Why VAT is good for MNCs

Dubai - Multinational and foreign companies operating in the UAE will prefer to pay low consumption tax here and avoid higher charges in their home country

The introduction of a five per cent value added tax in the UAE from next year is not only a righ step in right direction to diversify revenue generation sources, but the move will also help multinational and foreign companies operating in the emirate to skip higher rate in their home country, Khaleej Times has learnt.
The average VAT rate in the world is around 15 per cent and it goes as high as 27 per cent in Hungary among the OECD nations. Multinational and foreign companies operating in the UAE will prefer to pay low consumption tax here and avoid higher charges in their home country as the same tax cannot be levied twice as per international law, according to the experts.
Well-placed sources that did not wish to be quoted say multinational companies (MNCs) operating in the UAE are happy with the UAE government's decision to introduce VAT in the country with low rate as it will help them in saving money by avoiding a higher VAT rate in their home country.
"The UAE government has already been adopting serious measures to diversify its revenue sources in line with the suggestions of international institutions such as the IMF that recommended new taxation measures to reduce dependence on oil," according to the sources.
Last week, the Ministry of Finance acknowledged that it has benefited from some suggestions by the International Monetary Fund (IMF) especially on spending cuts and revenue increase programmes.
Younis Haji Al Khoori, under-secretary of the Ministry of Finance, said the ministry has benefited from certain suggestions, including those on spending cuts, revenue increase and financial policies co-ordination programmes. In a statement to Wam, he said that these suggestions are being applied, based on the best international practices.
Hamad Buamim, president and chief executive officer, Dubai Chamber, said the introduction of VAT will create a more stable revenue source for the government, which will instill confidence in the UAE's economy and business environment.
"I think it's important for business to use this time to learn about the requirements and adjustments that will need to be made in preparation for the VAT. It's important to understand that VAT is a tax on consumption which may or may not be passed on to the consumers depending on the type of service or product in question and the competitive landscape," Buamim told Khaleej Times.
Smart tax strategy
Clare McColl, partner, KPMG Lower Gulf, said VAT is a transactional tax and the proposed five per cent rate will be the lowest standard rate in the world.
"Standard VAT rates vary across the world with 10 per cent in Australia and exceeding 20 per cent in European countries. The low standard rate of VAT will not necessarily attract companies to shift their headquarters to the UAE because VAT is a tax on the final consumer rather than on the business itself," McColl said.
She said several international companies have identified Middle East as leading growth market, underpinned by double-digit like-for-like growth in certain industries. This has not gone unnoticed by multinationals and many are seeking to capitalise on the upswing driven by non-oil private sector.
"For multinationals seeking to position their business in the Middle East region and gain scale, Dubai and the wider UAE is unique in its capacity to offer this given its position as a regional business hub. As a result, interest is definitely surging," McColl elaborated.
Squire Patton Boggs, an international law firm with 46 offices in 21 countries, shared the similar views and said the UAE has been smart with its tax strategy.
"In introducing a low VAT rate, the UAE has broadened its tax base without imposing corporate or personal income taxes. Furthermore, it has aggressively sought to agree new double tax conventions, including with the UK," Jeremy Cape, partner in the Tax Strategy & Benefits Practice, Squire Patton Boggs, told Khaleej Times.
The UAE has signed more than 103 agreements on the avoidance of double taxation, and more than 66 agreements to protect and promote investment with various countries. These deals provide a legal framework allowing tax authorities to cooperate without violating the sovereignty of other countries or the rights of tax payers.
"The UAE is an attractive place in which business can establish genuine economic 'substance' that is essential in terms of successful international tax structuring, and may be a challenge for competing jurisdictions like Luxembourg and Mauritius," Cape said.
Markus Susilo, partner VAT service team leader - UAE at Horwath Mak, said the introduction of VAT can be seen as an effort by the UAE government to bring more transparency and clear structure to doing business in the UAE based on international best practices.
"This effort will attract more large and serious MNCs to set up or expand their presence in the UAE," Susilo told Khaleej Times.
Brexit impact
The experts and analysts say introduction of VAT in the UAE from January 2018 just ahead of Brexit proceedings can also benefit the emirate because multinational and foreign companies in the United Kingdom seeking relocation of their operations and headquarters may consider the UAE a preferred destination because of its strategic location, excellent infrastructure and low tax base.
Some 80,000 plus international companies including 5,000 British firms have already been working in major free zones of the UAE and these numbers might go further up after the VAT introduction, experts say.
Cape of Squire Patton Boggs said Brexit does not mean that MNCs will leave the UK or, if they do, they will head to the UAE.
"But the UAE is rapidly making itself more attractive as a place in which to base international business in a rapidly changing and increasingly challenging international tax environment," he said.
Susilo of Horwath Mak was of the view that a VAT rate of five per cent is unlikely to put off Western companies who are used to higher VAT rates in their home countries.
"The additional compliance related to VAT will be an extra cost for businesses but nonetheless it is likely that the UAE will retain its position as a low tax jurisdiction. This factor, along with its position as a regional hub, has served the UAE well in the past years and will continue to do so after the introduction of VAT."
Elaborating, he said it is estimated that approximately 80,000 plus companies are operating in major free zone companies across the UAE.
"The majority of these entities are MNCs, whether they are medium-sized MNCs or Fortune 500 companies such as Shell, General Motors, among others. These numbers should be more than doubled if one would take into consideration the number of joint-ventures of MNCs and local businesses in the UAE.
"Should you just look at Dubai - in 2015, according to the Dubai FDI data - it has been ranked sixth city globally in foreign capital investment attracted. Thus, it is expected to attract more MNCs to establish their presence here whether as hub to the region and/or operate in the city, especially with the upcoming World Expo 2020," he said.
- muzaffarrizvi@khaleejtimes.com