UAE to introduce VAT in 2018
Dubai - The Gulf Cooperation Council (GCC) is expected to introduce its first value-added tax (VAT) within two years.
The United Arab Emirates is to levy a 5% VAT by January 1, 2018, UAE Minister of State for Finance Humaid Obaid al-Tayer said during a visit by International Monetary Fund (IMF) Managing Director Christine Lagarde. Other GCC countries are expected to institute similar taxes within the following year.
The UAE is expected to generate $3.3 billion a year from tax revenue, local reports say.
The UAE also revealed that government-funded studies were looking into the possibility of introducing a corporation tax, but did not elaborate. However, the news that set most at ease — particularly the UAE’s expatriate community, which makes up more than 80% of the country’s population — is that there are no plans to introduce an income tax.
According to Tayer, 100 food items and health, education and social services would be exempt from the VAT.
“Once the framework agreement on implementation of VAT is reached, GCC countries have time from January 1, 2018, to January 1, 2019, to implement VAT,” he said.
The drive to introduce a VAT has been spearheaded by the UAE, which has the most diversified economy outside of oil production in the GCC, although the diversification was mainly funded by oil revenues.
Since the discovery of oil, GCC countries slipped into a welfare state economic system that saw governments subsidise major aspects of their citizens’ lives. However, new economic realities dictate that those days will soon be over.
“I believe we are on the verge of exiting the welfare state,” Saudi economist Turki Fadaq told Agence France-Presse. “The final goal of these measures is to restructure the Saudi economy in a way to stop its total dependence on oil.”
Saudi Arabia and other GCC members have had to reduce generous fuel, electricity and other subsidies to cut spending in the face of falling oil revenues.
Lagarde, in a February 23rd speech at the Global Women’s Forum in Dubai, called for greater taxation and fiscal reforms as a path to political stability.
“We cannot stop the warriors, we cannot bring truce but certainly we can help with good economic policies… with a state that actually works for the benefit of people, that collects tax, that organises public spending in an efficient way for countries, that finances infrastructure projects where it’s needed.”
The UAE is the Organisation of Petroleum Exporting Countries’ (OPEC) fourth-largest oil producer with output averaging more than 2.9 million barrels a day in 2014, the majority of which was produced by Abu Dhabi and the rest by Dubai and Sharjah.
The IMF has recommended that GCC countries prepare their economies for what it labelled a “new reality” of oil prices remaining low for the foreseeable future and suggested government spending cuts and income diversification.
The IMF also highlighted that Gulf economies remain in a strong position to make necessary adjustments, courtesy of large financial reserves built up during years of higher oil prices. According to the IMF, the combined budget deficit for GCC countries over the next five years is estimated to surpass $1 trillion.