Tax-Free UAE on Course to Introduce VAT in Gulf

(Agence France-Presse)

The United Arab Emirates is on course to shed its reputation as a tax haven and become the first oil-rich Gulf Arab state to introduce value added tax, marking a step towards diversifying public revenues.

As early as next year, shoppers in the sumptuous malls of Dubai — the city-state whose oil resources are dwindling — could find a VAT [ed. Similar to our GST.] of up to five percent slapped on their receipts.

Dubai Customs is in charge of developing the VAT infrastructure which once imposed will aim to gradually replace customs duties that should be slashed due to commitments made in free trade agreements.

This infrastructure will be “in place by the final quarter of 2008,” Dubai Customs executive director of business support, Abdul Rahman al-Saleh, said this month, adding it will be applied across the seven emirates that make up the UAE federation once the decision is taken.

The UAE has established a reputation of being largely a tax-free country where personal income tax does not exist, while corporate taxation applies only to foreign oil firms and banks, and municipal tax is imposed on house rentals.

Other members of the oil-rich Gulf Cooperation Council (GCC) also do not impose taxes on personal income, while taxation on firms varies from one country to another. None has so far introduced VAT or sales tax.

“VAT is important to diversify the revenue base, especially for places that are less reliant on oil revenues, like Dubai and Bahrain. It is also good for oil exporters to reduce their reliance on oil,” said Monica Malik, senior economist at the Dubai-based EFG-Hermes investment bank.

“It will still be a very small portion of revenues... Three to five percent is still low in international terms,” Malik said.

In an apparent attempt to ease fears of rising taxation among expatriate workers who represent the bulk of the UAE's manpower, Emirati authorities have implied that VAT will not exceed the five percent currently levied through customs duties on imported goods.

However, VAT will go beyond imported goods to include services.