54-58-TRE205-Special-Report-Tax Factor

Special Report

54 TRENDS | October 2015

Special Report

Taxing TimesThe lure of a tax-free UAE may soon be over and it is time for residents and corporates to know what lies ahead.

By Jethu Abraham, Dubai

mid the rumors of taxation that have been doing the rounds in the UAE for the past couple of months, value-added tax (VAT) has been trending, with its

attendant implication that the topic is dis-cussed not just in the corridors of power, but among the masses in the country as well.

In the GCC region, taxation is an alien concept to many living and working here and just contemplating it puts pressure on the ‘tax-free’ branding typically applied to anything in the Gulf countries. But,

it seems that governments, faced with increasingly pressing fiscal realities, are running out of alternatives. Aside from these internal pressures, the international finance community has long advocated a diversification of government income away from hydrocarbon revenues.

While efforts to design a fair, simple and effective tax system have been on the cards for sometime, the sudden slump in oil pric-es has hastened measures in this regard to reduce, from the governments’ viewpoint,

the chances of any unforeseen economic vulnerabilities and plan for long-term fiscal sustainability. “Governments in the region face a myriad of challenges arising from political, economic and social factors. The economic cost of the disruptions caused by the Arab Spring, the urgent need for social reform and [the] fall in oil price represent challenges that governments need to tackle head-on with new fiscal re-forms,” says Sherif El-Kilany, MENA Tax Leader, Ernst&Young.

A ©

Get

ty Im

ages

54-58-TRE205-Special-Report-Tax Factor.indd 54 9/30/15 3:31 PM

October 2015 | TRENDS 55

Increase in total revenue and expenditure A comprehensive study conducted by the IMF on the revenue and expenditure trends in the UAE shows that, during the period 2000-14, the country’s real total revenue grew by 11 percent on av-erage, allowing an increase of total ex-penditure by roughly ten percent.

On the revenue front, with the gener-al government revenue strongly depen-dent on hydrocarbon revenue, oil and gas revenues amounted to 24 percent of GDP in 2014 (a spike from 18 percent in 2004). In terms of total general gov-ernment revenue, oil and gas accounted for approximately 65 percent in 2014, while non-hydrocarbon revenues, ex-cluding investment income, amounted to nearly 20 percent of total revenue or roughly eight percent of GDP.

With an increase in revenue, there has also been a total increase in general gov-ernment expenditure, with the largest transactions being capital transfers to Abu Dhabi’s government related entities (GREs). Other expenses include security, defense and administrative spending, as well as grants to foreign governments.

Existent tax structure Currently, a Corporate Income Tax (CIT) of 20 percent is levied on foreign banks in Dubai; a local municipal prop-erty tax charges expat residents five per-cent of their annual rent; there is a ten percent local tax on hotel services; the GCC’s common external tariff for prod-ucts imported from outside the region (generally at five percent, 50 percent on alcohol and 100 percent on tobacco) ap-plied locally; and numerous fees on gov-ernment services applied by the Federal and Dubai governments.

Fiscal policy measures/suggestions:(A) Revenue Options:The key takeaway from the suggested tax measures has been low tax rates with a very broad base. Such a policy is favored as it limits any or all negative effects on investor and consumer behavior.

1) CIT with broader coverage but lower rates:The tax rate may be lowered to ten percent from the current 20 and the coverage broad-ened to include all companies (foreign, do-mestic and GCC) except for those located in free zones. A broadened CIT can be ad-vantageous for the economy, if it is applied to unincorporated companies as well, as it could provide some progressivity in taxa-tion and would lessen the need to introduce a general income tax on individuals.

2) VAT as a low-rate, broad-base tax:Globally viewed as the most stable rev-enue source, VAT is thought to have the least detrimental effects on investments. A low rate of, say, five percent, may be suggested so as to raise revenue with

minimal impact on the population. At the same time, its equity implications are ex-pected to be very insignificant in a mac-ro-fiscal environment, such as the UAE, where taxes are minimal and government expenditures are financed by oil revenues.

3) Excise on passenger vehicles for rais-ing non-oil revenue:Owing to the numerous costs automobiles impose on society – from the maintenance and expansion of roads to productivity losses incurred due to traffic jams – a tax on automobiles, as has been introduced in many developed economies, is yet anoth-er feasible suggestion. Imposition of an excise tax on automobiles is expected to considerably shift costs to the owners.

With a rise in revenue, there has also been an increase in government expenditure, with the largest transactions being capital transfers to Abu Dhabi’s GREs.

© G

etty

Imag

es

© G

etty

Imag

es


Special Report


4) Government fees and charges:An ideal cost-optimization measure with regard to government fees or charges would be to raise these fees if they are lower than the cost of goods and services offered. Raising fees for purposes of rev-enue-generation, on the other hand, could become a complex and inefficient pro-cess, with relevant shortcomings.

