Unless you're a tax lawyer, you don't generally want to be at a New Year's Eve party where the main subject of conversation is tax. However, reports from my friends around the UAE confirm that little other than VAT was discussed at social events during the final hours of the country's days as a tax-free jurisdiction.
And now here we are: the VAT regime is in force. Even a couple of months ago, there were rumours that the UAE and Saudi Arabia may delay its introduction, partly to allow businesses more time to prepare given the late publication of the legislation and partly because of a fear of a competitive disadvantage with the GCC countries that were not introducing VAT. If any discussion of such a proposal took place within the Government, it was (rightly) rejected.
So far, the fiscal sky has not fallen in. People have posted photographs of VAT receipts on Twitter - anecdotally, prices seem to have increased by up to, but not more than, 5 per cent - and my smartphone and e-mail have generally been quieter in 2018 than they were in the last half of December. But don’t be fooled. Big challenges remain.
Over the holiday period, I received a communication from a friend that he had received from his landlord, erroneously stating that his residential rent will increase by 5 per cent because of VAT. Was this a misunderstanding of the law on the part of the landlord or a deliberate attempt to seek to raise prices? How will it be resolved? Note that unlike most businesses, landlords will suffer a VAT cost because their suppliers will generally have to charge VAT, something they will be unable to recover, so you can understand why they might want to increase prices.
I've seen arguments from tax advisers that certain supplies are not subject to VAT because they are not supplies of goods or services, notwithstanding that not only are they supplies under the general rule, but they are specifically referred to in the legislation. And in applying the legislation to certain more complex factual situations, I've seen that the law seems to throw up answers that may not entirely reflect the intention of the framers, or principles underlying VAT, such as "fiscal neutrality".
Which leads to this question: to what extent is the legislation that is in place today fixed for all eternity? Any changes could come at a number of levels.
First, to the extent the legislation doesn’t “work” at a micro-level, the Federal Tax Authority (FTA) and courts may be able to interpret it in a way that results in a fairer, more just outcome. If that is the case, it is important that these interpretations are well disseminated, and consistently applied. It would be detrimental to the rule of law, and in turn the business environment, if rules are applied inconsistently.
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Secondly, to the extent the legislation doesn't work and the wording is sufficiently clear that there is not a simple administrative or judicial workaround, the legislation itself may need to be amended. That will give rise to questions of whether any desired amendment is consistent with the mandated approach outlined in the Unified VAT Agreement. If not, that will give rise to some difficult policy decisions on the part of the UAE – whether to keep the legislation as is, whether to seek an amendment to the Unified VAT Agreement, or whether to change the law and sort out the inconsistencies with its international obligations later. A decision would also need to be made whether any such corrective changes should be retrospective or not. If so, significant VAT refunds may in theory arise, but this is again not an entirely straightforward point.
Thirdly, the legislation may work as intended, but that intention may change. For example, the Government may determine some supplies that are currently zero rated should, say, be exempt. Or some supplies that are currently standard rated should, say, be zero rated. Changes in tax policy are sometimes criticised, but often there are good reasons for amending the scope and incidence of tax.
Fourthly, like other taxes, VAT needs to be dynamic on a macro level, to respond to broader changes in the UAE, the GCC and the wider world. For example, fundamental changes to the place of supply rules have occurred over time in the EU and VAT rates have changed (generally increasing) across the world. As recently as October 2017, the EU Commission announced a proposal to change the VAT regime fundamentally, including a move to the principle of "destination" whereby the final amount of VAT is always paid to the member state of the final consumer and charged at the rate of that member state.
Intuitively, one might conclude that the measure of success would be not seeing any change in the VAT legislation. In reality, I would argue that the measure of success of VAT in the UAE would be seeing all four types of changes over time.
That’s a subject to discuss at your next social event.
Jeremy Cape is a tax lawyer at Squire Patton Boggs, which has offices in London, Dubai and Abu Dhabi. Follow him on Twitter @jeremydcape