UAE ranked fourth in tax league

The possible introduction of new taxes may threaten the high ranking of the UAE and neighbouring Gulf countries for the cost and ease of paying tariffs, a Dubai tax expert says. The Emirates' tax regime came fourth in the Paying Taxes 2010 study, behind Qatar in second but ahead of Saudi Arabia (seventh), Oman (eighth), Kuwait (11th) and Bahrain (13th).

The Maldives fared best in the study, while other Middle East countries ranked towards the bottom of the list of 183 countries. "This is effectively a tax-free environment but there is no guarantee that this status quo will remain for the next 10 to 20 years, as oil revenues run out and governments will need new sources of income," said Dean Rolfe, a tax partner at PricewaterhouseCoopers (PWC) in Dubai.

The study is based on hypothetical companies that are owned by locals and employ only locals. It focused solely on corporate taxes and was conducted by PWC, the World Bank and the International Finance Corp, an IMF arm. The GCC has been looking at the effects of value-added taxes (VAT) for the region. Its secretariat gave a pilot project to the UAE to study the impact, which led to a joint study by Dubai Customs and the IMF.

Dubai Customs said in June last year the UAE Government would announce the introduction of a VAT at a rate between 3 per cent and 5 per cent within a few months. But nothing has happened so far. "These results help explain why places like Dubai have become such popular locations for international organisations doing business in the Middle East," Mr Rolfe said. "That said, while current tax rates are generally low, there is the risk that new taxes will be introduced in the future which could impact rankings.

"Taxes are on government agendas - many [regional] governments have reformed and are thinking of reforming their taxes. The IMF has been encouraging local governments to look at alternative sources of income - given the extreme volatility of their main revenue source", which is oil and gas. Asked whether the debt crisis would make the UAE or Dubai more prone to impose taxes, Mr Rolfe said: "I don't think governments will make such a decision based on economic cycles."

The introduction of a VAT would partially replace the 5 per cent customs duty that is scrapped when countries enter free-trade agreements, such as those Oman and Bahrain have signed with the US. There are no personal taxes in the region. Oman, Qatar, Kuwait and Saudi Arabia impose corporate income taxes of about 20 per cent. In the UAE, foreign banks pay a similar income tax, but that does not apply to banks doing offshore business in the Dubai International Financial Centre. The country also levies a 12.5 per cent tax on employing locals.

Bahrain is the other Gulf country not to levy corporate income taxes. @Email:[e-mail]