The six-nation Gulf Co-operation Council (GCC) has agreed in principle to implement corporate and individual income tax by 2012 and is now discussing ways to bring the deadline closer, said a news report, citing people close to the matter.

The oil- and gas-producing countries are grappling with the prospect of a significant contraction in energy income from oil and gas exports next year and the spectre of budgetary deficits, the Emirates Business reported.

Individual members of the Gulf group are unlikely to impose income tax unilaterally, said the paper citing sources at the GCC summit in Muscat..

'However, the prospect of drastic reductions in oil revenues and the resultant fiscal deficits has forced the six countries to examine whether implementation can be done earlier than 2012,' they said.

One of the Gulf's largest attractions for foreign investors and expatriate workers has been the absence of income tax.

The International Monetary Fund has long encouraged the UAE in particular to reduce its dependence on oil and gas revenues by extending corporate income tax to sectors outside the hydrocarbon and banking industries.

Foreign banks are taxed at 20 per cent of their taxable income in Abu Dhabi, Dubai and Sharjah. Oil companies pay a flat rate of 55 per cent on their taxable income in Dubai and 50 per cent in the other emirates.

The IMF has welcomed the UAE proposal to implement a value-added tax from 2010. The levy will range between 3.5 and five per cent and will replace Customs duty.

'There is a need to make the GCC monetary system more comprehensive and forward-looking. A modern tax system is one of the methods of breaking the traditional way of handling the fiscal system. It could be the first step towards monetary globalisation,' said one market analyst.

'However, the question is: do the six nations have the mechanisms in place to administer a taxation regime? This factor alone may delay the proposal to 2010, perhaps as an adjunct to currency union,' he noted.

In May 2006, Kuwait's cabinet said it will study a proposal to introduce income tax without regard to the nationality of the taxpayer. It proposed a flat rate of 10 per cent. Nothing has, however, come of that proposal so far.

In August 2007, Bahrain said it would deduct one per cent from salaries to pay for unemployment programme, becoming the first Gulf state to tax residents' income.