According to IMF policy paper (PP) titled 'Tax Policy Reforms in the GCC Countries: Now and How?', "VAT is an ideal revenue instrument for the GCC countries. It is a modern consumption tax that is highly effective in mobilizing tax revenue while avoiding economic distortions."

It says: "GCC countries need to overhaul their tax systems and increase tax revenues. This is an important part of implementing a comprehensive medium term fiscal adjustment strategy, which should include three other main elements: raising domestic energy prices; containing recurrent spending, particularly wages; and enhancing the efficiency of public sector investment."

The proposed tax reforms have been mooted against the backdrop of persisting slump in oil prices and the resulting decline in GCC's revenue. As put by PP, "Oil revenues accounted for between 70 and 95 percent of total government revenues during 2011–14 across the six countries. The large decline in oil prices has led to deteriorating fiscal balances and fiscal adjustment is needed. Under current policies, the fiscal deficit for GCC countries is projected at almost 13 percent of GDP in 2015, and to remain in deficit of 6.5 percent of GDP in 2020."

It notes that Non-oil tax revenues averaged about 1.6 percent of GDP (about 3 percent of non-oil GDP) in 2012–14. Raising this revenue effort through the introduction of efficient taxes that do not distort economic incentives or adversely affect investment and growth is part of the needed fiscal reform strategy.

PP says that GCC should opt for modern and efficient tax systems. It notes GCC countries' existing tax systems are characterized by very low rates and narrow bases. Dating back to the mid-20th century, GCC taxation systems are not very efficient and generate persistently low revenues.

It believes that tax reforms will help the nations mobilize tax revenues, provide the region with the opportunity to modernize tax laws and institutions, and create the foundations for financing the provision of government services when oil reserves dwindle. In addition to encouraging greater accountability, these systems will help promote equity and perceptions of fairness, while aligning GCC countries with international practices.

GCC countries should choose a combination of modern efficient tax instruments. These could be based on a low rate broad-based VAT tax together with selected excises, a business profits tax, and possibly a recurrent property tax. The combination of these taxes can ensure efficient and progressive tax systems in the region. Taxes should be at low rates with limited exemptions, with the aim of collecting revenues in line with country budget needs and constraints.