Two Negatives maketh a Positive. Not so often, but sometimes, this mathematical formula does apply to real life economic situations. With the omnipresent Covid Pandemic there is no searching for the first negative, and second negative is the dire state of economy of Bahrain’s neighboring country Saudi Arabia. New economy revival measures announced by Saudi Arabia, resultant of these two negatives, could just be the positive Bahrain could leverage on.
Negative effect of both Covid 19 and spiraling down Crude (oil) rates, have forced Kingdom of Saudi Arabia to announce a triple fold increase in their standard Value Added Tax (VAT) rate from 5% to 15%, with effect from 1st July 2020. Saudi Arabia plans to save at least $27 Bn by increasing its standard VAT levy along with other expenditure reduction initiatives. Its fellow members of the Cooperation Council for the Arab States of the Gulf for VAT (i.e. Bahrain and UAE) however, have chosen not to follow the lead of Saudi Arabia to increase their standard VAT rates. The Federal Tax Authority in United Arab Emirates (UAE) has already confirmed that UAE has no such intention of increasing the VAT Rates in their country. Bahrain, even though more tight lipped on its future intentions regarding VAT rates, is most likely to continue with the 5% VAT rate as Phase III of VAT implementation has just begun in Bahrain (i.e. January 2020), as against UAE and Saudi Arabia which implemented VAT in their country in the year 2018. With the proposed levy of 15% VAT on majority of the goods and services, Saudi Arabia would become one of the highest taxing countries in the region, second only to Jordon which levies 16% VAT in its country. At present Yemen, UAE and Bahrain levy 5% VAT on domestic trade of goods and services and Oman, Kuwait, Qatar & Iraq does not levy any form of VAT / GST in their country.
The rate change would certainly be detrimental for the people of Saudi Arabia, however its effect on Bahrain could completely be inverse. With higher taxation in Saudi Arabia, consumers in Saudi Arabia would always have an incentive to travel to its neighboring country (i.e. Bahrain and UAE) to get a quick bargain on their purchases. But then, one would always be cautioned regarding the Customs duties and VAT on goods, upon travelling to/from Saudi Arabia?
People travelling to / from Saudi Arabia are bound to abide by the VAT and Customs Laws of Saudi Arabia. As per Article 42 of Saudi VAT regulations, goods imported into Saudi Arabia as personal items and carried in personal luggage is Exempt from the levy of VAT. Furthermore, as per Saudi Customs and regulations regarding VAT on Import, all passengers traveling to/from Saudi Arabia are required to make a declaration to customs only in the following instances,
A combined reading of both Saudi VAT Laws and Saudi Custom laws infer that, any purchases meant for personal use, (restricted to SAR 60,000) can most likely be imported into Saudi Arabia free of tax without any declaration; And only if the goods are above SAR 60,000 in value, they will be subject to declaration and assessment on its commercial usage. Given, if rules and regulations prescribed by Saudi custom laws remain unamended post 1st July 2020, consumers in Saudi Arabia could consider an alternate expenditure options outside Saudi Arabia, in order to benefit from the tax discrepancy between countries.
Factoring in the travel ease, free flow of trade and accessibility to the market, Bahrain and UAE could most likely become the new shopping destination for Saudi consumers who wouldn’t mind travelling a few extra miles to benefit from a 10% price advantage. Most likely, High Value Goods which are personal in nature (i.e. Jewellery, Mobiles, Toys, Expensive Electronics, Clothes, etc.) may see an increase in demand in lieu of the preferential tax benefit created due this tax disparity.
Many countries in the past have found themselves in a unique position, where aggressive tax policies of neighboring countries have worked in favor of its less tax aggressive neighbors. For instance Hong Kong has benefited thoroughly from China’s aggressive VAT rates. Anyone with investment capability and an interest in Chinese market would certainly factor in the tax benefits of setting up shop in Hong Kong and accessing the Chinese market through Hong Kong. Similarly, if Tax Laws of both Saudi and Bahrain remain as is, Bahrain is most likely to reap the benefit of tax discrepancy between the two countries.
Even a minimal shift of 1%-2% in the expenditure pattern of people in Saudi Arabia could actually be huge for the economy of Bahrain in terms of sheer numbers. Certainly Bahrain may not be at the receiving end of all the expenditure shift, but certainly with favorable factors like an expenditure push from Saudi Arabia and an upward movement in crude prices, Bahrain’s economy may just get the necessary kick to be back on its growth trajectory.