UAE to study direct taxation implications

A key UAE minister has again raised the prospect of introducing direct taxation as a means of accelerating economic diversification. Sheikh Hamdan Bin Rashid al Maktoum, Deputy Ruler of Dubai and UAE Minister of Finance and Industry, last week told the Oxford Business group’s “Emerging Dubai 2006” review that the government was considering change.

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By  Alexandra Dubsky Published  October 1, 2006

A key UAE minister has again raised the prospect of introducing direct taxation as a means of accelerating economic diversification. Sheikh Hamdan Bin Rashid al Maktoum, Deputy Ruler of Dubai and UAE Minister of Finance and Industry, last week told the Oxford Business group’s “Emerging Dubai 2006” review that the government was considering change. “The introduction [of direct taxation] would require extensive studying at all levels to avoid a negative impact on the less fortunate segments of the population, disincentive effects on business and investment and other distortions to the economy,” said Sheikh Hamdan. “The aim will be to avoid adding to the overall tax burden any value-added tax. General sales taxes will be to compensate for the loss of customs revenue, not to generate more revenue,” he said. The initiative would be part of the UAE’s move towards more modern, organic budget laws with performance-based budgeting. This is intended to achieve better disclosure and greater transparency in the UAE’s quest for economic diversification away from high oil revenue dependency. However Jorg Seifert, advocate at Al Sharif Advocates & Legal Consultants, insists that the introduction of direct taxation is mainly used as a tool by the World Bank and the IMF to provide further transparency, and would not be required for the further economic growth of the country. “The global institutions want to create more transparency to follow up on money transfers more easily through these tax regulations. Economically the UAE is in no need of extra income,” he said. “Although there has been a lot of publicity around this topic lately, sales taxes are not likely to be implemented soon. As we have seen with the property law that took four years to be executed, legislative changes take their time to happen,” he added. “Effects on businesses and population will naturally depend on the height of the new taxation," he argued, “but they probably would not impact the general business climate significantly." “I do not see those eventual extra taxes hindering the inflow of foreign investment. Those who might suffer are lower-income employees who might then, under the new tax burden and the rise in accommodation costs and general living expenses, decide to relocate to their home countries. But the large economy-driving force won’t really be affected,” he stated. Each individual Emirate has its own taxation system with income taxes up to 40%, but until now they have been frozen to attract foreign investment. Seifert suggests that the regulator will implement a national legislation to keep competition healthy. “The government will most likely introduce a UAE-wide policy to create equal opportunities within all states, and to avoid the movement of foreign investment from one Emirate to another.” Last November Sheikh Mohammed Bin Rashid al Maktoum, UAE Vice President and Prime Minister, fuelled speculation about the possible introduction of a UAE sales tax, while reports suggested that the IMF has been asked by national authorities to help develop a value-added tax system. In the meantime, Sheikha Lubna Al Qasimi, UAE Minister of Economy and Planning, announced that the government is studying a plan to introduce sales taxes on tobacco and alcohol in 2006, but no further steps have been confirmed yet. Under the current law, no sales and corporate income taxes are payable by businesses in Dubai, with the exception of banks and oil companies, that pay up to 20% and 55% respectively on taxable income. Import taxes have been largely standardized at 5% as part of a GCC-wide customs union that was formed three years ago. There are various exceptions including food, building materials, medical products and any item destined for the free zones in Jebel Ali, Internet City and Dubai International Financial Center. Dubai is also required to levy 10% duty on all luxury goods as part of a GCC agreement. Cigarettes have a 100% custom tax and business properties pay a municipality tax set at 10% of the annual rent value. “Different GCC countries have individual taxation systems, but they might be unified," according to Seifert, in the course of monetary union and further centralizing initiatives.

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