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IMF recommends not just VAT, but also tax on cars, all companies

Tax reforms could help country raise as much as 4.1% of non-hydrocarbon GDP

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Dubai:  The UAE government could diversify its revenues and strengthen its fiscal position by implementing not just a value-added tax (VAT) system, but also a special excise on cars and corporate income tax on all companies.

In an August 2015 report, the International Monetary Fund (IMF) said the UAE could generate extra revenues worth as much as 4.1 per cent of the non-hydrocarbon domestic product (GDP) by introducing a 15 per cent ad valorem tax on passenger vehicles and broadening the coverage of its corporate income tax scheme, aside from collecting a five per cent VAT.

The UAE has been known for its tax-free regime. There is no personal income tax or value-added charges collected from residents in the country, making it an ideal place for working expatriates seeking to grow their income.

However, some 20 per cent is still levied on foreign banks in Dubai, while a local municipal property tax of 5 per cent is charged on the rental value and another 10 per cent local tax on hotel services.

In an attempt to further diversify its revenue streams, especially amid falling oil prices, the country has recently deregulated the prices of petrol, which has seen pump prices go up by 24 per cent.

According to the IMF, the current tax structure does not raise enough money for the economy, thus additional revenue-generating reforms should be implemented. Collecting VAT alone will help the country raise extra income worth 2.7 per cent of non-hydrocarbon GDP, according to the IMF.

But aside from VAT, also worth looking into is collecting excise from vehicle owners. The IMF argues that public use of automobiles entails a number of costs, such as the cost of maintaining and widening road networks, as well as productivity losses due to traffic jams, among others.  By collecting an ad valorem tax of 15 per cent, the government could raise an extra 0.6 per cent of non-hydrocarbon GDP.

“Imposing tax on automobiles would shift costs associated with the usage of [cars] to the owners.”

To avoid collecting general income tax from individual residents, the IMF said that widening the scope of the corporate income tax to include all foreign and domestic businesses operating in the country, except for those based in free zones, would be a great idea. The fee, however, should be reduced to 10 per cent from the current 20 per cent.

“A broadened CIT, if applied to unincorporated companies, could provide some progressivity in taxation and would lessen the need to introduce a general income tax on individuals. This measure is estimated to yield 4.1 per cent of non-hydrocarbon GDP.”

The report, completed last July 13, was drafted by a staff team of the IMF as a "background" paper for the "periodic" discussions with the UAE. It did not mention any timeline with regards to the implementation of the tax reforms, but some analysts said it will take a few years before a new tax is imposed.

"In my opinion, VAT will not be applied in 2015 or 2016, or even 2017. We are experiencing a paradigm shift, a new normal where oil price will remain around $55-$70 during the near term, possibly 2 to 3 years," Alp Eke, senior economist at the National Bank of Abu Dhabi, told Gulf News earlier.

While the fiscal threats posed by falling oil prices may be worrisome, the IMF assured in a separate statement that the "negative spillovers" from the downturn remain limited.

"The UAE has continued to benefit from its perceived safe haven status and large fiscal and external buffers that have helped limit negative spillovers from lower oil prices, sluggish global growth and volatility in emerging market economies."

In a statement issued on August 4, 2015, the IMF said that non-oil growth remained robust at 4.8 per cent in 2014. With lower oil prices, however, the economic outlook is likely to "moderate" and non-oil growth will slow to 3.4 per cent this year, before climbing again to 4.6 per cent by 2020, as new massive projects and investments come in, in the run-up to the World Expo.

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Latest Comment

Its not a good idea to collect tax in the middle east as long as theresidents do not get any long-term benefits for paying such taxes. Taxplans can be implemented but the govt should start issuing permanentresidency at least if they have reasons not to give the passports. Taximplementation without any residency benefits will cause majority ofresidents leaving the country for good. Tax on cars withoutsophisticated public transport will not be a good move.

Mohammad Iqbal

10 August 2015 17:00jump to comments
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