I need you to design research proposal

finance case study and need guidance to help me learn.

I’m planning to write research report titled ( Studying the Influence of Value Added Tax (VAT) Implementation on the Saudi Arabia economical growth ). you need to search for relevant researches through google scholar do the following:
1. Prepare the new research proposal as titled above, consist of the following:
A. Research Independent variables ( 4-5 max)
B. Research dependent variable ( influence of Value Added Tax (VAT) Implementation on the Saudi Arabia economical growth)
C. Researcher hypothesis ( use a hypothesis used on similar research with the selected IV’s)
D. Research Methodology
E. Questionnaires per every IV and DV.
2. Attach copy of used researches
You can use attached research if applicable
Requirements: 2 day
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 92 DOES A VALUE-ADDED TAX RATE INCREASE INFLUENCE COMPANY PROFITABILITY? AN EMPIRICAL STUDY IN THE SAUDI STOCK MARKET MAHFOUDH HUSSEIN MGAMMAL* ABSTRACT This study aims to estimate the consequences of a value-added tax (‘VAT’) rate increase on the profitability of the Kingdom of Saudi Arabia (‘KSA’) non-financial companies. Using statistical empirical approaches such as Ordinary Least Squares, Wilcoxon-signed-rank test and Difference-in-Differences, the analysis targets data before and after the VAT rate increase as well as the discovery of COVID-19. The findings support the hypothesis that after-VAT rate increase firms are, on average, less profitable. The imposed 10% VAT rate increase has caused, on average, a -2.16% decrease in profitability of Saudi firms. The results explore the notion that government debt negatively influenced firm profitability in 2020 which means that will affect Saudi companies’ growth in the long term. This paper recommends implementing some VAT incentives in the tax system and conducting further studies on VAT incentives efficiency using data in the long term. Keywords: value-added tax, taxation, total assets, shareholders’ equity, profitability * Accounting Department, College of Business, Jouf University. Correspondence via email at mrrsr77@yahoo.com.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 93 I INTRODUCTION According to the World Bank,1 in reply to COVID-19, the Saudi Arabian government has introduced financial stability and company sector aid measures, including measures to support lending to Small-Medium Enterprises. Growth in many oil-exporting countries will be severely constrained by further political restrictions in relation to oil production. In Saudi Arabia and other Gulf Co-Operation Council (‘GCC’) economies, lower oil prices, heightened ambiguity related to further possible spikes in COVID-19, and household-wide effects of primary budget adjustments (such as a value-added tax (‘VAT’) rise, wage restrictions) should significantly impact non-oil activities. Sixty years back, the VAT was only rarely taught of in some professional texts and external to France. VAT, a wide base tax on expenditure, is new and one of the utmost significant foundations of revenue for governments.2 Since its introduction in over 170 nations, VAT has generally increased 20% or more of all tax income. Broadly implemented in sub-Saharan Africa and the Middle East, among others, implementation of a VAT has been the cornerstone of tax improvement in numerous developing nations.3 In Saudi Arabia, the authority responsible for taxation is the General Authority of Zakat and Tax, which has the following functions to: collect taxes from taxpayers in accordance with the applicable laws, rules and regulations; offer high-quality services to taxpayers in order for them to meet their obligations; follow-up on taxpayers to ensure the collection of tax claims; educate taxpayers; and, exchange information with regional and international organisations and specialised institutions4. In this context, it has been said that numerous developing countries with limited tax capability have switched to VAT, and the optimality of this reform relies on the efficacy of VAT collection. In the Kingdom of Saudi Arabia (‘KSA’), the General Authority of Zakat and Tax, in 2017, argued that the development of the tax system will support the KSA to convert and become further companionable with the global system. The VAT was officially introduced on 1 January 2018 with an average rate of 5%.5 The KSA introduced VAT to decrease its dependency on oil reserves. Recently, due to the effects of the COVID-19 pandemic in the world, the KSA — as one country to have adopted some economic reforms to reduce these COVID-19 consequences — increased its VAT from 5% to 15%on 1 July 2020. For clarity, the 5% VAT is a standard rate, with the 15% VAT rate introduced and applicable to all other 1 World Bank, ‘Global Economic Prospects, June 2020′ (Report, June 2020). 2 See Bibek Adhikari, ‘Does a Value‐Added Tax Increase Economic Efficiency?’ (2020) 58(1) Economic Inquiry 496–517. 3 See Michael Keen and Ben Lockwood, ‘The Value Added Tax: Its Causes and Consequences’ (2010) 92(2) Journal of Development Economics 138–151. 4 General Authority of Zakat and Tax, ‘ZATCA’s Role’ (2021) . 5 General Authority of Zakat and Tax, ‘Value Added Tax’ (2021) .
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 94 taxable activities.6 Accordingly this study aims to examine the effects of this VAT rate increase. VAT is oftentimes defined as a regressive tax since it taxes consumption and the set to consume tends to reduce as income increases.7 Other tax frameworks have numerous issues and in some countries, a VAT might be introduced to lessen another ineffective implicit tax — for example, stamp duties, excise taxes and tariffs — or to marginally diminish explicit taxes — for example, the corporate revenue tax rate and individual revenue tax rate. However, these progressions are slight when contrasted with the substitution of sales taxes by VAT.8 In the KSA and hand-in-hand with its 2030 vision, this type of approach gives the government adaptability and therefore it does not have to rely so heavily on oil income alone. Similarly, it turns out to be less of a burden for the end consumer since it is the first type of tax framework presented in the KSA. Recently, Alhussain9 studied the influence of the VAT implementation on Saudi banks. The study revealed a small decrease in overall liabilities, overall assets, current accounts and customer deposits. Furthermore, there was an important reduction in retained earnings and total operating expenses following the implementation of the 5% VAT. There was also small growth in overall income and an important rise in net operating revenue. Moreover, there are no statistically important differences with other variables under the study, except reserved profits after and before the implementation of the 5% VAT. The present research question in this paper explores what the situation is after imposing a 15% VAT on non-financial10 Saudi listed companies. Relevantly, there is another study conducted by Bogari11 which examined the social and economic impact of the implementation of the 5% VAT in the KSA. The results of that study indicate that the implementation of the 5% VAT raises the country’s financial resources. Also, Bogari found an undesirable social influence and several other challenges. It recommended a need to redesign the nature of the execution of the on-VAT rules of determining the tax base in the ‘General Guidelines of VAT’ via developing the proficiency and viability of workers in the General Authority of Zakat and Tax, and streamlining tax systems until the beneficial outcomes on the financial and social side bounce back. 6 General Authority of Zakat and Tax, ‘VAT Law’ (2021) . 7 Masayuki Tamaoka, ‘The Regressivity of a Value Added Tax: Tax Credit Method and Subtraction Method—A Japanese Case’ (1994) 15(2) Fiscal Studies 57–73. 8 Adhikari (n 2). 9 Meshari Alhussain, ‘The Impact of Value-Added Tax (VAT) Implementation on Saudi Banks’ (2020) 12(1) Journal of Accounting and Taxation 12–27. 10 The designation of non-financial firms means that they are primarily involved in the production of non-financial goods and services: Organisation for Economic Co-Operation and Development (‘OECD’), ‘Understanding Financial Accounts’ (Report, 2017). 11 Adel Bogari, ‘The Economic and Social Impact of the Adoption of Value-Added Tax in Saudi Arabia’ (2020) 4(2) International Journal of Economics, Business and Accounting Research 62–74.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 95 According to the Organisation for Economic Co-Operation and Development (‘OECD’) study entitled ‘Consumption Tax Trends 2020’, the VAT accounts for more than 20% of total tax revenue in OECD countries. Moreover, recent outcomes noted within another study conducted by the OECD under a Taxation Working Paper prepared by Thomas12 and entitled ‘Reassessing the Regressivity of the VAT’ indicates that a roughly proportional VAT can still have significant equity inferences for poor people, possibly resulting in several families entering poverty. This highlights the importance of confirming the progressivity of the tax-benefit system to offset poor families for the cost in buying power from repaying VAT. In relation to the COVID-19 crisis, the results of these OECD studies suggest that there may be scope in many countries for VAT reform to address revenue requirements. Notwithstanding that in many countries the regular VAT rates is high, OECD evidence displays that possibility exists to extend VAT. However, any VAT increases, including VAT base expansion that influences the poor, should be accompanied with compensation for poorer families, for example benefit payments or targeted tax credits.13 This provides further motivation for conducting this study in order to discover the influence of imposing the new VAT of 15% on non-financial Saudi listed companies. We address abovementioned issues in the case of the KSA’s economy. Nowadays, the government has introduced wide economic developments intended to decrease the Kingdom’s dependence on oil income. The government applied a main reform and economic program called the 2030 Saudi Vision, which aims to revoke the country out of its reliance on oil income while differentiating its economy. This vision is specifically based on a transition from growth to non-oil activities and the private sector. It persists to work for constructing a helpful environment for competitiveness and business investment. While simultaneously assisting the combination of its economy into the new universal economy. Since there was no VAT in KSA before 1 January 2018, its participation in international trade pushes it to apply numerous fundamental policies in order to vary its economic resources. Therefore, the KSA implemented a 5% VAT on goods and services as of 1 January 2018, and due COVID-19 the Kingdom on 1 July 2020 increase the VAT from 5% to 15%. The consequence of Saudi Arabia’s weighty dependence on the oil income is that its income subsidises to more than 50.4% of its GDP. Inasmuch the Saudi economy is a mono exporter economy founded mostly on oil, any important deterioration in prices of oil will affect the economy of the KSA. The Kingdom’s foreign trade (‘FT’) reliance on oil returns accounts for 72% of the nation’s entire exports and closely 70% of regime income. Subsequently, these incomes are gathered by the public governance which rises public spending and results in numerous influences on macro-economic collections. Therefore, some studies display that the VAT is influenced by actual variables such as total income 12 Alastair Thomas, ‘Reassessing the Regressivity of the VAT’ (Working Paper, OECD Publishing, 2020). 13 Ibid.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 96 and government debt variables. Hence, it is interesting to evaluate the effect of imposing the new VAT on Saudi listed companies. In this regard, this study contributes to the VAT and taxation literature. It is one of the few that investigate the VAT effect in the KSA, then an additional encouragement to complete this article is to observe the effect of imposing the new 15% VAT on the profitability of non-financial Saudi listed companies. This paper is related to the empirical works that assess the effects of different VATs through time. The relationship is closer to those papers that investigated economic efficiency from different perspectives. However, previous studies do not examine the role of the VAT per se, and, more importantly, whether the design of how taxes are collected affects growth. Thus, this study focuses on examining the following question: Does imposing the 15% VAT affect profitability of Saudi companies? Using a time series sample of non-financial listed Saudi companies as one of the G20, OECD and GCC countries over two periods of time 2019–2020. Moreover, this investigation has a varied realistic implementation for investors, businesses, economic analysts and policymakers. To the best of our knowledge, it is the first article considering the latest VAT execution in the KSA which proposes to examine the consequences of such interventions for the non-financial companies’ sectors. The outcomes are significance for policymakers and should be taken into consideration by the KSA government by knowing the consequences of previous interventions before carrying out the next move of government interventions in the economic sectors of the Kingdom. Accordingly, this paper proceeds to describe the evident policy influence which can be employed not solitary to the KSA, but to other smaller countries considering a significant reform to their VAT rates. Ultimately, this is the reason why this development would be of interest to policymakers. Despite the fact we offer robust suggestions of the substantial negative influence of the VAT rate rise on company profitability, it is significant to edge that the scale of the influence could be exaggerated by out-of-control reasons. The remainder of the paper is as follows. Part II explores related literature, Part III outlines the research design and analyses, Part IV explores the additional tests and Part V provides a brief conclusion. II RELATED LITERATURE The shifting economic circumstances of worldwide growth at the end of 2019–2020 result in a need to guarantee the efficacy and functioning of the tax system in any country. The process of globalisation of economic models identifies the requirement to change the tax management in any country to these by confirming the capability and comprehensiveness of the revenue base of each country to diminish the underground economy, expand the tax base and improve the main tax instruments. These circumstances need constant enhancement and strengthening of global tax administration in the face of various challenges related to tax transparency, counting through the fast growth of business and commerce on the internet.14 VAT is a modern tax; as of 2020, over 160 countries around 14 Aleksy Kwilinski, Henryk Dzwigol and Vyacheslav Dementyev, ‘Model of Entrepreneurship Financial Activity of the Transnational Company Based on Intellectual Technology’ (2020) 24 International
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 97 the globe have implemented a VAT. Some countries refer to the tax as General Sales Tax or Goods and Services Tax. Figure 1 below shows the dramatic change and increases to VAT over time and Figure 2 (further below) illustrates the VAT rates of Middle Eastern countries. FIGURE 1: THE RISE OF THE VAT Source: IMF Internal International Tax Rates Database. FIGURE 2: MIDDLE EAST VAT RATES Source: IMF Internal International Tax Rates Database Journal of Entrepreneurship 1–5; Abramova et al, ‘The Ecosystem of VAT Administration in E-Commerce: Case of the Eastern Europe Countries’ (2021) 39(5) Studies of Applied Economics 1–15; Dubyna et al, ‘Transformation of Household Credit Behavior in the Conditions of Digitalization of the Financial Services Market’ (2021) 14(1) Journal of Optimization in Industrial Engineering 97–102; Shkarlet et al, ‘Infrastructural and Regional Development: Theoretical Aspects and Practical Issues’ (2021) 38(4) Studies of Applied Economics. % % % % % 0 %
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 98 The spirit of the VAT is that it is charged on all transactions however, being credited alongside tax due on dealers’ sales, eventually occurs to carry if the crediting chain is steady, and tax exactly levied on imports and remitted on exports merely on the last consumption.15 At all periods of the development of tax relationships, tax management has been explained as the construction of situations for the voluntary compliance with tax commitments, consequently, the payment of taxes and duties. In the event of non-compliance with the law, the application of corresponding penalties arises. Its main objective has been and remains to attain the effectiveness (low tax cost) and efficiency (integrity of the mobilisation of tax duties) of the work of the tax system16. Moreover, prior studies17 recommend that the divergence of C-efficiency from unity in developed economies is mostly because of the VAT that is not levied as a consequence of exemptions, decreased rates or compliance issues. However, Acosta-Ormaechea and Morozumi,18 argue that in the long-term, a boost in C-efficiency, maybe indicating the augmentation of the VAT base throughout small number of exemptions and a more uniform-rate structure with less decreased rates, has a growth-promoting influence relative to an increase in the VAT standard rate that declines the efficacy gains. As those VAT design characteristics, that have been common in many developed economies involving EU countries, change resource distributions extensively. In an inclusive, neutral, and operative way the VAT has been designed to tax the production chain and individual consumption. The VAT remained the utmost extensive tax reform worldwide throughout the subsequent semi of the 20th century and has verified to be a key underpinning of government incomes. The VAT is widely utilised in developing and developed countries.19 The rule of the VAT — mostly the individuals’ personal consumption, for example is measured via the value paid for services and goods. The implementation of VAT aids exports since exported goods are exempted from tax. Further, to the benefit of tax exception in the final step, it is conceivable to regain all the tax paid in the prior exporting steps, and thus the VAT helps the affordability of local 15 Keen (n 3). 16 Наталія Сергіївна Орлова and Алла Іванівна Іващенко, ‘Comparative Analysis of Some EU and EU Associated Countries to Identify the Phenomenon of Business Development in Post-Socialist Countries’ (2017) 163(1) Економічний часопис-XXІ 22–25; Grigoraș-Ichim et al, ‘Shaping the Perception and Vision of Economic Operators from the Romania-Ukraine-Moldova Border Area on Interim Financial Reporting’ (2018) 173 Economic annals-XXI; Bondarenko et al, ‘Risk Management of Enterprise Restructuring Strategy’ (2020) 11(5) International Journal of Advanced Research in Engineering and Technology; Kholiavko et al, ‘Comprehensive Methodological Approach to Estimating the Research Component Influence on the Information Economy Development = Комплексний методичний підхід до оцінювання впливу дослідницької компоненти на розвиток інформаційної економіки’ (2020) 178(4) Naukovyi Visnyk Natsionalnoho Hirnychoho Universytetu. 17 Ebrill et al, The Modern VAT (Report, 2001, International Monetary Fund); Michael Keen, ‘The Anatomy of the VAT’ (2013) 66(2) National Tax Journal 423–446. 18 Santiago Acosta-Ormaechea and Atsuyoshi Morozumi, ‘The Value-Added Tax and Growth: Design Matters’ (2021) International Tax and Public Finance 1–31. 19 Alan Schenk, Victor Thuronyi and Wei Cui, Value Added Tax (Cambridge University Press, 2015).
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 99 goods in overseas markets. Moreover, measures of VAT obedience rates are appreciated for classifying problem areas in VAT execution.20 Entirely tax rules are self-growing to some level and solitary of the core causes to practice the synthetic-control-method to measure its capability to account for unnoticed heterogeneity and further agreeably than matching techniques or old-style panel regressions. The context of the VAT implementation affords an exceptional exogenous set to evaluate the influence of tax improvements on economic effectiveness.21 In this context, Zou, Shen and Gong,22 discovered a clear drop in liability proportions after the VAT reform, in their study of the influence of China’s 2007 VAT reform on company leverage. That drop in liability percentage was more significant amongst private firms than public firms and foreign companies, which may be described by the fact that private firms typically face tighter financing restrictions. VAT choices are regularly impacted by outside powers that are ostensibly external to the inner circumstances of the restructuring countries. Numerous scholarly and non-academic foundations characterise the job of multifaceted associations, particularly the European Union (‘EU’) and the International Monetary Fund (‘IMF’), in affecting the boost‐up choice of VAT. The EU necessitates that part statuses embrace VAT on entrance to the EU.23 Along these lines, any nation becoming a member of the EU or trying to join the EU desires to implement a VAT.24 Likewise, the IMF is a robust supporter of the VAT and regularly places the implementation of VAT as solitary of the settings for assistance and financing a mortgage. Accordingly, nation’s that want the IMF’s support have an abundant advanced likelihood of implementing a VAT.25 For example, the VAT a 25% upper opportunity of implementing one in the year afterward in countries that enter a non-crisis program exclusive of a VAT, which verifies the prevalent discernment that the IMF has played an important function in the extension of the VAT. Ebrill et al,26 estimate that nations that familiarised a VAT throughout the 1980s and 1990s utilised the IMF’s guidance in implementing the VAT.27 20 James Giesecke and Nhi Hoang Tran, ‘A General Framework for Measuring VAT Compliance Rates’ (2012) 44(15) Applied Economics 1867–1889. 21 Adhikari (n 2). 22 Jingxian Zou, Guangjun Shen and Yaxian Gong, ‘The Effect of Value-Added Tax on Leverage: Evidence from China’s Value-Added Tax Reform’ (2019) 54 China Economic Review 135–146. 23 Adam et al, ‘A Retrospective Evaluation of Elements of the EU VAT System: Final Report’ (Report No TAXUD/2010/DE/328, FWC No TAXUD/2010/CC/104, Institute for Fiscal Studies, 2011). 24 Keen (n 3); Adhikari (n 2). 25 Keen (n 3). 26 Ebrill (n 17). 27 Keen (n 3); Alex Ufier, ‘Quasi‐Experimental Analysis on the Effects of Adoption of a Value Added Tax’ (2014) 52(4) Economic Inquiry 1364–1379; Pavel Čížek, Jinghua Lei and Jenny E. Ligthart, ‘Do Neighbours Influence Value‐Added‐Tax Introduction? A Spatial Duration Analysis’ (2017) 79(1) Oxford Bulletin of Economics and Statistics 25–54.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 100 According to previous studies,28 the plan of the VAT construction in one locale impacts the plan of assessment constructions in neighbouring territories. If nations implement a VAT because of the impact of their neighbours, at that point such tax reform is progressively external to the financial state of the implementing nation than a change persuaded by their interior economic circumstances. The presentation of the VATs without a doubt pursued regional waves.29 For example, more than 11 other European nations received VAT inside five years of France’s choice to implement a VAT. Correspondingly, 11 supplementary Latin American nations presented the VAT inside a time of Brazil’s choice to implement a VAT. The copycat conduct is especially solid in Eastern Europe, where 18 nations implemented VAT inside five years of Hungary’s VAT implementation. A comparative example is additionally discovered in the creating nations of Asia and sub‐Saharan Africa. The impressionist conduct in VAT appropriation is likewise shown in increasingly methodical studies.30 In this context, we disagree with what Case et al31 and Besley and Case32 have stated as that is not the only reason for many other European countries introducing VAT after France, there are some European countries that introduced a VAT after Hungary (another member of the EU) and countries in Asia have introduced VAT/GST at various times, not necessarily at similar times. Practically, the entirety of the nations implemented VAT to supplant sales taxes (i.e., manufacturing tax, whole-sale tax, or sales tax). In some nations, they additionally utilised a VAT prologue to diminish further unproductive indirect taxes, or to some extent decrease direct taxes. This holds as a rule too, and not simply in the nations canvassed in other studies.33 For example, in the example of 88 nations for which the author could gather information, Panama and Japan are the main two nations that had no broad sales taxes beforehand the VAT appropriation. Japan altogether decreased different extract taxes e.g., vehicles sales tax as of 23% to 6% and Panama fundamentally diminished different stamp duties once they implemented a VAT. Hence, these VAT changes provide a perfect set to assess the effect of changing sales and sales taxes through VAT on economic effectiveness.34 In relation to micro-enterprise (new-energy industry) a semi common analysis investigated the impact of new energy VAT incentives on the microenterprise level. Utilising the Differences-in-Differences (‘DiD’) method and a monetary board 28 Anne C. Case, Harvey S. Rosen and James R. Hines, ‘Budget Spillovers and Fiscal Policy Interdependence’ (1993) 52(3) Journal of Public Economics 285–307; Timothy Besley and Anne Case, ‘Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits’ (1995) 110(3) The Quarterly Journal of Economics 769–798. 29 Ibid. 30 Richard E. Krever, VAT in Africa (PULP, 2008). See also above n 27. 31 Case (n 28). 32 Besley (n 28). 33 Alex Ufier, ‘The Effect of VATs on Government Balance Sheets’ (2017) 24(6) International Tax and Public Finance 1141–1173. 34 Adhikari (n 2).
