Why VAT can be good for the UAE and its bevy of SMEs

After leaving school I spent a year travelling in what is still the best year of my life. When the money ran out, I returned home, to the UK, to unite with my brother.

With the £300 (Dh1,605) we had between us we decided to incorporate a company. We spent £100 on the registration, which took an hour to complete, and then spent the reminder on flash business cards with “DIRECTOR” printed in gold indented type. When the cards came back three days later I acknowledged that the company was cheaper and quicker to register than having our business cards printed.

We immediately applied for a government grant for a new business and like magic we were on our feet.

Eleven years on, and having incorporated companies in various countries in the GCC, my experience doing this has been exponentially more costly and time-consuming, and the support structure for entrepreneurs simply is not enough.

There is, however, one stark difference between these contrasting examples: I come from one of the most highly taxed countries in the world, and while my fellow nationals and I like to complain about it, those taxes fund the government to allow low incorporation costs and even government grants to support entrepreneurs.

As a result of the low oil prices and suggestions from the IMF on how to bolster public revenues, governments across the GCC have started to look at the introduction of VAT and corporation tax. I may have been the only one who read this and shouted “Hallelujah”. After all, isn’t the low-tax environment a key driver to why people come and work in the Gulf? Isn’t it why investors and entrepreneurs start businesses here?

Well, it may be a large factor, but fundamentally what entre­preneurs and investors are looking for is a way to create wealth for themselves. To achieve this, there are more factors to consider than simply the tax rate, such as the ease of doing business, a clear and fair legal framework, support mechanisms for new businesses and the efficiency in time and cost dealing with government affairs. These are all factors that could be developed and improved more quickly with increased government funds and attention.

The current system maintains itself through indirect taxes such as initial registration fees for new businesses and the ongoing licensing fees and administration for visas and document processing. These are unavoidable fixed fees, which may seem minimal for medium and large businesses but they a considerable burden to new and small businesses. It is simply a barrier to entry for small businesses that allows larger established businesses to pay relatively less.

Given that SMEs account for 95 per cent of company establishments in the UAE, 86 per cent of private-sector workforce employment and contribute 60 per cent to the GDP of the country, all steps to lower barriers to entry and increase efficiency of this sector would benefit the economy.

So how would tax be applied and what will the government do with the funds to improve the business environment?

At present this is still being devised and a proposed structure or date of introduction has not been confirmed. To say this tax plan will be difficult to devise would be an understatement given the complexities that arise in an economy that has many tax-free zones, laws on local sponsorships and an overall expansion plan that can only work with the continued population growth and the attractiveness of the region for working expatriates.

While the decision to introduce a corporate tax and how to apply it is essentially in the hands of the government, there is an invisible force that will shape this. You see, when people pay for anything they expect service. When you go to a restaurant you expect to get what you pay for otherwise you make a complaint and never go back. Well, people are twice as self-righteous when paying the government. When individuals pay personal income tax they demand social security but when businesses pay corporate tax it is the entrepreneurs and investors who demand a supportive environment.

Given the government’s pledge to foster SMEs in the UAE and the pressure from businesses that I believe will arise when a corporate tax is introduced, I can only see good things on the horizon for SMEs in the UAE. If and when tax is implemented it would certainly be interesting to see how the government would collect and enforce it.

Paris Norriss is an entrepreneur and partner in Coba Education, which provides educators to schools and institutes


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