What will VAT mean for you in the UAE?



What is a value-added tax?

VAT is a tax charged on the ‘value-added’ at each point in the supply ​chain. From raw materials to finished goods, companies “add value” to a product by improving it. This can be measured and taxed, with the justification that each company is taxed only on the value that they bring to the product.

The baker is charged tax on the value of bread, minus the cost of the raw ingredients; the flour mill is charged tax on the difference between the wheat and the ground flour; and the farmer is taxed on the cost of wheat. This means that tax is split between the producers of a good.

What will the impact be on companies and consumers?

In the most simple case, companies see their profit margins fall, while consumers see prices rise.

Usually, both happen – companies absorb some of the cost of new taxes, while consumers see prices rise by less than the headline rate of tax. This also means that Gulf companies will have to acquaint themselves with a piece of bureaucratic arcana that is unfamiliar to them – the tax return.

Why now?

Gulf governments have lost more than $300 billion from the collapse in the oil price from $110 per barrel in June 2014 to around $35 per barrel now. GCC states ramped up their spending in the decade of rising oil prices from 2003 to 2013, meaning that budget break-even points – the oil price at which Gulf governments do not spend more than they receive – slowly rose across the decade. Gulf governments presided over major expansions in public sector employment and wages, as well as eye-catching megaprojects. That is why HSBC’s economist Simon Williams says that “the excesses of the past 10 years have to be reversed”.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

COMPANY PROFILE
Name: HyperSpace
 
Started: 2020
 
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
 
Based: Dubai, UAE
 
Sector: Entertainment 
 
Number of staff: 210 
 
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners