Speaking at the Arab Fiscal Forum in Abu Dhabi on Monday, IMF managing director Christine Lagarde, said oil prices were likely to stay low for an extended period, meaning that all oil exporters would have to adjust by reducing spending and increasing revenue.
“Last year, for example, oil exporters in the MENA region lost more than $340bn (£241bn, €309bn) in oil revenue from their budgets, amounting to 20% of their combined GDP,” Lagarde said.
Global oil prices dropped 44% last year, forcing Saudi Arabia, the world’s biggest oil exporters, to cut spending on energy subsidies and consider selling sovereign bonds and shares in national oil company Saudi Arabian Oil Co. The United Arab Emirates has also eliminated fuel subsidies.
New tax system
The IMF’s chief said these economies now needed to strengthen their fiscal frameworks and reengineer their tax systems — by reducing their heavy reliance on oil revenues and by boosting non-hydrocarbon sources of revenues.
“How can GCC countries achieve this?
• Start by putting in place a simple system that initially focuses on VAT — ideally, a harmonised regional VAT. Even at a low single-digit rate, such a tax could raise up to 2% of GDP.
• Add to this a greater emphasis on corporate income taxes, as well as property and excise taxes.
• And continue to invest in building tax administration capacity that could eventually allow for the introduction of personal income taxes,” Lagarde said.
VAT coming
The six nations of the Gulf Cooperation Council (GCC), which includes Saudi Arabia and the UAE, agreed the key outline for a new VAT system, one of the first direct taxes in the region, at a meeting of finance ministers in December last year.
The new taxes are planned to come into effect as soon as late 2018.
Global reforms
Lagarde also noted that the IMF has become aware that too many multinational companies and wealthy individuals are “gaming” a creaking system of international taxation that is no longer fit for the modern global economy and said the system is being reformed.
“Let me be clear: significant progress has been made in recent years. A good example is the automatic exchange of taxpayer information among governments. This new global standard will make it harder for wealthy individuals to avoid income and wealth taxes by moving assets to offshore locations,” she said.
Lagarde singled out “low-tax locations” which she said have become part of the increasingly vigorous debate on excessive income and wealth inequality.
“According to one estimate, about 30% of Africa’s financial wealth is held offshore – and the percentages are thought to be even higher in some major oil-producing countries.”
In her conclusion, Lagarde said: “My main message today is this: creating successful 21st-century economies requires robust government revenues and an international tax system that works for everybody. These ingredients are essential for growth, fairness, and development.”
