Tax change is necessary to diversify

Plans for VAT and corporation tax will reduce the country’s reliance on oil and gas revenue

In addition to customers buying goods within the country, passengers buying cigarettes in duty free as they arrive in the country will also have to pay double the current price. Silvia Razgova / The NationalShow less

Step by step, the UAE is moving closer to implementing two laws that will change how the economy functions and how the country is perceived abroad. The first is a uniform corporate tax, which would apply to both domestic and foreign companies. While there is corporate taxation in the UAE, it has so far been limited to the banking sector. The law drafted by the Ministry of Finance would change that.

Perhaps of greater public interest is the second law drafted by the Ministry, for a sales tax on certain goods. The idea of Value Added Tax (VAT) is not a new one in the Gulf – the GCC has been discussing it since before the 2009 financial crash, but it was always intended to be implemented by all six countries together, to avoid giving any one a disadvantage.

Now, however, with the crash in oil prices, the idea has been revived. Back in May, the GCC adopted a draft agreement, and this draft law is the first fruits of that.

In outline, the idea is good, and certainly a necessary step forward. The International Monetary Fund has been advocating it for a while, and the idea of VAT fits well with the logic of diversification away from a reliance of hydrocarbons. Having a government revenue stream that was not (directly at least) dependent on oil would provide some cushioning for the Government’s coffers.

VAT is also, broadly, non-discriminatory, in that it affects people regardless of nationality to the extent they consume. The way the VAT law has been proposed, it would not apply to basic goods and would be tapered upwards, so that VAT was higher on luxury goods and alcohol. A VAT allows individuals to vary their level of consumption to fit their means.

There’s also a broader point about taxation. As our editorial below points out, there are many expatriates who do contribute greatly to the UAE, far beyond their working lives. Taxation, even if light, is a way for residents to invest in the future of the UAE.

The VAT law is still in a draft form and the suggestion is that when it comes in, individuals and companies will be given two years to adjust. But the direction of travel is clear. The UAE is building a more robust economy that will be prepared for tomorrow’s challenges.