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UAE considers introduction of VAT

THE UAE has moved towards a reform of its ultra-low tax regime after requesting that the International Monetary Fund (IMF) help it develop a value added tax (VAT) system.

THE UAE has moved towards a reform of its ultra-low tax regime after requesting that the International Monetary Fund (IMF) help it develop a value added tax (VAT) system.

The IMF’s annual report on the UAE’s economy, released last week, revealed that the Emirates’ government had agreed it needed to broaden its tax base.

It said talks on the introduction of a national sales tax had “gained momentum at the cabinet level”, and that the UAE had asked the organisation for technical help. “A VAT system will allow the federal government to reduce its dependence on charges and fees,” the report said.

The IMF, which has long encouraged the UAE to raise taxes and reduce its dependence on oil and gas revenues, also recommended that the Emirates extend corporate income tax to sectors outside the hydrocarbon industry. “The Emirates should considering introducing a property tax,” it added.

Although the UAE’s Ministry of Finance declined to comment on which items might be subject to VAT, or at what rate, analysts said the move could be easily absorbed.

“A 5% to 7% value added tax on retail and wholesale trade would hardly be a burden on consumers, considering the UAE’s per capita GDP of US$20,000 in 2004,” said Hany Gemena, an economist at EFG-Hermes. “Egypt, which has a per capita income of about US$1000, has an average value added tax of 10% but this does not curb economic activity,” he added.

Others said that the reforms could still be some time off. “Most countries take a couple of years to introduce VAT,” said Dennis Knowles, indirect tax partner at Deloitte. “Once you’ve announced it you need to educate people and firms will need to make changes to their businesses — introducing computerised accounting, for example.”

The move would nevertheless signal a considerable policy shift for the UAE, which has attracted significant foreign investment through its low-tax regime. At present, there is no national sales or income tax in the country, although profits of international banks and energy firms are taxed at federal level. Some of the emirates also levy limited sales taxes. Dubai, for example, has a 10% charge on hotel bills.

Although concerns have been raised that the introduction of VAT would impact on lower-income sections of the UAE, observers said it could also have societal benefits. One could be greater spending on public services and infrastructure. “The IMF may well be saying something like ‘you need a way of increasing everyone’s lot’,” said Knowles.

“VAT is generally one of the cheapest forms of tax to introduce. Businesses administrate it all, so you reduce the control problem. It’s very cost effective,” he added.

Last year, the UAE recorded fiscal revenues of US$30 billion, two thirds of which came from the hydrocarbon industry. Its GDP grew by 7.4% to US$88 billion, against US$82 billion in 2003. It recorded a US$4.9 billion budget surplus in 2004 and projects that it will post a surplus of close to US$5.5 billion this year.

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