VAT and income tax in UAE: What, how much and when…

After the recent fuel price deregulation reforms, Younis Haji Al Khouri, undersecretary at the UAE Ministry of Finance, revealed earlier this week that the GCC states have agreed on key issues for implementing VAT in the region. The International Monetary Fund (IMF), among other international bodies, has been advising the UAE and the rest of the GCC countries to introduce taxation among several options for the government to strengthen their revenue base in order to minimise dependence on the fluctuating global oil price. The 'low' rate of VAT as advised by the IMF is being generally seen as at or around 5 per cent. Even as the IMF maintains that the UAE economy is resilient to low oil prices and sluggish global growth thanks to its fiscal buffers and safe haven status, the agency is suggesting the government to undertake additional reforms to boost its finances. Primary among those suggestions are imposing a value-added tax, imposing an excise duty on the sale of automobiles, as well as a decrease in the corporate income tax levels but applying it to a much broader base. Read: 5% VAT, 15% tax on cars: IMF advice to UAE With agreements having been reached by members of the GCC on certain aspects of the VAT systems, the big question now is ‘when’ and not ‘if’ VAT will be implemented, and, importantly, by which country (or countries) first. “The timeframe for implementation has still not been confirmed – however governments in the region are facing deficit budgets over the short- to medium-term due to the low oil price environment. Policymakers will be prompted to introduce the VAT regime sooner rather than later,” Finbarr Sexton - Mena Indirect Tax Leader at EY, told this website. Is personal income tax 'on the table' too? According to Stuart Halstead, Indirect Tax Leader at Deloitte Middle East, it isn’t just VAT that’s on the table right now but also personal income tax even as he maintains that introducing personal income tax would be the most challenging. “Personal taxes offer a real challenge to the ‘tax free’ branding of the UAE and much of the GCC. For that reason alone, we would suggest that a near-term introduction of such taxes is very unlikely. Again though, it is difficult to predict how budgets will be funded in the long term and so such measures would, we feel, always be ‘on the table’ for discussion,” he told Emirates 24|7 in e-mailed comments. And while Deloitte’s Halstead sees personal income tax as unlikely but not impossible, EY’s Sexton says introduction of taxation in the form of VAT should keep personal income tax concerns at bay – at least for the moment. “Personal tax is not on the tax agenda of the UAE at present and is unlikely to be on the horizon in the near future. Introduction of indirect taxes in the guise of VAT is a tax on consumers and ultimately individuals will bear the cost of VAT as opposed to most businesses that will be in a position to recover input VAT against VAT on sales and services charged to consumers,” he says. What is VAT, how much may be imposed, and when The IMF maintains that VAT, which is a kind of consumption tax that the end-customer pays while purchasing a product, “would serve well as a low rate-broad base tax.” “The VAT rate is likely to be a low rate of 5 per cent, which is consistent with the recommendation of the IMF,” says EY’s Sexton. “It is important that there is an adequate lead time to allow companies to prepare their systems, train staff and staff up for the introduction of the VAT regime. Finance ministries will similarly need to staff up and implement sophisticated IT systems to deal with VAT collection and taxpayer monitoring and audits. A typical VAT implementation period would be 18 to 24 months – so the timeline for implementation may be 2018 or latest 2019,” Sexton maintains. “VAT is generally viewed as the most stable revenue source, which has the least detrimental effects on investments,” states the IMF. “In such a macro-fiscal environment as in the UAE, a low rate, for example 5 per cent, VAT could be considered,” it notes. “Our understanding of the broader economic drivers in the region and our experience of recent implementations of the tax globally would suggest a low rate with very few exceptions (i.e., it would have a broad base). Many commentators (including the IMF) have suggested rates in the region of 3-5 per cent initially, which appear sensible,” says Deloitte’s Halstead. “A broad-based consumption tax such as VAT would raise revenue proceeds at a low efficiency cost. At the same time, its equity implications would be relatively insignificant in such a macro-fiscal environment as in the UAE, where taxes are minimal and government expenditures are financed by oil revenue,” the IMF notes. However, while the initial VAT rate may be ‘low,’ experts maintain that a gradual increase over time or even a higher introductory tax rate cannot be completely ruled out. “Whilst the debt, cash and other fiscal performance measures that