Rivers of the black gold have proven difficult for the taxman to overcome in the Gulf, but times are changing. With oil revenues no longer a limitless lifeline and the tides of economic diversification rising, the region will slowly but surely make the inevitable shift towards taxation and alternative revenue streams to stay afloat.
After the discovery of oil, the six members of the Gulf Cooperation Council (GCC)— Saudi Arabia, Qatar, Kuwait, Oman, Bahrain, and the United Arab Emirates—leveraged their hydrocarbon windfall to build modern states and elevate citizens’ standards of living. This period of relative stability and economic growth fueled a population boom, with the region's population surging from 4 million in 1950 to 46.5 million by 2010, driven in part by a large influx of expatriates.
This remarkable transformation, however, was heavily underpinned by external oil rents, with only limited forms of taxation in place. Government revenues remained heavily reliant on hydrocarbons, leaving the region vulnerable to risks from price fluctuations. The 2014 oil price shock served as a stark reminder of these vulnerabilities, leading to fiscal deficits and straining government budgets. Adding to this, the rise of the 'shale revolution', growing global climate concerns, efforts to transition away from fossil fuels, and the inherently finite nature of oil have further compounded the uncertainty of continued reliance on hydrocarbons.
To break free from what has been quite aptly described as an “oil addiction”, GCC states have embarked on ambitious economic diversification programs as part of their long-term visions. In a step towards the inevitable, a pivotal step in addressing fiscal sustainability came with the signing of the landmark GCC Value Added Tax (VAT) Framework Agreement in 2016. The 5% VAT was introduced at different points in time, with the UAE and Saudi Arabia leading in 2018, followed by Bahrain in 2019 and Oman in 2021. Over time, Saudi Arabia increased its VAT rate to 15%, while Bahrain raised it to 10%. Kuwait and Qatar have yet to implement VAT, seemingly delaying the inevitable.
It is worth noting that some forms of taxation, such as excise taxes, customs duties, and more recently corporate taxation, already exist in varying forms within the region. Here is how fiscal diversification stands as of 2023, in terms of oil and gas revenues as a percentage of total fiscal income by country:
Source: Official government fiscal accounts (finalised figures) for 2023**
*UAE figure is an IMF estimate; *Kuwait’s fiscal year runs through April 1st, 2023, to March 31st, 2024.
Whilst Kuwait and Qatar are the most hydrocarbon-dependent, the UAE emerges as the most diversified. Bahrain, Saudi Arabia, and Oman fall somewhere in between, highlighting differing approaches and progress in reducing dependency.
Although the necessity for fiscal revenue diversification is apparent and acknowledged by GCC governments, the introduction of broader taxation policies must navigate the complexities of their oil-redistributive systems and the rentier state model that has defined the region. Funded by hydrocarbon revenues, GCC governments have established a unique social contract, offering extensive public services, subsidies, and welfare in exchange for social stability. Introducing direct taxation risks disrupting this delicate balance. As governments navigate this transition, they must carefully manage public sentiment while addressing fiscal sustainability.
On the economic front, the GCC’s low-tax environment has been a cornerstone of its appeal to foreign investors. Tax reform introduces a new variable in this equation, as policymakers must balance the need for additional revenue with the imperative to remain competitive. Strategic measures, such as maintaining investor-friendly tax rates, targeted exemptions, and efficient tax systems, will be crucial to ensuring that taxation supports economic growth rather than deterring investment.
Therefore, it is apparent that in the quest for fiscal sustainability, policymakers will have to navigate deeply entrenched social, political, and economic dynamics.
While the taxman may have been swimming against currents of the black gold for a while now, he is no Sisyphus and his task -though challenging- is not insurmountable. The GCC is aware of his inevitable arrival on its sandy shores and all they can do is plan diligently for his welcome party.
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