International Finance
Finance Magazine May - June 2018

Why is a ‘Value Added Tax’ so important to the UAE?

Experts say, instituting a value added tax in the UAE will drive its revenue expanse in a few short years. Mohammed Fathy, General Manager of Dubai-based tax consultancy Al Dhaheri Jones & Clark, explains its long-term effect on the region’s sectors and GDP percentage

How do the UAE residents and large working population respond to the economic transition from being a tax-free haven?

The Gulf had long been associated with being a tax-free haven. With the introduction of UAE VAT Law, the cost of living may go up slightly, but the rise will vary depending on the lifestyle of people.

How is VAT expected to affect non-oil sectors? Which are the sectors that will face its immediate repercussions?

VAT is introduced in the UAE after in-depth studies indicating that there would be no impact on the business sector and the investment environment in the country. The implementation would not affect the country’s position and competitiveness. In fact, the UAE has implemented the lowest VAT tax rate on a global level.

However, construction companies and real estate developers will have the immediate repercussions of VAT, in terms of cash flow impact, among others.

As per the regulations, the sectors that are subject to five percent VAT include food and beverages, utility bills, private transport services, hotel services, entertainment, electronics, commercial rents, and cars and jewelers.

The International Monetary Fund (IMF) also recommends levy of taxes on business profits. What do you think?

Taxation is the backbone of any economy. According to the statement released by the Ministry of Finance “Currently, the UAE does not think of imposing tax on individuals’ income. But the UAE is working on other tax options. Yet, they are under study and analysis. It is likely that they will not be implemented in the near future.” The other taxes that potentially might be introduced in the country could be corporate tax or possibly additional taxation on luxury cars because such is the case in Singapore.

Eventually, I think the introduction of personal income tax may be necessary depending on the development in oil markets, and also in terms of reforms and what type of yields they provide and how the overall budget looks like.

Will VAT raise percentage points in the UAE’s GDP revenue? Can you state an example?

The tax is part of the UAE leadership’s vision for long-term growth. We expect non hydrocarbon real GDP growth to pick up from two percent in 2017 to 2.7% in 2018. The introduction of the VAT [value-added tax] at five percent in January 2018 and the modest increase in import prices could raise average CPI inflation from two percent in 2017 to 3.6% in 2018.

What are the sectors zero-rated and exempt as part of the GCC-wide agreement? Why is there an exemption?

There will be some exemptions for big-ticket costs like residential rent, real estate sales (except first), whereas certain medications, international airline tickets and school tuition will be zero-rated. Higher education, however, will be taxed in the UAE. Extra costs parents pay to schools for uniforms, books, school bus fees and lunch will also be taxed, and so will real estate brokerage costs for renters and buyers.

What are the long-term VAT benefits the UAE economy will enjoy?

VAT would support the economic development witnessed by the UAE, as well as enable it to compete with the world’s most advanced economies. VAT will help the country reinforce its economy by diversifying sources of revenues and help fund public services.

The long-term impact will take a few years to crystallise after the introduction in 2018, especially as this system will take time to be streamlined across all industries.

What are the rising concerns after the new VAT system has been implemented?

Firstly, any entities having to manage and pay VAT will see their costs increase on both: one-off and ongoing basis in order to meet compliance regulations. This will place an additional financial burden on businesses against a backdrop of often rising costs and increasing customer price sensitivity.

What are the challenges presented to businesses at this time? How have they adapted to the economic change?

Operational readiness and system readiness from business side are the main key challenges at present. Businesses will be required to provide essential information to the FTA, as part of the compliance audit procedure. Additionally, it will be essential to maintain financial and accounting details for five years.

Gradually, with guidance and more clarity from authority on the grey areas, businesses are on the path of streamlined adoption of this transformation to a great extent.

What are the after-measures taken to control violations in consumer goods’ price hike?

Like any economic overhaul, the implementation of VAT has not been entirely devoid of drawbacks. Some unscrupulous businesses saw it as an opportunity to manipulate the prices of goods under the guise of obeying the new law.

Thousands of inspections have been carried out across all emirates to ensure customers’ rights are protected and that shops are not illegally rounding up and failing to give the right change, with consumer affairs inspectors scanning products every day to detect price manipulation by retailers.

The FTA has urged consumers to verify the VAT amount on prices displayed in tax invoices and asked all UAE consumers to demand tax receipts from retailers when purchasing products or services to prevent attempts to manipulate the tax system.

The Authority had launched online instruments and services to enable consumers to easily verify the value of the tax—namely, the VAT Calculator, to ensure the issuer of the invoice is actually registered with the FTA, through the TRN Verification service.

Overall, the services were launched to protect consumer rights and prevent efforts to take advantage of the UAE tax system to manipulate prices.

What necessary standards should be implemented to efficiently proceed with the new VAT system?

At the outset, all companies should cooperate and respond to the requirements of the Federal Tax Authority to speed up the administrative process. Timely tax registration, proper disclosure of requisite information and VAT Lodgement on time will help authority to ease in ensuring proper VAT compliances across the country.

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