GCC taxation plans raise 2007 price rise fears
The implementation of a Value Added Tax (VAT) regime in the United Arab Emirates by the end of 2007 could have massive implications for import and export activity in the region, and possibly even the future of the retail sector. CEO Middle East examines the consequences
Taxation is not a subject often talked about in a region where expatriates are lured to jobs by lucrative duty-free salaries, but over the past few weeks plans to solidify a basic tax structure across the UAE have firmly begun to take shape.
As with many firsts in the Middle East the idea has spawned from the UAE, a collection of Emirates now globally renowned for groundbreaking growth plans.
The first definite steps have jointly been taken by Dubai Customs, the International Monetary Forum and the UAE Ministry of Finance that are conducting a study seeking to identify ways and means to facilitate the ‘smooth implementation’ of a Value Added Tax regime in the GCC.
The issue was previously merely a blend of whispers and gossip across various Gulf governments but has now emerged as a distinct possibility.
Although exact details of how and to what extent the levy will be introduced remain murky, it is initially thought that the UAE could see a relatively high 5% level of VAT. This will be sought directly from wholesalers and distributors, rather than retailers on ‘non-essential’ products including tobacco and electronic items by the end of 2007.
The proposed levy would replace the 5% customs duty currently charged on imports following the implementation of Free Trade Agreements (FTA) with the UAEs major trading partners, several of which have yet to sign.
It is also in line with a global push towards a more liberalised trade regime and comes at a time when the World Customs Organisation (WCO) is urging countries to remove trade barriers, including customs tariffs, in order to facilitate free trade.
Abdul Rahman Al Saleh, executive director of business support and services for Dubai Customs and head of the task force conducting the study, told CEO Middle East that the principal drive towards a VAT regime was purely an economic decision.
“The global and regional economic systems have undergone a major transformation, requiring the UAE to adopt a fresh trade approach that is in step with the changed economic reality,” he said.
Al Saleh said that the UAE is seeking to sign mutually beneficial free trade agreements with several countries and influential economic blocks, and is already in discussions with the USA, India, Australia and China.
“The proposed changes to the country’s economic system will make the UAE ready for these agreements,” he explained. The European Union (EU) is expected to sign in May, bringing with it an FTA agreement comprising of 25 countries.
“Once these trade agreements take effect over the coming months, Dubai Customs will be required to substantially bring down the customs duty on various items, making it imperative for us to look for alternate sources of revenue. This influenced the move towards a non-direct tax regime,” he said.
Al Saleh added that wholesalers would initially be targeted for around two years but that it was “too early” to say whether the retail sector would see similar taxation levels.
The question of where the revenue will end up, however, was not something Al Saleh was keen to answer directly. He emphasised that the levy would “compensate” for and “not give the government additional revenue”.
Many experts believe that the starting level of 5% is too high suggesting that it could lead to an increase in inflation and make the country less attractive to foreign workers.
Fortunately the government is in close contact with the IMF that has laid emphasis on the need to ensure that the transformation to a new tax system does not lead to an increase in prices.
Chas Roy-Chowdhury, head of taxation at the Association of Certified Chartered Accountants in the UK, the largest global body for the profession, said that any taxes should be implemented “gradually” and start with lower percentages.
“The downside to VAT is that it pushes up inflation and therefore creates inflationary pressures which have to be compensated in other areas.
“The other issue is that 5% is the top-end of the scale for VAT. The problem is that whenever taxes are introduced they come in at a low level, and are then increased, but realistically they should be kept at a low level of between 2% to 3%.”
Roy-Chowdhury added that in the long-term, and if consumer goods take a hit in the future, VAT could also deal a severe blow to the less well off.
“If this happens then exemptions should be made to essential goods such as food, water, newspapers and children’s clothes, for example.”
This is a common call in the region with many people concerned that taxes will be too high, not be implemented gradually, and not include any social services for residents.
On the upside, Roy-Chowdhury said that VAT is easy to set up and well suited to economies that don’t have sophisticated tax structures. “Hong Kong is doing it and Russia has done it, while Malaysia is also planning to carry out similar measures to the UAE in 2007. It is broad based, provides a good yield, is as good as any, is the easiest to set up and commercial organisations can also administer it very easily.
In terms of revenue distribution, a possibility means could come in the form of one or more social provision funds, something Roy-Chowdhury agrees with.
“If the government doesn’t arrange for the VAT revenue to come to them then a good idea is to put the money back into society or into other non-oil developments, but this all depends on the future plans of the government.”