On January 1, 2018, a Value-Added Tax (VAT) was rolled out in the United Arab Emirates (UAE) as part of an agreement by the Gulf Cooperation Council (GCC). The tax imposes a five percent increase in cost for consumers on almost any transaction from buying groceries to a new automobile. VAT in the Emirates is intended to diversify the Gulf country’s economy and counterbalance the impact of decreased revenue from oil and gas, which in previous years composed roughly 40 percent of the UAE’s GDP.[i] The revenue is expected to be near $3.3 billion for 2018 and $5.5 billion for 2019. The government plans to invest some of the revenue toward new development and industries to further assist in diversifying the Emirati economy and making it based on innovation and a strong financial sector.
As the government seeks to raise revenue from VAT, the implementation has been slow and inefficient. VAT implementation will cause loss of revenue until the UAE government and businesses, from corporates to small business owners, can find a solution. The Federal Tax Authority (FTA) has extended registration deadlines and has waived late-registration fees, yet over a month into the year, businesses are still struggling with compliance after a two-year campaign of VAT preparation via the media and training courses.[ii] Depending on when solutions are finally implemented, and gaps fixed, the expected revenue of $3.27 billion could be much lower by the end of the year. Although concerns arose that the five percent rate would increase soon, the implementation is proving to be so bad that the Minister of State for Financial Affairs has announced the rate will not increase for at least the next five years.[iii]
The VAT implementation could prove challenging to other bodies within the UAE government. The Ministry of Foreign Affairs and International Cooperation along with the UAE Central Bank will likely be busy managing enforcement of international policies and complaints related to the tax. As for domestic issues, the Minister of Economy reported that more than 3,500 complaints about miscalculations, price hikes, and other difficulties were filed on the first day of VAT alone.[iv] The complaints continue daily. The frustration with the VAT could impede the still new Ministry of Happiness’ goals for harmonizing government plans. While a diversified economy in the long run could make the UAE a ‘happier’ country, the short run difficulties could negatively impact faith in the government’s ability to create policies to increase overall happiness and positivity during a time of increased taxes and lower incomes combined with a loss of business in Dubai related to the Qatar Crisis.
The VAT comes with numerous risks, most notably VAT fraud. The brand-new implementation of the tax could open doors for a complex chain of fraud practices.[v] With VAT imposed along every step of the supply chain, there are many potential opportunities for fraudulent charges along the way.
UAE VAT fraud can result in serious losses for the nation. In 2017, the European Union reported a loss of nearly 12 percent in expected VAT revenue. This gap between expected and actual revenue is known as the VAT Gap, and one of the tools the EU relies on to analyze fraudulent activity.[vi] Depending on the VAT gap for the UAE after 2018, the government might implement new anti-fraud policies, some of which could make companies liable for tracking fraud. For example, the United Kingdom has recently cracked down on VAT fraud on online marketplaces, placing the burden of regulation heavily on companies such as Amazon and eBay’s shoulders.[vii] Until the UAE government further establishes anti-fraud laws and practices, extra precaution might be necessary, including through online marketplaces where cyber fraud is prevalent.
Additionally, as the UAE, especially Dubai, undergoes a transitional period in the real estate sector, VAT does not apply to residential purposes and sales despite applying to commercial real estate. Renters might find that lower rental rates in 2018 will balance the effects of the VAT especially with the addition of tens of thousands of new rental units coming on the market. On the other hand, the surplus in supply for real estate will affect rental markets by driving down prices which will hit landlords the hardest with now sewage and garbage fees added to their financial obligations.
As for medium and long-run implications, the use of the VAT as compensation for decreasing oil revenue implies that, depending on oil revenue in the next few years, the government will have to continue to compensate either through a higher rate of tax or greater diversification of taxable items. Though the government has promised to use revenue towards development, depending on how quickly that development and economic growth takes hold, the five percent rate could increase after five years to ten percent. Although the five percent rate is low in comparative terms to other states, future increases to higher rates could affect business in the UAE as a historically tax-free region. In addition, the UAE is analyzing other tax options for the future, excluding a personal income tax.[viii]
The newly-implemented “Good Conduct” policy will also have dramatic effects on VAT revenue in the medium and long-run. Individuals looking to acquire a new work visa must first obtain a Certificate of Good Conduct (CGC) by undergoing security clearance checks from their home countries.[ix] Although the policy does not currently apply to those who currently have visas, it will affect new prospects seeking to work in the UAE and, with resident visas expiring after two years, all expats will be subject to this new security regulation. Businesses can also choose to request certificates or reports of current employees. There is potential for a loss in revenue from the VAT if the CGC prevents job-seekers from working in the country or forces those currently in the UAE to leave, especially the hard-working expat laborers who make the country function.
Ultimately, there have been many issues with the VAT thus far. The issues will persist until more solid and permanent solutions can be implemented. As the effects of the VAT are revealed in time, the UAE’s adjustment policies will likely set the pace for other GCC states as they prepare to roll out their VAT plans by January 2019. To be sure, the Saudi VAT program has so far been smoother simply because the Kingdom reinstituted subsidies to soften the blow of the new tax whereas in the UAE, preparation did not meet the immediate requirements dictated by the new VAT law. The UAE’s VAT is critical to the country’s fiscal health in the near term and straightening out the tax program is an immediate and necessary task.
Dr. Theodore Karasik is the Senior Advisor at Gulf State Analytics, a Washington, DC-based geopolitical risk consultancy.
Madison Taylor is a Contributor to Gulf State Analytics.
[ii] Saadi, Dania. “VAT Compliance a Challenge for UAE Firms, experts say,” The National, Feb. 4, 2018, https://www.thenational.ae/business/economy/vat-compliance-a-challenge-for-uae-firms-experts-say-1.701705
[iii] Abbas, Waheed, “No VAT, excise tax increase over next five years in UAE,” Khaleej Times, Feb. 11, 2018, https://www.khaleejtimes.com/business/vat-in-uae/no-vat-excise-tax-increase-over-next-five-years-in-uae
[iv] “More than 3,500 complaints on first day of VAT, says Economy Minister,” The National, Jan. 28, 2018, https://www.thenational.ae/uae/more-than-3-500-complaints-on-first-day-of-vat-says-economy-minister-1.699381
[v]Rahman, Azizur and Ben Ticehurst, “VAT And Dubai,” Mondaq, 6 February 2018, http://www.mondaq.com/x/670802/sales+taxes+VAT+GST/Vat+And+Dubai
[vi] “VAT Gap,” European Commission, https://ec.europa.eu/taxation_customs/business/tax-cooperation-control/vat-gap_en
[vii] “VAT fraud crackdown increases liability of website marketplaces,” The Guardian, Nov. 24, 2017, https://www.theguardian.com/uk-news/2017/nov/24/vat-crackdown-increases-liability-of-website-marketplaces
[viii] “VAT,” United Arab Emirates Ministry of Finance,” last updated, October 31, 2017, https://www.mof.gov.ae/En/budget/Pages/VATQuestions.aspx
[ix] “Good conduct certificate in UAE: Guide for all nationalities,” Khaleej Times, last updated Feb. 14, 2017, https://www.khaleejtimes.com/nation/how-to-get-good-conduct-certificate-in-the-uae