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UAE moving closer to sales tax regime

The move to introduce sales tax, which is in line with similar initiatives by other GCC countries, also seeks to ward off the impact of future oil revenue falls. Abdul Rahman Al Saleh, Executive Director, Business Support and Services, Dubai Customs and head of a task force conducting the study on VAT implementation, said the introduction of a non-direct tax had become imperative as an alternate source of revenue.

“Once the free trade agreements take effect, Dubai Customs will be required to substantially bring down the customs duty on various items, making it imperative for us to look for alternate sources of revenue. This influenced the move towards a non-direct tax regime,” Al Saleh added.

A recent IMF study suggested that GCC countries should implement the new tax system in two stages.

The report recommended levying of tax on selected goods like tobacco, cars and electronic items and the removal of customs duty on all imports, with the tax being collected directly from the distributors, agents and wholesalers. At a later stage, this process will be further modified to ensure that the tax is applied only at the point where the good is actually sold to the customer.

At present, there is no national sales or income tax in the UAE. Profits of international banks and energy firms are taxed at federal level, while some emirates levy limited sales taxes.

Analysts said a low VAT rate, which the GCC is expected to implement, would be a positive step for fiscal reform and is unlikely to hurt competitiveness. "The move for a tax regime despite record oil revenues may appear strange, but it reflects the growing maturity of the region's fiscal policy and is proof that peacemakers are increasingly looking beyond the current oil boom," they said.

Analysts said apart from offsetting a predicted drop in customs duty, there are other reasons why the Gulf governments are mulling sales tax. "The first concern is to reduce the impact if oil revenues fall over the medium term. The second reason is that some governments, in particular that of Oman and Dubai, faced with a contraction in oil production, are looking for additional sources of funding. Another reason is demographics. The GCC population is growing at 3.5 per cent per annum, leading to increasing demand for government services and raising the cost of subsidies."

Al Saleh pointed out that the global and regional economic systems have undergone a major transformation, requiring the UAE to adopt a fresh trade approach that is in step with the changed economic reality. "The UAE is seeking to sign mutually beneficial free trade agreements with several countries and influential economic blocks, and is already in discussions with the USA, European Union, Australia and China. The proposed changes to the country's economic system will make the UAE ready for these agreements."

Dubai Customs and the MF are jointly conducting a study that seeks to identify ways and means to implement VAT in the GCC countries. The study is being conducted in coordination with the UAE Ministry of Finance. Dubai Customs is part of the task force constituted to conduct the study on behalf of the UAE Government. The UAE Federal Government was authorised by the Secretariat-General of the Gulf Cooperation Council (GCC) to undertake the study after it submitted detailed suggestions regarding the implementation of VAT in the GCC countries. The task force will closely study various options before putting forward their final suggestions and recommendations to the GCC Secretariat-General.

The IMF in its primary report had underlined the importance of defining all taxes being paid by the private sector and the need to bring them under an integrated tax system. The report called for sector-wise categorisation of customs tariffs, so that tax rates could be fixed accordingly. The IMF report also laid emphasis on the need to ensure that the transformation to the new tax system does not lead to an increase in prices, and suggested a timeframe for GCC countries' shift towards a non-direct tax regime.

Dubai Customs' efforts towards a liberalised trade regime come at a time when the World Customs Organisation (WCO) is urging countries to remove trade barriers, including customs tariffs, in order to facilitate free trade.

Most analysts, however, said the impact of VAT on competitiveness is likely to be small. A low VAT rate is unlikely to reduce the GCC's position as a low tax destination. In the UAE, for example, there is currently no personal taxation and only international banks and gas companies pay any tax on their profits. Dubai also levies a 10 per cent fee on hotel bills.

"Economically, imposing VAT may make sense but, politically it will present challenges. A sales tax is unlikely to attract as much opposition as an income tax. More importantly, by acting now the GCC will be in a better position to deal with long term wealth issues, which could raise greater political difficulties in the future," they pointed out.

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