UAE has no intentions to raise VAT; Finance Ministry

By Backend Office, Desk Reporter
UAE
Representational Image

UAE Ministry of Finance (MoF) said that it increased $3.2 bilion (Dh11.6 billion) in value-added tax (VAT) revenues in the first eight months of 2020 and the government has no intentions to increase VAT (Value Added Tax) to more than five percent.

The UAE and Saudi Arabia imposed five percent VAT from January 1, 2018, and later Bahrain also implemented it. Saudi Arabia which is the largest economy in the region has increased VAT to 15 percent, from July 1 this year. Oman is expected to become the fourth GCC country to levy VAT by April of next year.

The ministry said that during the January-August 2020 period the excise tax revenues rose 47 percent year-on-year to $517 million (Dh1.9 billion).

The regional governments have implemented new taxes to boost their revenue base and lessen dependence on petrodollars which are the US dollars charged for the selling of a product to an oil-exporting country.

Revenues were stable before the COVID-19 outbreak, but the pandemic had an impact on regional economies, thereby affecting tax revenues.

The MoF said that the tax revenues produced in 2019 were approximately $8 billion (Dh31 billion) compared to almost $7.8 billion (Dh29 billion) in 2018. The growth rate of overall tax revenue in 2019 rose by around seven percent while compared to 2018.

Saeed Rashid Al Yateem, assistant under-secretary of resource and budget at MoF confirmed that there are currently no proposals or decisions to increase VAT to more than 5 percent in the UAE.

Saeed Rashid Al Yateem
Saeed Rashid Al Yateem
Assistant under-secretary
Resource & Budget
MoF

“MoF continues to follow up on tax policies in coordination with the Federal Tax Authority (FTA) to ensure they’re in line with developments in the regional and international arena and that legislations are continuously updated following financial policy objectives and sustainable economic growth”.

He stated that 30 percent of the revenue from VAT will be allocated to the federal government and 70 percent to the local government.

The federal government’s share of excise tax revenue on tobacco products is 45 percent and that of local governments is 55 percent. The share of excise tax revenues from the federal government in other excise products such as energy drinks, soft drinks and beverages sweetened with added sugar is 30 percent.

Tax revenues help execute development projects in compliance with the plans of the UAE government and mitigate the effects of the COVID-19 pandemic, Al Yateem added.

COVID-19 impact on tax revenue

Aurifer Middle East Tax Consultancy partner Thomas Vanhee said that the COVID-19 pandemic resulted in significant losses to the GCC economy and placed financial restrictions on the GCC states by increasing their spending on public welfare and decreasing their tax revenues. While the pandemic affected all GCC States, some states were already under fiscal pressure before the pandemic due to continued lower oil prices.

Mr. Vanhee said, “More specifically, as corporate income taxes are the most sensitive to economic cycles and conditions, one can expect that the related revenues will decrease in Saudi, Kuwait, Oman and Qatar. Those are the countries that have a broad-based corporate income tax system (often with exemptions for GCC held companies). Additionally, VAT revenues in the GCC are also expected to yield a low(er) amount due to the impacts of lockdowns and decreased consumer spending.”

He said that other regional countries are not planning to increase the VAT limit, but the current economic circumstances make it more appealing for Kuwait and Qatar, the two remaining countries that have not yet introduced VAT, to do so.

“Many GCC countries are also planning to tap the international bonds market, or have already done so recently (e.g. UAE),” he added.

Nirav Shah, director of Fame Advisory DMCC, said the overall economic scenario of the GCC is challenging, but other nations such as Saudi Arabia have taken measures to increase their tax revenue as oil revenues have decreased.

“For UAE, since the economy is already partly diversified and has non-oil revenues, it’s encouraging to note that the government is not planning to hike VAT rates. Businesses have seen a reduction in gross revenues and hence it’s likely that UAE will experience a reduction in VAT revenues for 2020 up to almost 15 per cent to 20 per cent due to overall reduction in domestic consumption,” Mr. Shah added.

He said that tax collections are directly related to economic development, higher domestic consumption raises VAT and excise collection.

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