The International Tax Monitor delivers daily news and analysis from the world's financial and business centers, with a focus on tax and accounting developments affecting transnational enterprises.
By Rasha Faek
Sept. 15 — The United Arab Emirates and other members of the Gulf Cooperation Council (GCC) are finalizing plans for a value-added tax (VAT) across the region to counter falling oil tax revenues and the UAE also is weighing an additional step of introducing a corporate tax.
The UAE Ministry of Finance said that bills for the two taxes are scheduled to be released in the third-quarter of this year. To date, the finance ministry has released no further details on the measures, including possible rates.
On the planned corporate tax changes, the finance ministry said “entities will be given at least 12 months to fully prepare their tax obligations — once the law is approved and implemented.”
Until now, each of the seven emirates of the UAE — Abu Dhabi, Ajman, Fujairah, Sharjah, Dubai, Ras al-Khaimah and Umm al-Qaiwain — have their own tax regimes for corporations, although in general, these rates are either low or non-existent, attorneys said. As such, the UAE felt compelled to address the issue collectively, they added, suggesting the corporate tax rates among the seven areas could be harmonized. Although planned tax rates have not been disclosed, attorneys told Bloomberg BNA that they are confident that the government would set a fair corporate income tax rate that will not discourage business or economic growth.
The GCC's plan for a VAT has been prompted by falling tax revenues resulting from the global slump in oil prices. The under-secretaries of the Ministries of Economy and Finance of Bahrain, Saudi Arabia, Oman, Qatar, Kuwait and the UAE have agreed to formulate a general framework for introducing the tax. However, the UAE finance ministry said in an earlier Aug. 18 statement that the GCC countries are yet to reach a final agreement on the tax rate and a list of tax exemptions for the regime.
As VAT changes are yet to be agreed among the GCC member countries, the UAE has not yet prepared a legislative bill for the tax, but said that once a VAT bill is finalized, companies will be given about 18 months to prepare for the change. “An immediate announcement will be made once a final agreement on imposing a VAT law is reached [between GCC members],” the ministry said.
Attorneys told Bloomberg BNA that they expect the introductory VAT rate will be set between 3 to 5 percent.
A spokesman for ACT Middle East, a regional network for treasury, risk and finance professionals, called introduction of the taxes “an important shift for the country's economy for now and for the future” and said companies will need to understand the implementation procedures clearly.
Jyothi Kasi, tax partner at KPMG in Dubai told Bloomberg BNA Aug. 24 that the introduction of VAT “will add additional process and system requirements to doing business.” Moreover, she said businesses may need to hire more staff, as well as “develop their finance resources.” Kasi also pointed out that systems will need to be implemented and configured to automatically calculate and record VAT in preparation for payment to the relevant authority.
The International Monetary Fund (IMF) suggested in a Sept. 2 document that countries in the Middle East, which have been highly dependent on tax revenues from oil, should diversify the tax base.
In staff discussion notes exploring how tax systems can play a role in meeting demands for greater economic fairness in Middle Eastern and North African (MENA) countries, the IMF said that countries with “with less established non-hydrocarbon revenue systems can begin with a ‘starter pack’ that includes introduction of low-rate value-added and corporate income taxes, excises, and property taxes while building up administrative capacity and taxation expertise together with plans for introducing a personal income tax.”
Meanwhile, “well-established non-hydrocarbon tax systems (mostly oil importers) reforms should focus on simplifying tax structures and introducing more progressivity of personal income taxes, broadening tax bases, and better designing and enforcing property taxes,” the IMF said, adding that across the region, effective communication, transparency and constructive dialogue between states and citizens would “be critical to the success of the reforms.”
“From a macro-economic perspective, the IMF has been pressing many MENA countries for some time to reduce subsidies and broaden their revenue base, helping to diversify economies from hydrocarbons,” KPMG's Kasi said. Last year's plunge in oil prices, which has hurt the finances of even wealthy Gulf states such as the UAE, has also been a factor in driving it to consider new ways of raising revenue, said another analyst who asked not to be named.
Still, the UAE has been more successful than others in growing non-oil sectors and diversifying its gross domestic product ratio, as well as continuing significant investment in infrastructure — highways, ports, airports and telecommunications — an important part of driving that diversification, said the ACT Middle East spokesman.
The spokesman added that introducing VAT and corporate tax “was a logical step to build a sustainable growing budget for the future.”
KPMG's Kasi added that as the slump in oil prices looks as though it could be relatively prolonged, this has helped convince stakeholders about the planned tax changes. Kasi noted that most GCC countries have used historically high oil prices to build up considerable surpluses. “Introducing VAT and corporate tax is an important sign of maturity for the UAE — it is the way most other countries raise revenue,” she said.
“It will be difficult for the consumers and companies to ignore the impact of VAT,” Kasi added, noting financial and time implications for companies, including price hikes for many goods and services.
To contact the reporter on this story: Rasha Faek in Amman at firstname.lastname@example.org
To contact the editor responsible for this story: Anjana Solanki at email@example.com
The Aug. 18 statement from the Ministry of Finance appears at http://www.mof.gov.ae/En/AboutMinistry/News/Pages/1882015.aspx.
The IMF report appears at http://www.imf.org/external/pubs/cat/longres.aspx?sk=43215.0.
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