With crude oil prices low and seen as unlikely to return to levels above $100 in the next few years, the matter of taxes has been pushed to the forefront of debate in Dubai. The establishment of some form of general taxation has been one of the longest-running political issues in the emirate, the UAE and the wider region. With public revenues lower across the Arabian Peninsula given the fall in crude prices, increased taxation has finally become a reality. The GCC countries are working towards implementing a value-added tax (VAT) across the region, and have settled on a 3-5% rate with a start date of January 2018.
The GCC is perceived as a low-tax, or even no-tax, region, thanks to the oil wealth that has traditionally funded government spending. However, with the region keen to preserve levels of spending on economic development, the drop in petroleum income has created an incentive for collecting more tax. Although Dubai is not an oil exporter it has been affected by lower crude prices, and overall lower level of public income in the region has impacted spending patterns there as well.
Existing taxes at the country level are applied to life insurance policies and some corporate income. There are also taxes on foreign corporations in banking and energy.
What is clear, however, from the statements of government figures is that the GCC wants to have a consistent tax framework across the six-state body, so that no single economy stands out with a different offering. The states have reached a consensus on implementing VAT, and by early 2016 had concluded discussions on what it would apply to and at what rate. Abu Dhabi daily The National reported in February 2016 that 150 food items would be exempt, and a GCC-wide framework was expected to be concluded by mid-2016, with an implementation deadline of January 1, 2019.
VAT is seen as economically efficient because it is less likely than other forms of taxes to impact investment decisions, according a study by global consultancy Deloitte titled “VAT in the GCC: Old News or New Chapter?”. VAT is therefore perceived as least likely to negatively impact the overall economy. The report stated, “[VAT] is considered to be efficient, cheaper to operate, less open to fraud and less likely to distort investment decisions by businesses than any form of direct tax.”
On a global basis VAT is increasingly representing a larger share of tax collections in the wealthy developed countries of the OECD, Deloitte’s study found. In 1965 VAT accounted for 12% of collections and corporate income taxes contributed 9%. By 2012 the share of corporate income tax was little changed, VAT had jumped to 20% of the overall share.
For Dubai specifically, avoiding a corporate income tax preserves a key part of the emirate’s offering for the foreign companies it wants to attract. The question of VAT refunds is an important one, however. In countries where VAT is implemented refunds are often offered to tourists, typically at departure spots such as airports. Managing this would require a significant fraud-prevention effort to ensure that only tourists receive refunds. For Dubai this is a key concern because it is also a tourism and shopping destination.
Dubai-based daily The Khaleej Times reported in February 2016 that the new VAT law is expected to bring in an additional Dh10bn-12bn ($2.7bn-3.3bn) in revenue. Younis Haji Al Khoori, undersecretary at the UAE’s Ministry of Finance, told the daily, “The VAT would be introduced at the rate of between 3% and 5% of the goods’ value, but GCC countries are yet to finalise their implementation policy. It will not be applied on education, health care, social services and some food staples.”
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