US economic expansion comes to an end as GDP contracts 4.8 per cent in the first three months of this year. AP
US economic expansion comes to an end as GDP contracts 4.8 per cent in the first three months of this year. AP
US economic expansion comes to an end as GDP contracts 4.8 per cent in the first three months of this year. AP
US economic expansion comes to an end as GDP contracts 4.8 per cent in the first three months of this year. AP

Business

US GDP contracts 4.8% as recession starts amid Covid-19

Consumer spending shrank at a 7.6% pace, the worst decline since 1980

Bloomberg

April 29, 2020

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The record-long US economic expansion is over.

Gross domestic product contracted at a 4.8 per cent annualised rate in the January-March period, the largest drop since 2008, according to Commerce Department data released on Wednesday. The median projection in a Bloomberg survey of economists had called for a 4 per cent drop.

The report is the first to show the wide-scale hit to US output from Covid-19, which shut down business around the globe as governments sought to prevent the deadly, contagious disease from spreading.

With estimates for a second-quarter contraction that would be a record in data going back to the 1940s, the first-quarter figures effectively confirm that a recession has begun, ending the expansion that began in mid-2009 in the wake of the global financial crisis.

Consumer spending shrank at a 7.6 per cent pace, the worst decline since 1980, as restaurants and shops closed and Americans stayed home under government orders.

Non-residential business investment contracted at an 8.6 per cent rate, the most since 2009, when factories and other firms went offline as the virus spread and oil prices plummeted.

One bright spot is that residential construction spending surged at a 21 per cent rate, the best gain since 2012, helped by warm weather and low mortgage rates.

Final sales to domestic purchasers, seen as a more accurate gauge of underlying demand in the economy, fell at a 5.4 per cent rate. It excludes the volatile categories of trade - which boosted GDP growth by 1.3 percentage points - and inventories, which subtracted by 0.53 points.

Ten tax points to be aware of in 2026

1. Domestic VAT refund amendments: request your refund within five years

If a business does not apply for the refund on time, they lose their credit.

2. E-invoicing in the UAE

Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption. 

3. More tax audits

Tax authorities are increasingly using data already available across multiple filings to identify audit risks. 

4. More beneficial VAT and excise tax penalty regime

Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.

5. Greater emphasis on statutory audit

There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.

6. Further transfer pricing enforcement

Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes. 

7. Limited time periods for audits

Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion. 

8. Pillar 2 implementation 

Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.

9. Reduced compliance obligations for imported goods and services

Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations. 

10. Substance and CbC reporting focus

Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity. 

Contributed by Thomas Vanhee and Hend Rashwan, Aurifer