When taxation is revolutionary

The Gulf monarchs have announced the introduction of VAT as a new way of collecting funds to halt the loss of government revenue. In December 2015, the six member states of the Gulf Cooperation Council (GCC) announced their intention to introduce a value added tax (VAT) over the next three years. This is part of a framework that would further integrate the economic systems of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates into a single market. It remains to be seen if and how the plan will be finalized, but the decision represents a radical policy shift that will potentially move the six oil-rich countries closer to introducing direct taxation for the first time. So far, the monarchies of the GCC have levied a few fees upon their subjects but have not taxed income or purchases.

The decision to review this taxfree environment appears to be motivated by a plunge in government revenues. Episodes of capital flight from global investment funds owned by Gulf States have started alarm bells ringing across the region. National budgets have been hit hard by costly military campaigns (the conflict in Yemen, in particular, is longer and more expensive than had been previously imagined) and by the slump in oil prices, now hovering around 40 dollars per barrel. This dynamic is beginning to create the impression that the current economic arrangements in Gulf States might become untenable and constitutes the underlying reason that the monarchies are considering introducing taxation to the region.