The UAE’s Ministry of Finance announced recently that value-added taxes (VAT) are to be introduced.
The percentage of VAT to be introduced has not yet been decided.
The six oil exporting states of the Gulf Cooperation Council have been studying the introduction of VAT for years. The International Monetary Fund (IMF) has advised additional taxation as a way for the UAE government to bolster its revenue and avoid having to impose income tax on individuals. This action would be brought in to minimise the UAE’s dependence on the oil industry. Until now, the nation has insisted its economy is doing fine despite the dip in oil prices yet the UAE is expected this year to post its first budget deficit since 2009.
The UAE has introduced fiscal reforms over the past few years, including most recently the fuel price deregulation that saw retail petrol prices jump 24 per cent and diesel prices decline 29 per cent in the country.
We’ve previously written about how the main reasons people are moving to Dubai are slowly becoming obsolete, and this development is likely to further affect the amount of expats who choose the UAE.
The UAE, like other GCC countries, does not currently collect VAT, and collects corporate income tax only partially, missing an opportunity to diversify its revenues and strengthen its economy.
Is the main pull for both tourists and expats in Dubai about to be removed?
VAT is a kind of consumption tax that the end-customer pays while purchasing a product. Anything over 3% VAT is likely to decrease both tourist and local spending.
The emirates are a hugely popular tourist destination and holiday makers account for a large part of the country’s spend on consumption. If the new VAT is high enough, it could eliminate any advantage that the UAE had in terms of lower prices of products and services compared to other countries worldwide.
Unlikely to scare away investors
So, will the new VAT laws result in an ‘Expat Exodus’? This article says no, and suggests the new rules signal that the UAE is planning for long-term economic strength. With depleting oil resources, the country is simply seeking to diversify its income sources.
International investors in the UAE are used to these types of taxes and so unlikely to be deterred from doing business in the region. Singapore and Hong Kong didn’t suffer so why would the UAE?