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Tax Concerns Included in Moody's Bahrain Downgrade

by Lorys Charalambous, Tax-News.com, Cyprus

24 August 2010


Bahrain’s long-term issuer rating has been downgraded by Moody’s, the credit ratings agency, from ‘A2’ to ‘A3’, partly due a perceived inability to raise additional tax revenues, if necessary in the future.

Moody’s believes that Bahrain’s creditworthiness is below the level of its ‘A2’ ratings peers because the increased level of its government spending is not backed by significant financial assets accumulated from its past oil revenues. It does not have the substantial reserves of other countries, for example, Saudi Arabia, Qatar and Kuwait, which are also commodity exporters.

Moody’s also points out that Bahrain does not have the “fiscal flexibility” which would allow it to react quickly to offset reductions in revenue. While reducing public capital expenditure can only be done at the expense of economic growth, it says that Bahrain’s narrow tax base leaves the government with no other choice if oil receipts become insufficient at any time.

However, Moody’s concludes that the introduction of personal income tax and/or value added tax, to solve any future problem, would be difficult while its fellow Gulf Cooperation Council nations still remain tax free.

In addition, Moody’s refers to the contingent liability risk represented by Bahrain’s comparatively large financial sector.

TAGS: tax | economics | value added tax (VAT) | fiscal policy | budget | Bahrain | individual income tax

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