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 101 informational collection of China’s listed organisations, it discovered that in 2008 China’s VAT incentives (e.g., VAT refunds) for new-energy sectors (basically alludes to nuclear-power and wind-power) are ineffectual in animating company return on equity (‘ROE’). The study recommended, tax encouragements for terminal use must be supported to alleviate the overloading in the new-energy sector. That means a VAT increase influences a company’s profitability when there are no VAT incentives to stimulate and increase the demand for goods then the company’s profitability decreases. Economic incentives must be familiarised to evade the market alteration and spiteful struggle of the new-energy sector. Encouraging research and development (‘R&D’) motivations is favourable for improvement in renewable energy technologies. Comparing supportive measures for the improvement of the new-energy sector must be executed in China’s listed firms.35 VAT is an indirect tax in the tourism industry, alike the United States (‘US’). Turnover tax, levied on tourism services and goods on the VAT at different steps of manufacturing. Bistros, cafes and hotels in the EU,36 accumulate VAT for the government.37 VAT can be considered as a macroeconomic instrument for tourism administration, meanwhile it raises the prices that face visiting tourists. Core outcomes specify that VAT raises have non-negative influences on the tourist stream. This suggests that as a macroeconomic instrument, governments can deliberate VAT growth in their plans, as to account for essential infrastructure creation to control boosted tourist inflow.38 Thus, given that a VAT does not make a destinations less attractive and for governments the general marginal rise in VAT does not influence tourism, and hence maybe a possible choice. ‘With (VAT) approach, income from capital would not be taxed until it is ultimately consumed’.39 According to Golob,40 the VAT has a positive effect on stock prices. This type of tax would disregard taxes on capital gains and dividends, but stock prices would rise a little less, meanwhile firms would still be taxed with different taxes. This is due to the reduction of the available income to be taxed. However, VAT taxes expenditure, for registered companies, the VAT generally has a revenue neutral influence, as they are entitled to input tax credits on taxable inputs. An instance of the influence of VAT is what 35 Chuanwang Sun, Yanhong Zhan and Gang Du, ‘Can Value-Added Tax Incentives of New Energy Industry Increase Firm’s Profitability? Evidence from Financial Data of China’s Listed Companies’ (2020) 86 Energy Economics 104654. 36 HOTREC, ‘European Trade Association of Hotels, Restaurants and Cafes’ (2021) . 37 Helga Kristjánsdóttir and Paula Remoaldo, ‘Tourism in a Remote Nordic Region: VAT, internet, Oil, English, Distance, Hofstede, and Christianity’ (2019) 5(1) Cogent Social Sciences 1709346. 38 Helga Kristjánsdóttir, ‘Tax on Tourism in Europe: Does Higher Value-Added Tax (VAT) Impact Tourism Demand in Europe?’ (2020) Current Issues in Tourism 1–4. 39 United States Congress Senate Committee on Banking, Housing and Urban Affairs, United States Trade Policy and the Economy: Hearings Before the Committee on Banking, Housing, and Urban Affairs, United States Senate, One Hundred and Second Congress, Second Session, to Review Some of the Major Causes of Our Current Economic Difficulties, and to Suggest Steps that the United States Can Take Now to Deal with These Problems (US Government Printing Office, 1992) vol 102. 40 John E. Golob, ‘How Would Tax Reform Affect Financial Markets?’ (1995) 80 Economic Review — Federal Reserve Bank of Kansas City 19–40.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 102 Asogwa and Nkolika41 found in their study about the VAT’s influence in Nigeria, which included stocks. This study found that there was an optimistic influence of VAT on stocks and on investments, and in general in the KSA there is a normal impact of VAT on stock prices. As a financial exchange record is the thing that quantifies the general action and execution of each stock in the securities market.42 Financial exchanges, often have a main index which clarifies how most organisations in the economy are doing, which can be influenced by any inside or outer components, including any tax activities. In addition, the securities exchange can give an extremely away from of how the economy is getting along. Actually, VAT generally does not apply to investments and financial supplies are generally exempt from VAT. Where the issues augmented by VAT and financial investments maybe the utmost questioning of all VAT and financial supplies to resolve.43 In this context, like the Dow Jones or the S&P500, the main index for the Saudi Arabian securities exchange is Tadawul44 All Shares Index (‘TASI’). TASI measures the Saudi securities exchange and can trace the status of each stock. Stocks typically clarify how a firm is doing based on their revenue and sales. This guides to a good association between stock prices and consumption levels. Which supposed to be influenced by VAT meanwhile taxes were continuously influencing the economy. This is another encouragement to conduct this study in order to measure the effects of implementing the new 15% VAT that was imposed from 1 July 2020 in non-financial45 KSA listed companies46 in Tadawul. III RESEARCH DESIGN A Methodology, Sampling and Data Sources In general, the experimental investigation of the economic impacts of VATs is horrifically irregular. It tends to be separated into two classes: decreased structure analysis and general equilibrium analysis. The primary preferred position of displaying general equilibrium is that it gives an away from and a pure line between the hypothetical and practical aspects of fiscal policy investigation. However, they likewise have significant impediments. For example, they build solid and impromptu suspicions about the 41 F. O. Asogwa and Okeke Mercy Nkolika, ‘Value Added Tax and Investment Growth in Nigeria: Time Series Analysis’ (2013) IOSR Jounal of Humanities and Social Science. 42 Maureen Burton and Bruce Brown, Financial System of the Economy: Principles of Money and Banking: Principles of Money and Banking (Routledge, 2014). 43 Richard E. Krever, ‘VAT and Financial Investments’ in VAT and Financial Services (Springer, 2017) 189–197. 44 ‘The Saudi Exchange is a completely owned subsidiary by Saudi Tadawul Group and was established in March 2021 following the transformation of the Saudi Stock Exchange (Tadawul) into a holding firm, Saudi Tadawul Group.’ 45 In this regard, there are also previous studies investigating the effects of VAT on KSA Banks which are excluded from our sample, for example, Alhussain (n 9); Ahmad Alkhodre et al, ‘A Blockchain-Based Value Added Tax (VAT) System: Saudi Arabia as a Use-Case’ (2019) 10(9) Int. J. Adv. Comput. Sci. Appl 708–716. 46 Listed company means approved in the Exchange.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 103 utilitarian types of the model, the sort of adaptability, the tax treatment, the structure of the market, the kind of innovation, and so on, that are commonly not kept up in reality47. All published equilibrium papers utilise data from high revenue nations like the US, Canada, Germany and Norway.48 They found an optimistic influence of VAT on economic effectiveness and supplementary macroeconomic factors. Nevertheless, when they integrate inadequacies originate in reality VATs in their models, the effectiveness expansions attained by implementing a VAT meaningfully reductions. For example, Bye et al,49 found that counting selective-services in the VAT basis decreases prosperity paralleled to non-counting selective-services in the VAT basis or counting all facilities in the VAT basis.50 Our article utilises a periodic dataset from a big section of registered companies in Saudi Arabia from 2019 before imposing the new VAT rate to 2020, after imposing the new VAT rate. The sample framework was chosen due to the time of implementing the new 15% VAT rate and the public access to information about VAT of non-financial companies, where Tadawul force all listed companies to publish their financial statements publicly quarterly and annually on the TASI website. TASI includes 192 publicly traded firms separated into 11 main sectors. The foremost segments are consumer discretionary, information technology, energy, consumer staples, materials, health care, industrials, communication services, real estate, utilities, and financials. Financial companies excluded from the sample framework as the have special treatments and some previous studies investigated the effects of VAT on KSA Banks, the final sample framework is 131 listed companies as clearly depicted in Table 1 below. 47 Adhikari (n 2). 48 Charles L. Ballard, John Karl Scholz and John B. Shoven, ‘The Value-Added Tax: A General Equilibrium Look at its Efficiency and Incidence’ in The Effects of Taxation on Capital Accumulation (University of Chicago Press, 1987) 445–480; Piggott, John and John Whalley, ‘VAT Base Broadening, Self Supply, and the Informal Sector’ (2001) 91(4) American Economic Review 1084–1094; Boeters et al, ‘Economic Effects of VAT Reforms in Germany’ (2010) 42(17) Applied Economics 2165–2182; Brita Bye, Birger Strøm and Turid Åvitsland, ‘Welfare Effects of VAT Reforms: A General Equilibrium Analysis’ (2012) 19(3) International Tax and Public Finance 368–392. 49 Bye (n 48). 50 Ballard (n 48).
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 104 TABLE 1: VAT RATE AND SAMPLE FOR SAUDI’S NON-FINANCIAL COMPANIES CLASSIFIED BY INDUSTRIES SECTOR 5% IMPLEMENTATION PERIOD* 15% IMPLEMENTATION PERIOD* NUMBER OF COMPANIES Energy From 1 January 2018 to 1 July 2020 From 1 July 2020, ongoing 5 Materials 42 Commercial and Professional Service 3 Transportation 5 Consumer Durables and Apparel 6 Consumer Services 10 Media and Entertainment 2 Retailing 8 Food and Staples Retailing 4 Food and Beverages 12 Health Care Equipment and Service 7 Pharma, Biotech and Life Science 1 Software and Services 2 Telecommunication Services 4 Utilities 2 TOTAL 113 Note: * In the KSA, VAT was first introduced in all industries as a 5% VAT on goods and services as of 1 January 2018 and because of COVID-19 the KSA on 1 July 2020, increased the VAT to 15%. B Profitability Analysis Table 2 below presents an initial overall profitability analysis of the sample selected, as it reports the mean, standard deviation, median, maximum, profitability percentile in 25%, 50% and 75% for the sample selected in 2019 and 2020 financial years. The selected sample as highlighted before comprises 226 (113*2) firm-year observations over the period 2019–2020 before and after tax increased. Generally, it is observed that for the same sample, in 2020 KSA companies are less profitable than they were in 2019. This is clearly apparent in the table as the mean net income in 2019 was 3,169.31 billion which decreased to 1,813.003 billion in 2020. Since the companies were exposed to COVID-19 crises which led to significant increase in VAT. Moreover, maybe the reason why firms are less profitable in 2020 than in 2019 is not merely to do with a rise in the VAT rate, but also COVID-19 and other factors which is beyond the scope of this paper. For instance, resultant increases in the prices of goods and services reduced demand which leads to decrease the company’s profitability. Thus, additional analysis is required to understand the discrepancies between these values.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 105 TABLE 2: OVERALL PROFITABILITY ANALYSIS 2020 VARIABLE OBS MEAN STD. DEV. MIN MAX PERC25% PERC50% PERC75% *EBITDA/T 113 0.0475005 0.0871319 -0.2104513 0.4120229 0.0000612 0.0400477 .1037356 *EBIT/T 113 0.0226953 0.075097 -0.2220433 0.1892432 -0.0062535 0.0213612 0.0710064 *EBTExclUnu~s/T 113 0.0343528 0.1460593 -0.2215373 1.332865 -0.006998 0.0217555 0.0708684 EAT2020 113 1813.003 17420.56 -3781.13 184926 -0.0119662 0.0264552 0.0706598 2019 EAT2019 113 3169.31 31119.4 -1676.32 330816 -0.0187827 0.0219593 0.0595443 Change(%)inEarn 113 2.973124 25.42851 -16.4361 264.1 -0.4129 0.0953 0.9172 All the measures of profitability are scaled by total assets and include earnings before interest, taxes, depreciation and amortisation (EBITDA/T), earnings before interest and taxes (EBIT/T), earnings before taxes (Earn2020T) and earnings after taxes (Earn2020T). * Scaled by total assets
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 106 We analysed per year the values for EAT which reflected net income per a year. Therefore, we selected this measure of profitability since it is calculated after interest, tax, amortisation and depreciation as it cannot be different at the same country, also company size etc.). Figure 3 below shows the percentage of EAT (Earnings after taxes) per year for Saudi firms for the period 2019–2020. It clearly shows that in 2019 the average net income is high in the year before the adoption of the new VAT rate in KSA. Starting from Q2 of 2020, the impact of the recent financial crisis of COVID-19 is observable in a steady decline in the average profitability. FIGURE 3: SAUDI COMPANIES’ EAT IN 2019 AND 2020 Table 3 reports Profitability by year of a sample using WilcoXon rank-sum and Wilcoxon signed-rank test51 to compare values of average profitability for 2019 versus 2020 for each firm size and year. Superscripts indicate statistical significance at 0.01 (*), 0.05 (**) and 0.10 (***) percent levels. P-values are reported in parenthesis. We test the null hypothesis that two independent samples (2019 and 2020) are the same against an alternative hypothesis that a particular population tends to have larger values than the other. A significant Z value indicates there is confidence evidence of significant differences across companies and the null hypotheses are rejected. Overall, the results support the hypothesis that in 2020 firms are, on average, less profitable than in 2019. Interestingly, after the VAT increase in Q4 2020 firms profitability became even a little bit different, the results are statistically significant and show lower Z- statistic. TABLE 3: WILCOXON SIGNED-RANK TEST OBS SUM RANKS Signrank EAT2019 = SIZE2019 Positive = 75 4581 Ho: EAT2019 = SIZE z = 3.898*** Negative = 38 1860 Prob > |z| = (0.0001) Signrank EAT2020 = SIZE2020 Positive = 75 4471 Ho: EAT2020 = SIZE z = 3.582*** Negative = 38 1970 Prob > |z| = (0.0003) 51 Non-parametric test used foe matched-paired data analysis, for a single sample, or based on differences. The null-hypothesis is that the individual, or differences observations in the single sample case, have a distribution centred about zero: R. F. Woolson, ‘Wilcoxon Signed‐Rank Test’ (2007) Wiley Encyclopedia of Clinical Trials 1–3.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 107 C Descriptive Statistics Table 4 below reports the summary statistics of dependent and independent variables defined in the previous section. GvD2020 and GvD2019 are measured as Government Debt to GDP, the average government debt to GDP was higher for sample in the 2020 analysed than 2019. The table represents mean, median, and standard deviation for 2019 before VAT increase and 2020 after VAT increase. SIZE2019 and SIZE2020 are measured as the natural logarithm of total assets. Moreover, the 25th and 75th percentiles for the abovementioned variables.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 108 TABLE 4: DESCRIPTIVE STATISTICS VARIABLE OBS MEAN STANDARD DEVIATION MIN MAX PERC 25% PERC 50% PERC 75% WILCOXON SIGN-RANK TEST (Z- STATISTIC) ProFtEBITDA 113 0.0000475 0.0000871 -0.0002105 0.000412 6.12e-08 0.00004 0.0001037 5.456*** ProFtEBIT 113 0.0000227 .0000751 -0.000222 0.0001892 -6.25e-06 0.0000214 0.000071 3.451*** ProFtEBTUnu 113 0.0000344 .0001461 -0.0002215 0.0013329 -7.00e-06 0.0000218 0.0000709 3.683*** 2019 (BEFORE TAX REFORM) EAT2019 113 0.0000842 0.0007884 -0.0006502 0.008303 -0.000018 0.0000214 0.0000586 3.259*** SIZE2019 113 6.402416 0.7762833 4.799299 9.600352 5.889565 6.336924 6.657192 ______ GvD2019 113 2.224271 8.346027 0.0095256 7.217121 0.117262 0.3284856 0.6867278 ______ 2020 (AFTER TAX REFORM) EAT2020 113 0.0000171 0.0000853 -0.0002951 0.0002637 -0.000012 .0000265 0.0000707 2.944*** SIZE2020 113 6.401014 0.7646444 4.63827 9.274225 5.867576 6.351831 6.67686 ______ GvD2020 113 1.27e+14 7.60e+14 1.79e+11 7.75e+15 3.04e+12 9.27e+12 1.96e+13 ______ Chg(ERN) 113 2.973124 25.42851 -16.4361 264.1 -0.4129 0.0953 0.9172 ______ Note: the statistical significance at 0.01 (*), 0.05 (**) and 0.10 (***) percent levels.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 109 The WilcoXon signed rank test is performed to test statistical significant differences in mean values for 2019 and 2020. In this regard, Wilcoxon signed-rank test used as a nonparametric statistical hypothesis test that compares two closely related samples to see if their population mean ranks differ. Results revealed less significant in 2020 sample the year of the VAT increase as it drops from 3.259*** to 2.944***. D Models, Multivariate Results and Discussions We analysed profitability in general in the above section. In this section, we examine the effect of the VAT rise on company profitability levels in 2020. So, the dataset of 2019 can be utilised to predict and/or expect the outcomes of the recently proposed equivalent VAT increase in 2020. In the first model we ran the OLS regression to determine the effects of independent variables on a profitability which was measured by EBITDA. ProFtEBITDA = β0+ β1 SIZE2020 + β2 EAT2020 + β3 GvD2020 + β4 EAT2019 + β5 SIZE2019 + β6 GvD2019 (1) TABLE 5: VARIABLES DEFINITIONS AND MEASUREMENTS VARIABLES DEFINITION MEASUREMENT ProFtEBITDA Company Profit Measured by earnings before interest, taxes, depreciation, and amortisation (EBITDA) and scaled by total assets* SIZE2020 Company Size in 2020 Measured by the natural logarithm of total assets** EAT2020 Company Earnings after tax in 2020 measured by subtracting all expenses and income taxes from the revenues the business has earned GvD2020 Government Debt 2020 Measured as government debt over GDP EAT2019 Company Earnings after tax in 2019 Measured by subtracting all expenses and income taxes from the revenues the business has earned SIZE2019 Company Size in 2019 Measured by the natural logarithm of total assets GvD2019 Government Debt 2019 Measured as government debt over GDP Notes: * All the measures of profitability are scaled by total assets and include: earnings before interest, taxes, depreciation and amortisation (EBITDA), Earnings before interest and taxes (EBT), Earnings before taxes (EBT) and Earnings after taxes (EAT). ** We expect a positive relationship among firm size Initially, we grasp the question of whether a company’s specific characteristics (IVs), affect profitability in 2019 and 2020. The results are reported in models 1, 2 and 3 — in each model we use different measurement of profitability. Table 6 below shows the findings of the independent variables on profitability measured by earnings before interest, taxes, depreciation, and amortisation (EBITDA) and scaled by total assets. R-squared equal (0.6052) which means that ProFtEBITDA level explained 61% of the total variance in ProFtEBITDA. Furthermore, this illustrates that the level of ProFtEBITDA has a good level of explanatory power. All company’s specific characteristics variables in the two period are statistically significant at 1% level (p-value below 0.01). In addition, a
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 110 company’s specific characteristics variables in 2020 have a higher sign then 2019. For 2020, in contrast to 2019, as companies grow older, their profitability seems to decline due to the COVID-19 crisis. In this model the outcomes strongly approve that raised levels of public debt in 2020 provided by the government to the economy negatively affect company profitability measured by EBITDA with (t = -2.66***). In the second model, and as denoted in Table 7 below, we ran the OLS regression to determine the effects of independent variables on a profitability measured by EBIT. ProFtEBIT = β0+ β1 SIZE2020 + β2 EAT2020 + β3 GvD2020 + β4 EAT2019 + β5 SIZE2019 + β6 GvD2019 (2)
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 111 TABLE 6: OLS REGRESSION RESULTS DV= PROFTEBITDA MODEL 1 PROFTEBITDA COEF. ROBUST STD. ERR. T P>T [95% CONF. INTERVAL] EAT2019 0.1106933 0.0455473 2.43 0.017*** 0.0203913 0.2009953 SIZE2019 0.0001276 0.0000615 2.08 0.040*** 5.79e-06 .0002495 GvD2019 1.14e-13 4.37e-14 2.60 0.011*** 2.72e-14 2.01e-13 SIZE2020 -0.0001571 0.0000617 -2.55 0.012*** -0.0002794 -0.0000348 EAT2020 0.7282002 0.1034695 7.04 0.000*** 0.5230618 0.9333387 GvD2020 -1.30e-19 4.87e-20 -2.66 0.009*** -2.26e-19 -3.29e-20 _cons 0.0002219 0.0000485 4.58 0.000*** 0.0001258 0.0003181 R-squared = 0.6052 ENHANCED CORRELATION MATRIX (PWCORRS)52 PROFTE~A SIZE2020 SIZE2019 GVD2020 GVD2019 EAT2020 EAT2019 ProFtEBITDA 1.0000 SIZE2020 -0.0837 1.0000 0.3778 SIZE2019 -0.0883 0.9936* 1.0000 0.3521 0.0000 GvD2020 -0.0859 0.5048* 0.5353* 1.0000 0.3656 0.0000 0.0000 GvD2019 -0.1268 0.5671* 0.5619* 0.3448* 1.0000 0.1809 0.0000 0.0000 0.0002 EAT2020 0.7276* 0.1844* 0.1634* 0.0825 -0.0107 1.0000 0.0000 0.0505 0.0837 0.3850 0.9106 EAT2019 0.0213 0.3940* 0.4246* 0.9431* 0.0448 0.1799* 1.0000 0.8229 0.0000 0.0000 0.0000 0.6378 0.0566 0.8229 52 The PWCORRS command is an improved version of Pearson’s correlation matrix (PWCORR) and Spearman’s rank correlation (SPEARMAN) that combines the features of both commands into single command that has enhanced formatting.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 112 TABLE 7: OLS REGRESSION RESULTS DV= PROFTEBIT MODEL 2 PROFTEBIT COEF. ROBUST STD. ERR. T P>T [95% CONF. INTERVAL] EAT2019 0.0696276 0.0394949 1.76 0.081** -0.008675 0.1479301 SIZE2019 0.0000464 0.00005 0.93 0.356 -0.0000529 0.0001456 GvD2019 6.91e-14 3.74e-14 1.85 0.067 -4.99e-15 1.43e-13 SIZE2020 -0.0000551 0.000049 -1.12 0.264 -.0001523 0.0000421 EAT2020 0.6917655 0.0874201 7.91 0.000*** .5184466 0.8650845 GvD2020 -8.52e-20 4.19e-20 -2.03 0.044*** -1.68e-19 -2.19e-21 _cons 0.0000666 0.0000391 1.70 0.092** -0.000011 0.0001442 R-squared= 0.6924 Where: ProFtEBIT is a company profit measured by earnings before interest, taxes (EBIT) and scaled by total assets ENHANCED CORRELATION MATRIX (PWCORRS) PROFTE~T SIZE2020 SIZE2019 GVD2020 GVD2019 EAT2020 EAT2019 ProFtEBIT 1.0000 SIZE2020 0.0597 1.0000 0.5301 SIZE2019 0.0446 0.9936* 1.0000 0.6391 0.0000 GvD2020 -0.0452 0.5048* 0.5353* 1.0000 0.6346 0.0000 0.0000 GvD2019 -0.0628 0.5671* 0.5619* 0.3448* 1.0000 0.5084 0.0000 0.0000 0.0002 EAT2020 0.8181* 0.1844* 0.1634* 0.0825 -0.0107 1.0000 0.0000 0.0505 0.0837 0.3850 0.9106 EAT2019 0.0534 0.3940* 0.4246* 0.9431* 0.0448 0.1799* 1.0000 0.5740 0.0000 0.0000 0.0000 0.6378 0.0566
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 113 Secondly, Table 7 shows the findings of the independent variables on ProFtEBIT measured by earnings before interest, taxes (EBIT) and scaled by total assets. R-squared equal (0.6924) which means that ProFtEBIT level explained 69% of the total variance in ProFtEBI. Moreover, this illustrates that the level of ProFtEBIT has a good level of explanatory power and higher then ProFtEBITDA explanatory power in model one by 9%. Furthermore, all company’s specific characteristics variables in the two period are statistically significant at 1% level (p-value below 0.01). In contrast to model 1, this model when we use EBIT as measurement for profitability, we found that firm size in the two periods is statically unsignificant with positive sign coefficient in 2019 and negative sign coefficient in 2020. But, other a company’s specific characteristics variables in 2020 have a higher sign then 2019 equal to model 1. For 2020, in contrast to 2019, their profitability seems to decline due to the COVID-19 crisis. In model 2, the outcomes also strongly approve that raised levels of public debt in 2020 provided by the government to the economy less negative t-value affect company profitability measured by EBIT with (t = -2.03***) which confirms the effect of the COVID-19 crisis on Saudi companies’ profitability in 2020. In the third model we ran the OLS regression to determine the effects of independent variables on a profitability which was measured by EBTUnu. ProFtEBTUnu = β0+ β1 SIZE2020 + β2 EAT2020 + β3 GvD2020 + β4 EAT2019 + β5 SIZE2019 + β6 GvD2019, (3)
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 114 TABLE 8: OLS REGRESSION RESULTS DV= PROFTEBIUNU MODEL 3 PROFTEBTUNU COEF. ROBUST STD. ERR. T P>T [95% CONF. INTERVAL] EAT2019 0.027959 0.0704643 0.40 0.692 -.1117433 0.1676613 SIZE2019 0.0000335 0.0000718 0.47 0.642 -0.0001089 0.000176 GvD2019 4.09e-14 6.20e-14 0.66 0.511 -8.20e-14 1.64e-13 SIZE2020 -0.0000568 0.0000784 -0.72 0.471 -0.0002123 0.0000987 EAT2020 0.7840316 0.1005927 7.79 0.000*** 0.5845968 0.9834664 GvD2020 -3.64e-20 7.69e-20 -0.47 0.637 -1.89e-19 1.16e-19 _cons 0.0001691 0.000101 1.67 0.097** -0.0000311 0.0003694 R-squared = 0.2098 Where: ProFtEBTUnu is a company profit measured by EBT Excl. Unusual Items which represents EBT Before non-recurring Items and scaled by total assets ENHANCED CORRELATION MATRIX (PWCORRS) PROFTE~U SIZE2020 SIZE2019 GVD2020 GVD2019 EAT2020 EAT2019 ProFtEBTUnu 1.0000 SIZE2020 -0.0272 1.0000 0.7750 SIZE2019 -0.0353 0.9936* 1.0000 0.7104 0.0000 GvD2020 -0.0365 0.5048* 0.5353* 1.0000 0.7009 0.0000 0.0000 GvD2019 -0.0530 0.5671* 0.5619* 0.3448* 1.0000 0.5771 0.0000 0.0000 0.0002 EAT2020 0.4428* 0.1844* 0.1634* 0.0825 -0.0107 1.0000 0.0000 0.0505 0.0837 0.3850 0.9106 EAT2019 0.0170 0.3940* 0.4246* 0.9431* 0.0448 0.1799* 1.0000 0.8583 0.0000 0.0000 0.0000 0.6378 0.0566
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 115 Finally, in the third model in Table 8 (below), when the dependent variable is ‘profitability’ measured by EBTUnu, only one variable is significant which is earning after tax in 2020. This means that a company profit measured by EBT Excl-Unusual Items which represent EBT Before non-recurring Items and scaled by total assets is not a suitable measurement of profitability. This is due to the variance between the variables used and the structure of the study framework, thus we did not analyse these deeply as it appeared to not be a worthy measurement in our sample but it could be used in another setting. Notwithstanding, researchers receive advantages from our findings related to this measurement of profitability as they can rely on this information when they choose the right measurement of company profitability. In general, regarding government debt (‘GvD’), previous studies approve a lagged negative relationship between company profitability and government debt levels is expected.53 They stated that high levels of public debt are expected to be harmful to firm growth and strength henceforth negatively influence firm profitability. This is important as Saudi government debt has risen considerably in the last years as it is obviously clear in Figure 4 and Figure 5 below in relation to annual and quarterly impacts respectively. However, results referred that the effect of GvD2019 in above three models on profitability (with three different measurements) were positive and statistically insignificant which means before the VAT rise and the level of GvD was normal, the effects of GvD on profitability were normal too. On the other hand, our results of GvD2020 are in line with previous studies, as we found in models 1 and 2 the GvD2020 variable with high negatively influenced firm profitability which means that it will affect Saudi companies’ growth in the long term. In model 3 when we use EBTUnu as a measurement of company profitability, the relationship coefficient was still negative, but insignificant that confirms the two measurements in models 1and 2 is more appropriate at reflecting firm profitability. Consequently, based on the outcomes, we assume that the significant reduction in company profitability in 2020 was not pushed by the change in the government debt in 2020. We believe this was due to COVID-19 crisis consequences and the significant increase in the VAT. 53 Cesario Mateus and Irina B. Mateus, ‘Does a VAT Rise Harm the Tourism Industry? Portuguese Evidence’ (2021) 83 Tourism Management 104234.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 116 FIGURE 4: YEARLY SAUDI ARABIA GOVERNMENT DEBT TO GDP FIGURE 5: QUARTERLY SAUDI ARABIA GOVERNMENT DEBT TO GDP IV ADDITIONAL TESTS A Difference in Differences Estimator Matching techniques cannot explain the biases produced by unnoticed confounders as King and Nielsen54 suggested to replace propensity score matching with other research designs as the tendency score matching regularly exacerbates these biases e.g., the DiD technique. This approach allows to control for both year and country fixed effects thus, we can control that all time invariant differences across years and shocks common to all years in the same country. Nevertheless, detecting the effects of a VAT employing DiD needs the paths of the outcome variable between, before and after imposing the VAT to be parallel; this assumption needs to control for specific time tendencies. Though, 54 Gary King and Richard Nielsen, ‘Why Propensity Scores Should Not Be Used for Matching’ (Pt Cambridge University Press) (2019) 27(4) Political Analysis 435–454.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 117 according to the Wolfers,55 and Meer and West56 studies, the controlling for time tendencies employing DiD possibly biased estimations in the incidence of a dynamic treatment effect and the influence of the VAT will be homogeneous across reforming periods. Therefore, it does not allow to discover whether the influence of the VAT systematically diverges across years affording to their capability to correctly implement and design it. We applied the DiD approach which requires data measured from a control group and a treatment group at two diverse periods, precisely in our study one time period before imposing the 15% VAT and one time period after imposing the 15% VAT. In Figure 6 below, the result in the control group is signified via the S line and the result in the treatment group is signified via the P line. FIGURE 6: DATA TIME PERIODS B COVID-19 and VAT Change Using DID We used binary variables to measure the effect during the COVID-19 crisis, pre- and post-VAT change periods on firm profitability and the probability of bankruptcy. The first binary variable (VAT2019) and the second binary variable (VAT2020) is equal to one for 2020 and zero otherwise. The change of VAT rate from 5% to 15% was implemented in 1 July 2020. 55 Justin Wolfers, ‘Did Unilateral Divorce Laws Raise Divorce Rates? A Reconciliation and New Results’ (2006) 96(5) American Economic Review 1802–1820. 56 Jonathan Meer and Jeremy West, ‘Effects of the Minimum Wage on Employment Dynamics’ (Pt University of Wisconsin Press) (2016) 51(2) Journal of Human Resources 500–522.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 118 Therefore, the full effect of such increase reflected in 2020, since VAT has almost an immediate impact on prices. This is because in KSA, the tax period can be monthly or quarterly, depending on the business owner’s annual turnover. In Figure 7 below, there are two groups of taxpayers: companies with annual taxable sales of more than 40 million SAR, who are required to file monthly returns, and companies with annual taxable sales of less than 40 million SAR, who are required to file a quarterly tax return. FIGURE 7: SAUDI COMPANIES TAX PERIOD Moreover, the VAT return must be submitted by Saudi companies for each tax period between the first day and the last day of the month following the end of the tax period. For example: To file a VAT return for the January–March 2020 quarter, you must file before 30 April 2020, see Figure 8 below. FIGURE 8: SAUDI COMPANIES TAX PERIOD DATES
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 119 According to Gautier and Lalliard,57 50% of price varies in the month of the new VAT introduction and 40% in the following month. Berardi, Gautier, and Le Bihan58 afford suggestion that price variations are abundant more repeated in the quarter one. Hence the “first” escalation in prices in our study is expected in the third quarter of 2020. However, in line with , we claim that firms may take the functional option to recognize some of the VAT rise into their margins to prevent an extreme crash in demand and consequently be able to survive in the competitive environment. Hence, we anticipate a negative influence of such years on firm profitability. In this context, we estimate our models again in order to perform the DiD regression properly as follows: Model 1a. DV is profitability which measured by EBITDA before and after VAT. Yi (ProFtEBITDA) = β0 + β1 SIZE2019 + β2 SIZE2020 + β3 SIZE2019 * SIZE2020 + β4 EAT2019 + β5 EAT2020 + β6 EAT2019 * EAT2020 + β7 GvD2019 + β8 GvD2020 + β9 GvD2019 * GvD2020 + εi Model 2a. DV is profitability which measured by EBIT before and after VAT. Yi (ProFtEBIT) = β0 + β1 SIZE2019 + β2 SIZE2020 + β3 SIZE2019 * SIZE2020 + β4 EAT2019 + β5 EAT2020 + β6 EAT2019 * EAT2020 + β7 GvD2019 + β8 GvD2020 + β9 GvD2019 * GvD2020 + εi Model 3a. DV is profitability which measured by EBTUnu before and after VAT. Yi (ProFtEBTUnu) = β0 + β1 SIZE2019 + β2 SIZE2020 + β3 SIZE2019 * SIZE2020 + β4 EAT2019 + β5 EAT2020 + β6 EAT2019 * EAT2020 + β7 GvD2019 + β8 GvD2020 + β9 GvD2019 * GvD2020 + εi Model 4a. DV is profitability which measured by EBITDA before and after VAT using different sample (226 company years observations). Yi (ProFtEBTUnu) = β0 + β1 SIZE + β2 EAT + β3 GvD + εi Where: Yi = is a linear function of the treatment εi = Error Other variable definitions are contained in Table 9 below. 57 Erwan Gautier and Antoine Lalliard, ‘How do VAT Changes Affect Inflation in France?’ (2013) (32) Bulletin de la Banque de France 5–27. 58 Nicoletta Berardi, Erwan Gautier and Hervé Le Bihan, ‘Les Ajustements Individuels de prix à la Consommation en France: De Nouveaux Résultats sur la Période 2003–2011’ (2013) 460(1) Economie et Statistique 5–35.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 120 TABLE 9: DID FRAMEWORK AND VARIABLE DEFINITIONS Before Imposing VAT After Imposing VAT Independent variables IVs Measurements of DV 1. EAT2019 1. ProFtEBITDA 2. SIZE2019 2. ProFtEBIT 3. GvD2019 3. ProFtEBTUnu Where: Implementing the new 15% Value Added Tax (VAT) In 1frst July 2020 Where: EAT: Company Earnings after tax SIZE: Company Size GvD: Government Debt 1. is a company profit measured by earnings before interest, taxes, depreciation and amortisation 2. is a company profit measured by earnings before interest, taxes 3. a company profit measured by EBT Excl 1. EAT2020 2. SIZE2020 3. GvD2020 C Analysis and Discussion Table 10 below presents the results of four models DiD regressions. In four model, we perform the DiD estimator to measure the impact of the VAT rise in 2020 compared to 2019. One can infer that the variables EAT2019 and EAT2020, which captures the average difference in profitability for Saudi firms in 2019 versus 2020, is not statistically significant. This finding confirms the results from Table 10 where differences in the impact of the VAT rises on firm profitability using different measurements for 2019 and 2020 in order to make sure that the effect is real and exist as the time of our sample is short were almost identical (in 2019, model 1a: 0.498, model 2a: 0.448, model 3a: 0.808 but in 2020, 0.000 highly significant in all models, respectively). However, differences were observed from testing firm profitability with the interaction variable of both years E19_E20 of earnings after tax which is required by DID regression assumptions in model 2a negatively significant with profitability measured by EBIT. This is conforming our expectations of the negative effects of unusual rise of VAT in 2020.
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 121 TABLE 10: DID REGRESSION MODELS IVS TIME SIRES’ SAMPLE PANEL DATA SAMPLE MODEL 1A DV=PROFTEBITDA* PROB > F = 0.0000 MODEL 2A DV= PROFTEBIT** PROB > F = 0.0000 MODEL 3A DV=PROFTEBTUNU*** PROB > F = 0.0014 MODEL 4A DV= PROFTEBITDA PROB > F = 0.1433 T P>|T| T P>|T| T P>|T| IVS T P>|T| SIZE2019 3.05 0.003*** 1.19 0.237 0.70 0.483 ContVAT -2.16 0.032*** SIZE2020 0.42 0.673 -0.20 0.840 0.26 0.795 EAT 1.22 0.223* S19_S20 -2.17 0.032*** -0.64 0.526 -0.63 0.532 SIZE -0.56 0.579 EAT2019 0.68 0.498 0.76 0.448 -0.25 0.805 GvD -0.21 0.832 EAT2020 9.21 0.000*** 11.50 0.000*** 4.16 0.000*** _cons 1.45 0.148* E19_E20 -1.18 0.242* -1.93 0.056*** -0.96 0.340 – – – GvD2019 1.17 0.243* 0.10 0.920 0.17 0.863 – – – GvD2020 0.45 0.656 0.27 0.784 0.77 0.441 – – – D19_D20 -0.79 0.433 -0.05 0.960 -0.47 0.636 – – – _cons -1.82 0.072** -0.48 0.635 -0.48 0.629 – – – Df= 122 R-squared = 0.6394 Adj R-squared = 0.6078 R-squared = 0.7096 Adj R-squared = 0.6842 R-squared = 0.2235 Adj R-squared = 0.1557 R-squared = 0.030 Adj R-squared = 0.0129 *ProFtEBITDA: is a company profit measured by earnings before interest, taxes, depreciation and amortisation **ProFtEBIT” is a company profit measured by earnings before interest, taxes ***ProFtEBTUnu: a company profit measured by EBT Excl
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 122 R2 is a number vary between zero to one, and this number shows the percentage change in the profitability of companies in the study models. Moreover, R2 illustrates the regression analysis of the profitability value, the variable which we are trying to predict, our DV was measured in model 1a using EBITDA. In our case, R2 is equal to 0.64 and Adj R2 equal to 0.61, which is close to the one, that means the regression analysis model is powerful and enables to calculate the value of profitability in a way that is very close to the characteristics of the company under study. Moreover, in model 1a results indicated that size of company in 2019 effect significantly the firm profitability in the contrary, in 2020 is insignificant. However, the interaction variable S19_S20 where found has significant effect on from profitability that means there different between two years happened due to the current circumstances’ companies going through. Regarding government debt results in three models with their interaction variable too, where with insignificant effect on profitability of the firm, that means the effect of the emergency support for the emerging companies do not appear yet cause it needs time to observe that effect unlike VAT effects which appear immediately in the short term as the previous study have said. In model 2a our DV was measured in this model using EBIT. In this regard, R2 is equal to 0.71 and Adj R2 equal to 0.68 higher than model 1a, that means the regression analysis model is very powerful and allows to estimate the value of profitability in a way that is very close to the company’s characteristics under study. Results confirm that when we measure profitability using earnings before interest and taxes the associations between IVs and DV high. On the contrary of model 1a, model 2a and 3a results indicated that size of company in 2019 and 2020 also the interaction variable S19_S20 effect insignificantly the firm profitability. Regarding government debt in model 2a and 3a results in three models with their interaction variable too, where with insignificant effect on profitability of the firm. In Model 4a we modify our sample and analysis to be suitable for treatments effects and continues outcomes. The sample consists of 226 firm-year observations as panel dataset over the period 2019–2020. Differences were observed from testing firm profitability between the two period for the years 2019–2020 after the VAT rate increase in 2020. The results are displayed in Model 4a, the results show that the years 2020 were, in general, the worst form the biggening as the crisis of COVID-19 start its effects on companies even before rise VAT. After rising VAT, a more relevant and significant finding is the negative impact on the profitability of Saudi firms arising after controlling for the VAT change. Indeed, the negative coefficient for the variable ContVAT shows, on average, a decrease in profitability of Saudi firms of -2.16% (statistically significant at 1 percent level in years 2020 versus 2019). We specifically control the impact on KSA firm profitability for each of the years, 2019 and 2020. We found that the negative impact on KSA firms was more realized in the year 2020, the first year after the implementation of the VAT change 0.032, statistically significant at 1% level with the effect disappearing in 2019 not significant .
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 123 V CONCLUSION The aim of this study was to estimate the consequences of imposing the new 15% VAT on the profitability of the KSA listed non-financial companies in various sectors. This study investigated that influence and the consequences using various statistical empirical approaches such as OLS, Wilcoxon signed-rank test and DiD. Within the analysis, data associated with 2019 was considered before the VAT increased and also prior to the discovery of COVID-19. Data from 2020 was then considered after the new 15% VAT was imposed and during the COVID-19 crisis. The outcomes of this paper explore the effects of the extraordinary rise of the KSA’s VAT, asking whether it has verified an exclusively operative system of taxation in the KSA. There are some policy implications for results of this paper, its outcomes were the extending of the theoretical and practical requirements for the VAT system. It is supported that VAT on transactions of commerce is however an tool of the macroeconomic impact on the budget revenues foundation. Previous studies outcomes designate that the hypothetical benefits of VAT do not essentially explain into exercise. In precise, in Saudi Arabia we hypothesis that the impression of the VAT on economic effectiveness be influenced by on the stage of advancement of the country. As global studies findings designated that the status of the advancement is extremely associated with reasons such as informal economy, tax evasion and tax capacity, which can rigorously undercut the efficacy of VAT. In this context, our findings support the hypothesis that in 2020 firms are, on average, less profitable than in 2019. Which means that a dramatic VAT increase significantly affects Saudi firm profitability in 2020, the effect even maybe more in the future due the continuous crisis of COVID-19. The imposed 10% VAT rise in 2020 has caused on average, a decrease in profitability of Saudi firms of -2.16%. Moreover, previous studies cited that VAT is habitually born in mind as a solution that can replace raise much-needed revenue and the distortionary taxes for community expenditure, particularly in the developing countries59. In this context, our findings shows also that KSA used the VAT as a solution for COVID-19 consequences as KSA as one of the fastest emerging developing countries. We underline the requirements to updating tax systems with VAT implementation, in order to advantage from the properties effectiveness of VAT in KSA. These implications constant with prior studies on development and taxation maintaining that the actual system of tax is not that which is conceded as regulation, but that which is managed . Thus, it is critical to conduct this study to confirm that the management and employment of VAT in KSA obtain some attention as the implementation of VAT does, specifically since prior outcomes designate large gains in economic effectiveness from accepting a well-designed and well-enforced VAT. Our valuation of the impact of VAT increase on firms’ profitability will be useful for governments and corporations to not only adjust their budget spending, but will also allow them to better regulate the markets and managing companies to observe tax system health. The government interventions accompanied 59 Abramova et al (n 14).
