How the introduction of tax would affect salaries in the UAE

In the last few weeks the rumour mill has been working overtime on the possible introduction of tax to the UAE. The focus is on corporation tax and value added tax – essentially a sales tax, while the dreaded spectre of income tax is not on the table – for now.

This comes after Al Ittihad, the sister newspaper of The National, reported last month that the federal Government was drawing up plans to introduce a value-added tax and a corporation tax.

So what would be the implications of introducing such taxes, and more importantly, how would this affect our monthly pay packet? The answers depend on many factors, such as how and where any tax is applied as well as the overall rate of tax.

A corporation tax would be more complex to introduce and probably more of a long-term play, but in essence shareholders’ returns would decrease as the government takes a slice of the wealth they create.

Typically, when shareholders see their margins decreased they want to find a way to improve them again, and therefore the introduction of corporation tax may result in a double-whammy on people – not just as employees, but as consumers too.

Salaries are a large part of the operating expense of most organisations in the region, and therefore annual increases in salaries may be scaled back. Additionally, costs of goods and services may increase to boost the top line so companies can hold the bottom line steady.

Therefore, while it is a tangential leap to say the introduction of corporation tax might have an adverse effect, it would be likely to have some negative effect on the dirhams in your pocket in the long term.

A sales tax would have a direct effect on all of us, as it would be levied at the point of sale. In essence, the price of everything from your iPhone to your groceries and insurance premium could increase overnight. The retailers and suppliers would simply pass on the charge to you to maintain their margins.

With this in mind, the question we will all inevitably ask is: “Can we all anticipate a pay rise to compensate for the increased cost of living that a sales tax would cause?”

While the answer depends on a number of variables, I think it is probably a plain and simple no.

Why is this probably the case? The answer depends on how any tax is introduced – specifically, what the rate of tax actually is and what goods and services the tax applies to.

For example, if the introduction rate was less than 5 per cent, then the case for a compensation increase is weak. If, however, we moved straight to a rate such as the United Kingdom’s 20 per cent, we would inevitably all feel the pinch and look for an inflation-busting pay rise.

Regardless of whether you are working in the public or private sector, your organisation is likely to follow the same path with regards to adjustments, and unfortunately there is no guarantee that increases will follow if taxes are introduced.

If we look at other economies where death and taxes are the only certainties, there are tax changes all the time. When the government introduces a new tax – for example airline taxes or insurance tax in the UK – there is no corresponding increase in the way workers get paid. Similarly, if there is an increase in the underlying tax rate for an existing tax – for example, the top rate of income tax in France moving to 75 per cent – employers do not equalise pay the next day to compensate for the decrease in euro value to the affected employees. Conversely, when taxes fall, which happens occasionally, employees do not rush to give money back to their employers.

In reality, the likely effect would be a long-term adjustment on compensation levels; essentially everybody has choices to make on where they work and how they are paid for their contribution. Typically when people move roles they tend to get paid more, and if companies see a pattern emerging that they are losing key contributors because they are behind the market, then they will adjust their pay to catch up with their competition – salaries will rise.

However, these trends are typically a lagging indicator and the budgeting process would take several cycles to catch up.

The introduction of taxes would have a negative effect on discretionary spending and the ability of people to save money. However, if taxes are introduced it would affect everyone equally and we would find every employer grappling with the same challenges from staff. No one could dodge the bullet, and therefore employees would quickly accept it and move on.

In a country where expatriates make up such a large proportion of the workforce, many who feel strongly enough about it might choose to return to their home countries. But rest assured, the Government’s take will be considerably more there, and without the sunshine and lifestyle benefits that many embrace here.

Martin McGuigan is the head of rewards consulting at Aon Hewitt Middle East

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