18-month grace period when value added tax is implemented in the UAE, ministry says

The VAT, which would make goods and services more expensive, would be done in the framework of the GCC custom union.

The VAT, which would make goods and services more expensive, would be done in the framework of the GCC custom union. Silvia Razgova / The National

The UAE’s finance ministry said there will be an 18 month grace period when a value added tax is introduced in the country.

The move to introduce VAT as well as federal-wide corporate taxation comes as the Government starts feeling the pinch from the decreasing price of oil.

“An immediate announcement will be made once a final agreement on imposing a VAT law is reached,” the Ministry of Finance said.

“Concerned sectors and entities will have around 18 months after imposing the law to implement and fulfil the requirements of their tax obligations.”

The VAT, which would make goods and services more expensive, would be done in the framework of the GCC customs union, Younis Haji Al Khouri, the finance ministry undersecretary, told The National last month. He was not immediately available to comment on yesterday's statement.

The statement said, however, that the draft VAT is still pending due to the absence of a final agreement between GCC countries on the tax rate and items that would be exempt.

“This is based on a previous agreement between the UAE and all GCC states to impose a VAT tax law simultaneously,” the ministry said.

The Government however will likely implement new tax regimes very gradually to avoid making the UAE a less competitive place for people to set up businesses and work in. The country’s tax -free status has attracted millions of expats over the years looking to bolster earnings.

If more taxes are introduced, such as a levy on income, the country may find it difficult to compete with developed markets, economists say.

The Finance Ministry said that the draft law for a corporate tax is also still being drafted and that a grace period of no less than a year would be given for compliance once it is announced.

At the moment, each emirate in the UAE has its own tax regime for corporations, although by and large they are low or non-existent.

While economists say it is unlikely that the UAE will move this year to start implementing corporate taxation on a broader basis, the move towards it highlight concerns that low oil prices may be with us for a while. In response to the drop in oil prices, the Government has also started to reduce energy subsidies. As of August, it raised the price of petrol to reflect the global price of energy,

Oil revenue, from which the UAE Government relies to fund more than 60 per cent of the Federal budget, has lost more than half its value in the past 12 months.

As a result of the drop, many economists, including those at HSBC and Standard Chartered and the IMF have lowered their growth forecasts for Arabian Gulf countries this year.

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