There have been discussions that VAT is just the first part in what is seen to be a wider strategy of collecting more fees in order to diversify revenues streams.
CFA Society Emirates, an association of local investment professionals, have questioned its 68 members on how they feel about income tax. Almost all of them (80 per cent) said they would consider leaving the country if a levy is placed on dirhams earned by workers.
“I am an expatriate and I would say that the introduction of an income tax, on top of all the current indirect taxes, would make the UAE less attractive to [foreign workers],” Maria João Lopes Delgado – Member of CFA Society Emirates, told Gulf News.
A 5 per cent VAT is up for implementation in the UAE on January 1st 2018.
Also, by the end of the month, expatriates and residents traveling from any airport in Dubai will start paying a Dh35 departure fee. In Abu Dhabi, municipality fees will be collected from hotels.
The introduction of VAT across the GCC is expected to cover government budget deficits caused by the decline in oil prices. During the first year of implementation, VAT is forecast to generate Dh10 billion to Dh12 billion in revenues in UAE.
The anticipated additional income from VAT might not be enough, though.
“This means that the introduction of corporate taxes, recurrent property taxes or even income taxes cannot be ruled out,” said Delgado.
“Some even argue that introducing VAT might very well make it easier and more acceptable for governments to introduce a broader range of taxes in the future.“
However, given that VAT will take effect in the beginning of 2018, it is unlikely that an income tax will be imposed before the end of 2019.
“Implementing VAT is already a very challenging achievement. It is a very labour-intensive process and economic impact is yet to be seen,” said Alp Eke, senior economist at the National Bank of Abu Dhabi.
Eke cautioned that income tax would “seriously affect the tax-free image” of the UAE.
“It is important to recall that introducing an income tax will [drive] people and companies to relocate as the attractiveness of the UAE will be lost to a certain extent. In addition to this, income taxes would have a negative effect on people’s ability to save money, while also reducing investment and discretionary spending,” Delgado pointed out.
Additionally, the implementation and administration of an income tax system is costly.
"Unless the government applies the right rates," Delgado said, "they could end up having higher administrative costs than the income received. Hence such a measure would require a comprehensive cost-benefit analysis. It does, however, offer the advantage of keeping a portion of expatriate workers’ savings in the UAE instead of them sending it out of the country.“
The additional reforms play an important role in making the economies in the Gulf Cooperation Council (GCC) weather the impact of falling oil revenues.
Compared to its peers, however, the UAE remains best positioned to soften the blow from tumbling oil prices.
“The UAE is able to withstand oil price fluctuations because the economy is strong and diversified due to efforts that have been implemented way ahead of GCC nation. There are ample foreign assets as fiscal buffer as well,” noted Eke.
“As we know state budgets in GCC have been severely affected by oil price fluctuations, and currently most GCC nations have fiscal break-even levels above the oil price. Therefore, additional reforms are necessary to improve the resilience of the economy and to support government revenues. UAE led the way in fiscal reforms and other GCC nations have started adjusting spending [as well as budget and subside cuts].
Source: Gulf News