What will GCC VAT rules mean for the commodities?
Even if, like spot metals, commodity trades remain zero-rated or tax exempt, the introduction of VAT will still impact the commodities markets.
In January 2018, the UAE becomes the first of six states in the Gulf Cooperation Council (GCC) region to implement Value Added Tax (VAT). Saudi Arabia, Kuwait, Qatar, Oman, and Bahrain are expected to follow suit later in the same year, with all six applying a 5 per cent point-of-sale tax to non-essential items including tobacco, beverages, jewelry, and luxury vehicles.
The move may see inflation soar by as much as 1.4 per cent, but it is expected to generate $25 billion in annual tax revenue. The new agreement will reduce government dependency on energy income, and follows ongoing recommendations by the International Monetary Fund to diversify revenue streams. The framework for the new taxation laws were technically agreed in 2016 but, since there is scope for deviation in domestic law between countries, exactly what this taxation agreement means for investors across the region has yet to be confirmed.
In an effort to provide some clarity, the UAE Ministry of Finance (MoF) held a VAT briefing session on 21 March, 2017. Here, it was confirmed that gold, silver, and platinum investments will be zero-rated; namely, VAT on these commodities will be charged at 0 per cent in the UAE. It seems likely (although, it is still unconfirmed) that the remaining regions will follow suit. The GCC governments recognise the competitive advantage countries viewed as low-tax or tax-free have, and will be keen to protect investor interest in the region. It is a strategy that will likely mitigate the impact the introduction of the tax will have on business confidence and investor interest, with the GCC states still boasting low VAT as a competitive advantage over developed markets.
In areas like the EU, where VAT has been a stalwart for over 40 years, investment instruments are exempt, including gold and gold jewellery. The GCC regions may not follow this model exactly - we know that gold jewellery will be subject to VAT in the UAE - but it is possible governments will lean heavily on precedents like this, at least in the early days of implementation. This news provides some hope for traders, who will be braced for a reduction in profits should a point-of-sale tax be added to instruments such as commodities. The pressing question for investors going forward, and those who have a vested interest in the local business climate, will be whether Gold jewellery is the first in a line of VAT inclusions.
Even if, like spot metals, commodity trades remain zero-rated or tax exempt, the introduction of VAT will still impact the commodities markets. The agriculture, mining, and energy industries require significant capital for daily operations, and will likely cover the tax as VAT input. For producers in a VAT refund position, cash flow issues could seriously impact performance. The subsequent reduction in yields will play out as decreased supply in the spot and futures market. Consumers will also have to closely watch the retail price of commodities, which may rise above the 5 per cent level should sellers use the introduction of a point-of-sale tax to mask inflated costs.
Given the dominance of oil and gas across the region, current expectation suggests some form of VAT relief will be extended to the energy industry. Should this prove to be the case, operators will still be facing a number of new planning and process issues. This could see a reduction in business confidence, which may have a knock-on effect on hiring by gas and oil companies.
With implementation of the new VAT agreement more than a year away for the majority of GCC countries, there is still very little information available on what the new rules will mean for investors, traders, and businesses across the region. Press conferences like the one held in UAE in March, and a similar event held in Bahrain in February, will continue to add clarity and assuage traders' concerns, but a number of factors will need to be taken into consideration - not least the planning and processing procedures and the impact they will have on yields and the commodities market. News that select spot metal investments will be zero-rated will be well received by investors, who will be hoping that other trading instruments will fall into the same category.
The writer is vice-president of corporate development and market research at FXTM. Views expressed are his own and do not reflect the newspaper's policy.