VAT in the UAE: a big change is on the way and it makes economic sense

VAT will be implemented in the UAE from January 1, affecting almost all sectors including retail. Sarah Dea / The National

Ping! – “You have a new message”.

As you navigate around the bank notifications of another purchase, and marvel at your good luck to be selected, yet again for a free draw, there it is.

No, not an invitation to a long-weekend Friday brunch or an offer of a couple of tickets to the Rugby 7s, but reality staring you in the face.

“Starting from January 1, 2018, the UAE Government will be introducing Value Added Tax (VAT) at 5 per cent which will be applicable to our products and services.  For more info and to view our updated terms and conditions, please visit ...”.

Blimey!  That hits home, doesn’t it?

It might not be up there with “So, you really are moving out then!”, but there is an undeniable feeling that things are never going to be the same again.

Yes, the introduction of VAT is going to happen. Yes, it is less than five weeks away. And yes, it is going to affect me and you.

Nor is that "ping" message a one-off hit to the solar plexus. This will be like going a round or two with Muhammad Ali in the Rumble in the Jungle.  Water is a "good" and, therefore, will carry VAT, as will all forms of energy – that's fuel, electricity and gas.  If you want to watch a download of the Ali vs Foreman fight?  Yes, the service from the internet provider is subject to VAT, too. VAT undoubtedly is in the air.

Some may regard this particular wind of change, in lyrical terms, as blowing straight into the face of time. Others may see it, more prosaically, as a straight punch. Who is right?

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The UAE Tax Procedures Law, VAT Law and VAT Executive Regulations form a suite of legislation, which establishes a new organ of Government, the Federal Tax Authority, will impose a compliance burden on many businesses, and will push prices up at a time when incomes are unlikely to keep pace.

It was once suggested that the mission statement for the Internal Revenue Service in the United States should be “We have what it takes to take what you have”.  Those of a cynical disposition may see all tax authorities in the same light.

There is an alternative point of view.

The UAE, along with all other GCC states, is economically dependent – to a greater or lesser extent – on natural resources: oil and gas.  Having most of your eggs in one basket holds two dangers.

First, natural resources are, by definition finite.  At some time in the future, the last drop of Gulf oil will be drilled, and the last molecule of Gulf gas will be extracted.  Without planning and investment for a post-hydrocarbon economy, the economic shock would be profound.

Secondly, social change can be remarkably quick and is quite capable of outrunning the consumption of natural resources.  In 2011, the financial services firm, Morgan Stanley, published a report on the future of electric cars, which contained two photographs, both of 5th Avenue, New York.  The first photograph, published in 1900, was under the caption Spot the Car (there was one, among a troop of horses). The second photograph, published in 1913, was entitled Spot the Horse (there was one, among a fleet of cars). Times can change rapidly. How many electric cars did you see on the streets of Abu Dhabi and Dubai, say two years ago?  Even if oil and gas hold out, society might move on.

Listen: Business Extra Podcast episode 33: Everything we know about VAT

It is government’s responsibility to plan for such eventualities.  If tax raised now is invested for future prosperity, government is fulfilling that obligation.

“If” is a small word with a big one hiding inside. “If X, then Y” contains a premise - X - which must hold good for Y to be achieved.  Whether or not a premise does hold good must be verified, and verification involves accountability.

A Saudi minister, speaking at the UK-GCC Economic Summit in London in July last year, expressed the view that “there is now a culture of accountability, for the first time”.  Since then, we have seen that governmental support for more accountability is a powerful instrument.

So maybe the cynic will be proved wrong.  Tax may be a necessary ingredient to build for the future, along with other current measures, such as the encouragement of entrepreneurship, the overhaul of the corporate insolvency regime, the promotion of market competitiveness, and the introduction of efficient regulation.

All government involves a social compact, acting for the greater good and not shirking tough decisions.  Like any dynamic, all social compacts need to be re-calibrated continuously to remain fit for purpose.

Viewed in isolation, it is easy to moan about tax, but that misses the point.  To do so focuses only on the negative side of the equation - the tax levy - to the exclusion of the positive side - the effective tax spend for future prosperity.  Of course, it goes without saying that the effectiveness of the tax spend must be objectively verifiable.  Accountability is inherent in the equation.

Coming back to the song to which I’ve already alluded obliquely, it depends on whether you see VAT as, like the name of the band (Scorpions), having a sting in the tail, or whether you side with the lyrics -

The future’s in the air

I can feel it everywhere

Blowing with the wind of change.

Michael Patchett-Joyce is a commercial lawyer and arbitrator, based in London and the UAE