ABU DHABI: The United Arab Emirates is on course to shed its reputation as a tax haven and become the first oil-rich Gulf Arab state to introduce value added tax, marking a step towards diversifying public revenues.
As early as next year, shoppers in the sumptuous malls of Dubai – the city-state whose oil resources are dwindling – could find a VAT of up to five percent slapped on their receipts.
Dubai Customs is in charge of developing the VAT infrastructure which once imposed will aim to gradually replace customs duties that should be slashed due to commitments made in free trade agreements.
This infrastructure will be in place by the final quarter of 2008, Dubai Customs executive director of business support, Abdul Rahman Al-Saleh, said this month, adding it will be applied across the seven emirates that make up the UAE federation once the decision is taken.
The UAE has established a reputation of being largely a tax-free country where personal income tax does not exist, while corporate taxation applies only to foreign oil firms and banks, and municipal tax is imposed on house rentals.
Other members of the oil-rich Gulf Cooperation Council (GCC) also do not impose taxes on personal income, while taxation on firms varies from one country to another. None has so far introduced VAT or sales tax.
VAT is important to diversify the revenue base, especially for places that are less reliant on oil revenues, like Dubai and Bahrain. It is also good for oil exporters to reduce their reliance on oil, said Monica Malik, senior economist at the Dubai-based EFG-Hermes investment bank.
It will still be a very small portion of revenues. … Three to five percent is still low in international terms, Malik told AFP.
In an apparent attempt to ease fears of rising taxation among expatriate workers who represent the bulk of the UAE s manpower, Emirati authorities have implied that VAT will not exceed the five percent currently levied through customs duties on imported goods.
However, VAT will go beyond imported goods to include services.
The UAE and GCC are still a tax-friendly environment for expatriates… The biggest burden on expatriates would be personal income tax which is still not collected here, Malik said.
But personal income tax is still a while away in the robust economies of the Gulf region, she said.
I do not see it in a two- to five-year scenario. Gulf countries still need to attract expatriates for their ongoing development projects.
Gulf economies have experienced rapid growth over the past few years as the world s richest region in oil resources enjoyed inflated receipts from its crude exports.
The UAE economy is estimated to have grown by 7.4 percent in 2007, and is expected to see 6.3 percent growth in 2008, according to the International Monetary Fund.
With oil revenues where they are now, this reduces the need for government to introduce personal income taxes in the short to medium term, Malik said.
But although the IMF was advising Dubai Customs on ways to implement VAT, the fund s Middle East director warned lately of inflationary repercussions of an imminent introduction of VAT in the UAE, where inflation is already a major problem.
Introducing VAT may add a point or two to the inflation rate, Mohsin Khan told reporters earlier in May, after the IMF released its regional outlook in which it estimated UAE consumer price inflation at 11 percent in 2007.
The timing is not good given the high inflation, agreed Malik, suggesting that the introduction of VAT should wait until inflation has been tamed.
Dubai Customs Saleh dismissed Khan s comments as personal speculation.
There is no reason to expect that VAT would be inflationary, although the VAT may have a one-time effect on the general price level and may lead to a change in relative prices, he said.
VAT is going to replace the current customs duties amounting to five percent. Thereby it is expected to support the price levels and mitigate the rise of the inflation rate.
The UAE and other GCC countries have been battling with high inflation over the past few years, combined with a drop in the value of their currencies, all of which except Kuwait s are pegged to the weakened US dollar. – AFP
