While the United Arab Emirates has traditionally been popular for being a tax-free regime, the day is not far that Value Added Tax (VAT) is going to be implemented in the country.
Currently, the following five types of taxes are in place in the UAE:
- 20% corporate income tax applicable to foreign banks
- 5% local municipality property tax of the rental value
- 10% local hotel tax on hotel services
- A general tax of 5%, 50% tax on alcohol, 100% tax on tobacco collected locally
- Select fees collected on government services (applied by federal and Dubai governments)
In the context of fluctuating oil prices and resultant diminished government revenues, the International Monetary Fund has advised that a ‘low’ 5% Value Added Tax in the UAE could push the Gross Domestic Product up by almost 2%. The UAE government has been fiscally prudent by building good capital buffers and diversifying businesses.
Experts say that the impact of the introduction of this tax on end users will mostly be quite negligible as some items, including more than 100 essential food items, would be exempted and only be compliance related, especially if food items are exempted. Businesses that work on tight operating margins will, however, have to take this factor into consideration. Businesses that work on exempt or partially exempt supplies will have to reevaluate their cost of purchase. Businesses will also have to address deficiencies in their operating models, and ensure that their personnel is duly trained on the changes that will come into place. The VAT for businesses will surely take a toll on their income and profit margin.
However, the bottom-line is that individuals are most likely to bear most of the cost of the tax as the business will likely include some of the VAT amounts into their profit margins.