(B) Expenditure Measures:Fiscal consolidation requires rationaliza-tion of spending, but the quality of spend-ing cuts is crucial to avoid damaging the country’s competitiveness and long-term growth prospects.1) Containing government expenses and prioritizing investment:

Policies targeting gradual adjustment in ex-penses could buttress fiscal sustainability and achieve intergenerational equity. A key measure in this regard would be to control the public wage bill by developing a clear, medium-term strategy to stabilize the size per capita as well as to limit wage increases to correspond to productivity gains.

2) Reducing energy and water subsidies:Other measures include continued efforts to reduce energy and water subsidies, while protecting those in need. A reduction of energy and water subsidies, at this point, would be beneficial as it would not only lead to a lower burden on public finances, but would also reduce welfare costs that stem from the distortion of relative prices in the economy.

These make up, more or less, the revenue and expenditure measures put forth as a

A reduction of energy and water subsidies...would be beneficial as it would not only lead to a lower burden on public finances, but would also reduce welfare costs.

20 PERCENT65 PERCENT

Is the total revenue growth of the UAE, during the period 2000-2014, according to the

IMF, while the total expenditure grew by ten percent.

Is the corporate tax levied on foreign banks in Dubai. Other taxes include five percent on property and ten percent on

hotel services.

Was the contribution of the oil and gas sector to the

UAE’s government revenue in 2014, while non-hydrocarbon revenues stood at 20 percent.

11 PERCENT

© G

etty

Imag

es


Special Report


means to develop a consolidated and for-ward-looking fiscal framework. Due to the heightened public interest in the mat-ter, the media is rife with opinion pieces on how this would affect public life and institutions once the proposed tax struc-ture is implemented.

“We suggest a very progressive tax sys-tem in place – one with a very low rate as the issue is not about the income. The re-spective countries do generate a lot of in-come from oil, but it is about diversifying revenue,” says Zeine Zeidane, Advisor of the IMF Middle East and Central Asia Department and the Mission Chief for the UAE, a key figure in the tax proposals.

“While nothing’s been decided for now, we certainly advise the government to move ahead with the VAT at [a] low rate and we advise them to also move forward with the CIT, so that they incorporate

some tax applicable to all companies – not only foreigners, but [also GCC] for-eign and domestic companies with a very low and flat tax,” he adds.

On the investment front, it is thought that the introduction of VAT or a corpo-ration tax is unlikely to deter foreign in-vestors from establishing a commercial presence in the country.

“Plans to introduce a federal tax sys-tem have been mooted for some time now, as the UAE steps up efforts to con-solidate non-oil revenues,” notes John Martin St. Valery, founding partner, The Links Group.

“The introduction of a sales tax and [a] broadening of the corporation tax are obvious steps forward and, although they will necessitate changes to the ad-ministration of locally registered compa-nies, the anticipated low rate of taxation

applied is unlikely to impact foreign in-vestors, who are typically familiar with these types of taxes,” he adds.

Meanwhile, a parallel discussion also took place on the topic of remittance tax when a member of the Federal Na-tional Council proposed that the UAE impose a tax on the billions of dirhams sent by foreign workers back to their home countries.

While the statement did reflect a cir-cular that was previously sent out to banks and institutions in the UAE, as part of a pilot project in 2013, Obaid Humaid Al Tayer, Minister of State for Financial Affairs, was quick to dismiss the proposal as the personal view of an FNC member.

Currently, while no government has committed to implementing taxes, the signs are that the status quo is expected to change as a result of persistently low oil prices and the correspondingly sub-stantial fiscal break-even gap faced by most GCC countries.

A classic example has been the slash of fuel subsidies since August 1 this year – the majority of motorists are now pay-ing more than 25 percent at pumps in the UAE. This indicates a somewhat momen-tous move in a country that is faced with the reality of halving its oil export price – something needs to be done soon to help balance the national budget and work to-wards fiscal sustainability.

At the time of going to press, the lat-est official update on the tax laws in the UAE is that the drafting of laws has been delayed, owing to a lack of agreement on rates and exemptions among neighbor-ing countries in the GCC region.

In an official statement released in August, the Ministry of Finance stated through its UAE state agency WAM, “If the GCC countries reach a final agree-ment on issues related to the application of VAT, it would be announced directly.” Once implemented, the UAE would give corporate entities a preparation time of 18 months from the enactment of the law to meet their tax obligations.

“Plans to introduce a federal tax system have been mooted for some time now, as the UAE steps up efforts to consolidate non-oil revenues.”

© G

etty

Imag

es


54-58-TRE205-Special-Report-Tax Factor

Documents

Transcript of 54-58-TRE205-Special-Report-Tax Factor