Journal of the Australasian Tax Teachers Association 2021 Vol.16 No.1 124 with a steady and dependable investment strategy, are critical to the confidence of firms in times of uncertainty which help companies plan their future investments to make proper decisions.
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EffectsofSaudiArabia’seconomicreforms:InsightsfromaDSGEmodelJorgeBlazqueza,MarzioGaleottib,c,*,BaltasarManzanod,c,AxelPierruc,ShreekarPradhaneaOxfordInstituteforEnergyStudies,57WoodstockRoad,Oxford,OX26FA,UnitedKingdombDepartmentofEnvironmentalScienceandPolicy,UniversityofMilan,viaCeloria2,20133,Milan,ItalycKingAbdullahPetroleumStudiesandResearchCenter(KAPSARC),P.O.Box88550,Riyadh,11672,SaudiArabiadDepartamentodeFundamentosdelAnalisisEconomico,FacultaddeCienciasEconomicasyEmpresariales,UniversidaddeVigo,CampusAsLagoasMarcosende,36310,Vigo,SpaineUniversityofVirginia,EngineeringSystemsandEnvironment,ThorntonHall,P.O.Box400259,Charlottesville,VA,22904-4259,USAARTICLEINFOJELclassification:D58E13E62E65H30H50Q43Keywords:SaudiArabiaDynamicstochasticgeneralequilibriummodelVision2030ValueaddedtaxEnergypricereformRenewableenergyABSTRACTSaudiArabia’sVision2030includesthecreationofavalue-addedtax(VAT),theenactmentofdomesticenergypricereforms,andthedeploymentofrenewableenergy.Weassessthesepolicymeasures’effectsonmacroeco-nomicvariablesusingadynamicgeneralequilibriummodeloftheSaudieconomy.Wefindthatenergypricereformsdeliverlong-runwelfaregainsthataremorethan20%ofcurrentconsumption,thegreatestamongthethreemeasures.IntroducingaVATgenerateswelfaregainsofupto4.3%ofcurrentconsumption.Thewelfareeffectsofrenewableenergydeploymentaresensitivetotheselectedfinancingscheme.Iffinancingforrenewablescomesfromareductioningovernmentconsumptionortransferstohouseholds,nowelfaregainsarerealized.Jointlyimplementingallthreepoliciesincreasesrealgrossdomesticproduct(GDP)by5%,reducesrealnon-oilGDPbyupto1.8%,andincreaseswelfareby23.5%–32.4%.1.IntroductionOnApril25,2016,theSaudigovernmentannouncedSaudiVision2030,whichaimedtobuild“avibrantsociety,athrivingeconomyandanambitiousnation.“1ToachieveVision2030’sstrategicobjectives,abroadsetofsocioeconomicreformswereapproved,someofwhichhavealreadybeenintroduced.2Specifically,threeflagshippolicymeasuresofthisprogramaretheintroductionofavalue-addedtax(VAT),reformstodomesticenergyprices,andtheinitialdeploymentofrenewableenergy.AVATof5%onnearlyallsuppliesofgoodsandserviceswasintro-ducedonJanuary1,2018.TheVATisexpectedtobecomeoneofthekingdom’smainsourcesofnon-oilrevenues.Asanindirecttax,aVATisanefficientwaytopursuethegoalofeconomicdiversification.Italsominimizesthedeadweightlossoftaxationandhaslowadministrativecosts.Theenergypricereformsgraduallyincreasefuelpricesuntiltheyreachinternationalreferenceprices.Thereformsstartedin2016withpriceincreasesofupto80%forgasoline,diesel,andelectricity.Gasolineandelectricitypricesagainrosesignificantlyin2018.Targetedcashtransferswereprovidedtolow-incomeSaudihouseholdstomitigatetheadverseimpactsontheirlivelihoods.Thesereformsaimtorationalizedomesticfuelconsumptionandstrengthenthecountry’sfiscalpositionbyreducingthecostsofadministeredenergyprices.Finally,thedeploymentofrenewableenergyisacentralmeasureoftheNationalRenewableEnergyProgram(NREP).Thisreformintendstoreducetheuseofhydrocarbonsinthepowergenerationfuelmixandallowmoreoilandgasexports.Thisstudymeasurestheimpactsofthesethreecrucialpolicyde-cisionsontheSaudieconomy.WedevelopanewmodeloftheSaudieconomyforthisanalysis.WebelievethatthisstudyisthefirstattempttoqualitativelyandquantitativelyassesstheeconomicconsequencesoftheseimportantaspectsofVision2030.*Correspondingauthor.DepartmentofEnvironmentalScienceandPolicy,UniversityofMilan,viaCeloria2,20133,Milan,Italy.E-mailaddress:marzio.galeotti@unimi.it(M.Galeotti).1https://vision2030.gov.sa/en.2https://vision2030.gov.sa/en/programs/FBP.ContentslistsavailableatScienceDirectEconomicModellingjournalhomepage:www.journals.elsevier.com/economic-modellinghttps://doi.org/10.1016/j.econmod.2020.12.004Received24August2020;Receivedinrevisedform2November2020;Accepted3December2020Availableonline13December20200264-9993/©2020TheAuthors.PublishedbyElsevierB.V.ThisisanopenaccessarticleundertheCCBYlicense(http://creativecommons.org/licenses/by/4.0/).EconomicModelling95(2021)145–169
SomepreviousstudieshaveanalyzedtheimpactsofpolicychangesinSaudiArabia,buttheirfocusisgenerallylimitedtoenergypolicies.3Forexample,studieshaveevaluatedtheeffectsofadministeredenergypricesandenergypricereformsusingtheKAPSARCEnergyModel(Mataretal.,2015,2017;Matar,2017;MatarandAnwer,2017).4Thismodelisabottom-upmodelofSaudiArabia’senergy-intensivesectors.Studiesalsousetop-downgeneralequilibriummodelstoanalyzesimilarissuesinSaudiArabia.Usingasimplesmallopeneconomydy-namicgeneralequilibriummodel,Blazquezetal.(2017)simulatetheimplicationsofdeploying9GWofrenewableenergyinSaudiArabia.Blazquezetal.(2020)analyzealternativepoliciesforreducingdomesticoilconsumptionand,thus,increasingoilexports.Usinganoverlappinggenerationsmodel,Gonandetal.(2019)studyenergypricereforms.Theyalsocheckwhetherthegovernmentrevenuesgeneratedbythesereformscanfinancepublicinvestmentspendingunderabalancedbudget.Soummaneetal.(2019)developarecursivedynamiccomput-ablegeneralequilibriummodel.Theyshowthatreformsaimedatimprovingenergyefficiencycancompensateforthedetrimentalimpactsofanexogenousdropininternationaloilprices.Thiscompensationoc-cursifsomeoftheadditionalbudgetrevenuesarededicatedtosup-portingselectedindustries.RoosandAdams(2019)useamulti-periodrecursivecomputablegeneralequilibriummodelofSaudiArabiawith57subsectors.Theyshowthatreformingpricesimprovestheefficiencyofresourceuse.Furthermore,theyfindthatbudget-neutralcompensationpaymentstoSaudinationalsoffsetthenegativeeffectsofenergypriceincreasesontheirrealincomes.Thisstudyemploysthedeterministicversionofanewlydevelopeddynamicstochasticgeneralequilibrium(DSGE)modelcalibratedtotheSaudieconomy.ThismodeliscalledtheK-DSGEmodel(Blazquezetal.,2019).DSGEmodelshavemicroeconomicfoundationsandareforwardlooking,internallyconsistent,anddesignedtomimicempiricaldy-namics.Thus,theyareincreasinglyusedtostudythepotentialmacro-economiceffectsofnotonlystructuralreformsbutalsostochasticshocks.Theyareparticularlyusefulforcapturingthedynamiclinkagesbetweenthemainmacroeconomicvariablesinamodel.DGSEmodelsareincreasinglybeingutilizedinenergyeconomicsresearch.Weprovideabriefinventoryofthisliteratureasfollows.Finn(1991),KimandLoungani(1992),andRotembergandWoodford(1996)analyzethemacroeconomiceffectsofenergypriceshocks.LinandLi(2012)andSchwanitzetal.(2014)studythemacroeconomiceffectsofremovingfuelsubsidies.Plante(2014)considerstheasymmetricimpactsofoilsubsidiesonoil-exportingandoil-importingcountries.Finally,DeMiguelandManzano(2006)andGolosovetal.(2014)studyoptimaloiltaxation.TheK-DSGEmodel,likethemodelsusedbythesepreviousstudies,isadvantageousforstudyingtheeffectsofrelevantpolicyre-formsthroughoutaneconomicsystem.5ThisstudyusestheK-DSGEmodeltoanalyzethemacroeconomicimpactsoftheVAT,domesticenergypricereforms,andrenewableen-ergydeploymentwithinthegeneralVision2030framework.Thus,unlikepreviousstudies,ouranalysisisnotlimitedtoinvestigatingtheimpactsofenergypriceinterventions.6Itisnotpossibletosummarizetheresultsofourpolicysimulationsforallkeymacroeconomicvariablesinthemodeleconomyhere.However,owingtotheK-DSGE’sdynamicstructure,wecancomputethewelfaregainsassociatedwitheachpolicyexperiment.First,wefindthatenergypricereformsdeliversignificantwelfaregainsthatamounttoover20%ofcurrentconsumption.TheintroductionofaVAT,incontrast,offersamoremodestwelfaregainofroughly3–4%ofcurrentconsumption.Second,thedeploymentofrenewableenergydoesnotincreasewelfarebecausethemodelassumesthatitisfinancedbyreducingeithergovernmentconsumptionortransferstohouseholds.However,itcouldhavepositivewelfareeffectsunderadifferentfinancingscheme(e.g.,privateinitiatives).Third,thethreepolicyde-cisionsjointlyincreasewelfareby24%–32%.Theeffectofenergypricereformsclearlydominates.Furthermore,wefindimportantresultsforafewkeymacroeconomicvariables.Eachofthethreepoliciesleadstoincreasedoilexports,albeitofdifferingmagnitudes.Theenergypricereformsincreaseoilexportsbymorethan20%andrealgrossdomesticproduct(GDP)bycloseto6%,althoughtheireffectonnon-oilGDPismixed.TheintroductionofaVATreducesbothrealandnon-oilGDPbylessthan1%butincreasesoilex-portsby0.5%–1.4%.Thedeploymentofrenewablesincreasesoilexportsbyabout2%butincreasesbothrealandnon-oilGDPbylessthan1%inthelongrun.Asexpected,themacroeconomiceffectofthejointpoliciesisdominatedbytheeffectsoftheenergypricereform.Theremainderofthispaperisorganizedasfollows.Section2explainsthemodelstructure.Section3describesthemodel’scalibrationtotheSaudieconomy,includingthedataandtheselectedparameters.Section4brieflyexplainstheeconomicreformsandtheunderlyingpolicysimu-lationthatweemploy.Section5presentsthepolicyexperimentsandsimulationanddiscussestheresults.Section6concludes.2.ThemodelSaudiArabia’seconomyisheavilydependentonoil.About44%ofitsGDPand75%ofitsexportsareoil-dependent.Oilexportsarealsobyfarthelargestsourceofgovernmentincome,accountingfor68%ofgov-ernmentrevenuesin2018.SaudiArabiaisthelargestexporterofcrudeoilintheworld,providing16%ofglobaloilexports.However,itisalsothetenth-largestconsumeroftotalprimaryenergyaccordingto2016data.About63%ofthisconsumptionwascrudeoilandpetroleumliq-uids,withnaturalgasaccountingforover30%ofconsumption.OnedriverofSaudiArabia’shighdomesticconsumptionisitslowadminis-tratedfuelprices,whichcosttheSaudigovernmentanestimated$61billionin2015(EnergyInformationAdministration,2017).7Basedonthiscontext,werepresenttheSaudieconomyasanoil-richsmallopeneconomy.Ittakestheworldpricesoftradablegoods,inter-nationalgasprices,andtheglobalinterestrateonforeignbondsasgiven.Weincludeanoilpricereactionfunctioninthemodel.ThisfunctioncapturesSaudioilexports’potentialroleintheinternationaloilmarketandoilexportrevenues’effectsontheSaudieconomy.ThedomesticcurrencyispeggedtotheUnitedStatesdollar(USD).Theeconomyispopulatedbytworepresentativehouseholds:aSaudiandanon-Saudi3SaudiArabiaisnottheonlycountrytohaveimplementedenergypricere-forms.InadditiontoArgentinaandMexico,forinstance,otherGulfCooperationCouncilcountries,suchastheUnitedArabEmirates,haveenactedsuchreforms(InternationalMonetaryFund,2015).4Mataretal.(2015)determineacombinationofadministeredpricesandinvestmentcreditsthatreducesenergysystemcostsbutsheltersendconsumersfrompriceincreases.Mataretal.(2017)extendthisanalysistoamulti-periodsetting.Theirresultsemphasizethebenefitsofpolicypackagesthatcombinepricereforms,investmentcredits,andfeed-intariffs.Matar(2017)andMatarandAnwer(2017)studyreformstohouseholds’electricityprices.5Recently,DSGEmodelshavebeenappliedtoclimatechange.See,forinstance,Changetal.(2009),FischerandSpringborn(2011),Heutel(2012),AnnichiaricoandDiDio(2015,2017),DissouandKarnizova(2016),Holladayetal.(2018),EconomidesandXepapadeas(2018),andEconomidesandJav-orcik(2019).ExtendingtheK-DSGEtoanalyzeclimatechangeissuesispartofourfutureresearchplan.6ThefullstochasticversionofthemodelisdescribedindetailbyBlazquezetal.(2019).Thistechnicalreport(availableat:https://www.kapsarc.org/research/publications/k-dsge-a-dynamic-stochastic-general-equilibrium-model-for-saudi-arabia/)providesmoreinformationonthemodel’sstructure.Theworkingpaperoffersonlyatechnicaldescriptionofthemodelanddoesnotcontainanypolicyanalysis.7Moody’sAnalyticsprovidesasetofreasonablyupdatedsocioeconomicin-dicatorsforSaudiArabiaathttps://www.economy.com/saudi-arabia/indicators.Moregenerally,theGeneralAuthorityforStatisticsoftheKingdomofSaudiArabia(https://www.stats.gov.sa/en)providesstatistics.J.Blazquezetal.EconomicModelling95(2021)145–169146
household.Fourrepresentativefirmsproduceatradableandanon-tradablefinalgood,energyservices,andelectricity.Themodelin-cludesaresourcesectorwiththreeenergysources:oil,gas,andrenew-ableenergy.Thegovernmentcollectstaxrevenues;providespublicservicesandincometransfers;employsSaudinationals;andinvestsinoil,naturalgas,andrenewableenergyproduction.Weassumethatthegovernmentmaintainsabalancedbudget.Theeconomyexchangesafinalgoodwiththerestoftheworld,exportsfossilfuels,andacquiresforeignbonds.WeprovideasimpleillustrationoftheK-DSGEmodelstructureinFig.1.8Allofthemodelequations,includingstructuralre-lationshipsandoptimalityconditions,arepresentedinAppendixA.2.1.HouseholdsThemodelincludestworepresentativehouseholds:aSaudihouse-holdandanon-Saudihousehold.Thisdistinctionisessential,asexpa-triatescomprisearound30%ofSaudiArabia’stotalpopulation.9Accordingtoofficialdatafrom2012,foreignworkersfilled66%ofjobsinSaudiArabiadespiteanofficialunemploymentrateof12%amongSaudis.Onaverage,expatriatessendUSD18billioneachyearinremittancestotheirhomecountries.SaudiArabiarequiresneitherSaudinorforeignworkerstopaypersonalincometaxes.However,Saudiworkersandtheiremployersmustcontributetothesocialinsurancesystem,whichpro-videsoldageanddisabilitybenefitsforcitizens.ForeignerswhoarenotfromGulfCooperationCouncilcountriesmaynotpayintoorusethissystem.2.1.1.SaudihouseholdsTheSaudihouseholdmaximizesitswelfare,givenbythepresentdiscountedvalueofaninfinitestreamofinstantaneousutilities,subjecttoabudgetconstraint.WedenotetheSaudihouseholddenotedbythesuperscript“s.”X∞t¼0βtUsCst;ESst;lstþlsg;t;GCt;(1)whereUsCst;ESst;lst;GCt¼lnCstσþκESstσ1=σþαGCGCtη1þνlstþlsg;t1þν:(2)Inthisequation,βisthediscountfactor,Cisafinalconsumptiongood,andESisenergyservices(e.g.,airconditioning,electricalappli-ances,privatetransportation,etc.).Wedefinelandlgasthelaborsupplytotheprivatesector(i.e.,tradableandnon-tradablegoods)andthattothepublicsector,respectively.Finally,GCisgovernmentconsumption(e.g.,government-providedhealthcare,education,nationaldefense,etc.).Thesymbolsfσ;κ;αGC;η;νgrepresentpreferenceparameters.Spe-cifically,theelasticityofsubstitutionbetweenconsumptionandenergyservicesis1=ð1σÞ.Thedistributionparameteroftheconstantelasticityofsubstitution(CES)aggregatorisκ.Thisbundleandgovernmentcon-sumptionareassumedtobeperfectsubstituteswithaconstantmarginalrateofsubstitutionequaltoαGC.Finally,ðη;νÞareparametersthatcharacterizethemarginalutilityofleisure.WedefineνastheinverseoftheFrischlaborsupplyelasticityandηastheweightofthedisutilityoflabor.Laborsuppliedtotheprivatesectorandthatsuppliedtothepublicsectorareassumedtobeperfectsubstitutes.Additionally,onlySaudihouseholdsareassumedtoworkinthepublicsector,andthesupplyoflabortothepublicsectorisexogenous.Basedontheseassumptions,finalconsumption,denotebyC,isgivenbyaCESaggregatorofconsumptionoftradableandnon-tradablegoodsaccordingto:Ct¼264θ1σCCCσC1σCT;tþð1θCÞ1σCCσC1σCNT;t375σCσC1:(3)WerespectivelydefineCTandCNTas:CT;t¼θCð1þτT;tÞPT;tð1þτC;tÞPtσCCt(4)CNT;t¼ð1θCÞð1þτNT;tÞPNT;tð1þτC;tÞPtσCCt:(5)Here,τTandτNTaretheconsumptiontaxesontradableandnon-tradableconsumptiongoods,respectively,andτCistheconsumptiontaxontheaggregategood.PTandPNTarethebefore-taxpricesofthetradableandnon-tradablegoods,respectively,andPisthebefore-taxpriceofthefinalconsumptiongood.Thispriceisgivenby:10Pt¼nθCP1σCT;tþ1θCP1σCNT;to11σC:(6)ThecoefficientσCistheelasticityofsubstitutionbetweentradableandnon-tradableconsumptiongoods,andθCisthedistributionparameter.ThesupplyoflaborðlÞisaCESaggregateofthelaborsupplyinthetradableandnon-tradablegoodssectorsandisgivenby:lt¼264θ1σLLlσL1σLT;tþð1θLÞ1σLlσL1σLNT;t375σLσL1:(7)Here,lTandlNTarethesuppliesoflabortothesetwosectorsandaredefinedas:Fig.1.K-DSGEmodelstructure.8Theversionofthemodelusedinthisstudyisnon-stochastic.Thus,theequationsdescribingthemodeldonotincludeanynon-deterministiccompo-nents,andwedonotelaborateonthetimeseriespropertiesofthemodelshocks.Studyingtheeffectsofshockstoproductivityoroilandgaspricesrequiresaseparatetreatmentthatcannotberealizedhereowingtospaceconsiderations.SubsequentresearchtoexpanduponthisstudywillusethestochasticversionoftheK-DSGEmodel.9In2019,SaudiArabia’spopulationwasestimatedtobe34million.Asper2017–2018data,expatriatesaremorethan30%ofthispopulation.Thus,thetotalnumberofnon-Saudisinthecountryisestimatedtobealmost11million.10Theexpressionsoftheproducerandconsumerpriceindexesarereportedintheappendix,alongwithothermodelequationsthatarenotincludedinthemaintext.Blazquezetal.(2019)providedetailedderivationsofthemodelequations.J.Blazquezetal.EconomicModelling95(2021)145–169147
lT;t¼θLWT;tWtσLlt(8)lNT;t¼ð1θLÞWNT;tWtσLlt:(9)WedefineWT,WNT,andWasthenominalwagesinthetradableandnon-tradablegoodssectorsandtheaggregatewage,respectively.11ThecoefficientσListheelasticityofsubstitutionbetweenlaborsuppliedtothetradableandnon-tradablegoodssectors,andθListhedistributionparameter.Saudihouseholds’budgetconstraintincludesspendingonthefinalconsumptiongood,theinvestmentgood,andenergyservices.Italsoincludesthenetacquisitionofbothgovernmentandforeignbonds.Thesehouseholds’incomeincludesafter-taxlaborincome,capitalincome,governmenttransfers,andreturnsfromgovernmentandforeignbonds.Thus,ð1þτC;tÞPtCstþPtIT;tþhT2IT;tKT;t1δT2KT;t1þPtINT;tþhNT2INT;tKNT;t1δNT2KNT;t1þð1þτES;tÞPES;tESstþxtB*txt1þxti*tB*t1þBtð1þitÞBt1¼1τsW;thWstlstþWsg;tlsg;tiþð1τK;tÞ½iT;tKT;t1þiNT;tKNT;t1þTRt;(10)whereIisgrossinvestment,Kisthecapitalstock,δisthedepreciationrateofcapital,andWgisthepublicsectorwage.Additionally,τESandPESaretheconsumptiontaxrateandprice,respectively,forenergyservices.WeallowforquadraticadjustmentcostsingrossinvestmentwiththeparametershT;hNT.GovernmenttransfersaregivenbyTR,andhouse-holds’netacquisitionsofgovernmentandforeignbondsaregivenbyBandB*,respectively.ForeignbondsaredenominatedinUSD,andxisthenominalexchangeratebetweenSaudiriyals(SAR)andUSD.Finally,iT;iNTarethenominalreturnsoncapitalstockforthetradableandnon-tradablegoodssectors,respectively,andiandi*aretheinterestratesongovernmentandforeignbonds,respectively.FollowingSchmitt-GroheandUribe(2003),weassumethatthein-terestrateonforeignbondsisgovernedbythedebt-elasticinterestrate.i*t¼i**þζexpB*ssB*t11(11)Here,i**isanexogenousforeigninterestratedeterminedintheforeigncapitalmarket,ζisarisk-premiumparameter,andB*ssisthesteady-statelevelofforeignbonds.12,13Weusefamiliarformulastodescribecapitalaccumulation,asfollows:IT;t¼KT;tð1δTÞKT;t1(12)INT;t¼KNT;tð1δNTÞKNT;t1:(13)Thesolutiontotheconstrainedwelfaremaximizationprogramgivenbyequation(10)yieldsoptimalityconditionsforthefollowingdecisionvariables:Cst;B*t;Bt;ESst;lst.WetakeGCt;lsg;t;Wsg,andTRtasexogenouspolicyvariables.2.1.2.Non-SaudihouseholdsAsstatedbefore,non-SaudisarerelevanttothebehavioroftheSaudieconomy,astheycompriseimportantpercentagesofthepopulationandthetotallaborsupply.Thekafalasystemmeansthatnon-Saudiscometothekingdomtoworkandcannotstaywithoutajob.Thus,non-Saudisareassumedtosupplylaborinelastically.Thesavingsofnon-Saudisaretransferredabroadintheformofremittances,asnon-SaudiscannotinvestinSaudiArabia.Giventheseconsiderations,weassumethatthenon-Saudihouseholdconsumesafinalconsumptiongoodandenergyservicesandsupplieslabortothetradableandnon-tradablegoodssectors.Thelaborsupplyofnon-Saudiworkersisexogenous,andtheydonotworkinthepublicsector.Thebudgetconstraintincludesonlytheafter-taxlaborincomereceivedforthehoursofworksuppliedtothetradableandnon-tradablegoodssectors.Thus,thenon-Saudihousehold’snetincomeis:1τnsW;tWnstlnst;(14)wherethishouseholdisdenotedbythesuperscript“ns.”Weassumethatthenon-Saudihouseholdspendsaconstantfractionϕiofitsincome,givenbyequation(14),onconsumptiongoodsandenergyservices.Theremainderissavedandtransferredabroadasremittances.Thus,thenon-Saudihousehold’sconsumptionofgoodsanditsconsumptionofenergyservicesaregivenbythefollowingexpressions:ð1þτC;tÞPtCnst¼ϕC1τnsW;tWtlnst(15)ð1þτES;tÞPES;tESnst¼ϕES1τnsW;tWtlnst:(16)Thenon-Saudihousehold’sremittances(REM)aredeterminedresiduallyas:ð1þτREM;tÞREMt¼ð1ϕCϕESÞ1τnsW;tWtlnst:(17)Here,theparametersϕCandϕESaretheconstantsharesofexpendi-turesontheconsumptiongoodandenergyservices.Thisspecificationimpliesthatthenon-Saudihouseholddoesnotintertemporallyoptimizeitsdecisionsandthatitsincomeandexpendituresourcesareexogenouslydetermined.Animportantreasonformakingthisassumptionisthatthedataneededtocalibratethemodelarelacking.AllofthevariablesfortherepresentativeSaudiandnon-Saudihouseholdsareexpressedonanindividualbasis.Toobtainaggregateamounts,wemultiplythesevariablesbytheeconomy’stotallaborforce,N,whichissetequaltothetotalpopulation.ThisvalueisthesumoftheSaudiandnon-Saudilaborforces,asdenotedby:Nt¼NstþNnst¼ð1xpatÞ*Ntþxpat*Nt:(18)Here,xpatistheshareofnon-Saudisinthetotallaborforce,whichiskeptconstantinourmodel.2.2.FirmsThemodelincludesfourrepresentativefirms.Onefirmproducesafinalgoodthatistraded(i.e.,importedorexported),andoneproducesanon-tradedfinalgood.ThisdistinctionisimportantformimickingtheDutchDiseasemechanismofrealexchangerateappreciationinresource-richeconomies.ThesegoodsareacquiredbytheSaudihouseholdforconsumptionorinvestmentpurposes.Athirdfirmproducesenergyser-vices,whichareconsumedbybothhouseholds.Thefourthfirmproduceselectricityusingtheeconomy’senergyresources;thiselectricityisan11Weassumethatthetaxratesonwagesinthetradableandnon-tradablegoodssectorsarethesame.Thus,thetaxratealsoequalsthetaxontheaggregatewage.Notethatinequations(3)–(9),weomittheSaudisuperscripttoavoidclutteringthenotation.12Weinducestationarityinthemodelbyassumingthattheinterestrateonforeignbondsdependsonthelevelofexternaldebt.Thisdependencecanbeinterpretedasatransitorychangeinthesovereignriskpremium.13Thepolicyexperimentsdescribedinsection4areconductedinanenvi-ronmentwithperfectforesight.Thus,theoptimalityconditionsforgovernmentandforeignbonds(equations(11)and(12)intheappendix),alongwiththepegtothedollar,allowforarbitragebetweenforeignandgovernmentbonds.Bothinterestratesarethereforeequalineveryperiod.Thisconditioncausesthedomesticinterestratetoreacttothecountry’sexternalassetposition,followingtheforeigninterestrate.J.Blazquezetal.EconomicModelling95(2021)145–169148
