Care needed in VAT decision

The division of future VAT revenue between the emirates will be a key socio-political decision, say analysts.

ABU DHABI // The division of future value added tax (VAT) revenue between the emirates will be a key socio-political decision facing those implementing the new system, financial analysts said yesterday. VAT, an indirect tax on the domestic consumption of goods and services, is likely to generate more revenue than the customs import duties it will replace, allowing the Federal Government to collect a pool of funds for public service spending throughout the country.

Dubai and Abu Dhabi are likely to generate the highest revenues from a VAT due to the spending power of their populations, but smaller emirates may have a greater need for funding. The Government will consequently face some potentially sensitive decisions. The tax, which has aroused criticism among residents struggling to cope with inflation, is expected to be introduced in the GCC in 2012 at a common rate of five per cent. Very few goods and services are expected to be exempt.

The issue of sharing VAT revenue between the emirates dominated large parts of a two-day conference organised by the Dubai Economic Council entitled "Preparing for the VAT in the UAE and the GCC". Speakers stressed that it would be important to set rules and principles dictating how the pool of VAT money is shared to avoid possible conflict between emirates. "Revenue sharing is one of the most important aspects, because we have seven emirates and each one differs in its endowment of oil and other natural resources," Juma al Majid, the chairman of Dubai Economic Council, told the conference.

Although most of the VAT revenue will be used to refund emirates with money they would have otherwise earned from customs import duties - which will be significantly reduced when upcoming free trade agreements are signed - a pot of available funds will be left over. Speakers debated whether this revenue should be distributed where it was collected, which would favour Dubai, Sharjah and Abu Dhabi, or divided among emirates according to their needs, a method used among the states of Australia.

"It's a problem of the political economy, which is how much [revenue] stays in the place it is generated and how much is re-distributed among some of the poorer emirates," Dr Ehtisham Ahmad, a senior adviser to the executive director at the International Monetary Fund, told the conference. The UAE is expected to hold fresh talks early next year to resolve this and other issues related to the proposed VAT system.