HE Obaid Humaid Al Tayer, UAE Minister of State for Financial Affairs, announced on February 24, 2016 after a joint press conference with Christine Lagarde, Managing Director of the IMF, that the UAE will implement VAT at a rate of 5% on January 1, 2018.
After the 2008 global economic recession, talks gained speed, but it was not until the recent drop in oil prices that the introduction of VAT was considered a necessity. In order to mitigate the effect of fluctuating oil prices, the IMF and the World Bank strongly recommended that GCC countries implement tax reforms and remove subsidies to reduce expenditures.
Through the implementation of VAT, the UAE is hoping to generate new sources of revenue that will help combat the deficit created by the low oil prices on the UAE economy. Some argue that implementing VAT would reduce competitiveness, especially in the UAE, where the public is sensitive to taxation. Furthermore, it could affect the UAE’s appeal as a non-tax and business-friendly environment that has attracted international investors in the past. The additional revenues collected are targeting developing other key areas of the economy such as education and healthcare.
In 2018, VAT will be introduced across the UAE at a rate of 5%, excepting 150 food items, bicycles, healthcare, and education. It is expected to generate AED12 billion in its first year. According to Al Tayer, the GCC-wide framework for the regional tax is expected to be concluded in June 2016. Countries will have until January 1, 2019 to implement the reforms. This means that the UAE could launch VAT a full 12 months ahead of its regional peers, Saudi Arabia, Qatar, Oman, Kuwait, and Bahrain. In comparison to direct taxes, VAT is considered an efficient option, is cheaper to operate and is less open to fraud, according to a report by Deloitte.
Al Tayer insists that despite the introduction of VAT, corporate tax was not on the agenda for now. Ultimately, the success of VAT implementation will rely on the business community. As business administrators, it will be their responsibility to collect VAT from their customers.