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VAT may come to the UAE in 2014: What will it mean for you

By Vicky Kapur

A new report from the World Bank insists that the GCC countries could implement a value-added tax (VAT) by as soon as 2014.

“The GCC countries continue with their endeavours to introduce a VAT system with a target for doing so in the next two to four years,” the latest Paying Taxes 2013 study by World Bank, IFC, and PwC maintains.

The study maintains that background work on a GCC-wide implementation of VAT is ongoing, and outlines that that the preparation for VAT implementation across Gulf nations, which include the UAE, Saudi Arabia, Qatar, Kuwait, Bahrain and Oman, includes an intention to harmonise the VAT laws, which will be introduced by adopting a VAT framework law.

Rumours about VAT implementation in the UAE have been circulating since 2008, when a UAE study suggested the implementation of a 2 to 5 per cent VAT by the first quarter of 2009.

The average standard VAT rate across the 27 member countries of the European Union (EU), however, is more than 21 per cent in 2012, according to global taxation expert Ernst & Young. In addition, news broke out this morning that UK may be forced to raise the VAT rate to 25 per cent as Chancellor George Osborne continues his battle to restore Britain's economic health.

Whereas a proposed VAT rate of up to 5 per cent in the UAE should not have a huge impact on most of the end-consumers’ finances, anything beyond 10 per cent is bound to squeeze residents and visitors in the country.

A VAT of 20 per cent on a Dh150,000 car, for instance, will make it dearer by Dh30,000, which in effect will result in a higher EMI (equated monthly instalment), thus impacting personal finances of UAE consumers in a big way.

Similarly, tourists looking to snap up a Dh100,000 luxury watch will have to shell an additional Dh10,000 in case a 10 per cent VAT rate is implemented. This may diminish a little the UAE's allure for foreign tourists as a shopping paradise although retailers may absorb a part of the tax to keep it competitive.

While experts believe that the GCC nations will begin implementing VAT in phases, starting perhaps at the lower end of the scale (5 per cent or less), they agree that the tax rates could go up subsequently, in line with global trends.

In June this year, the GCC set up a Customs Union Authority to arrive at a formula on how to divide customs revenues between the governments. The Gulf nations are expected to scrap the intra-GCC customs duty regime if and when the VAT implementation gets underway.

The latest World Bank report maintains that the VAT framework will be adopted by all GCC countries, much like the GCC Customs Union law which existed prior to the introduction of a national VAT law.

“Value-Added Tax (VAT) and other taxes are among the most important resources along with other fees,” Juma Al Majid, Chairman of the Dubai Economic Council, said last month.

“Imposing taxes, if any, should be performed in two stages. First is imposing VAT – which is relatively easier in terms on implementation as is the case in tens of countries – provided that national institutions should be prepared for the process in terms of technology, knowledge, human resources and material resources,” Al Majid said.

“In light of this and after considering the general atmosphere and trends, other taxes mulled by the government can be considered in line with developments,” he added.

“VAT is the best tax system for strengthening the economy of the UAE,” a UAE official had said in 2008. The tax will be imposed on consumer goods and services, he added, arguing that any inflation caused by the VAT should be less than a “diminishable half a per cent.”

Officials at the World Bank and the International Monetary Fund have long urged GCC states to introduce taxation, particularly VAT, as a way of ensuring a reliable inflow of government revenues, safeguarding against volatility in oil prices.

While experts expect VAT to happen at some point, no timeframe has been announced officially so far. According to the latest World Bank report, however, we might see VAT becoming a reality in as soon as two years.

If a 5 per cent VAT is indeed applied – and the 5 per cent intra-GCC Customs duty scrapped – there may not be a large inflationary effect on goods sourced from within the GCC. However, goods sourced from outside the region may see a 5 per cent increase in price, at least a part of which will surely be passed on to the end-customer.

But if the GCC nations agree in implementing a VAT rate of 10 per cent or more, it could seriously impact the cost of living in the region, with most products imported from beyond the GCC’s borders attracting a substantial additional rate of taxation.

VAT is the most common form of consumption tax system used around the world, and its implementation in the region may be a matter of time, as the World Bank reckons. However, the rate of VAT and what all is included in the tax (some experts believe that foodstuff, for instance, should be exempt from VAT) will ultimately dictate the impact it will have on individuals and retailers’ finances.

In the end, an earlier estimate of less than a “diminishable half a per cent” impact on overall inflation may still hold good. Nevertheless, as the World Bank report asks, “the question and the challenge will be whether the Middle East countries will be able to remain easy places to pay tax.”

“With a slowing world economy and the potential for stagnating oil prices, governments in both oil and non-oil rich countries will have a need to increase tax revenues in order to balance their budgets, and at the same time still provide an attractive business environment for investors.”

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