Plans for tax on goods ready by end of 2008

Plans for tax on goods ready by end of 2008
Robert Ditcham, THE NATIONAL

Last Updated: May 07. 2008 1:56AM UAE / May 6. 2008 9:56PM GMT
The introduction of VAT is likely to be unpopular with Emiratis, residents and businesses, who have enjoyed years of tax-free conditions. Jeffrey E Biteng / The National
The UAE will be ready to introduce a system of value added tax (VAT) by the end of the year.

Abdul Rahman al Saleh, the executive director of Dubai Customs, said the “infrastructure” for an Emirates-wide taxation system would be put in place between October and December.

Dubai Customs was commissioned by the Government two years ago to look into a potential VAT and is finalising the strategy. If implemented, it would be the first time VAT, which is applied to the sale of goods and services and not income, has been imposed in a GCC nation.

However, a government source said although the mechanics would be in place, it was “very unlikely” that VAT would be introduced this year because Federal approval and GCC co-operation, on several related issues, would be required.

VAT would be introduced to replace customs duties, which the UAE must phase out as part of the free trade agreements (FTAs) it is signing with a number of major trading partners, Mr Saleh said.

The government source, who declined to be identified, said a GCC-wide agreement on these FTAs is still some way off.

Mr Saleh told a seminar at the Arabian Travel Market in Dubai that VAT was likely to be set at a flat rate of between three and five per cent. It would be applied to all goods and services.

The introduction of VAT is likely to be unpopular with Emiratis, residents and businesses, who have enjoyed years of tax-free conditions.

If the UAE were to introduce it before other members of the GCC, analysts warned the tax could drive business away from the UAE.

Although the proposed three to five per cent rate is lower than in many other countries – the rate in the UK, for instance, is 17.5 per cent – residents are likely to oppose any measure that could increase already rising food and accommodation costs.

But Mr Saleh said prices were unlikely to climb because of the removal of customs duties.

“I don’t expect a negative reaction from the public because the providers of the services and the goods will take care of this [VAT expense],” he said.

“They would not be paying customs duty so they should not need to increase their prices.” Mr Saleh said if Federal authorities decided to press ahead with VAT, there would be a provision for tourists to claim back the tax they paid on purchases over a set amount. Small businesses with revenue of less than a specific annual figure – expected to be about Dh3.67 million (US$1m) – would also be exempt, he added.

Customs officials have said the VAT would be necessary to replace the “lost revenue” from the removal of customs duties. The funds would be required for investment in health, education and public infrastructure, they said.

The International Monetary Fund is backing the initiative.

Mr Saleh said Dubai Customs had been working for the past two years to develop a VAT system that could be applied across the Emirates.

He said research was conducted in countries such as the UK and New Zealand, many of which use different forms of the taxation system. While some countries apply a low flat rate to all goods and services, others tax certain goods heavily but exempt others.

“We will put in a low rate and have direct aids to the right people, rather than having exemptions. Products and services in certain areas, such as education and health, can be looked at by the Government.”

rditcham@thenational.ae