Tax expert explains why Saudi VAT hike could boost investment

Sanjeev Fernandez. (Supplied)
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Updated 12 May 2020

Tax expert explains why Saudi VAT hike could boost investment

  • Ernst & Young tax expert Sanjeev Fernandez tells Arab News how the increase in VAT in Saudi Arabia will bring the Kingdom in line with other countries and help to spur investment

RIYADH: How will the increase affect the Saudi economy?

In its discussions with the GCC member states around the introduction of VAT, the IMF has been clear that rates of VAT higher than the 5 percent standard rate initially enacted, are necessary to preserve fiscal spending. The latest announcement brings Saudi Arabia’s standard rate of VAT more in line with other global regimes, although still significantly lower than some European regimes where VAT rates are generally in the 20s. As Saudi Arabia works toward its goals as part of Vision 2030, especially in relation to infrastructure spending, the increase in the rate of VAT could potentially help drive continued government investment, particularly in the context of low oil prices. Ultimately, sustainable government spending in an economy creates jobs, which in turn stimulates economic activity and growth.

How will these measure be felt in the short, medium and long term?

While these are exceptional times, the initial introduction of VAT in Saudi Arabia at the beginning of 2018 was met with minimal disruption to businesses and impact on consumers. Therefore, provided consumer spending remains consistent, and tax revenues are quickly reinvested in the economy, the increase in the VAT rate could be a positive move in the medium to long term. Ensuring a balanced approach to the government’s fiscal position will support business confidence, and in the medium to longer term, could increase investment and economic growth in the Saudi economy.

Is the 15 percent VAT rate here to stay?

Since the introduction of VAT, it has been understood by many in the profession that the GCC member states would ultimately look to raise their VAT rates, to align with other global VAT and GST regimes, and to increase government revenues to support continued fiscal spending. For Saudi Arabia at least, the 15 percent rate could potentially be here to stay depending on the circumstances, and is consistent with calls by the IMF for higher VAT rates across the GCC.

How will companies react?

Businesses impacted by the increased VAT rate, will face a challenging decision as to whether to pass on the additional VAT to their customers, or absorb this cost to some degree. Many businesses may have no choice but to pass on the additional cost to customers, bound by long term agreements and fixed pricing, capping legislation, or a need to preserve profit margins.


Oil surges on hopes of new deal on output cuts

Updated 02 June 2020

Oil surges on hopes of new deal on output cuts

  • Brent price has doubled in five weeks
  • OPEC talks may be brought forward

DUBAI: Oil prices surged toward $40 a barrel on Monday as hopes rose for an early agreement to extend the big production cuts agreed by Saudi Arabia and Russia under the OPEC+ alliance.

Brent, the global benchmark, jumped by more 9 percent to nearly $39, continuing the surge that has doubled the price in five weeks — the best performance in its history. It recovered after record supply cuts agreed between the 23 countries of the OPEC+ partnership, and enforced cuts in US shale oil.

DME Oman crude, the regional benchmark in which a lot of Saudi Aramco exports are priced, rose above $40 a barrel for the first time since early March.

Market sentiment was buoyed by the possibility that the Organization of Petroleum Exporting Countries would agree with non-OPEC members to extend the cuts for a longer period than was agreed in April.

Oil analysts expect OPEC to fast track a “virtual” meeting to formally agree to maintaining cuts at the record 9.7 million barrels a day level. The meeting was scheduled for June 9, but bringing it forward would allow producers more time to set pricing levels.

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An official with one OPEC delegation told Arab News there was consensus among the 23 OPEC+ members for the new date, which could be as early as June 4. The meeting will also consider how long the current level of cuts would be maintained. Some OPEC members want it to run to the end of the year, other producers would prefer a two-month extension.

Omar Najia, global head of derivatives with trader BB Energy, told a forum run by Gulf Intelligence consultancy: “I’d be amazed if OPEC did not extend the higher level of cuts. As long as Saudi Arabia and Russia continue saying nice things to each other I’d expect the rally to continue.”

A Moscow source close to the oil industry said energy officials there had come to the conclusion that “the deal is working” and it was important to keep prices at an “acceptable” level.

Sentiment was also affected by a comparatively high level of compliance with the new cuts, running at about 75 percent among OPEC+ members, with only Iraq and Nigeria noticeable under-compliers.

Robin Mills, chief executive of Qamar Energy, said: “That’s where I’d expect it to be after two months in such a fluid situation. It will be even better in June.”