1. 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.
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2. 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)CITwithbroadercoveragebutlowerrates:
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.
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3. Special Report
56 TRENDS | October 2015
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
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4. October 2015 | TRENDS 57
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5. Special Report
58 TRENDS | October 2015
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.”
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