It has been confirmed that the UAE will introduce a value added tax from 2018 at a rate of 5 per cent, and that plans for a corporation tax are expected to be revealed in the near future. After months of discussion and hints, the announcement finally provided clarity on what lies ahead. The tax will be the first step in widening the Government’s revenue base, and will constitute one plank in creating a platform for a post-oil future.
No one, however, is under any illusion that the introduction of new taxes is going to be easy. Many retailers, for starters those that purvey luxury goods and consumer electronics, have been able to price goods competitively against other markets but enjoy much healthier profit margins. With VAT, they will have to adjust prices accordingly or be outsold. The possibility of a business tax adds to the pressure. Taken in tandem, businesses will need to cut fat from their operations and become more efficient. That is no bad thing.
Another cost will come in the form of compliance. That’s fancy talk for keeping track of sales in a manner that is acceptable to the taxing authorities, and making regular and accurate deposits to the exchequer. Again, a new cost will encourage more efficiencies to lower the final expense of doing business. A collateral benefit from all this is that the accumulation of data will provide economists with a more accurate perspective of the economy. The topography of this landscape – the highs and lows of commercial activity – will let policymakers better chart the journey to the horizon, towards a new economy that will be less and less dependent on hydrocarbon.
The hard bit in all this is that, of course, VAT is a regressive tax. Again, that’s fancy speak for the fact that a flat tax affects poorer people more than it does richer ones. But this is only true if no mitigating measures are in place. In the case of the UAE, there are. A roster of essential items will be exempt from VAT – including food staples, education and health care – ensuring that those at the base of the income pyramid are shielded from deleterious effects.
No one likes taxes. It’d be foolish to say otherwise. But prudent implementation of a well-reasoned tax regime with sufficient mitigation can surprisingly build a stronger and more efficient commercial and economic ecosystem. We’ll see the proof of that in a couple of years.
