Dubai and the other members of the Gulf Co-operation Council (GCC) are edging closer to a significant change in how the region's states garner revenue, with plans to introduce a value added tax across the bloc, possibly as soon as the first quarter of next year.
With the countries of the GCC in the process of negotiating a series of free trade agreements with major trading partners such as the European Union, China and India, the bloc's member states have been looking at ways to compensate for the expected loss in customs revenues and fill the income gap. The path chosen is VAT.
The idea of introducing a VAT across the bloc has been around for some time, first being raised by an International Monetary Fund (IMF) report in late 2005, which recommended the broadening of the tax base and the introduction of a VAT system to be made effective in two stages.
The first stage envisioned the imposition of VAT on selected goods such as tobacco, cars and electronic items and the removal of customs duty on all imports, with the tax being collected directly from the distributors, agents and wholesalers. The second stage consisted in a modification of the procedure for the tax on products to be chargeable at the point of sale only.
Dubai Customs was commissioned by the government of the UAE to research and introduce the VAT system before implementation in the UAE. A preliminary report prepared by concerned authorities and the IMF, completed in late 2006, concluded that the introduction of a tax on goods and services in replacement of the existing Customs duty was inevitable if GCC states were to maintain their current levels of economic welfare.
According to Abdul Rahman Al Saleh, the executive director of Dubai Customs, work on preparing for a comprehensive goods and services tax is well advanced.
"Having spent two years studying VAT around the world to ensure that what is proposed for the UAE and the GCC is best practice, we are now in phase two, which is looking at how to successfully implement VAT," he said on May 8.
Though having flagged the imminent arrival of VAT, Al Saleh and other Dubai officials have not indicated whether the recommendations of the IMF will be adopted wholesale or in a modified form.
However, Al Saleh revealed that when implemented, the new goods and services tax would only have a minimal effect on consumers, with its rate being lower than that currently imposed on imported goods.
No exact rate for the tax has been decided on but it is expected to be between 3% and 5%, applied as a flat rate payment on all goods and services and projected to generate the same amount as customs receipts.
There would be some exemptions, with small businesses with revenues below $1m not having to pay the tax, and companies in the health and education sectors also possibly in line for a VAT-free status, according to a statement released by the Dubai Customs on May 6.
Al Saleh also played down fears that the new tax would weaken the UAE's appeal as a business and investment hub.
"I have no concern that the UAE will be perceived as less attractive for doing business, we have been looking at inflation and our conclusion is that VAT will not cause any inflation," he said. "The VAT is being introduced to replace customs duties. We are targeting a very low rate of tax compared to an average of 20% in Europe."
Though the final form of the new tax would have to be approved by the UAE government, Al Saleh said the objective of introducing VAT across the GCC region could be met within four to five years.
While Al Saleh has said the new tax will be implemented by early 2009, comments in late February from a senior official of the UAE ministry of finance were slightly less optimistic.
"Introducing such a tax is not a simple issue as thorough studies are needed on the implementation and its consequences in every country, preparation and the necessary tax management system, and such issues are always considered during the GCC's financial and economic committee meetings," Younus Khouri, undersecretary at the ministry, was reported as saying on February 21.
While a goods and services tax may not be popular with consumers or with businesses that will have to process the payments, it will probably prove a more attractive option than other state revenue raising alternatives such as an income tax. Popular or not, VAT will replace the revenue lost when trade barriers in the region go down.