VAT in the UAE: the words may rhyme, but the tune isn’t a chirpy one for residents of the emirates

Nadine Hawa for CNBC, June 2008

Since its establishment as a federation composed of seven emirates in December 1971, the UAE has prided itself as one the worlds remaining tax havens…a reputation it is about to shed, with the introduction of VAT next year.

Dubai customs recently announced the UAE was planning to introduce Value Added Tax (VAT) as early as January 2009.

The tax, which will be imposed on consumer goods and services, would be set at 3%, towards the lower end of the 2-5% scale commonly quoted by officials.

It will replace Customs Duties, which will be scrapped in parallel with the introduction of VAT and in line with the completion of Free Trade Agreements (FTA’s) between the UAE and the West.

If the final decision held by the federal government maintains the tax at 3%, consumers will not be affected by the introduction of the tax which equals the current 5% customs duty. However, if the government decides to impose VAT at the higher end of the scale, closer to 5%, consumers will certainly feel the impact.

Certain sectors and businesses will be exempt. Notably the healthcare and the education sectors, as well as small businesses with revenues under $1 million. Furthermore, tourists will be able to claim tax refund upon their departure from the UAE.

According to Abdul Rahman Al Saleh, Executive Director at Dubai Customs, the introduction of VAT will strengthen the economy: “it is well known globally that implementing VAT in many countries has significantly contributed in boosting economic sustainability, as VAT is considered the ideal tax for already strong economies. While the UAE seeks to strengthen and diversify its economy, the country will not be an exceptional case in this regard.”

Al Saleh added that the tax will help raise the current standard of living; though many residents have voiced concern over the fact that the tax might actually inflate what is already an overheated economy. The UAE’s inflation rate currently stands at 11%. Dubai customs was quick to respond in an attempt to calm their fears, pointing out that “any inflation caused by the tax should be less than a diminishable half a percent”.

The Emirate’s tax free environment has always been the expat community’s core incentive. The country has one of the world’s highest percentages of foreign nationals in any single country, with emigrants roughly representing 80% of the UAE’s 5 million inhabitants.

But now that the main advantage (a tax free sanctuary with no restrictions on the repatriation of profits) becomes questionable, how will expatriates react?

According to a recent survey conducted by a leading business publication in the UAE, 65% of respondents said they would consider leaving the Emirates upon introduction of the tax, as VAT implementation could be the catalyst for additional taxes in the future, namely income tax.

Their fears are not fully unfounded – Adelaziz Al Uweisheg, head of studies and integration at the Gulf Cooperation Council (GCC) told Arabic daily Al Watan they were presently studying a new tax. One which would impose a 100% tax on luxury goods such as luxury cars, yachts, and private jets; and could come into effect starting 2012.

The UAE has reaped big returns from its primary attraction: the “No-Tax” strategy.

Coming in at second and third place, are the gulf country’s booming real estate and financial sectors. Now that tax exemption is on its way out, will the latest icons of wealth and success such as the DIFC’s landmark “Gate” building (Dubai’s physical symbol of its accomplished status as one of the worlds leading business hubs), or Burj Dubai (the worlds tallest man-made structure, a project worth an estimated $4.1 billion) be enough to attract expats, and retain them?