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Law360 (May 11, 2020, 5:19 PM EDT) -- Saudi Arabia said Monday it was tripling its value-added tax to 15% while ending cost-of-living allowances for public employees to help the country's economy recover from damage wreaked by falling oil prices and other effects of the coronavirus pandemic.
In a statement, the Saudi Finance Ministry said the VAT increase will take effect July 1, just 2 1/2 years after the 5% rate was introduced. Starting in June, the government will also end its cost-of-living allowance of 1,000 riyals per month ($267) to state workers, according to the statement.
The monthly stipend was granted in 2018 following complaints from citizens about the financial impact of austerity cuts during the last oil price rout. The decision to end the allowance comes as many Saudis are coping with reduced incomes from layoffs and pay cuts as businesses struggle to survive.
The measures to keep the economy afloat are valued at about 100 billion riyals, the state-run Saudi Press Agency reported. It quoted Finance Minister Mohammed Al-Jadaan as saying the new measures, "as tough as they are, are necessary and beneficial to maintain comprehensive financial and economic stability in the medium and long term for the interest of the country and its citizens."
Saudi Arabia had announced March 18 that it was cutting spending by 50 billion riyals, or nearly 5% of its budget expenditure for 2020, after the government approved a partial reduction in some items with the least social and economic impact. At the time, the government also said monthly VAT filing and payment deadlines for February, March, April and May 2020 would be postponed by three months. For quarterly taxpayers, the VAT filing and payment deadline for the first three months of 2020 was postponed to July 31.
Most of the country's budget revenue comes from exports of crude oil, and this year's rout on global oil markets has resulted in huge financial losses for Saudi Arabia. Even before lockdowns from the coronavirus slashed demand for gasoline and sent prices into a tailspin, the market was softened by a Saudi decision to flood the market with cheap oil after a deal with other members of the Organization of Petroleum Exporting Countries collapsed.
Also Monday, the Saudi Energy Ministry state-run oil monopoly Aramco decided to cut crude production for June by an additional 1 million barrels per day, limiting daily output to 7.5 million barrels. Lower demand has caused storage of crude to approach maximum capacity worldwide.
A ministry official said in a statement that the cut would be voluntary, in addition to the reduction the country committed to in its April 12 agreement with OPEC and other oil producing nations. The move brings the total production cut to about 4.8 million barrels per day from April's level.
The government in the neighboring United Arab Emirates said Monday that it had no plan to increase VAT from 5%. In a statement, the UAE Finance Ministry said it was focused on working with other government bodies "to assess the priorities for the post-COVID-19 stage."
Like Saudi Arabia, the UAE introduced VAT on some goods and services in 2018.
The International Monetary Fund has projected that all six oil-producing Gulf Arab states will be in economic recession this year.
--Editing by Vincent Sherry.
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