inputtotheproductionofenergyservices.2.2.1.Tradableandnon-tradablegoodsfirmsWebeginbydescribingtheproductionofthetradableandnon-tradablegoods.ThesegoodsareproducedbytworepresentativefirmsthatuselaborbybothSaudiandnon-Saudiworkers,fixedcapital,andenergyservicesasinputs.Similartoourrepresentationofhouseholds,weexpressinputsandoutputsinpercapitaterms(strictlyspeaking,inpermemberofthelaborforceterms).WeconsideraCobb-Douglas(CD)technologythattakesaggregatelaborandanaggregateofcapitalandenergyservicesasinputs.Withinthelaboraggregate,weassumethetwotypesoflaborinputsareperfectlysubstitutable.WeaggregatecapitalandenergyservicesusingaCESaggregator.Theproductionfunctionisasfollows:yi;t¼Aihð1xpatÞlsi;tþxpatlnsi;tiαinθi½ð1xpatÞKi;t1νiþð1θiÞESνii;toð1αiÞνi:(19)Here,i¼TorNT,yistheaggregateoutput,andAisatechnologicalindex(scale).Thecoefficientsðαi;θi;νiÞaretechnologyparameters.Spe-cifically,αiistheoutputelasticityoflabor,νiistheelasticityofsubsti-tutionbetweencapitalandenergyservices,andθiistheshareofcapitalinthecapital-energyservicesaggregate.Allfirmsinthemodelareassumedtobeprofit-maximizingagentsandpricetakers.Becausethetwotypesoflaborareperfectlysubstitutable,theircorrespondingmar-ginalproductivitiesandwagesareequal.2.2.2.EnergyservicesfirmThethirdfirminthemodelproducesenergy-relatedservices,suchasairconditioning,electricalappliances,lighting,andprivatetrans-portation.Forsimplicity,itusesenergysourcesasitsonlyinputs.Thus,thefirmcombineselectricity(ELES),oil(OES),andgas(GES)accordingtoaCEStechnologywithanelasticityofinputsubstitutionequalto1=ð1λÞ.Specifically:ESt¼hϕELλtþψOλES;tþð1ϕψÞGλES;ti1=λ;(20)whereϕandψarethesharesofelectricityandoilintheCEStechnology.Optimalityrequiresthefirmtochooseitsenergyinputssuchthatthemarginalproductivitiesequaltheinput-outputpriceratios,thatis,PEL=PES,PdO=PES,andPdG=PES.14Thefourthfirmgenerateselectricityusingthreefuels:oil,gas,andarenewableenergysource,suchassolarpower.Theoilandgasinputshaveadegreeofsubstitution,modeledasaCDfossilfuelaggregatewithaunitaryelasticityofsubstitutionbetweenoilandgas.Thisaggregatefossilfuelinputisassumedtobeperfectlysubstitutablewithrenewableenergy,representedbyREN.Weassumeconstantreturnstoscale.Spe-cifically:ELt¼OγEL;tG1γEL;tþRENt;(21)whereγistheelasticityofoilinelectricitygeneration.Profitmaximi-zationrequiresthemarginalrateoftechnicalsubstitutionbetweenoilandgastoequalthecorrespondingpriceratio.Theprofit-maximizingconditionforrenewablesis:PEL;t¼PR;t:(22)Inotherwords,thepriceofrenewableenergy,PR,equalsthepriceofelectricity.2.3.NaturalresourcesNaturalresources,thatis,renewableenergy,oil,andgas,areassumedtobeproducedusingasimpletechnologythatdependsonlyonthepubliccapitalstock.Thegovernment,viathestate-ownedelectricitycompany,investsdirectlyinrenewableenergy.Renewableenergyisproducedac-cordingtothetechnology:RENt¼2664AR1þχRENtELt3775KgR;t1:(23)Here,ARistheproductivityofthepubliccapitalstockKgRinrenew-ablesproduction,andχisanintegrationcostparameter.15Oilproductionisgivenby:Ot¼αOutKgO;t1:(24)Here,αOistheproductivityofthepubliccapitalstockKgOinoilpro-duction,anduistherateofcapacityutilizationofthecapitalallocatedtooil.TotaloilproductionisgivenexogenouslyasO.Finally,weassumethatgasproductionGisproportionaltooilproduction:Gt¼αGOt;(25)whereαGistheproportionalityfactorofgasrelativetooil.Publiccapitalaccumulationinrenewablesandoilisgivenby:Kgj;t¼Igj;tþ1δjKgj;t1:(26)Here,j¼R,O,Igjispublicinvestment,andδjistherateofdepreciationofthecapitalstock.Gasproductionalsodependsonpubliccapitalin-vestmentthroughequations(24)and(25).Weassumethattheinternationalpriceofoilevolvesovertimeac-cordingtoamean-revertingprocess.SaudiArabiahasasignificantshare(about12%)oftheglobaloilmarket.Thus,anychangestoSaudioilexportsimpactinternationalpricesand,thus,cansignificantlyaffectSaudiexportrevenues.WethereforeneedincorporatethepricechangescausedbychangesinSaudiexportsintoourmodel.Weconsideramean-revertingprocessthatembedstwoadjustmentmechanisms.Thefirstisapartialadjustmenttowardthepricethatwouldmaterializeinthelongrunifthepreviousperiod’sexportlevelremainedforever.Thesecondisashort-runadjustmentduetothecurrentchangeinexportlevels.Botharegivenasfollows:lnP*O;t¼ð1ϱOÞlnP*O;ss;t1þϱOlnP*O;t1þ1εSRlnOXtOXt1(27)ln P*O;ss;tP*O;ss!¼1εLRlnOXtOXss(28)Here,P*O;tistheinternationaloilpriceineachperiod,andϱOisthepersistenceofthisprice.Thesteady-stateinternationaloilpricethatwouldariseifSaudioilexportswerepermanentlyequaltoOXt(i.e.,inthelongrun)isP*O;ss;t.Additionally,εSRandεLRaretheshort-runandlong-14Thesuperscripts“*,”“d,”and“g”denoteforeign,domestic,andgovernmentvariables,respectively.15Theterminsquarebracketsrepresentstheproductivityofoneunitofpubliccapitalinvestedinrenewables.Conversely,itrepresentsthecostofoneunitofrenewableenergy.Theproductivityofrenewablesisnegativelyrelatedtore-newables’penetrationinelectricitygeneration,reflectingintegrationcostsintheelectricitysystem.J.Blazquezetal.EconomicModelling95(2021)145–169149
runpriceelasticities,respectively,oftheresidualdemandforSaudioilexports.16Giventhedefinitionoftheshort-termelasticity,εSR,theterm1εSRlnOXtOXt1isthechangeintheoilpriceduetothevariationinexportlevelsduringtheperiod.Equation(27)capturesthelong-runresponseoftheinternationaloilpricetochangesinSaudioilexportlevels.Com-bined,equations(27)and(28)capturetheshort-termeffectsofcontemporaneouseventsandthelong-runeffectsduetopastchangesinexportlevels.17Theinternationalgaspriceisgivenbyasimplemean-revertingpro-cess,asfollows:lnP*G;t¼ð1ϱGÞlnP*G;ssþϱGlnP*G;t1;(29)Here,ϱGisthepersistenceoftheinternationalgasprice,andP*G;ssisthesteady-stateinternationalgasprice.2.4.GovernmentGovernmentexpendituresconsistofpublicinvestmentsinoilpro-ductionandrenewableenergy,laborcompensationtopublic(Saudi)employees,governmentconsumption,andtransferstoSaudihouseholds.GovernmentrevenueincludestaxesontheconsumptionofgoodsandofenergyservicesandlaborincometaxespaidbySaudiandnon-Saudihouseholds.Theyalsoincludecapitalincometaxes,paidbySaudihouseholds,andtaxesonremittances,paidbynon-Saudihouseholds.Additionally,thegovernmentearnsrevenuesfromdomesticsalesandexportsofoilandgasandnetgovernmentbondissuances.Thegovern-ment’sbudgetis:Thefiscalauthoritycontrolsnumerouspolicyvariablesthatitcanusetopursueitsowngoals,includingtaxrates,governmentconsumption,andpublicinvestments.Thesevariablesareexogenoustothemodel.Weassumethatthebudgetremainsbalancedineachperiodthroughtheuseoftransfers.2.5.Marketequilibrium,aggregation,andforeignassetpositionWecompletethemodeldescriptionbydefiningtheequilibriumconditionsofthemarketsinthiseconomy.First,equilibriumintheen-ergyservicesmarketrequiresequatingtheproductionofenergyserviceswithtotaldemand.ThisdemandincludesSaudiandnon-Saudihouseholdsandfirmsproducingtradableandnon-tradableconsumptiongoods.Inotherwords:ESt¼ð1xpatÞESstþðxpatÞESnstþEST;tþESNT;t(31)Thegeneratedelectricityisusedonlyasaninputtotheenergyser-vicesfirm.Thus,equations(21)and(22)jointlyimplythattheequilib-riumconditionforelectricityissatisfied.InvokingWalras’law,wesetthemarketequilibriuminthenon-tradablegoodssector.Equation(19)de-scribesthesupplyofnon-tradablegoods.ThissupplymustequalthedemandforthesegoodsbySaudiandnon-Saudihouseholdsforcon-sumptionandinvestmentinfixedcapitalandgovernmentservices.Themarketequilibriumconditionis:Toclosethemodel,aneconomy-wideconstraintmusthold.Thisconstraintensuresthatthetotalresourcesusedbytheeconomicagentsequalthetotalcreatedoravailableresources.Thisrelationshipin-corporatesthehouseholdbudgetconstraintsforbothSaudiandnon-Saudiagents,thegovernmentbudgetconstraint,thehouseholds’opti-malityconditions,andfirms’behavior.WedenotethecapitaladjustmentcostsbyACT;tandACNT;tforsimplicity.Afterrearranging,theaggregateresourceconstraintisasfollows:Ptð1xpatÞCstþðxpatÞCnstþPES;tð1xpatÞESstþðxpatÞESnstþð1xpatÞPt½ðIT;tþACT;tÞþðINT;tþACNT;tÞþPtIgO;tþIgR;tþð1xpatÞPtGCtþð1xpatÞxtB*txt1þxti*tB*t1þðxpatÞREMt¼PT;tyT;tþPNT;tyNT;tþPES;tð1xpatÞESstþðxpatÞESnstþxtP*O;tOtOEL;tOES;tþxtP*G;tGtGEL;tGES;t(33)ThenominalGDPatcurrentpricesforthiseconomyisgivenby:PtIgO;tþPtIgR;tþWsg;tlsg;tð1xpatÞþPtGCtð1xpatÞþTRtð1xpatÞ¼τC;tPtð1xpatÞCstþðxpatÞCnstþτES;tPES;tð1xpatÞESstþðxpatÞESnstþτsW;thWstlstþWsg;tlsg;tið1xpatÞþτnsW;tWnstlnstðxpatÞþτK;t½iT;tKT;t1þiNT;tKNT;t1ð1xpatÞþτREM;tREMtðxpatÞþPdO;tðOEL;tþOES;tÞþPdG;tðGEL;tþGES;tÞþPR;tRENtþxtP*O;tOtOEL;tOES;tþxtP*G;tGtGEL;tGES;tþ½Btð1þitÞBt1ð1xpatÞ(30)yNT;t¼ð1θCÞð1þτNT;tÞPNT;tð1þτC;tÞPtσCð1xpatÞCstþðxpatÞCnstþð1θCÞPNT;tPtσCð1xpatÞIT;tþhT2IT;tKT;t1δT2KT;t1þINT;tþhNT2INT;tKNT;t1δNT2KNT;t1þIgO;tþIgR;tþð1xpatÞGCt(32)16ItcanbeprovenmathematicallythatεSR¼εDSRεSSRð1ρÞρandεLR¼εDLRεSLRð1ρÞρ.Here,ρisthemarketshareofSaudioilexportsintheglobaloilmarket.Theshort-runpriceelasticitiesofglobaloildemandandthenon-SaudioilsupplyareandεDSRandεSSR,respectively.Finally,εDLRandεSLRrepresentthesameelasticitiesinthelongrun.17Iftheshort-termandlong-termpriceelasticitiesoftheresidualdemandforSaudioilwerebothinfinite,thestandardcompetitivemarketassumptionswouldhold.Thus,equation(27)wouldsimplifytotheusualmean-revertingequationwithaconstantlong-runprice.J.Blazquezetal.EconomicModelling95(2021)145–169150
GDPt¼PT;tyT;tþPNT;tyNT;tþPES;tð1xpatÞESstþðxpatÞESnstþxtP*O;tOtOEL;tOES;tþxtP*G;tGtGEL;tGES;t:(34)Inthiscontext,non-oilGDPexcludesthevalueofoilandgassalesabroadfromequation(34).Non-oilGDPthereforereflectsthevalueoftheproductionofdurableandnon-durablegoodsandenergyservices.Theforeignsectorischaracterizedbycurrentandcapitalaccounts.Thecurrentaccountincludesimportedgoods(acomponentoftradablegoods)andremittancesononesideandexportsoftradablegoods,oil,andgasontheother.Netinterestpaymentsonforeigndebtarealsoincludedinthecurrentaccount.Thecapitalaccountincludesnetac-quisitionsofforeigndebtandthechangeinofficialholdings(officialreserves),whichensureabalanceofpaymentsequilibrium.Thus,thenominaltradebalanceisthesumofremittancesbynon-Saudis,thechangeintheforeignbondposition,andtheinterestearnedfromforeignbonds.Thatis:TBt¼ð1xpatÞxtB*txt1þxti*tB*t1þðxpatÞREMt:(35)ToobtainrealGDPandtherealtradebalance,wedivideequations(34)and(35)bytheaggregatepricePoftradableandnon-tradablegoods.Thisvalueisobtainedfromequation(6).Toclosethemodel,weneedtoselectanormalizationrule.Here,weassumethat:PT;t¼xtP*T;t;(36)whereP*T;tistheinternationalpriceofthetradablegoodandisexoge-nous.Followingthestandardinmodelswithtradableandnon-tradablegoodssectors,wedefinethetradablegoodasthenumeraire.Thus,PT;t¼18t.3.ModelcalibrationWecalibratethemodelonanannualbasis,asmostofthedataforSaudiArabiaareprovidedatanannualfrequency.Thus,thetimehorizonofasimulationisoneyear.Theparametersforthemodelcalibrationcanbesortedintotothreegroups:parametersthatareobtainedfromtheliterature;parametersthatareindependentlycalibrated;parametersthatarejointlycalibratedforthemodeltomatchsomelong-runrelationshipsintheSaudieconomyduringtheperiod1997–2016.18Wenowdescribetheparametercalibrationbyagentorsectorofthemodel.3.1.Households’parametersFollowingPlante(2014),theelasticityofsubstitutionbetweenaggregateconsumptionandenergyservicesσissetequalto0.3333.Saudihouseholds’utilityparameters,κandαGC,andthesizeofthegovernmentservices,GC,arejointlycalibratedwithotherparameters.TheaimofthiscalibrationistomatchtheactualshareofenergyservicesexpendituresintotalconsumptionexpendituresandtheactualsharesofprivateandpublicconsumptioninGDP.TheinverseoftheFrischlaborsupplyelasticity,whichrepresentsthelong-runlaborsupplyelasticity,issetasν¼1.429(Behar,2015).Theweightofthedisutilityfromsup-plyinglabor,η,isjointlycalibratedtomatchtheactuallong-runratioofSaudilabortothetotallaborsupply.Weassumeaunitaryelasticityofsubstitutionbetweentradableandnon-tradableconsumptiongoods,σC¼1,thusimplyingaCDaggregator.Theshareofconsumptioninthetradablegoodssector,θC,isjointlycalibratedtomatchtheactualaverageratiooftradablegoodsconsumptiontototalconsumption.Theelasticityofsubstitutionbetweenlaborinthetradableandnon-tradablegoodssectorsissetasσL¼1(Bergetal.,2010).Theshareoflaborinthetradablegoodssector,θL,isjointlycalibratedtomatchtheactualaverageratiooflaborinthetradablegoodssectortototallabor.Weobtainthediscountfactor,β,fromthefirst-orderconditionforforeignbondsinthesteadystate.Theinitialsteady-statesizesofforeignbonds,B*;andgovernmentbonds,B;arejointlycalibratedtomatchtheactualratiosofthetradebalanceandgovernmentbondstoGDP.Theadjustmentcostsofcapital,hTandhNT,arecalibratedtomatchtheactualvolatilityofinvestmentrelativetoGDP.FollowingBlazquezetal.(2017),therisk-freeinternationalinterestrate,i**,issetequalto4%.WechooseζtoreproducethevolatilityoftheratioofthetradebalancetoGDPobservedinthedata.Theproportionofnon-Saudisinthetotallaborforce,xpat;comesfromdataprovidedbytheGeneralAuthorityofStatistics(2016).Fortheconsumptiongoodsandlaboraggregatorsfornon-Saudihouseholds,weusethesameparametervaluesasforSaudihouseholds.Thefractionsofincomespentonconsumergoodsandenergyservices,ϕCandϕES,respectively,arejointlycalibrated.TheaimofthiscalibrationistomatchtheactualratiosofenergyservicesexpenditurestototalexpendituresandofremittancestoGDP.3.2.Firms’parametersForfirms,wemakenodistinctionbetweenthetechnologicalpa-rametersofthetradableandnon-tradablegoodssectorsowingtoalackofdataatthesectorallevel.Thus,wefollowBlazquezetal.(2017)bysettingαT¼αNT¼0:58.WealsofollowKoetseetal.(2008)bysettingtheelasticityofsubstitutionbetweencapitalandenergyservicesasνT¼νNT¼1:381.Inaddition,wesettheshareofcapitalinthecapital-energyservicesaggregateasθT¼θNT¼0.99997.19Thetech-nologyindexesfortradableandnon-tradablegoods,ATandANT,arejointlycalibratedtoreproducetheactualrelativeweightsofthetwosectors.Inenergyservicesproduction,wefollowBlazquezetal.(2017)andsettheshareofelectricityasϕ¼0.332.Weassumethatψ¼0.332,implyingthatoilandgashaveapproximatelythesameweightintheproductionofenergyservices.Theparametergoverningtheelasticityofsubstitutionamongoil,gas,andelectricityisdefinedtobeλ¼2.574(Serletisetal.,2010).WeobtainfuelconsumptioninpowergenerationfromtheBPStatisticalReviewofWorldEnergy(2016)andtheElectricityandCogenerationRegulationAuthority(2017).ThepriceofelectricityistakenfromtheSaudiElectricityCompany(2018).ThepricesforthegasandoilsupplyareobtainedfromWoganetal.(2017).Usingthesedataforelectricitygeneration,wesettheshareofoilasγ¼0.47.18Forthejointlycalibratedparameterstoreproducesomelong-runcharac-teristicsoftheSaudieconomy,themodel’ssteady-stateresultsshouldmatchkeyempiricalrelationships.Wefollowanon-linearconstrainedoptimizationpro-cedure.Thisprocedureminimizesthedeviationfromtheempiricalrelationshipswhilemeetingtheconstraintsgivenbythemodel’ssystemofequations.Inotherwords,itinvolvesminimizingthesumofthesquaresofthedeviationsfromtheempiricalrelationshipsbyoptimallyadjustingtheselectedparameters.19Todeterminetheshareofcapitalinthecapital-energyservicesaggregate,westartbysettingthelong-runcapital-to-outputratio(K/y)equaltotwo.Weassumea10%annualcapitaldepreciationrate,whichiscommoninthemac-roeconomicliterature(KingandRebelo,1999).Thecapital-outputratioisconsistentwith20%grossfixedcapitalformationoverGDP,theaveragevaluefrom2000to2017.Wethenestimatecapitalstocklevelsin2017usingtheratioK2017/GDP2017¼1.75.Theoptimalityconditionshowsthatthedemandforcapitalstockrelativetoenergyservicesisafunctionoftheirpriceratio.Usingthisinformation,wefindthatitequals0.99997.J.Blazquezetal.EconomicModelling95(2021)145–169151
3.3.Naturalresourcesector’sparametersFollowingBlazquezetal.(2017),wetakethecostofpubliccapitalinvestedinarepresentativephotovoltaictechnologyforrenewablepowergenerationas1.34millionSARpermegawattin2010prices.Wedefinetheannualcapacityfactoras19%andthedepreciationrateas5%,whichisstandardforthesetypesoftechnologies.Usingtheseassump-tions,weestimatethatthemarginalproductivityofpubliccapitalinrenewableenergytechnologyis0.0328tonsofoilequivalent(toe)perthousandSARin2010prices.Thus,wesetAR¼0.0328.Maietal.(2012)findthatintheU.S.,thecostoftheelectricitysystemincreasesbyasmuchas5%whenrenewables’penetrationreaches10%.Thus,wedefinerenewables’integrationcostparameterasχ¼0.5.Weassumethatdepreciationofpubliccapitalinrenewables,δR,is5%,asinBlazquezetal.(2017).Themarginalproductofpubliccapitalinoilproduction,αO,isjointlycalibratedtomatchtheactualratioofoiltooilandgasusedinelectricitygeneration.Thedepreciationofpubliccapitalinoilproduction,δO,isassumedtobe5%.Theexogenousvalueofpublicinvestmentintheoilsector,IgO,issettomatchSaudiArabia’sactualaverageoilproduction.Wenormalizetherateofcapitalutilization,u,toequalone.Weassumethatgasandoilproductionareproportional,withαGcalibratedaccordingly.TheaveragepriceofBrentcrudeoilover1997–2016isgivenasP*O;ss¼1.753thousandSARpertoe.ThisvaluecorrespondstoUSD65perbarrelin2016atconstant2010prices.SaudioilexportsduringtheperiodwereOXSS¼18:06billiontoeonaverage(SAMA,2017).FollowingPierruetal.(2018),wesetthemarketshareofSaudioilex-portsinglobaloilproductionasρ¼0.12.Toobtainthelong-runpriceelasticityofresidualSaudioildemand,weassumethatthelong-runpriceelasticityofglobaloildemandisaboutεDLR¼0:6.Weassumethatthesupplyofnon-SaudioilisaboutεSLR¼0:3.Wethereforeobtainalong-runpriceelasticityofSaudioilexportsofεLR¼7:2.Toobtainthecorrespondingshort-runpriceelasticityofSaudioilexports,weassumethattheshort-runelasticityparametersareabout50%oftheirlong-runcounterparts.Hence,theshort-runpriceelasticityofresidualSaudioildemandisεSR¼3:6.Forthelong-runprice’spartialadjustmenteffect,weestimateequations(24)and(25)fortheperiod1997–2016.TheestimatedcoefficientisϱO¼0:84.Theaverageinternationalpriceofgasfor1997–2016isfoundtobeP*G;ss¼0.815thousandSARpertoeusingHenryHubprices.ThisvaluecorrespondstoUSD25perbarrelin2016atconstant2010prices.TheestimatedcoefficientofthepersistenceofgaspricesisϱG¼0:79.Thedomesticpricesofoilandgas,PdOandPdG,arejointlycalibratedtomatchtheactualobservedratiosofoilandgasexportstoproduction.3.4.SummaryTosummarize,Table1liststheparametersthatareeithertakenfromtheliteratureorindividuallycalibrated.Table2showstheexogenousvariablesthatarejointlycalibrated.Finally,Table3presentsthecom-parisonofthelong-runrelationshipstakenfromhistoricaldataanddeterminedinthecalibratedmodeleconomy.Table1Parameterstakenfromtheliteratureorcalibratedindividually.ParameterValueDescriptionParameterValueDescriptionσ0.3333ElasticityofsubstitutionbetweenconsumptionandenergyservicesθT;θNT0.9997Shareofcapitalinthecapital-energyservicesaggregateκ0.0598WeightofenergyservicesinhouseholdconsumptionνT;νNT1.381ElasticityofsubstitutionbetweencapitalandenergyservicesαGC0.452Weightofpublicservicesinhouseholdconsumptionλ0.2579Elasticityofsubstitutionbetweenelectricity,oil,andgasν1.429InverseoftheFrischlaborsupplyelasticityϕ0.332Shareofelectricityη0.429Weightoflabordisutilityψ0.332ShareofoilσC1Elasticityofsubstitutionbetweentradableandnon-tradableconsumptiongoodsγ0.47ShareofoilinthefossilfuelsaggregateθC0.479ShareoftradablegoodsinprivateconsumptionAR0.0328ProductivityofthepubliccapitalstockinrenewablesproductionσL1Elasticityofsubstitutionbetweentradableandnon-tradablelaborχ0.5IntegrationcostparameterθL0.736WeightofthetradablegoodssectorinthelaboraggregatorαO0.128ProductivityofcapitalinoilproductionhT1.2CapitaladjustmentcostinthetradablegoodssectorαG0.185ProportionalityfactorbetweenoilandgasproductionhNT0.02Capitaladjustmentcostinthenon-tradablegoodssectorϱO0.84Persistenceoftheoilpriceprocessζ0.01Riskpremiumparameterρ0.12MarketshareofSaudioilinglobaloiloutputϕC0.65Shareofnon-SaudiincomespentonconsumptiongoodsεDLR0.6Long-runpriceelasticityofglobaloildemandϕES0.10Shareofnon-SaudiincomespentonenergyservicesεSLR0.3Long-runpriceelasticityofthesupplyofnon-SaudioilAT0.434TechnologyindexintradablegoodsproductionεLR7.2Long-runpriceelasticityofSaudioilexportsANT0.577Technologyindexinnon-tradablegoodsproductionεSR3.6Short-runpriceelasticityofSaudioilexportsαT;αNT0.582OutputelasticityoflaborϱG0.79PersistenceofthegaspriceprocessTable2Calibratedexogenousvariables.ParameterValueDescriptionParameterValueDescriptionβ0:9615DiscountfactorδO0.05DepreciationrateoftheoilsectorcapitalstockGC0.647PublicservicesintheinitialsteadystateδR0.05Depreciationrateoftherenewablesectorcapitalstocki**0.04Risk-freeinternationalinterestrateIgO0.179PublicinvestmentintheoilsectorBss0.466GovernmentbondsP*O;ss1.753Long-runoilpriceinforeigncurrencyB*ss10.041ForeignbondsP*G;ss0.815Long-runnaturalgaspriceinforeigncurrencyδT;δNT0.10CapitaldepreciationrateOXSS18.06AverageSaudioilexportsxpat0.6Shareofthenon-SaudilaborforcePdO0.292DomesticoilpriceU1RateofcapacityutilizationofpubliccapitalPdG0.409DomesticgaspriceJ.Blazquezetal.EconomicModelling95(2021)145–169152
