Value added tax will be introduced to the UAE by the end of 2018 at a rate of 5 per cent, while studies into a possible corporation tax are also under way.
A final GCC-wide agreement on a region-wide VAT is expected in June this year, Humaid Obaid Al Tayer, Minister of State for Financial Affairs, said after a press conference with the IMF’s Christine Lagarde yesterday. Mr Al Tayer’s remarks are the first time that a UAE minister has confirmed the details of the Gulf’s tax plans.
That tax would not be levied on spending on education, healthcare, and a basket of essential food items, according to reports.
The UAE is also weighing the introduction of corporation tax, Mr Al Tayer said, and is currently looking at the “social and economic impact” of a levy on businesses, as well as its impact on the UAE’s competitiveness.
But he added: “there is no time frame for implementing [corporation] tax and no law or draft law has been stipulated.”
Despite the zero-tax environment acting as a significant draw for companies looking to the UAE, Ms Lagarde played down the potential effect of taxes on business activity in the country.
“The localisation and development of investment by companies … is not predominately driven by a tax rate,” she said.
Ms Lagarde said that it was the time for the UAE to raise taxes to reduce the impact of the collapse in oil revenues on government finances.
“To provide services, you need to finance those services. Some countries have been blessed by nature and when that changes … [those countries] have to find an alternative … to finance those services. It’s as basic as that.”
The UAE’s fiscal deficit was estimated to stand at 4 per cent of GDP last year, according to National Bank of Abu Dhabi, but is likely to widen to double digits after the oil price scraped 12-year lows in January, ratings agencies forecast.
Corporation tax “will obviously help to raise additional revenue for governments across the region, given … the fact that their budgets are blowing up”, said Jason Tuvey, emerging markets economist at Capital Economics. “It is another way the government can undertake fiscal adjustment without hurting households.”
But it could harm the Gulf’s efforts to diversify away from oil. “It would discourage firms from investing and creating jobs – and given that governments across the region will struggle to create jobs over the coming years, they had hoped that the private sector would pick up the slack, but imposing taxes will make that more difficult.”
abouyamourn@thenational.ae
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