UAE says introducing VAT delayed by disagreement in region

The United Arab Emirates and its neighbours are working towards introducing value-added tax in the region but don’t yet have a consensus on tax rates and exemptions, the finance ministry said on Tuesday.

“If the GCC countries reach a final agreement on issues related to the application of VAT, it will be announced directly,” a ministry statement said, without elaborating on when agreement might be reached.

Introducing VAT would be a major economic reform in the GCC states, which have minimal tax systems. The plunge of oil prices since last year has slashed government incomes, making it more urgent for them to find new revenue; the UAE is expected this year to post its first budget deficit since 2009.

But the six oil exporting states of the Gulf Cooperation Council differ over how VAT would be applied to economic sectors, Younis Haji al-Khouri, undersecretary at the ministry, told Reuters.

“For example, one country is keen not to impose VAT on food and beverages, especially children’s food. Some countries are more hesitant on the services sector and whether there will be an impact on the financial sector, especially in the UAE.”

A technical committee will discuss such issues in Riyadh next week and report by October, Khouri said. Talks have not yet reached the level of undersecretaries or ministers, he added.

Governments have been discussing VAT for years, but political and economic sensitivities have delayed the project. Analysts believe that to limit smuggling and damage to competitiveness, the tax would probably have to be introduced regionally rather than by individual countries at different times.

“We really can’t implement VAT alone – it has to be part of the GCC,” Khouri said, but “If all GGC states agree on a deadline, then one can implement ahead of the other.”

Once a decision to impose VAT is made, the public will be given no less than 18 months to prepare, the ministry’s statement said.

It also said the ministry was still studying reforms to increase taxation of corporations in the UAE and that the tax rate was under study. Businesses would be given at least one year to prepare.

At present, there is little corporate taxation outside the oil sector, apart from a 20 percent levy on foreign banks in Dubai. The government is considering whether to impose a broad corporate tax across the economy.

Although the UAE is one of the richest countries in the GCC, it has been the most aggressive in reforming its finances to save money. This month it cut state gasoline subsidies, allowing prices paid by consumers to rise, and in January Abu Dhabi reduced electricity and water subsidies.

The International Monetary Fund has suggested the UAE consider imposing VAT at a 5 per cent rate, a 10 per cent corporate income tax, and a 15 per cent excise tax on automobiles.