4.Policyexperimentsinthecontextofvision2030Inthissection,wedescribethepolicyexperimentsthatweconducttosimulatethekeyeconomicreformsofSaudiVision2030.20a)Introductionofa5%VAT:OnJanuary1,2018,SaudiArabiaintro-duceda5%VATongoodsandservices.WeimplementtheVATinthefirstperiodasa5%increaseinthevalueoftradablegoods,non-tradablegoods,andenergyservicesconsumedbyhouseholds.Thecorrespondingvalueinthereferencecaseis0%.Thus,thetaxratesτT;τNT;τESaresetequalto0.05inthefirstperiodandremainatthatlevelinallfutureperiods.b)Energypricereform:TheenergypricereformsintheFiscalBalanceProgram,includingawaterpricereform,aimtoreducedomesticconsumptionofenergyandwater.Theseproducts,whichwemodelasenergyservices,areprovidedusingmostlyfossilfuels.Thus,weincorporatethismeasureinourmodelbygraduallyincreasingthedomesticpricesofoilandgas,PdOandPdG,fromtheirinitiallevelstointernationalpricelevelsinthefirstperiod.Wethenkeepthemattheirinternationallevelsinthefollowingperiods.c)Deploymentofrenewableenergy:UnderVision2030,theNREPaimstoincreaserenewableenergy’spotentialinSaudiArabia.Currently,thereisnoofficialtargetfornewinstalledcapacity.Wethereforeassumethatconstantinvestmentsaremadetoreach10%penetrationinfiveyearsandthatthisshareismaintainedhenceforth.Weimplementthispolicybyincreasingpublicinvestmentinrenewables(IgR).Theshareofrenewablesinelectricitygenerationgraduallyrisesfrom0%to10%infirstfiveyearsofthemodelandremainsat10%henceforth.d)Jointpolicysimulation:Wealsosimulatethesimultaneousintro-ductionofallthreeofthepolicychanges.5.ResultsWerunoursimulationsbyperturbingthesteady-stateequilibriuminperiodzeroandtrackingthemodeleconomy’sresponseoverfiftype-riods.Ineachsimulation,apolicychangeresultstochangesingovern-mentrevenues.Thesechangesaccountforchangesinreceiptsfromtaxes,resourcerents,andoilandnon-oilexports.Tobalancethegovernmentbudgetineachperiod,thesurplusordeficitcreatedbyeachpolicychangeisrecycledbackintotheeconomy.21Weconsidertwoscenarios,dependingonthechannelthroughwhichthisrecyclingtakesplace.First,inthetransferstoSaudihouseholds(TR)scenario,agovernmentsurplus(ordeficit)increases(ordecreases)thepaymentstransferredtoSaudihouseholds.Second,inthegovernmentconsumption(GC)scenario,thegovernmentsurplus(ordeficit)increases(ordecreases)governmentconsumption,whichSaudihouseholdsdirectlybenefitfrom.225.1.Introductionofa5%VATInthisscenario,weincreasetheindirecttaxratesontradablegoods,non-tradablegoods,andenergyservices(τT;τNT;τES)consumedbyhouseholdsfrom0%to5%inthefirstperiod.Thesetaxratesremainat5%thereafter.Theintroductionofa5%VATincreasesgovernmentconsumptionbyabout7%intheGCscenario,whereasitincreasesgov-ernmenttransfersbyabout15%intheTRscenario.Thus,thecontrac-tionarymeasureiscounteractedbyexpansionarymeasures.ThefullresultsofthisexperimentarepresentedinFigs.2–4anddescribedinthissection.Importantly,oilandgasexportsplayaprominentroleinourmodel.GiventheimportanceofSaudiArabiatotheglobaloilmarket,achangeinexportsimpactstheinternationaloilprice.TheeffectsofthispricechangearethenfedbackintotheSaudieconomy.Thismechanismiscapturedbytheoilpricereactionfunctiongivenbyequations(27)and(28).Thisfunctionaffectstherevenuesideofthegovernmentbudget,asshowninequation(30).Households:IntheGCscenario,theintroductionofaVATnegativelyaffectshouseholds’consumption.GCisaperfectsubstitutefortheaggregateconsumptionofgoodsandenergyservices.Thus,anincreaseinGCfurtherreducesSaudihouseholds’consumptionofbothtradableandnon-tradablegoodsandenergyservices(Fig.2).IntheTRscenario,thenegativeeffectfromtheVATislargelyoffsetbythepositiveincomeeffectofgovernmenttransfers.Becauseofthisnetpositiveeffect,households’consumptionoftradableandnon-tradablegoodsandenergyservicesincreases.Inbothscenarios,however,householdsrespondbydecreasingtheirlaborsupply,reducingsavingsandinvestment.23TheoverallreductioninSaudihouseholds’consumptionisslightlysmallerintheGCscenariothanintheTRscenario.Non-Saudihouseholds’consumptionofgoodsandenergyservicesdependsonproductpricesandhouseholdincomes.Inbothscenarios,non-Saudihouseholds’realincomeincreases,drivenbyhigherrealwagescausedbythedecreaseintheSaudilaborsupply.However,thepurchasingpoweroftheirincomedecreasesbecauseofthenewtaxes.AsTable3Comparisonsoflong-runrelationshipsbasedonhistoricaldataandthecalibratedmodeleconomy.Long-runrelationship(inratios)Historicaldata(1997–2016)CalibratedmodeleconomySaudilaborsupplytototallaborsupply0.380.38Tradablegoodstototaloutput0.220.22Oilexportstooilproduction0.760.76Gasexportstogasproduction00Trade-balancetonominalGDP0.160.16PrivateconsumptiontoGDP0.310.31PublicconsumptiontoGDP0.220.22PublicbondstoGDP0.130.13RemittancestoGDP0.050.05Laborintradablegoodstototallaborsupply0.470.47EnergyservicesexpenditurestototalconsumptionexpendituresforSaudis0.110.11Energyservicesexpenditurestototalconsumptionexpendituresfornon-Saudis0.100.13Electricitydemandforoiltoelectricitydemandforoilandgas0.510.5520Themodelcouldbeusedtostudytheeffectsofotherpolicychangesortoconductthepresentpolicyexperimentswithdifferenttargetsandchanges.ThechangesthatweconsiderhereareeitherpreciselyorveryclosetothoseenvisagedbytheVision2030reforms,asdescribedintheintroduction.InAp-pendixB,wereporttheresultsofsensitivityanalysesconductedontworelevantparameters.Toconservespace,wepresentonlytheresultsofthewelfareanalysis.Anextensiveanalysisofthedynamicresponsestopolicychangesisprovidedintheonlinesupplementarymaterial.21Wesimulateanumberofpolicyexperiments,andthemodelcontainsmanyvariables.Thus,toconservespace,weillustratethegraphsofdynamicresponsesforonlyselectedvariables.Thefullsetofgraphsisprovidedintheonlinesupplementarymaterialassociatedwiththisstudy.22Ofcourse,thegovernmentbudgetcanalsobebalancedbychangingthestockofgovernmentbonds.However,wedonotconsiderthisoptionfortwomainreasons.First,theoilexportincreaseresultingfromeachpolicychangewouldbeusedtoreducethepublicdebtstock,therebylimitingthepolicies’macroeconomicimpacts.Specifically,Saudihouseholdswouldmainlybeaffectedbythechangeintheirgovernmentbondholdings.Second,SaudiArabiahasnopublicdebtsustainabilityissues,meaningthattheuseofextrapublicrevenuestoreducepublicdebtseemsunrealistic.23Recallthatonlyvoluntaryunemploymentispossibleinthecurrentversionofthemodel.J.Blazquezetal.EconomicModelling95(2021)145–169153
Fig.2.VATsimulation:Saudihouseholds.Fig.3.VATsimulation:energysources,electricity,andenergyservices.J.Blazquezetal.EconomicModelling95(2021)145–169154
aresult,non-Saudihouseholds’consumptiondecreases,andremittancesincrease.However,consumptionandremittancesarenotverydifferentbetweenthetwoscenarios.Firms:TheintroductionoftheVATnegativelyaffectstheeconomy’snon-energyproduction.IntheGCscenario,GCstimulatesthedemandfornon-tradablegoods.However,thesector’soveralloutputstilldecreases,largelybecauseofthedecreaseinhouseholds’consumptionandprivateinvestments.IntheTRscenario,demandbySaudihouseholdsincreases.However,itcannotoffsetthedecreasesinSaudihouseholds’privateinvestmentandnon-Saudihouseholds’consumption.Asaresult,outputandthedemandforinputsbothdecline.AsthesupplyofSaudilaborfallsinbothscenarios,thenon-tradablegoodssectorusesexpatriatelaborinstead,andrealwagesincreaseasaresult.IntheGCscenario,thissectorsubstitutesthecapital-energyaggregateforlabor,leadingtoanincreaseinthestockofcapitalandenergyservices.Inbothscenarios,theincreaseinproductioncosts(i.e.,wagesandthereturnoncapital)increasesthepriceofnon-tradablegoods.Therealexchangerateconsequentlyappreciates,renderingtheSaudieconomylesscompetitive.Inbothscenarios,thenotedlossofcompetitivenessfollowedbytheappreciationoftherealexchangeratecausestheoutputoftradablegoodstodecline.Thus,thedemandforallinputsfalls.Thesereductions,however,aresimilarinthetwoscenarios.Energyservicesandelectricity:Theproductionofenergyservicesdeclinesfollowingthedropinhouseholdconsumption,andoutputde-clinesforbothtradableandnon-tradablegoods.Thedemandforinputs(i.e.,oil,gas,andelectricity)falls,asdoeselectricitygeneration(Fig.3).ThesereductionsaremuchlargerintheGCscenariothanintheTRscenario.Thedeclineindemandforoilandgasinputsleadstoincreasedoilandgasexports.TheseexportsareslightlyhigherintheGCscenariothanintheTRscenario.GDP:TheVATaffectsrealGDPnegatively(Fig.4).Althoughoilandgasexportsincrease,thedecreaseinnon-oilGDPcausesrealGDPtofall.Non-oilGDPdecreasesasaresultofthedeclinesintheoutputsoftrad-ableandnon-tradablegoods.Therealtradebalancedeterioratesasaresultoftheinteractionbetweentwoseparatecomponents.Specifically,exportsoftradablegoodsfallowingtotheappreciationoftherealex-changerate,andoilandgasexportsincrease.Theformerslightlyprevailsoverthelatter,drivingthenegativeeffectontherealtradebalance.Thepricedynamicsaredrivenbytheincreaseinthepriceofnon-tradablegoods,causingtheaggregategoodspricetoincrease.5.2.EnergypricereformsOursecondpolicyexperimentfocusesonthereformstodomesticenergypricesenvisagedinVision2030’sFiscalBalanceProgram.Inourmodel,householdsconsumeenergyservicesintheformofmobilityandwateruse,amongothers.Theenergyservicesindustryusesoil,gas,andelectricityasinputs,and,inturn,theelectricitygenerationindustryusesoil,gas,andrenewablesasinputs.Giventhissimplifiedstructure,wesimulateenergy(andwater)pricereformsinourmodelbyprogressivelyclosingthegapbetweenthedomesticoilandgaspricesandthecorre-spondinginternationalprices.Specifically,wereducethegapby25%oftheoriginalgapineachperiod.Thus,afterfourperiods,thedomesticandinternationalpricesofoilandgasareequalandremaintheequalinthefollowingperiods.24Thesepriceincreasesarecarriedovertothepriceofelectricityand,inturn,thepriceofenergyservices(Fig.5).Becauseweassumethatrenewableenergyrequirespublicinvestment,thedeploy-mentofrenewablesisexogenousinourmodel.BecauseweallowtheinternationaloilpricetoreacttoSaudioilFig.4.VATsimulation:macroeconomicvariables.24AsexplainedinSection3,theinternationaloilpriceissetequalto1.753thousandSARpertoe.ThispriceisequivalenttoUSD65perbarrelin2016atconstant2010prices.Theinternationalpriceofgasisequalto0.669thousandSARpertoe,correspondingtoUSD25perbarrelin2016atconstant2010prices.J.Blazquezetal.EconomicModelling95(2021)145–169155
Fig.5.Energypricereform:energyprices.Fig.6.Energypricereform:Saudihouseholds.J.Blazquezetal.EconomicModelling95(2021)145–169156
Fig.7.Energypricereform:energysources,electricity,andenergyservices.Fig.8.Energypricereform:macroeconomicvariables.J.Blazquezetal.EconomicModelling95(2021)145–169157
exports,wefindthatitfallsbyabout5%initially.Itthenslightlyre-covers,leadingtoapermanentreductionof3%.ThisdecreaseisaconsequenceofincreasedSaudioilexports.Toreachtheinternationalbenchmarklevels,thedomesticpriceofoilincreasesbycloseto500%,andthepriceofgasdoubles.Thepricesofelectricityandenergyservicesincreasebymorethan200%asaresult.Domesticconsumptionofoilandgasthereforedecreases,causingoilandgasexportstoincrease.Theadditionalrevenuesfromtheseincreasedexportsgenerateafiscalsur-plus.Asbefore,weconsidertheGCandTRscenariosforhandlingthisrevenuesurplus.TheresultsofthisexperimentarepresentedinFigs.6–8.Households:EnergypricereformshavesignificantbutmixedimpactsonSaudihouseholds’consumption.Theirconsumptionofenergyser-vicesfallssignificantly,withamuchlargerdecreaseintheGCscenariothanintheTRscenario.However,thereformalsoinducesalargein-creaseingovernmentrevenuesowingtosignificantlyhigherexportsofoilandgas.IntheGCscenario,GCsignificantlyincreases,stimulatingnon-energydemand.Non-energyconsumptionandenergyservicesarecomplements,whereasnon-energyconsumptionandGCaresubstitutes.Thus,households’non-energyconsumptiondecreasesintheGCscenario.IntheTRscenario,however,thepositiveincomeeffectofgovernmenttransferstoSaudihouseholdssignificantlyincreasesthesehouseholds’non-energyconsumption.Inbothscenarios,Saudihouseholdssignifi-cantlyreducetheirlaborsupplyandrealsavings,leadingtoareductionininvestment.ThisreductionisslightlysmallerintheGCscenariothanintheTRscenario(Fig.6).Thepricereformhasamixedimpactonnon-Saudihouseholds.Ononehand,thelargeincreaseinenergypricessignificantlyreducestheirconsumptionofenergyservices.Ontheotherhand,theincreaseinrealwagesasSaudilaborrecedesfromthelabormarketincreasesnon-Saudihouseholds’realincome.Thus,thesehouseholds’non-energycon-sumptionandrealremittancesincrease.TheseincreasesaresimilarintheGCandTRscenarios.Firms:Thenon-tradablegoodssector’soutputfallsduringtheinitialperiodofthepricereformsbutincreasesinthefollowingperiods.IntheGCscenario,thedecreasesinSaudiandnon-Saudihouseholds’demandprimarilyleadtoloweroutputinthissector.IntheTRscenario,thedemandfornon-tradablegoodsincreasesowingtoincreasesindispos-ableincome.However,thisincreaseisnotsufficienttocompensateforthereductionsininvestmentbySaudihouseholdsandconsumptionbynon-Saudihouseholds.Nevertheless,intheGCscenario,theincreaseindemandledbygovernmentconsumptiondrivessteadypositivegrowthinthesector’soutputinthelongrun.IntheTRscenario,theincome-ledincreaseindemanddrivesthesector’soutput.ExpatriatelaborsubstitutesforSaudilabor,whichdeclines.Capitalsubstitutesforenergyservices,whichdecline.Thus,therealrateofreturnoncapitalandtherealwagerise.Asaresult,thepriceofnon-tradablegoodsincreases,causingtherealex-changeratetoappreciate.Inbothscenarios,outputinthetradablegoodssectorsignificantlydeclinesowingtotherealexchangerateappreciation.Thesector’sdemandforallinputsalsofallsasaresult.Energyservicesandelectricity:Asexpected,thesignificantdeclineinthedemandforenergyservicescausestheinputdemandsforelectricitygeneration,oil,andgastodeclinesubstantially.Thedomesticcon-sumptionofoilandgasfallssignificantlyasaresult,andexportsofoilandgasincreasesignificantly(Fig.7).GDP:ThepricereformhasapositiveimpactonrealGDP.Thiseffectismainlyduetoincreasedoilandgasexports.Thelong-runincreaseinrealGDPisslightlyhigherintheGCscenariothanintheTRscenario.Realnon-oilGDPincreasesduringtheinitialreformperiod,mainlybecauseofthedynamicsoftheoutputsoftradableandnon-tradablegoodsandfinalenergyservicesconsumption.However,inthelongrun,realnon-oilGDPdecreasesfollowingthedeclineintheoutputoftradablegoods.ThisdeclineisslightlylargerintheTRscenariothanintheGCscenario.Furthermore,thetradebalancedeteriorateseventhoughoilandgasexportsincrease.Thisimpactissimilarinbothscenarios(Fig.8).5.3.DeploymentofrenewableenergyOurthirdpolicyexperimentfocusesonrenewableenergy.ToreducetheSaudieconomy’sdependenceonoil,theVision2030planincludestheNREP,whichaimstoincreaserenewableenergy’spotentialinSaudiArabia.Wesimulatethispolicyinourmodelasaconstantincreaseinpublicinvestmentinrenewables,IgR.Specifically,theshareofrenewablesinelectricitygenerationgraduallyrisesfrom0%to10%overthefirstfiveyears.Inthefollowingperiods,wekeeppublicinvestmentatthelevelneededtocoverthedepreciationofthepubliccapitalstock.Thus,aconstantlevelofrenewableenergycapacityismaintainedafterthefirstfiveyears.25WeassumethateithergovernmentspendingorgovernmenttransferpaymentstoSaudihouseholdsarereducedtofinancethepublicin-vestmentsneededfortheinitialincreaseinrenewableenergy.Thesepublicinvestmentsreducegovernmentconsumptionbymorethan10%andgovernmenttransfersbyaround30%inthefirstfiveyears.Afterthefirstfiveyears,weassumethatthepolicyrequiresminimalinvestmentsthatarefinancedbytheincreaseinoilandgasexportrevenues.TheresultsofthissimulationarepresentedinFigs.9–11.Households:Inbothscenarios,thedeploymentofrenewablesintheinitialfive-yearperiodaffectsSaudihouseholds’consumption.IntheGCscenario,theimpactisdrivenbythereductioninpublicservices,asthepolicysubstantiallyreducesgovernmentspending.Thisdecrease,inturn,increasesSaudihouseholds’marginalutilityofprivateconsumption.Privateconsumptionincreasessubstantiallyasaresult,andprivatein-vestmentandsavingsfall(Fig.9).IntheTRscenario,however,theimpactstemsfromareductioningovernmenttransfers.Thisreductionhasanegativeincomeeffectonhouseholds,leadingtoreducedhouse-holdconsumption.Inbothscenarios,Saudihouseholdsrespondbysup-plyingmorelabor.Afterthefirstfiveyears,theincreaseinoilandgasexportrevenuesissufficienttofinancepublicinvestmentsinrenewables.Thus,thepolicyhasanegligiblelong-termimpactonSaudihouseholds.Thedeploymentofrenewablesimpactsnon-Saudihouseholdsthroughitsimpactontherealwage.AsthesupplyofSaudilaborin-creases,therealwagedeclines,andtherealincomeofnon-Saudihouseholdsconsequentlydeclinesaswell.Non-Saudihouseholds’re-mittancesandprivateaggregateconsumptionthereforedecrease.Inthelongrun,however,therealwagerecoverstoalevelaboveitsinitiallevel.Thus,households’privateconsumptionandremittanceseventuallyin-crease.Furthermore,duringthefirsttwoyearsofthepolicy’simple-mentation,non-Saudihouseholds’consumptionofenergyservicesandtradablegoodsincreases.Thisdynamicarisesbecausehouseholdscanaffordmoreofthesegoodsinthefirsttwoyearsofthepolicy.Thesegoods’pricesdonotchange,whereaspricesintheeconomyaregenerallyincreasing.Firms:Thepolicyaffectstheoutputofnon-tradablegoodsinthreedifferentstages.Initially,theiroutputincreases.Thiseffectreversesafterafewyears,however,andtheiroutputfalls.Oncerenewablesarefullydeployed,theoutputofnon-tradablegoodsstartstorecover.IntheGC25Oneofthemainbenefitsofdeployingrenewableenergysourcesistheassociatedreductionincarbondioxideemissions.However,globalwarming,whichiscausedbyincreasingconcentrationsofgreenhousegases,isaglobalphenomenon,whereaswearemodelingasinglesmallopeneconomy.Welfaremaybeaffecteddirectlybytheglobaltemperatureortotalgreenhousegasconcentrationsorindirectlybychangesineconomicactivity.Theseeffectscouldbemodeledwithadamagefunction(whichstilldependsontheglobaltem-peratureorconcentrations).However,anyreductioninSaudiArabia’scarbondioxideemissionswillhaveasmall-to-negligibleimpactontemperatureand,thus,onSaudicitizens’welfare.Althoughourmodelcancalculatethecarbondioxideemissionsgeneratedbytheuseoffossilfuels,wedonotmodeltheclimatesystemandfeedback.Suchworkisleftforfutureresearch.Instead,wecanconsiderthispolicydecisionbySaudiauthoritiestobemotivatedbyadesiretodiversifytheeconomy’senergysources.J.Blazquezetal.EconomicModelling95(2021)145–169158
Fig.9.Deploymentofrenewableenergy:Saudihouseholds.Fig.10.Deploymentofrenewableenergy:energysources,electricity,andenergyservices.J.Blazquezetal.EconomicModelling95(2021)145–169159
Fig.11.Deploymentofrenewableenergy:macroeconomicvariables.Fig.12.Jointsimulation:Saudihouseholds.J.Blazquezetal.EconomicModelling95(2021)145–169160
Fig.13.Jointsimulation:energysources,electricity,andenergyservices.Fig.14.Jointsimulation:macroeconomicvariables.J.Blazquezetal.EconomicModelling95(2021)145–169161
scenario,theinitialincreaseinoutputismainlydrivenbygreaterde-mandfromSaudihouseholdsandpublicinvestment.IntheTRscenario,theinitialincreaseinoutputismainlydrivenbytheincreaseddemandcomingfrompublicinvestmentinrenewables.Inthelongrun,thepolicypositivelyaffectstheoutputofnon-tradablegoods.Thedemandforin-putsandthepriceofnon-tradablegoodsfollowsimilarpatterns.Incontrast,thedeploymentofrenewablesdecreasesoutputinthetradablegoodssector.Theincreaseinthepriceofnon-tradablegoodsimpliesthattherealexchangerateappreciates,whichisanegativeshocktothetradablegoodssector.Thedemandfortradablegoodsfromcon-sumptionandprivateandpublicinvestmentmayincrease.However,thisincreaseisoutweighedbythereductionindemandfromgovernmentconsumptionandtheforeignsectorexceptinthefirsttwoperiods.Moreover,allinputsarereduced,andthesectorsubstitutesexpatriatelaborwithSaudilabor.Energyservicesandelectricity:Theincreaseinrenewableenergylowerstheuseofoilandgasinpowergenerationinthelongrun,butitdoesnotsubstantiallyaffectenergyservices(Fig.10).Intheshortrun,however,thetwoscenariosresultinoppositeimpactsofrenewablesdeploymentonenergyservicesandelectricity.IntheGCscenario,thedemandforelectricityandenergyservicesincreasesbecauseconsump-tionbySaudihouseholdsincreases.IntheTRscenario,thedemandforelectricityandenergyservicesdecreasesashouseholds’consumptionfalls.However,afterrenewablesarefullydeployed,theeffectsreverse.Oilandgasexportsfollowthesamepattern.Inthelongrun,oilandgasexportsexperiencepositivegrowthinbothscenariosasrenewablesarefullydeployed.GDP:ThedeploymentofrenewablespositivelyimpactsrealGDPinthelongrun,drivenbyoilandgasexports.However,duringtheinitialdeploymentperiod,realGDPdeclinesintheGCscenariobutincreasesintheTRscenario.Realnon-oilGDPfollowsthesamepatternasnon-tradablegoodsinbothscenarios.Whenrenewablesaredeployed,therealtradebalancedeterioratesbecausetherealexchangerateappreci-ates.However,inthelongrun,therealtradebalanceimprovesasoilandgasexportsoutweighthereducedproductioninthetradablegoodssector(Fig.11).5.4.JointsimulationInthisscenario,weintroducethepoliciesthataresimulatedintheprevioussubsectionssimultaneously.Specifically,wesimulatea5%VAT,agradualincreaseindomesticoilandgaspricestotheirinternationallevels,andanincreaseofpublicinvestmentinrenewableenergytoreach10%penetrationinelectricityafterfouryears.Theresultsofthissimu-lationarepresentedinFigs.12–14.Theseresultsreflecttheneteffectofallimplementedpolicies.However,theenergypricereformproducesthelargestquantitativeeffectsbyfar.Thus,theadjustmenttrajectoriesformostvariablesaredominatedbythispolicy,asthefiguresshow.5.5.WelfareanalysisInthissection,wecomputethewelfaregainsassociatedwitheachpolicysimulation.NotethatweonlytakeintoaccounttheSaudipop-ulation’swelfare.Wemakethisdistinctionfortworeasons.First,Saudihouseholdsaretheonlyhouseholdsthatbenefitfromgovernmenttransferpaymentsandgovernmentspending.Second,wemodelnon-Saudihouseholdsasnon-Ricardianhouseholdsthatdonotoptimizeintertemporally.RecallthatthewelfareofarepresentativeSaudihouseholdisgivenbyequations(1)and(2).Foreaseofexposition,wedenoteaggregatecon-sumptionbyAGCst.Aggregateconsumptionisacompositeofnon-energyconsumptionandenergyservices½ðCstÞσþκðESstÞσ1=σ.Wemeasurewel-faregainsandlossesbycomparingthediscountedutilityflowinthecasewithnopolicychangetothediscountedutilityflowwhenthepolicyhasbeenimplemented.WecomputethepercentageincreaseinaggregateconsumptionthatmakesaSaudihouseholdindifferentbetweenthepolicyandnopolicy,followingtheequivalentvariationcriteria.Thischangeismeasuredintermsofinitialconsumption.Wedenotethevar-iableswithnopolicychange(i.e.,intheinitialsteadystate)byzandthosewithapolicychangeby~zt.Thus,wecomputetheequivalentvariationasthevaluexthatsolves:11βUsAGCsð1þxÞ;lsþlsg;GC¼X∞t¼0βtUsgAGCst;glstþlsg;t;gGCt:(37)TheresultsarepresentedinTable4.TheVATpolicycreatesconsiderablewelfaregainsforSaudihouse-holds.Ifthispolicyresultsinanincreaseingovernmentspending,thenthewelfaregainisaround3%.Ifitresultsinanincreaseingovernmenttransfers,thenthewelfaregainisover4%.TheenergypricereformpolicyleadstosubstantiallylargerwelfaregainsforSaudihouseholds.Thecorrespondingequivalentvariationsare22.35%and30.39%inthegovernmentspendingandtransferrecyclingscenarios,respectively.Incontrast,thedeploymentofrenewablesgeneratesawelfarelossofaround2%forSaudihouseholds.Thislossisexplainedbythenecessaryinitialinvestmentsinrenewables,whichsignificantlyreducehouseholdtransfersorgovernmentspendingduringtheinitialdeployment.Althoughrenewablesgenerateconsiderablelong-termfinancialgains,theyarenotsufficienttooffsetthehighinitialcosts.Thus,thedeploy-mentofrenewableshasanegativeoverallwelfareimpactonSaudihouseholds.Takentogether,thethreepolicychangessimultaneouslycreatewel-faregainsofnearly25%inthegovernmentspendingscenarioandmorethan32%inthetransferscenario.Theeffectoftheenergypricereformclearlydominates,asnotedabove.Theestimatedwelfaregainfromjointlyimplementingthesepoliciesisarelevantresultforpolicymakers.Thus,thepolicychangesenvisionedbyVision2030thatweanalyzehereareworthwhile.Table5,whichshowsthemacroeconomiccontributionsofeachpol-icychange,reinforcesthisconclusion.Inthelongrun,GDPincreasesbyover5%,revenuesfromoilexportsincreasebyabout20%,andoilTable4Policywelfaregains:equivalentvariationcriterion.PolicyRecyclingscenarioGCTRVATsimulation3.02%4.25%Energypricereforms22.35%30.39%Deploymentofrenewableenergy1.88%2.07%Jointpolicy23.48%32.44%Table5Long-runeffects(%relativetotheinitialsteadystate).PolicyRecyclingscenarioGCTRVATsimulationRealGDP0.17%0.60%Realnon-oilGDP1.04%1.14%Oilexportrevenues1.12%0.33%Oilrevenues0.86%0.25%EnergypricereformsRealGDP5.88%5.50%Realnon-oilGDP0.94%0.21%Oilexportrevenues20.00%18.78%Oilrevenues21.20%21.40%DeploymentofrenewableenergyRealGDP0.56%0.57%Realnon-oilGDP0.30%0.30%Oilexportrevenues0.83%0.85%Oilrevenues0.64%0.65%JointpolicyRealGDP5.54%5.16%Realnon-oilGDP1.83%0.94%Oilexportrevenues20.45%19.09%Oilrevenues21.12%21.33%J.Blazquezetal.EconomicModelling95(2021)145–169162
