UAE has no plan to hike VAT

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KT file
KT file

Published: Tue 10 Nov 2020, 6:50 PM

The UAE’s Ministry of Finance on Tuesday said it raised Dh11.6 billion in value-added tax (VAT) revenues in the first eight months of 2020 and the government has no plans to raise VAT to more than five per cent.

By Waheed Abbas

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The UAE and Saudi Arabia levied five per cent VAT from January 1, 2018 and later Bahrain also introduced it. Saudi Arabia, the region’s largest economy, hiked the VAT to 15 per cent from July 1, 2020. Oman is set to become fourth country in the GCC to impose VAT from April next year.

The ministry said excise tax revenues increased 47 per cent year-on-year to Dh1.9 billion during January-August 2020 period.

The regional governments have introduced new taxes in order to broaden their revenue base and reduce dependence on petrodollars. Revenues were steady prior to the outbreak of Covid-19 but the pandemic has had impact on the regional economies, hence impacting tax revenues.

The UAE’s Ministry of Finance said tax revenues generated in 2019 amounted to about Dh31 billion as against almost Dh29 billion in 2018. The growth rate of total tax revenues in 2019 increased by about seven per cent in comparison to 2018.

Saeed Rashid Al Yateem, assistant under-secretary of resource and budget at Ministry of Finiance, affirmed that there are no plans or decisions at the moment to raise VAT to more than five per cent in the UAE.

“Therefore, MoF continues to follow up on tax policies in coordination with the Federal Tax Authority (FTA) to ensure they’re in line with developments in the regional and international arena and that legislations are continuously updated in accordance with financial policy objectives and sustainable economic growth,” he added.

He said 30 per cent of VAT revenues will be distributed to the federal government and 70 per cent to local government.

While the federal government's share of excise tax revenues on tobacco products stood at 45 per cent and 55 for local governments. The federal government's share of the excise tax revenues on other excise goods such as energy drinks, soft drinks as well as beverages sweetened with added sugar is 30 per cent.

Al Yateem said tax revenues help implement development projects in accordance with the UAE government’s plans and mitigate impact of the Covid-19 pandemic.

Covid-19 impact on GCC tax revenues

Thomas Vanhee, partner at Aurifer Middle East Tax Consultancy, said the Covid-19 pandemic has resulted in acute damage to the GCC economy and imposed financial constraints on the GCC states by increasing their public welfare expenditure and decreasing their tax revenues. While all GCC states have been affected by the pandemic, certain States already found themselves under fiscal pressure prior to the pandemic due to the sustained lower oil prices.

“More specifically, as corporate income taxes are the most sensitive to economic cycles and conditions, one can expect that the related revenues will decrease in Saudi, Kuwait, Oman, and Qatar. Those are the countries that have a broad based corporate income tax system (often with exemptions for GCC held companies),” added Vanhee.

“Additionally, VAT revenues in the GCC are also expected to yield a low(er) amount due to the impacts of lockdowns and a decreased consumer spending.”

He said other regional countries do not plan to raise VAT rate, but the current economic circumstances make it more tempting for the two remaining countries Kuwait and Qatar which have not implemented VAT yet to do so. “Many GCC countries are also planning to tap the international bonds market, or have already done so recently (e.g. UAE).”

Nirav Shah, director at Fame Advisory DMCC, said overall GCC economic scenario is challenging, hence other countries like KSA have taken steps to increase their tax revenue since oil revenues have fallen.

“For UAE, since economy is already partly diversified and has non-oil revenues, it‘s encouraging to note that the government is not planning to hike VAT rates. Businesses have seen reduction in gross revenues and hence its likely that UAE will experience a reduction in VAT revenues for 2020 upto almost 15 per cent to 20 per cent due to overall reduction in domestic consumption,“ Shah added.

He said tax revenues are directly linked to economic activities – more domestic consumption increases collection of VAT and excise.

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