It’s official — VAT (or value added tax) will be introduced in the UAE in 2018. As soon as the news was announced, speculations, forecasts and commentary began, which is typical with every big change a country faces.
For those who have been living in the UAE for a long time, the concept of ‘tax’ is almost unheard of. In fact, one of the key factors that make this country an attractive destination for investors worldwide is its low-taxation environment.
The average tax burden in the GCC is close to zero, whereas the average for Europe (based on percentage of GDP) is over 40 per cent. The worldwide average is close to 30 per cent.
And yet, due to the continual decline in oil prices and geopolitical uncertainties, several measures had to be taken to safeguard the economy and to ensure that it would be able to withstand increasingly difficult times that are being witnessed in the region and at a global level as well. As HSBC’s economist Simon Williams put it, “the excesses of the past 10 years have to be reversed”.
In the current environment, diversification of revenues is imperative for all the GCC countries. With a decline in oil prices, economies that rely heavily on oil for income are significantly stressed. That is where the UAE has been proven wise over the past period.
The contribution of the non-oil sector continues to be a priority, and with the government intent on further enhancing its diversification strategy, the UAE is working towards achieving a healthy balance to offset future economic turbulences.
It has already taken several measures recently in response to the global economic challenges, such as the oil subsidy reform. The introduction of VAT was another step that had to be taken; one that has been talked about for a while, although there was hesitation to implement it on a Gulf level.
In times when economies in the GCC were stressed, taxes of all kinds were considered. In the early 1990s several studies were commissioned in the GCC to prepare to implement a VAT.
Each time implementation was planned, economic characteristics changed to discourage it. In some cases, inflation spiked and it was thought that a VAT would exacerbate the problems.
In other cases, oil revenues rebounded and the pressure to diversify revenues was decreased. In current times, diversification of revenues is imperative for all the GCC countries and with inflation worldwide at relatively low levels, the introduction of the VAT is timely.
The impact of VAT will be felt across two segments: consumers and business. Overall, the impact on the economy will be small, given the size of the tax. For individuals, the impact will depend on their purchases, where the prices of luxury goods and large ticket items will be most impacted.
All of the GCC countries are concerned about their less well-off citizens and residents. Most economists view the VAT as a regressive tax, although technically, it is a proportional tax.
By exempting essential food items, health care, and education, the government greatly reduces the burden on the poorest residents. According to Andrew Prince, financial planner at deVere Acuma: “If [VAT] is implemented at low levels, say 3 per cent to 5 per cent on luxury goods such as computers and cars, then the impact on low-income families will likely be negligible. [But] those who regularly purchase the latest smartphone or upgrade their car are the ones to shoulder a greater portion of the burden.”
For businesses, the VAT will have a greater impact. The introduction of the tax will increase the costs of business for firms at all levels (not just retail). The biggest concern will be the effort required to collect and report on the new tax, in addition to ensuring that it is being applied correctly.
Likewise, the government will have to have a trained set of tax collectors who understand the problems that businesses will face in implementing the tax reporting procedures.
As with any new system, public awareness campaigns are critical, to ensure that people understand the new tax system, how it is calculated, what it is being applied to, and how to report it. Universities will need to modify their business curriculums to include computations and accounting for VAT so that graduates will understand how to implement systems in the business community.
The UAE has solid financial fundamentals, and is committed to its diversification strategy, thereby establishing a resilient and sustainable growth model. The introduction of VAT was the correct decision to make at this time, given the macroeconomic headwinds that are present on a global level.
Despite speculations, the UAE’s residents will not be greatly impacted by the new tax. Even if the VAT were to double, the GCC will still have a competitive advantage with relatively low taxes compared to the rest of the world.
The writer is Associate Professor of Accounting at the American University of Sharjah.
