Will VAT in the UAE backfire and put Dubai back up the creek?

Financial Center Dubai

The modern variety of VAT was first implemented by France back in the 1950s. It was Maurice Lauré, Joint Director of the French Tax Authority (Direction Générale des Impôts) that first implemented VAT on 10 April 1954 to be precise, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. So, in short, we have the French and the Germans to thank for VAT!

Today Value Added Tax (VAT) described by some as “Various Added Things” is essentially an indirect tax. You may have heard it referred to as a type of general consumption tax. Countries that adopt VAT, impose it on most supplies of goods and services that are bought and sold.

Sadly, today over 150 countries have already implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members (mindful that the UK will leave), Canada, New Zealand, Australia, Singapore and Malaysia. The EU is generally the most aggressive with VAT Tax; the force of implementation is extremely strong and many SME’s have either long since closed down or relocated out of the EU to get away from it, as VAT by its process, favours large multinational companies that have the resources to administrate VAT and the cash flow to handle fast payments out to the Government and typically slow payments back in. Moreover, SME’s struggle to pay for the Accountants and Lawyers that charge for advice and to process. Therefore, it’s not surprising that to quote the words of the UK’s Foreign Secretary Boris Johnston “The only continent with weaker economic growth than Europe is Antarctica”.

VAT is charged at each step of the ‘supply chain’. Of course, it’s the poor consumers who are generally penalized to bear the VAT cost, while Businesses collect and account for the tax, in a way acting as a “Tax Collector” on behalf of the government.

A business pays the government the tax that it collects from its customers transactions, while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain or more simply put, it’s a little messy.

For decades Dubai has enjoyed “Tax Free” status in terms of NO Corporate Tax or Income Tax and this freedom of tax collection inspired innovation and business has thrived, especially for SME’s. Any dream was possible in Dubai; this spirit constructed the world’s tallest building the “Burj Khalifa” some 828 M high making it some incredible feet of engineering, a reputation for the world’s only 7-star Hotel “Burj Arab” and a plethora of world’s best and world’s first. In 2015, according to the Washington-based Brookings Institution's Global Metro Monitor, "no metropolitan area grew faster relative to its national economy than Dubai, where the business and financial services sector helped drive 4.5 per cent growth in GDP per capita."

No-where on the planet in recent times has tax freedom and innovation thrived quite in the same way as Dubai, so one has to ask the question, why the negativity of VAT now? The UAE Minister of State for Financial Affairs, His Excellency Obaid Humaid Al Tayer, stated that the UAE will implement VAT at the rate of 5% on 1 January 2018.

The Minister was speaking in Dubai on 24 February after a joint press conference with Christine Lagarde, Managing Director of the International Monetary Fund (IMF). So, wow we begin to understand, the IMF is involved, represented by a French Lady; history repeats itself!

VAT will be introduced at a rate of 5% with some limited exceptions including basic food items, healthcare and education. In simple terms, VAT goes against all the freedom and innovation principles of Dubai as the Emirate succumbs to the demands of the IMF. For such a low 5%, it will cause havoc for SME’s to administrate the processing of VAT, many companies are expected to move away from the GCC and for those already complaining about pricing, it could be the last straw to relocate home.

Despite being Tax Free, Dubai is today exceptionally expensive and another 5% on top of the average $13 USD for a mere small glass of wine, will be too much for many Expats. Food, Shopping in general, property rental and most services are already at breaking point pricing-wise, hence another 5% may well be a bridge too far and Dubai’s once successful financial model could be up the creek!

There are winners of course, being the army of Accountants and Lawyers descending upon Dubai, that can hardly contain their enthusiasm to capitalize on the introduction of VAT. This will strike a major blow to SME’s already finding it tough, to pay high Accountancy Fees for advice and solutions to a complex VAT implementation that still lacks clarity with only a month to go (time of writing 26 November 2017).

The reason given is that The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT is planned to provide the UAE with a new source of income, which they trust will contribute towards the continued provision of high quality public services into the future. It is also supposed to help the government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.

I wonder however, if the number of companies that will close or how many new companies that be discouraged from opening has been factored in. Also, the cost to implement and the impact on the image of Dubai as a Tax free and innovative place to do business in. VAT is simply not innovative!

I sincerely hope that Dubai, the UAE and all GCC countries reconsider, but I doubt they will, so we should expect and plan for the worst. There are of course many other ways for the government to collect funds without the complication, which requires armies of VAT receipt collectors, enforcers and the like, all of which will discourage business and innovation, against the once great free principles of Dubai and the UAE.

All great empires came to an end when they started charging Tax! Check out this article: A History of more than 4000 years of Taxes, when will we ever learn!

Comments

  1. All sensible comments welcome, especially form residents in the UAE.

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