Although no official announcement on imposing uniform taxes has come from the annual summit of GCC leaders in Muscat, Oman, Emirates Business has learnt that such a tax structure is on the way. Economists maintain that discussions to form such a monetary union have been in place for the past two years.
"This was inevitable. They cannot go on forever this way. Taxes will only help (GCC countries) remain competitive," said John Wright, the former Chief Executive of Oman International Bank and Gulf Bank of Kuwait.
A tax structure implies that governments will start earning local currency, which is crucial for the potential creation of a local-currency government bond market. "This will enhance government cash-flows, and could also prepare the ground for an active local bond market," said Armen Papazian, a Dubai-based economist.
Plagued with volatile oil prices that have plummeted to a fourth to where they stood six months ago, the GCC states plan to impose taxes on individuals and businesses. People close to the matter said that such a tax structure is unlikely to be imposed unilaterally. And preparations need to be in place before the final plunge. Going by basic economics books, a tax structure may raise inflation, analysts said.
"The pan-GCC tax structure is based on the existence of the region as a monetary union. There are certain issues that need to be fixed before such a structure comes into place. The GCC customs union has still not become effective in a way that it is meant to be. The fact is that if one has an industrial licence he may not be required to pay customs duty when exporting goods from one country to another. But then, a trading company still has to pay customs duty from port to port within the region," said Jeetendra Chauhan, the Director of UHY Saxena, a Dubai-based accountancy firm.
The GCC countries would not be in a hurry to impose taxes, Chauhan said, citing the fact that none of the countries have any infrastructure in place to impose taxes.
"It's not that the oil prices will remain low for years to come. The fact is that each of these countries has had a tax structure in place for long. But that goes to individual ministries instead of a body specifically meant for the purpose," he said.
Absence of income tax has been the largest attraction for corporations and individuals in the region. All the GCC economies have aggressively competed with each other to open free zones wherein the companies are not taxed. Dubai, and in fact the UAE, has particularly led the way.
There are 29 free zones in the country and nine new ones are coming up. Dubai alone has more than 20 free zones. Qatar and Saudi Arabia have aggressively joined the wave – with Qatar focusing on finance and science and technology companies and Saudi Arabia on manufacturing industries.
"It remains to be seen how the GCC countries will append a new tax structure to these free zones. Taxes may derail investments in these zones. After all, it's not that all the resources used for manufacturing come cheap here," said Chauhan.
Personal taxes remain a bottleneck, said analysts. "I doubt that they would come to an unanimous decision on this. Income tax is one of the main draws to attract highly qualified foreign human capital and breaking this sacred rule could damage that internationally known appeal," said Shayne Nelson, Regional Chief Executive of Standard Chartered bank. "There are many other more painless or subtle ways to levy taxes through indirect means with the same benefits for the government. In most developed countries, the bulk of government revenues from taxes are actually not coming from personal income taxes," he said.
Taxes, when imposed, will have to be progressive, said a Dubai-based economist who declined to be named.
"There is a variety of businesses that exist here. So we cannot think of having a uniform tax structure. Some GCC member may not want to tax a particular sector on grounds that it wants to promote it. People with different income slabs may be taxed differently. A uniform flat rate of tax may hamper smaller industries," she said.
The progressive tax structure may in fact be the reason why the tax may not be implemented soon. "We have all known that the matter has been under discussion for the past two years even when the oil prices were high. They need more time to realise how much tax they need to impose on which sector and on which set of professionals," the economist added.
Qatar Financial Centre began operations as a free zone but plans to impose a flat 10 per cent tax on firms registered under its umbrella. Foreign banks are taxed 20 per cent of their taxable income in Abu Dhabi, Dubai and Sharjah. Oil companies pay a flat rate of 55 per cent of their taxable incomes in Dubai and 50 per cent in the other emirates.
On the federal level, UAE plans to impose the IMF-promoted Value Added Tax on its soil in 2010.
Kuwait's cabinet in May 2006 said that it will study a proposal to introduce income tax regardless of the nationality of the taxpayer. It proposed a flat rate of 10 per cent. In August 2007, Bahrain said that it will deduct one per cent from salaries to pay for its unemployment programme, becoming the first Gulf state to tax its residents.
Qatar has a progressive tax structure for businesses starting at 10 per cent for companies with turnovers between QR100,000 (Dh100,865) and QR500,000. Such a tax structure on businesses has been in place in the gas-rich nation for the past 15 years.
"The biggest impact would definitely be on government finances as it would bring – as said above – a sense of clarity and the ability to build budgets on known and stable future source of revenues. We can definitely argue that this has already started in Dubai with indirect taxes such as the Salik, the visa fees, municipality fees etc," said Nelson.
Some parts of the Gulf have already entered the terminal decline phase of their oil reserves. For them, levying taxes is of utmost importance, he said.
GCC states will also need to tread a fine line when defining taxes for expatriates and nationals. "The fact is that if a limited liability company (LLC) is taxed in the UAE, it will directly effect the nationals. Every such firm has a 51 per cent stake by nationals," said Chauhan.
A tax structure is also relevant to the creation of active local currency government bond market, Papazian said.
"In order to issue and repay local bonds, governments need local currency cash flows. Today, they do not have such an inflow and they spend their petrodollars locally, while backing currencies with foreign currencies, and pegging the exchange rate. With a new tax structure and additional local currency revenues, governments can now repay local currency bonds, ushering in a new environment where local bonds finance local expenditure, dissociating the link between petrodollar revenues and local expenditure," he said.
http://www.business24-7.ae/Articles/2008/12/Pages/12312008_341e5b222a0d468eb96a4805e238be02.aspx 
