This year, the 5% VAT (value added tax) will be applied to most products and services in Saudi Arabia and the United Arab Emirates (UAE).
The Gulf states have long attracted foreign workers thanks to the tax-free lifestyle. However, sales of oil exports have been steadily declining for several years, prompting them to change.
The UAE estimates that in the first year of application, VAT will bring the budget of nearly 12 billion dirhams ($ 3.3 billion). Gasoline, diesel, food, clothing, electricity and gas bills and hotel rooms are subject to VAT on January 1. Still, many other services are tax exempt, including medical care, financial services and public transportation.
Organizations such as the International Monetary Fund have long called on Gulf countries to diversify their revenues and avoid dependence on oil reserves. In Saudi Arabia, more than 90% of the revenue comes from the oil industry. This figure is around 80% in the UAE.
Both countries have taken measures to increase the budget. Arab Saudi tax on cigarettes and carbonated water, as well as cutting some subsidies for people in the country. In the UAE, road fees have been raised and tourism is taxed.
However, both have no plans to apply personal income tax. Most people do not pay this tax. Other countries in the Gulf Cooperation Council – Bahrain, Kuwait, Oman and Qatar – have pledged to apply VAT, although some have postponed until at least 2019.