The Saudi Arabia VAT Tax Increase and What it Means for the GCC

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May 28, 2020

With coronavirus still affecting people’s everyday lives, the job, property and stock markets for countries the world over are continuing to be impacted. Many individuals have had their incomes suspended, meaning that less money is available to be pumped through the economy.

Countries such as Saudi Arabia are known for having a low tax policy with no charges on personal finances for its citizens.

However, its economy has taken a hit during this pandemic and the Riyadh government has made the decision to increase their VAT tax from 5% to 15% effective on the 1st of July 2020. This is to ‘shore up state finances’ and help diversify their country's wealth.

In this blog post, we will be covering:

  • The current situation
  • The three economic shocks
  • What it means for the GCC

The Current Situation

On the 11th of May 2020, Saudi Arabia made the announcement that they were going to triple their VAT tax.

The oil-rich country has seen a decrease in their economy’s finances since the pandemic, which has forced them to lower their global energy prices.

Saudi Arabia only introduced a value-added tax (VAT) two years ao, to aid in cutting its reliance on the world’s crude oil markets, however this increase from 5% to 15% has sent a level of shock through its economy.

As the tax increases, Saudi Arabia has also suspended the cost of living allowances until the 1st of June.

A living allowance is a sum of money that an employee can claim for in addition to his or her normal pay. This is because the cost of living in particular can be high and the individual could be doing an essential job, such as working within the medical field.

The Living Allowance was only introduced in Saudi Arabia in 2018, and it allowed state employees to claim 1,000 riyals per month on top of their monthly salary. This Living Allowance was also to help offset the increasing financial burden of VAT and petrol.

The Three Economic Shocks

The Minister of Finance and Acting Minister of Economy and Planning, Mohammad Aljadaan has stated that Saudi Arabia has faced “three economic shocks” as a result of COVID-19.

Saudi Arabia’s main revenue driver is its oil supply. Saudi’s oil reserves are the second largest in the world and it is the world’s leading oil exporter and second largest oil producer, preceded only by the United States of America.

Whilst oil is Saudi’s top earner, they have recently seen a plummet in the price of Brent Crude by 50% since the year has begun. This is due to pandemic travel bans eliminating the demand for oil.

This was the first economic shock that Saudi experienced. Second, was the shutdown of the economy. To slow down the overall spread of the virus, Saudi Arabia has implemented many of the same rules that have been put in place around the world. For example, they have issued social distancing rules and recommended face masks in local areas.

Again, like many other countries, Saudi Arabia has had to cancel a lot of special occasions. This sadly includes suspending visas for Muslims seeking to visit Mecca and Medina.

Each year, millions of Muslims make the journey to Mecca or Medina during the month of Ramadan, which started in April 2020. It is still unclear how major Hajj pilgrimage will be affected, but it begins in July. However, the government has come forward and said that the measures are only temporary.

Thirdly, the final economic shock is Saudi having to up their healthcare spending. With 57,345 cases of Coronavirus confirmed in Saudi Arabia, like many countries, they are having to put more money into their local hospitals, doctor surgeries and medical supplies.

What Does it Mean for The GCC?

The GCC stands for The Gulf Cooperation Council, which is now called The Cooperation Council for the Arab States of the Gulf. The GCC is an intergovernmental, political and economic union consisting of all Arab states, including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.  

The primary purpose of the GCC is to unite the members and find common political objectives, which are rooted in Arab and Islamic culture.

Due to Saudi Arabia raising their VAT, the question ‘Have taxes killed GCC economic integration?’, has been asked.

Policy coordination has been at the heart of the GCC and with this new tax hike in place, it could interfere with their regional economic integration. Regional Economic Integration is an agreement between groups of countries in a close geographical proximity, through which they can discuss, reduce and eliminate tariff and non-tariff barriers to the free flow of services, factors or production and goods between each other.

The policy coordination also allows the six states to homogenize policy across all inter-state trade and allow for equal treatment of citizens. However, with Saudi’s decision to up their VAT, there is no chance for the regional economic integration and policy coordination to continue.

There is also a bigger, more impending worry that this could cause a ripple effect through the other members of the GCC and have them take a corresponding route. In 2018, a similar issue took place. Saudi Arabia and The United Arab Emirates initiated the 5% raise in VAT, then a year later, Qatar, Oman and Kuwait committed to also having a 5% VAT rise in the next 2-3 years.