressing the situation now in the GCC becomes especially important when, as stated by the firm, “the experiences of several developed economies show that implementing revenue-generating reforms and achieving a robust fiscal balance take a decade to design, build, and gain social acceptance.” Reforms also need to be introduced gradually, so as not to overwhelm the private sector.

The upside: the GCC states can take advantage of their unique late-mover opportunity, the firm contends, deriving lessons from the struggles of more mature tax systems. Here, newly-built world-class, integrated tax systems in the GCC offer the chance to surpass these more mature systems abroad without the burden and barrier of legacy operating models, complexities, inefficiencies, and older technology.

And according to the firm, taxation reform if implemented correctly could achieve a potentially massive 80 percent of targeted non-oil government revenues in the GCC through just four taxes. Local governments, it states, “should focus on fewer but larger taxes rather than become bogged down in the administration of small taxes and fees. And they should keep regulations simple so that compliance is economical for the taxpayer and enforcement for the tax agency.”Interdependencies in modern tax administrationElsewhere, the firm points to a handful of other initiatives in tax administration and front-line practices from around the globe, including; digitisation in areas such as payments and reporting;  platforms and systems built around blockchain; data-driven administration and advanced analytics for compliance activities; broader, more unified public sector services beyond tax; and, not unimportantly, cultivating greater public accountability.

The last of these measures, notes the firm, may in part contribute to another, less immediately expected benefit of developing an effective local tax system. “The spread of taxation will create more-demanding citizens, who will insist that the taxes they pay are used efficiently,” the report states. “That implies a drive for efficiency in government – as well as transparency, so that people can see for themselves that their money is being spent well.”

“The future of taxation will heavily depend on governments showcasing its value to citizens and businesses; it should be presented as a partnership,” concludes Ghoul, who consults on public policy. “Transitioning from the current situation is a significant task requiring commitment from numerous stakeholders, the participation of the private sector, digitising the taxpayer interface, and working closely with public-sector institutions and communities.”