Will UAE apply VAT on expat remittances?

Dubai - If it does get implemented, it may only result in very little revenue

Charges and commissions levied by exchange houses on remittances from the UAE may fall under the purview of the imminent value-added tax (VAT), Khaleej Times has learnt.
VAT is set to be introduced from January 1, 2018, as part of the government's initiative to further diversify revenue sources in a bid to move away from dependence on oil income.
Well-placed sources that did not wish to be quoted told this newspaper that the new consumption tax may be applied on the fee charged by exchange companies on remittances from the UAE. At the same time, they maintain that VAT may not be applied on the total amount remitted back home by the seven million or so expatriates in the country.
Promoth Manghat, CEO of UAE Exchange Group, said VAT on remittance fee has been a subject of speculation among the media and service providers for quite some time now. "According to the information that we have from experts, the fee on remittances might be subject to VAT in the near future," Manghat told Khaleej Times.
Sudhesh Giriyan, COO of Xpress Money, echoed similar views. "Our initial indications are [that] VAT may not be applicable directly on the remittance amount but it may be imposed on the customer fee applicable to send out the remittance," he said.
Markus Susilo, VAT services team leader for the UAE at Horwath Mak, said if there were tax on the amount remitted from the UAE to abroad, this would be a different tax than VAT, for example, remittance tax. "I am not aware of any UAE official information on VAT in relation to the remittance service. However, if the new VAT laws follow the similar practice in the EU countries, these transactions [fees charged by financial services for the remittance services] may be exempted," Susilo said.
 
Nominal fees
Exchange houses in the UAE charge varying fee on remittances for various corridors. The fees range on average between Dh10 and Dh20 for Asia, between Dh15 and Dh35 for the Middle East and Asia, and between Dh35 and Dh55 for the US, UK and Europe.
That would mean a VAT of between 50 fils and Dh2.75 will be added to the overall amount (remittance plus fees) - and that too in case exchange houses decide to pass on the entire burden on the remitter. VAT on remittance fees, therefore, will have a very nominal impact and will be in line with the enforcement of new levy on other professional services.
Last year, the UAE registered double-digit growth in remittances. It accounted for around $20 billion out of the Middle East's $100 billion remittances annually on average, and the new levy will help generate additional revenue that can be spent on infrastructure and development of the country, according to sources.
When contacted, the Ministry of Finance neither denied or confirmed the report and said that the VAT implementation system will be clarified soon at a Press conference.
"We have not heard on VAT being introduced on remittances from the UAE. It is important to note that a majority of the expatriates have relatively low income as they are blue-collar workers that remit funds overseas. If VAT is introduced [on the amount remitted], it will increase the cost of remittance and expatriates then may use unofficial channels to remit funds," Rajiv Raipancholia, treasurer at Foreign Exchange and Remittance Group, told Khaleej Times.
 
VAT and watch
To a question, Manghat said clarity regarding possible VAT on remittances is expected from regulatory authorities in the coming weeks.
"There has be no official intimation from the regulators on this, neither are there any guidelines issued in this context. We are awaiting formal guidance from the regulatory authorities on the subject," he said.
Giriyan too said the Ministry of Finance was yet to provide specific guidelines on VAT implementation and its applicability to remittances.
Most of the seven million expatriates in the UAE originate from countries such as India, Pakistan, Egypt, the Philippines, Bangladesh and Sri Lanka, among others, and many earn blue-collar wages.
"We want to assure our customers that we are continually monitoring the situation and will keep them abreast of regulatory changes that may impact the remittance process. We understand that VAT is a valuable effort towards economic diversification and sustainable growth and look forward to cooperating with the government and regulators for an easy transition to a VAT-based system," Giriyan said.
It is important to note that a study remained under discussion of the government to determine the possibility of levying a tax on remittances in the country.
In one of its recent reports, the International Monetary Fund said imposing a tax of about five per cent on expat remittances from the GCC will result in very little and marginal revenue of only 0.3 per cent of the region's gross domestic product (or $4.2 billion), which is very modest compared to the financial reforms required in the GCC countries.
The fund said such tax, which has already been proposed in Kuwait, would also result in administrative and operational costs that might reduce revenues and cause risks related to the repute of the country among the workers. The competitiveness of the private sector may also decline.
- muzaffarrizvi@khaleejtimes.com