The UAE has become famous globally as a top expat destination. These days 8 out of every 9 people in the United Arab Emirates is an expat, drawn by strong career prospects and a tax-advantaged system.
Now, however, the government in the UAE is considering making changes to their low-tax economic policies, with the potential introduction of both VAT (sales tax) and corporation tax on companies being run from within the Emirates.
There are a number of reasons suggested for these recent discussions. For one, global oil prices have been tumbling since last year. For countries like the UAE that rely on oil as one of their largest exports, this has led to significant declines in government revenues.
Indeed, some authorities believe that 2015 will be the first time in many years when the UAE will report a budget deficit; something almost imaginable just a few years ago.
Other experts claim that the introduction of such taxes isn’t just designed to offset the falling value of oil; it can also provide funds for essential infrastructure upgrades and should be seen as a sign of a maturing market.
Business proponents claim that the introduction of these taxes – if they happen – are unlikely to dampen the spirits of international investors and global businesses. After all, the Middle East is one of the few areas of the world where these taxes are absent; most large companies are used to paying such taxes in other destinations.
That said, with expats in the UAE repeatedly bemoaning the rising costs of living in the Emirates, adding VAT onto products purchased in the Kingdom could put an even tighter squeeze on finances which are already struggling.
Government spokespeople claim that this potential new source of revenue will help the UAE to retain its crown as one of the most tempting expat destinations anywhere in the world. By investing for the long term – long after peak oil has been reached – the United Arab Emirates has the potential to weather the storm and truly establish itself as a global player.
The question isn’t really whether the introduction of such taxes is a good idea – many business owners claim it is – but rather why it hasn’t been introduced before. Here the news is rather more interesting.
In order to remain competitive, the Middle Eastern countries which make up the Gulf Cooperation Council are all seeking a unanimous agreement. In such a way the taxes would be introduced in all member states in short order, thus ensuring that companies are not tempted to simply hop across the border to a lower-tax destination.
Discussions are ongoing, and no formal agreement has been reached at the time of writing. It therefore seems likely that the introduction of these taxes is still some way off. Even once agreement has been met it will take time to roll out the necessary systems and infrastructure to enable the government to collect such taxes.
We will be watching with interest to see how these new tax implications impact competitiveness in the UAE if and when they are introduced.