revenuesincreasebyover21%.Allthreepoliciesindividuallyproduceincreasesinoilexports,albeitofdifferentmagnitudes.Theenergypricereformleadstoanincreaseinoilexportsofmorethan20%andanin-creaseinrealGDPofcloseto6%.Itseffectonnon-oilGDP,however,ismixed.WiththeintroductionofaVAT,bothrealandnon-oilGDPdecreasebylessthan1%.Oilexportshaveaslightincreaseof0.5%–1.4%.Withthedeploymentofrenewables,thegaininoilexportsisabout2%,withlong-runincreasesinbothrealandnon-oilGDPoflessthan1%.Again,themacroeconomiceffectofthejointpoliciesisdominatedbytheeffectoftheenergypricereform.6.ConclusionsIn2016,theSaudigovernmentannouncedSaudiVision2030,whichenvisionsabroadsetofsocioeconomicreforms.ThesepoliciesincludeaVAT,energypricereforms,andtheincreaseddeploymentofrenewableenergytoreducehydrocarbons’useinthepowergenerationfuelmix.WethereforeusetheK-DSGEmodeltoanalyzethemacroeconomicimpactsofthesethreeflagshipeconomicpolicyreformsofVision2030.TheK-DSGEmodelisadeterministicversionofadynamicstochasticgeneralequilibriummodel,thefirstofitskind.AstheSaudieconomyheavilydependsonoilexports,themagnitudeoftheeconomicimpactofthestructuraleconomicreformslargelyde-pendsontheireffectonoilexportrevenues.Reformsthatreducedo-mesticenergyconsumptionleadtoincreasedoilexports.Thus,theimpactoftheeconomicreformsontheSaudieconomydependsontheireffectonthegovernmentbudget.Italsohingesonthewaythataddi-tionalrevenuesfromtaxesoroilexportsarerecycledbackintotheeconomy.Wepresentedtheresultsforallofthekeymacroeconomicvariablesinthemodeleconomy.Wealsoquantifiedthewelfaregainsandthedy-namicadjustmentsofoilexportsandGDP.OurresultsshowthattheVATandenergypricereformpoliciesresultinincreasedfiscalrevenue.Ifthisrevenueisrecycledbackintotheeconomythroughgovernmentspendingorlump-sumtransfers,Saudihouseholds’welfareimproves.Thedeploymentofrenewablesforpowergeneration,incontrast,requiresgovernmentinvestmentand,thus,hasanegativewelfareeffectonSaudihouseholds.TheVATnegativelyaffectsrealGDPeventhoughoilandgasexportsincreaseunderthispolicy.ThefallinrealGDPismainlydrivenbyadecreaseinnon-oilGDP.TheenergypricereformpositivelyimpactsrealGDP,mainlybecauseofthesignificantincreaseinoilandgasexports.ThedeploymentofrenewablespositivelyaffectsrealGDPinthelongrun.However,intheinitialdeploymentphase,theeffectonrealGDPdependsonhowthegovernmentbudgetisadjustedtoaccommodatetheneces-sarypublicinvestment.Ifadeclineingovernmentspendingisnecessary,thenrealGDPfallsinthedeploymentphase.Ifadeclineingovernmenttransfersisnecessary,however,thenrealGDPincreasesinthedeploy-mentphase.Finally,underallthreepolicies,thefiscalsurpluscanalsoberecycledthroughadjustmentstogovernmentdebt.Inthisscenario,ourmodelwouldallocatetheincreasedoilexportrevenuesassociatedwithapolicychangetoareductioninthepublicdebtstock.Inthiscase,thescaleofthemacroeconomicimpactsmaybelimitedcomparedtotheotherscenarios.Notethatinthiscase,ourmodelsuggestthatSaudihouseholdswouldbeaffectedmainlybyachangeintheirgovernmentbondholdings.Thischangewouldaffecttheirdisposableincome.Thus,theimpactontheeconomywouldmimictheTRscenario,inwhichthefiscalsurplusisrecycledbackintotheeconomythroughgovernmenttransfers.However,theSaudieconomyisnotexperiencingpublicdebtsustainabilityprob-lems,and,thus,usingextrapublicrevenuestoreducepublicdebtseemsunrealistic.ThereareseveralavenuesforfutureresearchusingtheK-DSGEmodelthatweplantoundertake.Oneisusingthestochasticversionofthemodeltostudytheroleofoilpriceshocks.ThisresearchcaninvestigatetheSaudieconomy’sresiliencewhenthegovernmentcanrelyonawealthstabilizationfundasabufferforthoseshocks.Aseconddirectionforresearchisextendingthemodeltoincorporate“NewKeynesian”features.Doingsowouldallowustobettermodelandstudylaborandproductmarketissues.Third,wecanincludeaclimatemoduleandtechnologiesforthecaptureandutilizationofcarboninthemodel.Thus,wecanincorporatefeaturesoftherecentlydescribed“carboncirculareconomy”(William,2019).Thesethreeitemsarenextonourresearchagenda.DeclarationofcompetinginterestTheauthorsdeclarethattheyhavenoknowncompetingfinancialinterestsorpersonalrelationshipsthatcouldhaveappearedtoinfluencetheworkreportedinthispaper.AcknowledgementBaltasarManzanoacknowledgesthefinancialsupportfromtheSpanishGovernmentandFEDERtroughgrantRTI2018-093365-B-I00.AppendixA:ModelequationsA.1.SaudiHouseholdsAggregatetaxrateontradableandnon-tradableconsumptiongoods:ð1þτC;tÞ¼(θC½ð1þτT;tÞPT;t1σCþ1θC½ð1þτNT;tÞPNT;t1σCθCP1σCT;tþ1θCP1σCNT;t)11σC(1)Aggregatepriceoftradableandnon-tradableconsumptiongoods:Pt¼nθCP1σCT;tþð1θCÞP1σCNT;to11σC(2)Saudilaborsupplyinthetradablegoodssector:lsT;t¼θLWT;tWtσLlst(3)Saudilaborsupplyinthenon-tradablegoodssector:J.Blazquezetal.EconomicModelling95(2021)145–169163
lsNT;t¼ð1θLÞWNT;tWtσLlst(4)Aggregatewageinthetradableandnon-tradableconsumptiongoodssectors:Wt¼θLðWT;tÞ1σLþ1θLðWNT;tÞ1σL11σL(5)Saudihouseholds’marginalutilityofconsumption:MUCst¼∂Us∂Cst¼Cstσ1CstσþκESstσ1σσCstσþκESstσ1=σþαCGGCt(6)Saudihouseholds’marginalutilityofenergyservices:MUESst¼∂Us∂ESst¼κESstσ1CstσþκESstσ1σσCstσþκESstσ1=σþαCGGCt(7)Saudihouseholds’marginalutilityofleisure:MULst¼∂Us∂lsT;t¼ηlstþlsg;tν(8)Dynamicconditionforforeigndebt:MUCstð1þτC;tÞPtxt¼βEtMUCstþ1ð1þτC;tþ1ÞPtþ1xtþxtþ1i*tþ1(9)Dynamicconditionforgovernmentdebt:MUCstð1þτC;tÞPt¼βEtMUCstð1þτC;tþ1ÞPtþ1ð1þitþ1Þ(10)Optimalallocationofconsumptionandenergyservices:MUESstMUCst¼ð1þτES;tÞPES;tð1þτC;tÞPt(11)Optimalallocationofconsumptionandleisure:MULstMUCst¼1τsW;tWtð1þτC;tÞPt(12)Fixedcapitalinvestmentinthetradablegoodssector:qT;t¼Pt1þhTIT:tKT;t1δT(13)Fixedcapitalinvestmentinthenon-tradablegoodssector:qNT;t¼Pt1þhNTINT:tKNT;t1δNT(14)Dynamicconditionforfixedcapitalstockinthetradablegoodssector:qT;t¼Et11þxtþ1i*tþ1xtqT;tþ1ð1δTÞþð1τK;tþ1ÞiT;tþ1Ptþ1hT2IT;tþ1KT;tδTIT:tþ1KT;tδT(15)Dynamicconditionforfixedcapitalstockinthenon-tradablegoodssector:qNT;t¼Et11þxtþ1i*tþ1xtqNT;tþ1ð1δNTÞþð1τK;tþ1ÞiNT;tþ1Ptþ1hNT2INT:tþ1KNT;tδNTINT:tþ1KNT;tδNT(16)Saudihouseholds’budgetconstraint:xtB*txt1þxti*tB*t1þBtð1þitÞBt1þð1þτES;tÞPES;tESstþð1þτC;tÞPtCstþPtIT;tþhT2IT:tKT;t1δT2KT;t1þPtINT;tþhNT2INT:tKNT;t1δNT2KNT;t1¼1τsW;thWstlstþWsg;tlsg;tiþð1τK;tÞ½iT;tKT;t1þiNT;tKNT;t1þTRt(17)J.Blazquezetal.EconomicModelling95(2021)145–169164
Capitalaccumulationinthetradablegoodssector:IT;t¼KT;tð1δTÞKT;t1(18)Capitalaccumulationinthenon-tradablegoodssector:INT;t¼KNT;tð1δNTÞKNT;t1(19)A.2.Non-SaudiHouseholdsNon-Saudilaborsupplyinthetradablegoodssector:lnsT;t¼θLWT;tWtσLlnst(20)Non-Saudilaborsupplyinthenon-tradablegoodssector:lnsNT;t¼ð1θLÞWNT;tWtσLlnst(21)Non-Saudihouseholds’consumption:ð1þτC;tÞPtCnst¼ϕC1τnsW;tWtlnst(22)Non-Saudihouseholds’energyservices:ð1þτES;tÞPES;tESnst¼ϕES1τnsW;tWtlnst(23)Non-Saudihouseholds’remittances:ð1þτREM;tÞREMt¼ð1ϕCϕESÞ1τnsW;tWtlnst(24)A.3.Tradableandnon-tradablegoodsfirmsProductionoftradablegoods:yT;t¼AThð1xpatÞlsT;tþxpatlnsT;tiαTnθT½ð1xpatÞKT;t1νTþð1θTÞESνTT;toð1αTÞνT(25)Optimallaborinputintradablegoodsproduction:WT;t¼αTPT;tAThð1xpatÞlsT;tþxpatlnsT;tiαT1nθT½ð1xpatÞKT;t1νTþð1θTÞESνTT;toð1αTÞνT(26)Optimalcapitalinputintradablegoodsproduction:iT;t¼ð1αTÞθTPT;tAT½ð1xpatÞKT;t1νT1hð1xpatÞlsT;tþxpatlnsT;tiαTnθT½ð1xpatÞKT;t1νTþð1θTÞESνTT;toð1αTÞνT1(27)Optimalenergyservicesinputintradablegoodsproduction:PES;t¼ð1αTÞð1θTÞPT;tATESνT1T;thð1xpatÞlsT;tþxpatlnsT;tiαTnθT½ð1xpatÞKT;t1νTþð1θTÞESνTT;toð1αTÞνT1(28)Productionofnon-tradablegoods:yNT;t¼YNT;tNt¼ANThð1xpatÞlsNT;tþxpatlnsNT;tiαNTnθNT½ð1xpatÞKNT;t1νNTþð1θNTÞESνNTNT;toð1αNTÞνNT(29)Optimallaborinputinnon-tradablegoodsproduction:WNT;t¼αNTPNT;tANThð1xpatÞlsNT;tþxpatlnsNT;tiαNT1nθNT½ð1xpatÞKNT;t1νNTþð1θNTÞESνNTNT;toð1αNTÞνNT(30)Optimalcapitalinputinnon-tradablegoodsproduction:iNT;t¼ð1αNTÞθNTPNT;tANT½ð1xpatÞKNT;t1νNT1hð1xpatÞlsNT;tþxpatlnsNT;tiαNTnθNT½ð1xpatÞKNT;t1νNTþð1θNTÞESνNTNT;toð1αNTÞνNT1(31)J.Blazquezetal.EconomicModelling95(2021)145–169165
Optimalenergyservicesinputinnon-tradablegoodsproduction:PES;t¼ð1αNTÞð1θNTÞPNT;tANTESνNT1NT;thð1xpatÞlsNT;tþxpatlnsNT;tiαNTnθNT½ð1xpatÞKNT;t1νNTþð1θNTÞESνNTNT;toð1αNTÞνNT1(32)A.4.EnergyservicesfirmProductionofenergyservices:ESt¼hϕELλtþψOλES;tþð1ϕψÞGλES;ti1=λ(33)Optimalelectricityinputinenergyservicesproduction:PES;t¼EL1λtϕhϕELλtþψOλES;tþð1ϕψÞGλES;tiλ1λPEL;t(34)Optimaloilinputinenergyservicesproduction:PES;t¼ O1λES;tψ!hϕELλtþψOλES;tþð1ϕψÞGλES;tiλ1λPdO;t(35)Optimalgasinputinenergyservicesproduction:PSE;t¼ G1λES;t1ϕψ!hϕELλtþψOλES;tþð1ϕψÞGλES;tiλ1λPdG;t(36)A.5.ElectricityfirmElectricitygeneration:ELt¼OγEL;tG1γEL;tþRENt(37)Optimaloilinputinelectricitygeneration:γPEL;tOγ1EL;tG1γEL;t¼PdO;t(38)Optimalallocationofoilandgasinelectricitygeneration:γ1γGEL;tOEL;t¼PdO;tPdG;t(39)Optimalconditionforrenewableenergyinputinelectricitygeneration:PEL;t¼PR;t(40)A.6.ResourcesectorRenewableenergyproduction:RENt¼2664AR1þχRENtELt3775KgR;t1(41)Publiccapitalaccumulationintherenewableenergysector:IgR;t¼KgR;tð1δRÞKgR;t1(42)Oilproduction:Ot¼αOutKgO;t1(43)Publiccapitalaccumulationintheoilsector:IgO;t¼KgO;tð1δOÞKgO;t1(44)J.Blazquezetal.EconomicModelling95(2021)145–169166
Gasproduction:Gt¼αGOt(45)Internationaloilprice:lnP*O;t¼ð1ϱOÞlnP*O;ss;t1þϱOlnP*O;t1þ1εSRlnOXtOXt1(46)Internationalgasprice:lnP*G;t¼ð1ϱGÞlnP*G;ssþϱGlnP*G;t1(47)A.7.GovernmentGovernmentbudgetconstraint:PtIgO;tþPtIgR;tþWsg;tlsg;tð1xpatÞþPtGCtð1xpatÞþTRtð1xpatÞ¼τC;tPtð1xpatÞCstþðxpatÞCnstþτES;tPES;tð1xpatÞESstþðxpatÞESnstþτsW;thWstlstþWsg;tlsg;tið1xpatÞþτnsW;tWnstlnstðxpatÞþτREM;tREMtðxpatÞþτK;t½iT;tKT;t1þiNT;tKNT;t1ð1xpatÞþPdO;tðOEL;tþOES;tÞþPdG;tðGEL;tþGES;tÞþPR;tRENtþxtP*O;tOtOEL;tOES;tþxtP*G;tGtGEL;tGES;tþ½Btð1þitÞBt1ð1xpatÞ(48)A.8.OtherequationsEquilibriuminthemarketforenergyservices:ESt¼ð1xpatÞESstþðxpatÞESnstþEST;tþESNT;t(49)Equilibriuminthemarketfornon-tradablegoods:yNT;t¼ð1θCÞð1þτNT;tÞPNT;tð1þτC;tÞPtσCð1xpatÞCstþðxpatÞCnstþð1θCÞPNT;tPtσCð1xpatÞIT;tþhT2IT:tKT;t1δT2KT;t1þINT;tþhNT2INT:tKNT;t1δNT2KNT;t1þIgO;tþIgR;tþð1xpatÞGCt(50)NominalGDP:GDPt¼PtytþPES;tð1xpatÞESstþðxpatÞESnstþxtP*O;tOtOEL;tOES;tþxtP*G;tGtGEL;tGES;t(51)Nominaltradebalance:TBt¼ð1xpatÞxtB*txt1þxti*tB*t1þðxpatÞREMt(52)Nominalforeigninterestrate:i*t¼i**þζexpB*ssB*t11(53)Priceindexes:Pt¼nθCP1σCT;tþ1θCP1σCNT;to11σC(54)Pagg;t¼Pσ1σtþκ1σPσ1σES;tσσ1(55)Normalization:PT;t¼xtP*T;t(56)AppendixB.SensitivityanalysisB.1.Sensitivityanalysisfortheparameterrepresentingtheelasticityofsubstitutionbetweentradableandnon-tradableconsumptiongoods(σC)ThemainreasontoassumethatσC¼1isthelackofavailabledatatoestimateitforSaudiArabia.Estimationsforothereconomiesareavailable,butJ.Blazquezetal.EconomicModelling95(2021)145–169167
therangeoftheseestimationsissizable.Mendoza(1995)estimatesavalueof0.74usingamulti-countrydatabase,whereasStockmanandTesar(1995)obtainavalueof0.44withadifferentdatabase.Moreover,SaudiArabiahasauniquetradestructure,asmostofitsexportsareoil-related.Thus,estimatesfromothercountriesmustbeusedwithcaution.Becausethiselasticityisneverthelessaveryrelevantparameterinthemodel,weconductasensitivityanalysistodetermineitsinfluenceontheresults.TableB.1Sensitivityofwelfaregains(equivalentvariationcriterion)tochangesinσC.PolicyRecyclingscenarioGCTRVATsimulationσC¼13.02%4.25%σC¼0:752.78%4.34%σC¼0:52.48%4.46%EnergypricereformsσC¼122.35%30.39%σC¼0:7519.91%28.82%σC¼0:516.69%26.13%DeploymentofrenewableenergyσC¼11.88%2.07%σC¼0:751.99%2.38%σC¼0:52.13%2.85%TableB.1reportsthepolicywelfaregainsunderseveralelasticities.Whethertheclosingfiscalvariableistransfersorgovernmentspending,changingσCproducesonlysmallchangesintheresults.Wealsoreportthedynamictrajectoriesofthethreedifferentpoliciesunderthetwofiscaladjustmentscenarios.WefindnoqualitativedifferencesandonlyverymildquantitativedifferenceswhenσCischanged.B.2SensitivityanalysisfortheparameterrepresentingtheweightofpublicconsumptionintheSaudihousehold’sutilityfunction(αGC)Themacroeconomicliteraturedescribesutilityfunctionsthatlinearlyaggregateprivateandgovernmentconsumption.Amongothers,relevantstudiesincludethoseofBarro(1981),Aschauer(1985),andChristianoandEichenbaum(1992).Givenourlogarithmicpreferencestructure,theaggregateconsumptiongoodandgovernmentconsumptionareperfectsubstitutes.Theconstantmarginalrateofsubstitutionbetweenthetwogoodsisequalto1=αGC.AnegativesignofαGCwouldimplythatgovernmentconsumptionhasnegativeexternalities.Thereisnodirectmethodforindividuallyestimatingtheinfluenceofgovernmentconsumptiononindividualpreferences.Thus,wejointlyestimateαGCwithotherparameterstomatchthemostrelevantaverageratiosintheactualSaudieconomy,andweobtainavalueofαGC¼0:452.However,totesttheinfluenceofαGContheresults,weconductasensitivityanalysis.TableB.2Sensitivityofwelfaregains(equivalentvariationcriterion)tochangesinαCG.PolicyRecyclingscenarioGCTRVATsimulationαGC¼0:21.27%3.84%αGC¼0:4523.02%4.25%αGC¼0:77.48%4.66%EnergypricereformsαGC¼0:23.51%30.19%αGC¼0:45223.59%31.91%αGC¼0:744.05%33.75%DeploymentofrenewableenergyαGC¼0:20.72%1.91%αGC¼0:4521.88%2.07%αGC¼0:73.11%2.21%TableB.2reportsthewelfaregainsofthethreepoliciesforseveralvaluesoftheparameterαGC.Whentheclosingfiscalvariableistransfers,changingαGCproducessmallchangesintheresults.However,whentheclosingvariableisgovernmentspending,themagnitudeofthewelfaregainschangessubstantially.Thedriverofthischangeisnotthedynamicreactionbutratherthevaluationofthechangesingovernmentconsumption.Thus,theincreasesingovernmentconsumptiongeneratedbytheVATandenergypricereformshavelarger(smaller)welfareimpactswhenαGCisgreater(smaller).Inthecaseofrenewablesdeployment,weobservetheoppositeresultbecausethepolicyinducesadecreaseingovernmentconsumptioninthefirstperiod.AppendixC.SupplementarydataSupplementarydatatothisarticlecanbefoundonlineathttps://doi.org/10.1016/j.econmod.2020.12.004.ReferencesAnnicchiarico,B.,DiDio,F.,2015.EnvironmentalpolicyandmacroeconomicdynamicsinanewKeynesianmodel.J.Environ.Econ.Manag.69(C),1–21.Annicchiarico,B.,DiDio,F.,2017.GHGemissionscontrolandmonetarypolicy.Environ.Resour.Econ.67(4),823–851.Aschauer,D.A.,1985.Fiscalpolicyandaggregatedemand.Am.Econ.Rev.75,117–127.Barro,R.J.,1981.Outputeffectsofgovernmentpurchases.J.Polit.Econ.89,1086–1121.Behar,A.,2015.Comparingtheemployment-outputelasticitiesofexpatriatesandnationalsintheGulfcooperationCouncil.InternationalmonetaryfundworkingpaperN.15/191.IMFWorkingPapers15(191).Berg,A.,Gottschalk,J.,Portillo,R.,Zanna,L.-F.,2010.Themacroeconomicsofmedium-termaidscaling-upscenarios.InternationalMonetaryFundWorkingPaperN10/160.Blazquez,J.,Hunt,L.C.,Manzano,B.,2017.OilsubsidiesandrenewableenergyinSaudiArabia:ageneralequilibriumapproach.EnergyJ.38(1),29–45.Blazquez,J.,Galeotti,M.,Manzano,B.,Pierru,A.,Pradhan,S.,2019.K-DSGE:ADynamicStochasticGeneralEquilibriumModelforSaudiArabiaKAPSARCDiscussionPaperN.KS-2019-MP06.Blazquez,J.,Hunt,L.C.,Manzano,B.,Pierru,A.,2020.ThevalueofsavingoilinSaudiArabia.Econ.EnergyEnviron.Policy9(1),207–222.J.Blazquezetal.EconomicModelling95(2021)145–169168
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International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 62 THE ECONOMIC AND SOCIAL IMPACT OF THE ADOPTION OF VALUE-ADDED TAX IN SAUDI ARABIA Adel Bogari1 Assistant Professor – College of Business Administration, Al-Baha University, KSA Email: aabogari@bu.edu.sa Abstract: The purpose of this study is to determine the economic and social effects of the adoption of value-added tax in the Kingdom of Saudi Arabia. To achieve this goal, a descriptive and an analytical approach was used. We examine a sample of (287) Saudi nationals working in the private and public sectors. Our methodology used the direct questionnaire delivery and receipt method. To process our data and test our research hypotheses, we used SPSS software. The results indicate that the implementation of the value-added tax increases the country’s financial resources. However, such an initiative has a negative social impact and faces many challenges. Bearing on these results, we recommend the need to upgrade the quality of the implementation of the on value-added tax law through improving the efficiency and effectiveness of employees in the General Authority of Zakat & Tax, and simplifying tax procedures until the positive effects on the economic and social side rebound. The researcher recommends the need to overcome economic challenges through the commitment of wholesalers and retailers to release tax invoices for all their dealings, and to organize their businesses through electronic invoices. The researcher recommends the need to overcome the social challenges that face the implementation of the value-added tax law, by promoting trust between the community and the General Authority of Zakat & Tax and activating the role of the Zakat and Tax Authority in spreading awareness and tax culture to the community. Keywords: added value, tax, State financial resources, purchasing power, inflation, savings, investment. 1. Introduction Since January 1, 2018, the Kingdom of Saudi Arabia has started implementing the 5% value-added tax, which is the lowest approved rate in the world. This measure is expected to have a positive impact on economic growth through an increase in GDP. According to the report of the International Monetary Fund (2019), economic reforms in the Kingdom have started to achieve positive results, and it is recommended to increase this percentage to match the ratios approved around the world. For example, the value-added tax rate reaches 25% in the European Union. The adoption of value-added tax is one of the mechanisms covered by the Kingdom’s 2030 vision of reducing dependence on oil as a primary source and diversifying the sources of the economy to ensure financial balance, continuity of development, and sustainability of government services. The General Authority of Zakat & Tax is responsible for managing and applying this tax in the Kingdom of Saudi Arabia. The adoption of Value-Added Tax is one of the most controversial topics, not only among professionals in the field of law and tax, but also by economic sectors and broad segments of society interested in knowing the impact of value-added tax on consumers as well as knowing the various options available to consumers regarding goods subject to VAT. The research problem under study is the lack of sufficient studies on this topic, specifically on the impact of the adoption of value-added tax in the Kingdom of Saudi Arabia on the economy in general and on different social segments groups in the private and in the public sectors.
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 63 2. Research Hypotheses The first hypothesis (H1) The adoption of VAT has a positive economic impact in the Kingdom of Saudi Arabia. The second hypothesis (H2) The adoption of VAT has a negative social impact in the Kingdom of Saudi Arabia. The third hypothesis (H3) VAT implementation faces challenges at more than one level in the Kingdom of Saudi Arabia. 3. Research methodology To reach our research objectives and determine the impact of the adoption of value-added tax on the economic and social spheres, we will use accepted scientific approaches in economic and social sciences in general, and therefore we will rely on: – The descriptive approach to develop our theoretical framework of taxation and highlight the importance of the state’s involvement in economic activity. – The inductive approach with the aim of studying and extrapolating some of the previous research and studies on taxation – Statistical and standard methods. – The tools used in the study are: – Macroeconomic indicators, such as GDP, exports, taxes, trade balance, and social stability. – A questionnaire – Statistics and related packages, – Laws and legislation on tax and trade. Then, the rest of the paper is structured as follows. The second section presents the concept, characteristics and importance of adopting VAT. Section three reviews the economic and social effects of implementing value-added tax. Section four goes through previous research and experiences of some countries that adopted the value-added tax measure. In section five, we present our results and test our hypotheses. 4. The concept, characteristics and importance of adopting Value Added Tax (VAT) 4.1 Definition of VAT In order to study the effects of value added tax, a proper definition of the concept of value added is necessary. Most definitions agree that added value is the difference between the sale value of goods and services (Output) and the cost of purchasing materials and other production costs, including the percentage of depreciation of assets that go into manufacturing goods and services (Input). VAT can be defined as a tax on consumption or spending in all its forms and imposed on the value added at each stage of production. In theory, it can be considered a tax on public spending in all its forms. It is a tax borne by the final consumer of the good or the last beneficiary of the service. Therefore, it is considered a transfer tax. To understand the nature of this tax, it should be noted that the goods go through different and multiple stages since they were raw materials (primary commodities) until they reach the consumer as finished goods. Through these different production stages each person has added-value, whether during the production stage or during the retailing stage, known as production cost factors (materials, salaries, wages, rents, profit margins, etc.). At this level, the tax is imposed on this added value or on this difference between the production value at the beginning of the stage and its value at the end of the stage.
