Value added tax will be introduced to the UAE from 2018 at a rate of 5 per cent, while studies into a possible corporation tax are also under way.
Obaid Humaid Al Tayer, the Minister of State for Financial Affairs, said that the government was in the initial stages of examining the social and economic impact of such a tax as well as how it might affect competitiveness.
He made the disclosure at a press conference with Christine Lagarde, the IMF’s managing director, in Dubai. He said: “There is no time frame for implementing this tax and no law or draft law has been stipulated.”
Mr Al Tayer announced at the same event that the UAE would introduce value added tax from January 1, 2018, at a rate of 5 per cent. A GCC-wide framework for VAT is expected to be concluded by June, he said.
GCC countries have until January 1, 2019, to implement the levy. It has been previously reported that 150 food items, education and health care would be exempt from the levy.
Despite the zero-tax environment acting as a significant draw for companies looking to the UAE, Ms Lagarde played down the potential effect of corporation tax on business activity in the country.
“The localisation and development of investment by companies … is not predominately driven by a tax rate,” she said.
The IMF chief acknowledged it may play a part, but that it was just one factor to consider.
Ms Lagarde said that it was the time for the UAE to raise taxes to reduce the impact of the collapse in oil revenues on government finances.
“To provide services, you need to finance those services. Some countries have been blessed by nature and when that changes … [those countries] have to find an alternative … to finance those services. It’s as basic as that.”
The UAE’s fiscal deficit for last year is estimated to stand at 4 per cent of GDP, according to National Bank of Abu Dhabi, but is likely to widen to double digits after the oil price scraped 12-year lows in January, ratings agencies forecast.
Corporation tax “will obviously help to raise additional revenue for governments across the region, given … the fact that their budgets are blowing up”, said Jason Tuvey, emerging markets economist at Capital Economics. “It is another way the government can undertake fiscal adjustment without hurting households.”
But it could harm the Gulf’s efforts to diversify away from oil. “It would discourage firms from investing and creating jobs – and given that governments across the region will struggle to create jobs over the coming years, they had hoped that the private sector would pick up the slack, but imposing taxes will make that more difficult.”
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