Kuwait and Qatar's VAT implementation is expected to be postponed until 2024.

Tax directors and consultants anticipate that Kuwait and Qatar would not implement VAT regimes before 2024, as worries about increasing inflation and high oil prices boost tax collections.

Tax specialists in the Middle East are concerned that rising inflation and global oil costs may cause tax authorities in Kuwait and Qatar to delay implementing VAT.

Mohamed Faycal Charfeddine, group head of tax at Aujan Coca-Cola Beverage Company (ACCBC), stated that he does not see VAT in Kuwait being implemented until at least 2024.

“If I was a betting man, I would say it would be another 3-4 years at minimum before VAT would see the light of day,” said Ali Kazimi, managing director of Hansuke Consulting. “On one side, you have so much inflationary pressure kicking in and you add more fuel to it by hiking up prices through VAT, it just does not make any economic sense,” he added.

Kuwait's inflation rate has reached a decade high of more than 5%, although the price of brent crude oil has remained above $100 per barrel in the aftermath of Russia's invasion of Ukraine. These trends have resulted in a bonanza for Middle Eastern economies, as income from record-high commodity prices such as oil and liquefied natural gas (LNG) have boosted Treasury coffers.

High oil prices also alleviate pressure on finance ministries to expand their national revenue bases, while stifling any demand for tax reform through the introduction of extra taxes such as VAT.

“In Kuwait if people see oil prices going up and the economy doing well then they might find it difficult to understand the reason to introduce VAT,” said a Kuwait official who preferred to speak on the basis of anonymity.

Political compulsions

VAT is a foregone conclusion. Kuwait and Qatar are under regional pressure to implement VAT as signatories to the Gulf Cooperation Council (GCC) accord in 2017 and as the last two nations to do so.

Ali Kazimi highlighted that one of the primary roadblocks to introducing VAT in Kuwait is the parliamentary and political procedures. Other GCC nations lack legislative systems comparable to Kuwait, which implies that the government can make the ultimate decision on VAT implementation unilaterally.

“There is a lot of concern in Kuwait that VAT will drive up inflation plus adversely affect the economy which is a real concern for the Kuwaiti economy, particularly through the COVID-19 pandemic,” explained Robert Tsang, partner and head of indirect tax at Deloitte in Kuwait, Oman and Qatar.

“It seems highly unlikely given the current situation that VAT will be introduced in Kuwait in the next year,” said Tsang. “Though with four of the six countries in the GCC countries already implementing VAT you would expect Kuwait to follow suit.”

The GCC accord established an aim of implementing a unified VAT rate of at least 5% across its six member states, which include Oman, Bahrain, the United Arab Emirates, and the Kingdom of Saudi Arabia, by 2019.

According to a Kuwaiti official who requested anonymity, while a 5% VAT rate would be a realistic starting point, it is unlikely to be authorized at this point owing to current oil prices.

Qatar is expected to adopt VAT in the first quarter of 2023, following the FIFA World Cup in November.

Kuwait's near-term goal is to implement an excise tax, which will be a restricted charge on commodities such as cigarettes, carbonated and sweetened beverages, and select luxury goods.

Kuwait's enterprises, on the other hand, will be prepared when VAT is implemented. Charfeddine stated that ACCBC would be prepared even if VAT were implemented earlier in Kuwait, as they would be able to replicate the mechanisms in place when the VAT regimes in Oman and Bahrain took effect.

“I don’t see our business having an issue if Kuwait or Qatar were to implement VAT as we’ve become used to it in our other operations and we expect that VAT regulations would be almost the same. But I can see how this might be a big game changer for businesses that only have bases in Kuwait or Qatar where they would need to implement IT systems as well as amend their processes and procedures to deal with the VAT system,” said Charfeddine.

Kuwait has additional hurdles from inflation and its habit of mirroring the US Federal Reserve's monetary policy, which is projected to continue raising interest rates in reaction to growing inflation.

Increases in the federal borrowing rate are anticipated to result in Kuwait tightening its base rate, further delaying the implementation of VAT.

Market analysts anticipate the adoption of a 5% VAT rate, which would be a modest payment to demonstrate compliance with the GCC accord. With a tiny population and a legislative system, a higher percentage (10%) might spark outrage in the country.

The long-term estimate is that after all GCC nations have implemented VAT, the rate would gradually grow from 5% in late adopters – Saudi Arabia now has a 15% VAT rate, Bahrain has a 10% rate, and the UAE and Oman have a 5% rate – until stabilizing at a uniform rate of 10%.

By fLEXI tEAM