The introduction of personal and corporate income tax in the GCC will boost "economic progress and well-being" in the region, financial experts said.
Members of the banking and finance industry said that a new tax system will likely create a host of government sponsored financial and investment products, growing local revenue while encouraging taxpayers to save. Leading economists and businessmen in the UAE also believe that any system will need a balance of benefits for national and expatriate taxpayers.
Emirates Business reported exclusively this week that the six Gulf nations have agreed in principle to implement corporate and individual income tax by 2012 – and are now discussing ways to bring the deadline closer.
Yesterday, Dr Armen Papazian, a senior Dubai-based consultant, said the key issue was not what percentage of GDP new tax revenues would represent, but rather how much more local currency revenue governments will be able to achieve.
"This is critical because GCC governments earn more foreign currency than local currency since there is no taxation and revenues are in large majority derived through oil and gas revenues, which are petrodollars. Thus, the tax structure introduces the possibility of balancing the local/foreign currency ratio of government cash flows.
"This is also important because in the GCC, due to the monetary architecture, central banks do not monetise government expenditure. It is typical in the United States and the United Kingdom to back currency issuance with local sovereign bonds. In the GCC, local currency issuance is backed by foreign currency, the US dollar.
"From a macroeconomic perspective, the new tax structure will enhance the ability of governments to finance local expenditure and investments. This in itself will contribute to economic progress and well-being, and will thus lead to tangible benefits to the tax paying public. This is very important for the sustainability of the developmental drive in the region."
The merits and benefits of an income tax system far outweigh the knee-jerk reaction of those who seek refuge in not paying any taxes, said Pankaj Ganjoo, Regional Head of Retail and Private Banking for Middle East and Africa at ICICI.
Apart from contributing a sizeable part to the country's GDP, income tax funds help governments provide social insurance that encompasses healthcare, unemployment benefits, disability, pension and other such funds for the taxpayer, he added.
"All governments need to have finances, so taxation is essential," he said.
"On implementation it would adversely affect barely five to 10 per cent of those in the lower taxable income bracket. In time and with the right tax-saving products, even they will find a greater level of comfort and belief in the system."
The creation of a central government body for the implementation, enforcement and collection of tax is a Herculean task – but one that will also trigger the dawn of investment agents shadowing as tax consultants.
Papazian said: "A co-ordinated implementation of collection and monitoring mechanisms will be critical. One of the key challenges is to ensure fairness is an integral principle across the board."
THE IDEAL TAX REGIME
Business leaders in the UAE said that a maximum of 10 per cent of taxable income would be received without much opposition.
Qatar, the first country within GCC to implement corporate income tax, has a progressive tax rate structure that peaks at 35 per cent. With the first QR100,000 of chargeable income not taxed and the next QR400,000 drawing 10 per cent, analysts said the UAE would need to adopt a similar system. In May 2006, Kuwait had proposed a flat 10 per cent income tax levy, but there has been no development since.
Currently, within the UAE, only foreign banks and oil companies are charged corporate income tax. Foreign banks are charged 20 per cent of their taxable income in Dubai, Abu Dhabi and Sharjah, while oil companies pay 55 per cent on their profits in Dubai and 50 per cent in the rest of the UAE.
Other major financial centres such as Singapore and Hong Kong also offer individuals a progressive personal income tax rate along with an optional flat rate.
With diverse trade zones and industries, the UAE will find maximum ease and productivity in a progressive system. Ganjoo said the federal government could follow the tax deduction-at-source model "which doesn't burden individuals and keeps the cash flow to the government constant".
"The ministry is thoroughly professional and efficient. It will study and learn from the global chaos. It will work closely with economists to get this right. I have full faith in it," said Ganjoo.
Papazian said the UAE's tax regime should have its own model. "It should be based on local priorities, domestic concerns, and a national awareness that this tax structure could be a key development supporting further monetary independence and local domestic wealth creation independently of the US dollar," he said.
TAXABLE INCOME AND BENEFITS
Taxable income is the product of one's total earnings, minus the deductions and allowances the government allows. In Hong Kong, as in most countries, corporates and businesses benefit from deductions on dividends, interest on borrowings, bad debts, all expenses incurred in running the enterprise including rent, depreciation on assets and contributions to employee retirement plans, provident funds etc.
Since Qatar also permits similar deductions, analysts say the UAE could adopt a similar approach.
"The right deductions, allowances and incentives are crucial to taxation not being a deterrent to business and individual livelihood. It will enable people to save more money than they do today," said Ganjoo.
Papazian said: "Tax structures always imply tax benefits in one form or another. Independently of the tax regime adopted, the fairness and balance of the structure will be very important. Naturally, benefits to special interest groups will be part of the equation, and ensuring that those most in need of their current disposable income are not affected negatively makes economic sense."
It is too early to tell what type of social and public benefits will accrue to the tax paying public in the GCC. But this is an important issue. "Until now, given the absence of taxes, governments have been pushing forward their local currency revenues through service charges and other type of fees. It is important to consider these issues before the introduction of taxes. Moreover, there are clear differences today between the benefits provided to nationals and expatriates. All these issues must be appropriately addressed by the new tax regime in order to enhance rather than erode the value proposition of working and doing business in the region," he added.
YOUR MONEY TODAY
Presently, professionals allot on average 30 to 40 per cent of their paycheques for house rent. A municipality tax of five per cent on annual rental value, an average indirect tax of Dh250 on Salik every month, and other levies such as visa fees and custom duties make for a further one per cent. Car loans, transport and household expenses complete a typical salary breakdown.
Professionals in the UAE, while embracing the advent of income tax, have expressed concern over an over-valued rental market.
"Today, high rentals already consume a great portion of one's salary and as a result, the cost of living is very high," Ganjoo said.
How it works: Hong Kong
ALLOWANCES AND DEDUCTIONS
(All figures are in HK$ for assessment year 2008/2009)
Married person 216,000
Year of birth 100,000
Other years 50,000
not residing with taxpayer 30,000
residing with taxpayer 60,000
Aged 55 to 59
not residing with taxpayer 15,000
residing with taxpayer 30,000
Dependent sibling 30,000
Single parent 108,000
Disabled dependant 60,000
(maximum deduction for amount paid for)
Self-education expenses 60,000
Home loan interest 100,000
Elderly care expenses 60,000
Retirement schemes 12,000
Charitable donations 35% of assessable income
TAX COMPUTATION EXAMPLE
Value of residence provided 75,700
Total income 935,700
- Charity 4,000
- Outgoings 3,000
- Retirement scheme 12,000
Total deduction 19,000
- Married person 216,000
- Two Children 100,000
- Dependant Parent (aged under 60) 60,000
Total Allowances 376,000
Net Chargeable Income 540,700
Tax Payable 79,919