VAT & Taxation May Increase Illicit Trade in GCC Countries

The introduction of VAT and a “sin tax” on tobacco, coupled with the rise of free trade zones that underpin the GCC’s reputation as a global trade hub, are creating a gateway to counterfeit goods and illicit trade across the region.

Emerging technologies, legal loopholes, e-commerce and regional socio-economic instability have also opened up new opportunities for terrorism, intellectual property crimes and other trade crimes, according to experts at a conference on Tuesday, who urged GCC countries “to work together in harmony” and embrace transparency to stem corruption and extortion.

In a bid to diversify government revenues and strengthen economic development, the Gulf Cooperation Council instituted a value-added tax; Saudi Arabia and the UAE implemented VAT at 5% from January 1, 2018, while the other GCC states are expected to follow suit. In parallel, a separate excise tax of 100% is being selectively levied on harmful products such as tobacco.

Warning taxation was a “double-edged sword,” Brendan LeMoult, anti-illicit trade and fiscal affairs vice-president at JTI (Japan Tobacco International), said while countries have a need to diversify, criminals can be quick to take advantage of changing market conditions and said, more than ever before, there is a clear business case for bringing the fight against illicit trade into the mainstream.

“And once they infest a country they are hard to get rid of. Criminal networks operating in from illicit tobacco trade can expand: You will see them get into drugs, weapons, human practices. And that is what you want to prevent.”

Whether the desired effect of a high tax is to drive tax revenue or to encourage people to stop smoking, often it can be counterproductive, he said. “There is a point where if you keep hiking tobacco tax you will end up losing revenue and it drives people underground,” he said. “And this market is so big and so vast that they can supply products non-stop.”

“However, it is a worldwide issue. When the tax goes up, the illicit trade will go up – it boils down to making sure to let the market settle, letting harmonization become part of the GCC so every market is similar, and develop a long-term tax calendar that will benefit revenue and consumption in achievable goals.”

 

However, there is a lack of physical access for law enforcement to oversee free trade zones, coupled with a lack of cooperation with businesses and a lack of transparency that allows many companies to use free trade zones to operate illegal activity, he said.

 

Source Credit: Albawaba