Recent news from the Al Arabiya Network revealed the United Arab Emirates is seeking to bolster state revenues by introducing corporate tax and VAT in the third quarter of this year; the announcement was made by a senior Ministry of Finance official on July 2. This news follows the figures released by the International Monetary Fund (IMF) that saw a fiscal deficit of 2.3 percent of gross domestic product from a 5.0 percent surplus last year (influenced by the drop in oil prices). As a result, “the IMF has urged the UAE to consider introducing excise taxes and a uniform corporate tax for both local and foreign firms” under a program approved by the GCC’s Financial and Economic Cooperation Committee (FECC) to cover for the lost income, the Al Arabiya News (AlArabiya.net) post affirmed.
As stated in the UAE Ministry of Finance report released on July 2, the cabinet has approved versions of the corporate tax and VAT draft laws. Younis Haji al-Khouri, under-secretary at the ministry, told in a press statement that the drafting of UAE laws will happen eventually, but declined to comment on the proposed tax rates or when they might take effect.
The introduction of VAT aims to strengthen the region’s fiscal frameworks by considering new tax legislation. However, this news is unsettling for firms that will soon be required to fill-in a tax form demonstrating accurate financials and visibility for the government to review.
Some opponents say, why introduce the corporate tax and VAT now? Unfortunately, the fiscal deficit of 2.3% of GDP has been UAE’s first negative outcome since 2009 immediately after the financial crisis.
The tax burden is a significant shift away from a ‘tax-free’ environment that companies have benefited from up until now and has been the driving force behind them coming to setup a business in the UAE.
Nevertheless, UAE has intentions to keep the cost of implementation to a low minimum for business practicality; some predicted a VAT starting rate at between 3% and 5 %, but that has yet to be determined or decided on at this time. As well, the implementation of VAT should not be a factor for those operating in tax-free trade zones; otherwise, this would lead to a break down in investor confidence.
Overall, to phase in the VAT under UAE law will offer a fresh approach for a changed economic reality. With regard to fiscal reform, by implementing local taxes allows the “[UAE government] to examine the effects of imposing a uniform corporate tax across all the emirates in a bid to reduce its dependence on oil revenues,” Al Bawaba said in a post on the topic from a local perspective.
Even if a shift towards a GCC territorial approach to taxation were necessary, imposition of taxes would allow the UAE government to raise additional revenues to boost the economy.
“With GCC governments considering introducing value added tax (VAT), the biggest challenge in order to drive voluntary compliance will be to ensure that the VAT systems are simple, efficient and cost effective for companies,” Dean Kern, partner, PwC’s Middle East markets, tax and legal services leader, said.