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 64 4.2 Characteristics of VAT 1- The relative 5% tax The Saudi law sets VAT rate at 5% of the value of goods and services. It should be noted that this percentage is the lowest in the world. Australia (10%), Egypt (13%), Turkey (18%), Germany (19%), Morocco (20%), France (20%), Italy (22%). 2- Indirect tax As the business does not bear the VAT burden, this tax is considered an indirect tax borne by the end consumer. In order to clarify the method of discounting and the end-consumer bearing the tax, we will explain the procedure in the following example (Figure.1): Figure 1. Method of discounting indirect tax B A Raw materials producer 1- Sales : 140 SAR 1- Sales = 100 SAR 2- VAT 140*5% = 7 2- VAT: 5*%100 =5 3- VAT due : 7-5= 2 3- VAT due: 5-0 = 5 C D 1- Sales = 170 SAR 1- Sales = 190 SAR 2- VAT: 170*5% = 8.5 2- VAT: 190*5% =9.5 3- VAT due: 8.5 – 7 = 1.5 3- VAT due: 9.5 – 8.5 = 1.5 Source: Ravindra , jripathi , amblika sinha , sweta agarwal ” the effect of value added taxes on the Indian society ” journal of accounting and taxation , VOL 3 (2) , 2011. P.32-39. Thus, the value-added tax has become as follows: 2 + 5 + 1.5 + 1 = 9.5 = 5% * 190 3- Periodic tax (monthly, ….) Where the taxpayer is forced to pay to the relevant tax authority (The General Authority of Zakat & Tax) with periodic statements attached to the specified dates. 4- A value tax It is imposed on the value of the good or service, regardless of the type of commodity, as a specific percentage of the value of all goods and services.
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 65 5- Regional tax The value-added tax applies to local products as well as to goods imported from abroad and sold domestically. As for exported goods, they are not subject to this tax. 6- Added tax not considered a cost component. The registered operator may not consider the tax paid on their inputs as cost elements because they can deduce this tax from the tax due on their sales. 7- Tax Collection 7.1. Collection method Tax is not collected once or during a specific period, but it is collected at every production and sale stages and on the added part in each stage and is not imposed on the value for which a tax was previously paid. Example: imagine that the store is selling and shipping 20 of its 100 TVs to a customer in Egypt. We want to know which amount of VAT is due to government. Tax label Total tax Units sold Tax on each unit Unit price before tax Transactions Inputs 50*100=5,000 100 1,000 =%5*50 1,000 R 1- Buying goods from factory Outputs 60*80=4,800 80 1,200 =%5*60 1,200 R 2- selling goods to a consumer in Saudi Arabia Outputs 0*20=0,000 20 1,200 =%0*0 1,200 R 3- Selling goods to a consumer in Egypt Tax due to Saudi government = outputs – inputs = (4,800 +0) – 5,000 = (200) Source :Kingdom of Saudi Arabia VAT manuel 7th Nov, 2017 https://www.vat.gov.sa/sites/default/files/2017-11-2/VAT_Manual_English_16_Nov.pdf 7.2. How to record VAT in accounting books VAT is recorded in the journal according to the nature of the account. In case of purchases, we debit purchase and VAT and credit Cash or bank or name of creditor account or account payable. In case of sales, we debit cash or bank or account receivable and credit sales and VAT. To illustrate this, we provide the following example: Example N°. 1: Suppose that on 5/1/2018 Rayan purchased goods, on the account, for a value of 5250 riyals, including tax on the account from the computers company. This process is accounted for as follows: Credit Debit Account Date 5 000 Purchases 5/1/2018 250 VAT 5 250 To computer company Suppose that on 5/1/2018 Rayan sold, in cash, a merchandise of 6850 riyals, inclusive of tax. This transaction should be recorded as follows: Credit Debit Account Date 6 850 Cash 5/1/2018 6 500 325 Sales VAT The question after these two transactions is: What is the tax amount payable to the General Authority of Zakat & Tax?
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 66 Answer: 325-250 = 75 4.3 VAT goals VAT goals revolve around financial, economic, social, and finally administrative goals. – The financial goals are to increase public revenues, or to provide the largest possible amount of revenue to the state’s treasury. – As for the economic goals, it is to finance the development of projects and different economic programs, and to dismantle financial bottlenecks, or contingencies faced by the state, therefore States need huge financial resources. This forces them to search for resources to increase their revenues. – The social goals are to reach tax justice by allowing some exemptions for essential and basic commodities for some income earners (Kaisa, 2018). – Finally, the administrative goals are to simplify tax legislation so that it can be easily accepted by its payers and also contribute to improving tax performance. These goals have emerged and been consistent with the tax reform policies that have been introduced in most countries (Al-Abdali et.al, 2019). 5. The economic and social effects of implementing Value-Added Tax 5.1 The effect of (VAT) on investment The application of value-added tax may have a positive impact on stimulating investment and production for two reasons (the discount and liquidity principle): a. The taxation principle gives the investor the right to recover the value of the tax that they previously incurred on the services acquired by them under the tax-exempt economy, whether it is fixed assets or current expenses (Atwi, 2004: Al-Madhidi 2018) The principle of tax deduction has a positive impact on investment and results from the non-increase in the cost of investment equivalent to the value of the tax imposed, thanks to the possibility of recovering the amounts paid as a tax on the purchase of equipment and materials needed to manufacture the commodity or to perform the service subject to VAT (Camel, 1992: Jalata, 2011). b. The second factor bears on the liquidity factor that results from keeping the funds collected until the due date. 5.2 The impact of (VAT) on international competition Exemption of exports from value-added tax with the right to deduction provides the value-added tax with its complete neutrality with regard to external and internal trade, and thus the choice and identification of markets is independent of the tax regime (Ugrieh, 2002: Sarmento, 2016). Seen from a different perspective, the adoption of value-added tax encourages exports because exported goods are exempt from tax. In addition to the advantage of tax exemption in the final stage, it is possible to recover all the tax paid in the previous exporting stages, and therefore the value-added tax supports the competitiveness of domestic products in foreign markets (Othman, 2000: Al-Madhidi, 2018). 5.3 The effect of (VAT) on prices, inflation, and purchasing power 5.3.1 The effect of VAT on prices The dependence of most countries around the world on value-added tax initially resulted in an increase in prices, but the wave of price increases was adjusted in light of the climate of competition on which the free economy is based. This amounts to determining demand volume, casting the tax burden upon the buyer and seller together, in contrast to the principle that the indirect tax is fully born by the consumer. The tax burden is transferred from the importer or the producer and from the distribution circles to finally settle on the consumer. Thus, it is said that the tax should not affect production activity, yet it should be noted that although the consumer bears the full burden of the tax, distribution and recovery circles are indirectly involved in bearing the tax burden (Qutaish, 2002).
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 67 Economists think that the adoption of value-added tax will have three effects on prices: 1) Reducing prices of investments (capital goods – investment) and the institutions’ stocks of goods, as a result of the deduction principle that is adopted by the value-added tax. 2) A slight decrease in prices when exporting, as the product (or the exported service) after deducing the tax originally collected on raw materials or investments and general burdens and in general the funds and services necessary for its production or importation. In addition, it is subject to zero tax rate, thanks to the tax deduction mechanism for tax-exempt exports with the right to deduction (Sharaf, 2008). 3) High consumer prices, if imposed on all goods and services consumed without exception or exemption, will cause inflation (Ritu, 2017). 5.3.2. The effect of value-added tax on inflation One of the most important consequences of inflation is the rise in money supply compared to the quantity of goods and services offered in the market. To mend for this, the overall demand should be reduced due to its imbalance with the offered goods and services. In order to reach balance, economists believe that new laws should be enacted to impose modern taxes, or to raise the rates of previous taxes. This will ultimately lead to a low income and low demand for goods. Then, indirect taxes should not be considered to deal with this phenomenon, especially in developing countries that suffer from poor production due to the underdevelopment of their production system, as their tax regimes rely heavily on indirect taxes (Darwish, 2003: Oseni, 2017). Hence, indirect taxes should be avoided and used as a means to remedy this phenomenon and raise its rate because this will inevitably lead to an increase in inflation after sensing the effect of tax on development. Tax is no longer a financial instrument only allocated to finance regular expenses under the traditional financial theory, whose target is maintaining internal and external security, but tax has become a means used by States to influence the different economic spheres and channel investments towards the achievement of social and economic development goals defined in the State’s Economic policy (Al-Qaei, 2002: Eyisi, 2017). There has been a great debate by economists about whether the application of value-added tax has inflationary effects. The outcome of that controversy is two-fold: The first trend sees that implementing value-added tax has no effect on the general level of prices, and that the simultaneous rise in prices is caused by the expansion of loan policies and increase in wages (Al-Morsy, 2004). However, the second trend sees that the adoption of value-added tax results in an increase in prices and an increase in the intensity of inflation in some countries. There are no final studies that clearly explain the effects of VAT on prices and inflation, due to several factors such as changes resulting from other influences such as a rise in wages or loan policy, consumption behavior or timing of the application of tax ….. etc. (Saleh, 2003: Al-Naqash, 2003; Kalas, 2017). 5.3.3. The effect of VAT on purchasing power Most economic theories agree that an increase in commodity prices from the consumer point of view will reduce purchasing power and thus reduce demand, leading to lower sales and thus profits, and then less employment opportunities. Accordingly, economic theory assumes two scenarios: – Real income may decrease through a decrease in nominal wages and payments of other production factors without any change in the general level of prices. – Real income may decrease through an increase in price level while nominal wages and payments of other production factors remain constant or unaffected, depending on tax. In both cases, real household income may decrease depending on the amount of tax practiced.
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 68 6. Previous studies and experiences of some countries implementing value-added tax 6.1. Previous studies There are many studies that dealt with the effects of applying VAT: Mohamed, (1985): This study dealt with the application of value-added tax in France. The study concluded that the old French legislation is not effective in the area of tax exemptions. The study indicated that modern French legislation has taken exemption measures for the purpose of achieving tax justice and among the most important of these exemptions is the exemption on both capital goods, necessary commodities, raw materials and semi-manufactured goods. Moreover, it extends exemption on some bodies and establishments such as non-profit bodies, government interests and institutions. Ahmad, (1999): This study examined the wide application of value-added tax in many developed countries, which made many developing countries aware of it. The study also noted that value-added tax regimes in developing countries are very similar to those in developed countries. Ahmed, (2005): The study aimed to determine the aspects surrounding the implementation of value-added tax, and to identify some of the problems that faced its application. It is noteworthy that value-added tax did not negatively affect revenue or prices if they were better applied. Of the most important results of the study: success in implementing value-added tax lies in the effectiveness of collection and increase in public revenues. Abdel-Rahman, (2009): The study aimed to identify the problems facing the implementation of value-added tax in order to reach appropriate solutions that would increase the efficiency of the tax system. The study concluded that incompatibility of tax laws with some accounting principles leads to several problems that result in unfairness of tax application. Sultan, (2010): The study aimed to measure the role of value-added tax in achieving financial and social goals in the Syrian Arab Republic. The study concluded that value-added tax has a high financial return on the State’s budget and also has a positive impact on investment. Naqd, (2016): The study aimed to show the efficiency of the accounting system in providing accounting information with qualitative characteristics that would enable the General Administration of Value Added Tax in Sudan to properly measure and determine the value-added tax on the taxpayer. One of the most important recommendations of the study is that the costly use of a good accounting information system enables the identification and measurement of value-added tax and reduces tax evasion. Saleh, (2018): The research problem studied by the author was the measurement and determination of the effectiveness of collecting value-added tax revenues and the effect of increasing value-added tax on the volume of public revenue in Sudan during the 2010 to 2015 period. Alavuotunki et al, (2019): This study aimed to determine the effect of VAT on government revenues and inequality between people. This study concluded that value-added tax led to an increase in total government revenues, and as a result increased spending in basic public services provided to poor families. On the other hand, value added tax has led to inequality between people with different income levels, and this tax has created differences in the savings rate. 6.2. Experiences of some countries implementing value-added tax Several countries, such as Belgium, France, Portugal and the United Kingdom, studied data after adopting VAT. The results are as follows. Belgium has applied a complex cumulative value-added tax that extends to all stages and has taken strict control measures. Prices have been frozen for the first three months after introducing this tax. This measure has led to a reduction in price increases. Revenues multiplied and people accepted a significant impact on prices in the future. In France, there was a slight increase in the consumer price index. France conducted a study on value-added tax and found that the differences in prices before and after the transformation reflect the correct changes in taxation. The Price Control Department made an effort to provide advice and set a table to calculate the gross profit margins to raise awareness and guide retailers and avoid price increases.
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 69 It should be noted that the Arab countries that have applied value-added tax, including Tunisia and Lebanon, expect that value-added tax will not have a noticeable impact on the overall price index for several reasons. Of these reasons, the introduction of the value-added tax came with an exemption policy for some products and sectors. According to many economists, the reason for lower inflation is the exemption of basic consumer goods from tax. Because if it is imposed on all goods and services without exception or exemption, it will inevitably cause inflation. 7. The Results 7.1 Study sample Our sample consists in targeting (300) Saudi nationals working in the private or public sector or others, of both gender. 7.2. The Survey The researcher conducted a survey and administered questionnaires. The researcher relied on the direct delivery and receipt method. Of the administered questionnaires, 13 were rejected because of inappropriate responses. Therefore, the questionnaires that were valid and ready for statistical analysis are (287) questionnaires. 7.3. Data sources The survey required: a. Secondary sources: These are the data that could be obtained by looking at the relevant literature on the subject under study. b. Primary sources: These are data from the field, which were collected by administering a questionnaire to the study sample to test our hypotheses. 7.4. The statistical method The researcher used the Program for Social Sciences Statistical (SPSS) program. They relied on percentages, means and standard deviations to analyze the responses of our sample to the items of the questionnaire. The researcher also used the T-test for a single sample and the probability level at (90%), to determine the relationship between the dependent variable and independent variables. The significance level (alpha) is less than or equal to 5% (α ≥5.00). The percentages of occurrences of each item were found, as well as their mean and standard deviation. 7.5. Questionnaire internal coherence and reliability The researcher used the Cronbach’s Alpha, which is a measure to check the internal coherence and reliability of questionnaires. The following table shows a high Alpha coefficient: Cronbach’s Alpha No of Items 0.862 (28) It is clear from the table above that Cronbach’s Alpha is 0,862, attesting to the consistency of the study questionnaire. It is worth noting that Cronbach’s Alpha ranges between zero and one, closer to one indicates a high reliability and validity. 7.6. Analysis of questionnaire data 7.6.1. Analysis of the items of dimension one: The Economic Impact of VAT Application
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 70 Table N°. 1: Mean and Standard Deviation of Economic Impact of Value Added Tax Application Item Mean Standard deviation Percent Rank 1 The value-added tax contributes to increasing the State’s general revenue 3.9443 1.29159 78.886 1 2 The value-added tax provides additional resources to the state budget that it avoids debts 3.7596 1.15633 75.192 4 3 The adoption of value added tax leads to a rise in the consumer price index 3.7561 1.14801 75.122 5 4 Adoption of value added tax in the local market encourages entrepreneurs to think about creating external markets (export is exempt from tax) 3.4564 2.14933 69.128 8 5 Accounting bookkeeping helps prepare the tax return accurately and easily 3.6934 1.14510 73.868 6 6 The adoption of value-added tax leads to inflation in the general level of prices 3.6446 1.21147 72.892 7 7 The adoption of VAT leads to a decrease in real income per capita 3.8676 1.26127 77.352 3 8 The adoption of VAT leads to a decrease in saving 3.9443 1.23626 78.886 2 Total 3.75828 1.3249 75.1657 Tables (1-2 and 3) show the results on the importance of each item, and their rank as seen by respondents. It is clear from Table No. (1) the following: The first item ranked important by our respondents is item 1, with 78% of responses, and a mean of (3.9443), greater than the hypothetical average identified by the researcher (3). The last ranked item by our respondents is item 8, with 69% of responses and a mean (3.4564), greater than the hypothetical average identified by the researcher. As for the economic impact of applying the tax on value Added in the Kingdom of Saudi Arabia, it is found to be significant. Dimension Mean Standard deviation t-Student Significance level 1 The economic effect of VAT adoption in Saudi Arabia 30.0662 6.38501 16.095 0.000 In the table above, it is clear that the calculated t-value is greater than the tabular (T), and this means that the study sample believes that the adoption of value-added tax has a positive impact on the economy in the Kingdom of Saudi Arabia. 7.6.2. Analysis of the items of dimension 2: the social impact of applying value-added tax Table N°. 2: The mean and standard deviation of the social impact of the implementation of value-added tax Item Mean Standard deviation Percent Rank 1 I have a clear investment program and I allocate a monthly budget for it 3.1777 1.44592 63.55 6 2 I invest every month of my remaining monthly 3.2091 1.28664 64.18 5
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 71 resources after purchasing all my monthly consumption needs 3 I consume monthly what remains for me after deducing the investment budget allocated for each month 2.8711 1.33305 57.42 8 4 When making a purchase, I choose the product that has the best relationship (price, quality) regardless of whether it is domestic or foreign 3.6167 1.23730 72.33 1 5 When prices of a specific product increase and the increase exceeds my budget level, I buy the product and decrease the usual purchase amount. 3.2404 1.31746 55.19 9 6 When prices rise and exceed my budget, I resort to debt and maintain the same standard of living 2.4913 1.41881 70.17 2 7 The adoption of value-added tax will entail the recruitment of competencies in order to prepare the tax declaration accurately and transparently 3.1538 1.21284 63.07 7 8 The adoption of value-added tax leads to rationalization of consumption 3.2892 1.27235 65.78 4 9 The adoption of value-added tax burdens the budget of the socially vulnerable groups 3.8188 1.22414 43.62 10 10 Adoption of value-added tax increases state spending in public services 3.4808 2.11029 69.61 3 Total 3.23489 1.3858 64.6978 In table 2, 72% of our respondents ranked first item 4 with a mean of (3.6167), greater than the hypothetical average that the researcher identified. The last ranked item by 43% of our respondents is item 9, with a mean (3.8188), greater than the hypothetical average identified by researcher. As for the social impact of applying VAT in Saudi Arabia, the results are significant as shown in the table below. Dimension Mean Standard deviation t-Student Significance level 1 Social impact of VAT adoption 32.3392 6.7158 5.890 0.000 From the above table, it is clear that the calculated value of t-student is greater than the tabulated (t). This means that the study sample believes that the adoption of value-added tax has a negative social impact in the Kingdom of Saudi Arabia. 7.6.3. Analysis of the items of dimension 3: the challenges of adopting VAT Table N°. 3: The mean and standard deviation of the challenges of implementing VAT Items Mean Standard deviation Percent Rank 1 Maintaining accounting records is a catalyst to avoid double taxation 3.4843 1.24271 69.7 8 2 VAT is a catalyst for maintaining accounting records 3.5261 1.11812 70.5 7
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 72 3 The adoption of VAT creates additional difficulties for small enterprises 3.5854 1.21997 71.7 6 4 The adoption of value-added tax increases the need for consulting tax authority and the methods for dealing with it 3.6376 1.07142 72.8 2 5 The adoption of value-added tax leads to the need for the government to take a package of measures and actions to protect the poor and middle social groups 3.7631 1.24862 75.3 1 6 The adoption of value-added tax leads to the growth of informal trade, which is not subject to tax 3.5923 1.19630 71.8 5 7 The adoption of value-added tax leads to the growth of e-commerce 3.5958 1.14525 71.9 4 8 The adoption of value-added tax leads to competition in the prices of similar products 3.4355 1.15049 68.7 9 9 The VAT system includes a precise definition of exemptions and benefits 3.3136 1.15537 66.3 10 10 The VAT system includes precise measures to track down tax evasion 3.4843 1.20438 72.6 3 Total 3.5564 1.1752 3.5564 Dimension Mean Standard deviation t-Student Significance level 1 VAT challenges 35.5645 7.5744 12.445 0.000 In the above table, it is clear that the calculated (t) is greater than the tabulated (t). This means that the study sample believes that the application of value-added tax faces challenges on more than one level in the Kingdom of Saudi Arabia. As for the rank of items by our respondents, item 5 was ranked first by 75% of respondents, with a mean of (3.7631), greater than the hypothetical average that the researcher identified. The last ranked item by 66% of our respondents is item 9, with a mean (3.3136), greater than the hypothetical average identified by researcher. As for the challenges facing VAT adoption in the Kingdom of Saudi Arabia, the results are significant as shown in the table above. It is clear that the calculated value of t-student is greater than the tabulated (t). This means that the study sample believes that VAT adoption faces many challenges in Saudi Arabia. 8. Conclusions and Recommendations 8.1. Results The researcher reached a set of results, the most important of which are: 1. There is a strong and statistically significant correlation between VAT application and economic variables such as investment, consumption, inflation, purchasing power and the trade balance. 2. There is a strong and statistically significant correlation between VAT application and social variables, mainly represented by prices, purchasing power and social welfare. 3. There is a strong and statistically significant correlation between VAT implementation and the economic and social challenges facing the Kingdom of Saudi Arabia. 8.2. Recommendations 1. The researcher recommends the need to develop the quality of VAT implementation, by improving the efficiency and effectiveness of employees in the Saudi Zakat and Tax Authority, their continuous training, the use of information technology by this authority, and standardizing and simplifying tax procedures so that positive effects on the economic and social spheres can be reached.
International Journal of Economics, Business and Accounting Research (IJEBAR) Peer Reviewed – International Journal Vol-4, Issue-2, 2020 (IJEBAR) E-ISSN: 2614-1280 P-ISSN 2622-4771 https://jurnal.stie-aas.ac.id/index.php/IJEBAR International Journal of Economics, Business and Accounting Research (IJEBAR) Page 73 2. Researcher recommends the need to overcome the economic challenges facing VAT implementation, through the commitment of wholesalers and retailers to release tax invoices of all their transactions, establish tax rules for domestic and international e-commerce, and regulate business through electronic invoices. 3. Researcher recommends the need to overcome social challenges facing VAT application, by promoting trust between the community and the General Authority of Zakat & Tax and activating the role of the General Authority of Zakat & Tax in spreading awareness and taxation culture to the community, improving the level of wages for community members, and the obligation of registrants to keep regular books and accounts, activating the role of the social interest through training registrars on how to apply the provisions of the value-added tax law and its executive regulations, and training registrars on dealing with the Saudi Zakat and Tax Authority through the tax services portal. Acknowledgments The author acknowledges the financial support of the Deanship of Scientific Research at AlBaha University, Kingdom of Saudi Arabia. This article, which is part of the research Project, is developed within the framework of research Programs of AlBaha University References Ahmed Sanaa Ibrahim Al-Ahmad (2005). Value Added Tax in Sudan – Mechanism for Implementation and Economic Effects. University of Khartoum – Khartoum Alavuotunki Kaisa et al., (2018). The Effects of the Value-Added Tax on Revenue and equality. The Journal of Development Studies, pp.1-19. Al-Madadi, Naseer Mashaan, (2018). The Impact of Diversity in Public Revenues on the Public Budget in Jordan, Unpublished Master Thesis, University of Al-Bayt, Faculty of Economics and Administrative Sciences, Jordan. Al-Mursi, Mr. Hijazi, (2004). Income, Wealth and Expenditure Taxes in Lebanon with Presentation and Analysis of Value Added Tax, University House, Beirut, Lebanon. Al-Naqash, Ghazi Abdel-Razzaq, (2003). Public Finance – Analysis of the Basics of Financial Economics, Dar Al-Awael Publishing, Amman, Jordan. Al-Qaei, Fadi Moyes, (2002). The Value Added Tax, Supplement to Law N° 379 in accordance with the implementing decrees, Dar Al-Nahar, Beirut, Lebanon, translated by Kamel Majeed Saada. Atwi, Fawzi, (2003). Public Finance: Tax Regulations and the State Budget, Al-Halabi Human Rights Publications, Beirut, Lebanon. Darwish, Mohamed Kamel, (2003). Value-added tax, an essential step to keep pace with the global economy, Dar Beirut, Beirut, Lebanon. Eyisi Adanma Sabina, et al, (2017). Comparative Analysis of the VAT System of Developed and Developing Economies (UK and Nigeria). Research Journal of Finance and Accounting,Vol.8, N°.22,pp.66-72. Al-Abdali Iman Mudhi, Rawiya Rida Obaid and Talal Ibrahim Sajini, (2019). The impact of the application of value-added tax on the revenues of the public budget in the Kingdom of Saudi Arabia, The Arab Journal of Literature and Humanities – Issue 6. https://www.vat.gov.sa/sites/default/files/2017-11-2/VAT_Manual_English_16_Nov.pdf Jalata, D. M, (2014). The Role of Value Added Tax on Economic Growth of Ethiopia. research journal, Vol.1, pp.156-161. Kalas, Branimir, (2017). The role of value added tax in the economy of Serbia. Scientific review article, 63(2),p.69- 78.
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