New Taxes, New Era: IMF Explores the Impact of GCC Fiscal Shifts on Growth and Firms

The IMF study finds that recent tax reforms in GCC countries especially VAT and excise taxes have had limited negative effects on macroeconomic performance and firm profitability, with corporate income tax impacting smaller firms more significantly. It highlights the need for careful, inclusive fiscal design to support revenue diversification without undermining growth or equity.

In an in-depth exploration of the Gulf Cooperation Council’s (GCC) evolving fiscal policies, researchers Anja Baum, Dorothy Nampewo, and Greta Polo from the International Monetary Fund’s (IMF) Middle East and Central Asia Department present a timely analysis of how recent tax reforms are reshaping the region’s economic and corporate landscape. Their April 2025 working paper uses a combination of macroeconomic indicators and firm-level financial data drawn from sources such as IMF databases, national tax records, and S&P Capital IQ to assess the impact of newly introduced value-added tax (VAT), excise taxes, and corporate income tax (CIT). Through this analysis, the study offers rare empirical insights into how tax changes are influencing the economies and businesses of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE).

From Oil-Fueled Welfare to Revenue Diversification

Until recently, the GCC states were global outliers in their fiscal structures. For decades, their public finances were almost entirely underwritten by hydrocarbon revenues, which accounted for over 80 percent of total government income before 2015. This allowed for low tax burdens, generous energy subsidies, and expansive public spending. In 2014, public spending reached nearly 40 percent of GDP in Saudi Arabia and Oman. The private sector thrived in this environment, enjoying low operational costs and minimal taxation. However, the oil price collapse of 2014 sent shockwaves through the region’s finances, exposing vulnerabilities in a model overly dependent on oil exports.

The response was swift and coordinated. Following the crisis, GCC governments launched wide-ranging reforms aimed at broadening their tax base. By 2016, the bloc had agreed on excise and VAT treaties. Saudi Arabia and the UAE were first to implement VAT in 2018, with other members gradually following suit. Excise taxes were also introduced on products considered harmful to health, such as tobacco, sugary drinks, and energy beverages. Over time, more countries began extending or increasing corporate income tax, with the UAE implementing a 9 percent federal CIT in 2023. These measures marked the beginning of a new fiscal era, where domestic taxation would start to supplement, and eventually reduce reliance on, oil revenues.

Macroeconomic Ripples: Mild and Manageable

Contrary to widespread concerns about the economic drag of new taxes, the IMF study finds that the macroeconomic impact of recent tax reforms has been relatively modest and, in some cases, even positive. Using panel regressions and local projection methods covering the years 2002 to 2022, the authors show that VAT increases tend to raise inflation by about 0.4 percentage points per 1 percent rate hike, but this effect fades within a year. For instance, Saudi Arabia’s VAT tripling in 2020 led to an inflation spike above 6 percent, which normalized to under 1 percent by mid-2021.

More surprisingly, VAT implementation is linked with a small but statistically significant rise in GDP and non-oil GDP, particularly in the year following adoption. This is attributed to stronger consumer demand supported by government compensation programs, such as Saudi Arabia’s Citizen Account, and improved fiscal confidence. The authors also suggest that well-functioning VAT refund systems helped businesses avoid cash flow problems. Excise taxes, meanwhile, had a similarly muted effect. Although they slightly dampened GDP and consumption in the year of implementation, the effect reversed in the following year, indicating that consumers and markets adapted quickly.

Corporate Reaction: Size and Sector Shape the Impact

The most revealing findings come from the analysis of firm-level financials. While VAT and excises had little effect on aggregate firm performance, corporate income taxes presented a more nuanced picture. A one-percentage-point increase in foreign CIT was associated with a 0.03 percentage point decline in return on assets (ROA). But this average masked deeper disparities: small and medium-sized enterprises (SMEs) suffered far more than large corporations.

When companies were grouped by size, smaller firms experienced a 0.3 percentage point drop in ROA and a 0.5 point drop in return on equity (ROE) following a CIT hike. Larger firms, in contrast, were better able to absorb the impact, likely due to access to exemptions, more sophisticated tax planning, or economies of scale. Sectoral variation was also evident in firms in the food and tobacco industries, targeted by excises, saw a sharp decline in profitability, highlighting the need for targeted support during reform rollouts.

Medium-Term Trends and Investor Signals

The study further applies the Jordà local projection method to trace the medium-term impact of tax changes. Over a three-year horizon, VAT appeared to have a delayed but positive impact on ROE, suggesting long-term gains from improved fiscal management and investor confidence. Exercises remained neutral for most sectors but showed persistent negative effects for those directly targeted. CIT continued to weigh on small firms over time, reinforcing the call for more differentiated tax structures.

These results suggest that while indirect taxes like VAT can be integrated into the economy with minimal disruption, direct taxes like CIT require more careful calibration. The resilience shown by firms and economies in the face of new taxes reflects both institutional adaptability and the effectiveness of compensation mechanisms, but it also underscores the need for ongoing reform in labor markets and regulatory environments to support competitiveness.

A Measured Path Forward for Fiscal Reform

As GCC states transition from hydrocarbon-heavy to more diversified revenue models, the study emphasizes the importance of thoughtful policy design. Broadening the tax base is essential, but doing so without overburdening SMEs or creating uneven playing fields is equally critical. Avoiding excessive exemptions and aligning with international best practices, especially in light of global minimum tax developments will be key to maintaining investor appeal while achieving fiscal resilience.

The paper concludes that the GCC’s experience offers an important lesson for other resource-rich economies: taxation, when implemented transparently and strategically, need not stifle growth. On the contrary, it can reinforce stability and credibility. As the region continues its fiscal transformation, policymakers would do well to ensure that reforms are equitable, efficient, and aligned with a broader vision of sustainable economic development.