As Arabian Gulf countries start to feel the pinch from lower oil prices, the UAE Finance Ministry says it is making progress towards a draft federal tax code that may help in reducing projected fiscal deficits.
The IMF last month said the UAE this year is expected to post its first fiscal deficit since 2009. It said the deficit would be about 2.3 per cent of GDP this year.
Talks are also moving forward among GCC countries on a value added tax (VAT), according to Younis Haji Al Khouri, the Finance Ministry undersecretary.
The VAT, which would make goods and services more expensive, would be done in the framework of the GCC custom union and is not expected to happen this year, he said.
“The federal corporate tax is part of the old study that we have been discussing the draft law with the local authorities,” Mr Al Khouri said. “So it is still in the discussion stage and also at the ministry of finance we are discussing impact studies socially and economically as well as for VAT.”
Mr Al Khouri said the progress in the federal corporate tax discussion had no connection with the drop in the price of oil, which has lost roughly half its value since last year.
The discussions over the federal corporate tax have been ongoing since 2005 as the IMF and World Bank have been persuading Gulf nations to reduce subsidies to find other forms of taxation.
The IMF did not immediately respond to a request for comment.
Those talks however, economists say, may have taken on a new kind of urgency as an anticipated rebound in the price of oil failed to materialise.
The Finance Ministry said in a report on Thursday that it was aiming to set up a department to collect the taxes.
At the moment, each emirate in the UAE has its own tax regime for corporations, although by and large they are low or non-existent.
While economists say it is unlikely that the UAE will move this year to start corporate taxation, the moves highlight the concerns that low oil prices may be with us for a while.
At stake, however, is the competitiveness of the UAE, which has thus far been boosted by its tax-free status for individuals. Any moves that reverse that policy may damage the country’s attractiveness as a destination to live and work in, economists say.
Last year, the UAE economy is estimated to have grown more than 4 per cent, even after the price of oil fell more than 50 per cent during the second half.
As a result of the drop, many economists, including those at HSBC and Standard Chartered and the IMF have lowered their growth forecasts for Arabian Gulf countries this year.
Alp Eke, senior economist at National Bank of Abu Dhabi, said that the GCC region will register a fiscal deficit of about 11 per cent if oil prices remained around $55 to $60 per barrel.
Revenues from oil make up about 65 per cent of the region’s budgetary spending.
“This clearly indicates a very high reliance on oil revenues and as a result points to significant vulnerability,” said Mr Eke. “Hence given current macroeconomic conditions, GCC governments need to find other ways to broaden their revenue base away from oil and hence balance their fiscal budgets.”
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