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Introduction of VAT in UAE – from 2018 – and its effects

Introduction of VAT in UAE – from 2018 – and its effects

The current economic situation in the countries of the Gulf Cooperation Council (GCC) is characterized by general economic contraction, which is caused by the decrease in oil prices. It has become a challenge that requires an effective and well-balanced solution. The governments of the GCC countries need to generate new sources of revenue to maintain economic stability in the region.

For this purpose, the GCC countries have competed the negotiation for altering the applicable fiscal legislation. The introduction of Value Added Tax (VAT) was on agenda and the possibility of adopting a common tax framework on VAT is also under discussion.

Several countries have already agreed to introduce the minimal VAT starting from 2018 or 2019. The suggested rate of VAT is 5 per cent (in comparison to 20% in the majority of other developed countries).VAT introduction is unlikely to have a noticeable negative impact on the social standard of living. That is due to the fact that the certain vital health care and education sectors, as well as essential food items, will be exempted from taxation.

As to the legislative changes — each country will decide independently whether to join the common tax law or to maintain its legislation. Therefore, all the countries of the Gulf Cooperation Council will remain free in the choice of a policy framework.

The UAE and Saudi Arabia have already confirmed introduction of VAT from 2018, and other countries of the region are expected to follow in the nearest future. Qatar is the only country of the whole GCC region, which will hardly introduce VAT at this stage. The available fiscal reserves at this state are large enough to sidestep tax introduction. Qatar possesses the world’s largest natural gas reserves, which serve the country’s major revenue item.

Special committees and task forces were established in the GCC countries to analyze the impacts of the proposed changes on the region’s economy and society in general. The introduction of VAT at the rate of 5 per cent will make it one of the lowest worldwide. Therefore, it will have the minimal impact on the general prices level. At the same time, this VAT tax rate is sufficient to increase the current GDP level by 4-5 per cent.

Such measures have already elevated the level of public criticism concerning the expected inflation and subsequent deterioration of consumer spending. In any case, no business is interested in experiencing losses and the entire tax burden will fall on consumers.

The governments, however, claims that the low tax rates will not have significant negative impact on consumer behavior. Moreover, they expect to raise state revenues using further diversification of the national economies.

The introduction of the VAT requires appropriate preparations. The countries of the Gulf Cooperation Council, being tax-free jurisdictions, face the common difficulty — absence of the necessary legislative and infrastructural base. Each country needs to develop the applicable tax legislation. The governments should also establish special revenue services, which will take control of tax payments. In case of the UAE it has already established such tax authority as well as has already adopted the respective legislation for VAT introduction.

VAT introduction, in spite of the possible difficulties, will revive the region’s economy and will strengthen international positions of the GCC countries.

The absence of taxes in the UAE was also often criticized by various international organizations. The introduction of the VAT with the minimal level of 5% would not have strong effect on the business but would make the UAE be in line with international organizations recommendations and standards.

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